Chapter 2. Comparative Economic Development. Copyright 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 2 Comparative Economic Development Copyright 2009 Pearson Addison-Wesley. All rights reserved.

Common Characteristics of developing (poor) countries 1. Lower levels of living and productivity 2. Lower levels of human capital 3. Higher levels of inequality and absolute poverty 4. Higher population growth rates 5. Greater social fractionalization 6. Larger rural population- rapid migration to cities 7. Lower levels of industrialization and manufactured exports 8. Adverse geography 9. Underdeveloped financial and other markets 10. Colonial legacies (?) - poor institutions etc. Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-2

Defining the Developing World World Bank Scheme Atlas Method: Ranks countries on GNI/capita ($US at exchange rates) LIC: <$875 LMC: $876 -$3,465 UMC: $3,466 - $10,725 High Income: >$10,725 Figures are for 2005; US = $43,650 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-3

2.1 Defining the Developing World World Bank Scheme- ranks countries on GNP/capita LIC, LMC, UMC, OECD (see Table 2.1 and Figure 2.1) Calculated based on exchange rates, e.g. China s GNP/capita = RMB21,000/capita Exchange Rate: 7 RMB = $ 1 => China s GNP/capita = $3,000/capita

Figure 2.2 Income Per Capita in Selected Countries (2008)

Alternatively, convert to common currency using Purchasing Power Parity PPP method instead of exchange rates as conversion factors (see Figure 2.2) PPP method better represents what people can actually buy with their income

Table 2.2 A Comparison of Per Capita GNI, 2008

Why do these methods differ? Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-8

Why do these methods differ? Think: What is the Law of One Price? Where/when does it apply/not apply? Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-9

Why do these methods differ? Think: What is the Law of One Price? Where/when does it apply/not apply? Answer: Wages are lower in DCs Services are both non-traded AND labor intensive Ergo: Services cost less in DCs Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-10

UN Human Development Index HDI as a holistic measure of living levels 1/3*Log (GDP/capita at PPP) 1/3*Life Expectancy Index 1/3*(2/3*Adult Literacy+1/3*Enrollment Index) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-19

Figure 2.5 Under-5 Mortality Rates, 1990 and 2005 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-20

Table 2.7 Primary School Enrollment and Pupil-Teacher Ratios Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-21

Figure 2.6 Correlation between Under- 5 Mortality and Mother s Education Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-22

Correlations Components of HDI are highly correlated with each other Best single measure of development is GNI/capita at PPP???? www.gapminder.org Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-24

UN Human Development Index HDI as a holistic measure of living levels 1/3*Log (GDP/capita at PPP) 1/3*Life Expectancy Index 1/3*(2/3*Adult Literacy+1/3*Enrollment Index) HDI varies across countries HDI also varies for groups within countries HDI also varies by region in a country HDI also reflects rural-urban differences Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-25

Figure 2.3 Human Development Disparities within Selected Countries Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-26

Figure 2.3 Human Development Disparities within Selected Countries (continued) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-27

10 Characteristics of the Developing World: Diversity within Commonality 1. Lower levels of living and productivity 2. Lower levels of human capital (health, education, skills) 3. Higher Levels of Inequality and Absolute Poverty Absolute Poverty World Poverty 4. Higher Population Growth Rates Crude Birth rates Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-31

Figure 2.7 People Living in Poverty, 1981-2002 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-34

Pinkovskiy and Sala-i-Martin (2009) NBER 15433 Go to Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-35

Pinkovskiy and Sala-i-Martin (2009) NBER 15433 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-36

Figure 2.7 Number of People Living in Poverty by Region, 1981 2005

Changing Poverty Rates Depend on Percentage of Population versus Absolute Numbers Region: Tremendous progress in East Asia, esp. China. Slower progress -- if any in other regions. Why???? Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-38

10 Characteristics of the Developing World: Diversity within Commonality 5. Greater Social Fractionalization 6. larger Rural Populations but Rapid Rural-to- Urban Migration 7. Lower levels of Industrialization and Manufactured Exports 8. Adverse Geography Resource endowments Landlocked Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-40

Percent of Population Urban and Farm Populations: USA 80 New Old Farm 60 40 20 0 1790 1840 1890 1940 1990 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-42

GDP/Capita (Log Scale) Income and Urbanization $100,000 $10,000 $1,000 $100 0 20 40 60 80 100 Urbanization (%) WDI (2003) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-43

