Lecture Development economics - Lecture 2: Comparative Economic Development

Lecture 2

Comparative Economic Development

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Common Characteristics of
developing countries
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Lower levels of living and productivity
Lower levels of human capital
Higher levels of inequality and absolute poverty
Higher population growth rates
Greater social fractionalization
Larger rural population- rapid migration to cities
Lower levels of industrialization and manufactured exports
Adverse geography
Underdeveloped financial and other markets

Colonial legacies- poor institutions etc.

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Defining the Developing World
• World Bank Scheme- ranks countries on
GNP/capita
– LIC ($975 or less)
– LMC (between $976 and $3855)
– UMC (between $3856 and $11906)
– High income countries – OECD- Organisation
for Economic Co-operation and Development
($11907 or more)
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Table 2.1 Classification of Economies