GDP/Capita (2000) Income and Urban: China 30000 25000 SHA 20000 15000 10000 5000 JSU FUJ 0 10 20 30 40 50 60 70 80 90 Urban Population (%) Copyright 2009 Pearson Chen Addison-Wesley. (2002) All rights reserved. 2-44 ZHE GDN LIA SDN HEI HEB HUB XIN HAI JIL HENHUN MON ANH SIC JIASAA NIN SAX QIN TIBYUNGXI GAN GUI TIA BEI

Urban-Rural Income Ratio: China 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1978 1983 1988 1993 1998 Chen (2002) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-45

GDP/Capita (Log Scale) Income and Agricultural Employment $100,000 $10,000 $1,000 0 10 20 30 40 50 60 Agricultural Employment (% of T WDI (2003) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-47

10 Characteristics of the Developing World: Diversity within Commonality 9. Underdeveloped Financial and Other markets Imperfect markets Labor, goods, financial Importance of clan or family relationships Incomplete information Prices: Cell phones Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-48

10 Characteristics of the Developing World: Diversity within Commonality 10a. Institutions Legal: Secure property rights; enforceable contracts Government: Civil War Dictatorship/Oligarchy: Responsive to elites vs. Democracy: Responsive to broader population Bureaucracy: Unresponsive Central Planning vs. Market Oriented East vs. West Germany; North vs. South Korea Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-49

10 Characteristics of the Developing World: Diversity within Commonality 10b. Institutions Colonial Legacy? Extractors of Wealth vs. Creators of Wealth Climate: Inhospitable => Extractors Gold, oil, diamonds, etc. => Extractors Post-colonial elites in many developing countries took over the exploitive role formerly played by the colonial powers. (p. 68) But: Never colonized countries also face problems: Afghanistan, Ethiopia, Liberia, Myanmar Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-50

Convergence? Are world incomes becoming more equal? Specifically, are DCs catching up with rich countries? More specific yet: Is the growth rate of income per capita negatively related to the level of income per capita? Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-52

Convergence: US State Incomes Barro and Sala-I-Martin (1992) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-53

Growth Rate of Income per Capita Convergence: 1959-79 4.5% 4.0% MS SC AR SD ND 3.5% 3.0% 2.5% ALNC TN KY WVGA LA VA WY OKTX MN IA FL AZ NE KS VT MD CO ID MT NH MO IN WI OR WA PA MI ME NM OH UT RI MA NJCA IL NV CT NY 2.0% $6,000 $10,000 $14,000 Per Capita Income (1959) Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-54 DE

Figure 2.8 Convergence among OECD Countries but Divergence in the World as a Whole Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-55

Figure 2.9 Per Capita GDP Growth in 125 Developing Countries, 1995-2005 Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-56

Figure 2.10 Growth Convergence and Absolute Income Convergence Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-57

Nature and Role of Economic Institutions Institutions provide rules of the game of economic life Provide underpinning of a market economy Include property rights; contract enforcement Can work for improving coordination, Restricting coercive, fraudulent and anti-competitive behavior Providing access to opportunities for the broad population- Constraining the power of elites, and managing conflict Provision of social insurance Provision of predictable macroeconomic stability

Role of Institutions Acemoglu, Johnson, and Robinson s reversal of fortune and extractive institutions Bannerjee and Iyer s, property rights institutions. Landlords versus cultivators Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-61

Case Study: Pakistan Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-62

Case Study: Bangladesh Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-63

Concepts for Review Absolute poverty Brain drain Crude birthrate Convergence Death rate Dependency burden Developed world Economic Institutions Foreign exchange Gross domestic product (GDP) Gross national product (GNP) Human Development Index (HDI) Imperfect markets Income gap Income inequality Incomplete information Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-64

Concepts for Review (cont d) Infant mortality rate International poverty line Labor productivity Least developed countries (LLDCs) Levels of living Low income countries (LICs) Malnutrition Middle-income countries (MICs) Mixed economic systems Newly industrialized countries (NICs) Physical resources Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-65

Concepts for Review (cont d) Primary industrial sector Production function Purchasing power equivalent Purchasing power parity (PPP) Resource endowment Secondary industrial sector Tertiary industrial sector World Bank Copyright 2009 Pearson Addison-Wesley. All rights reserved. 2-66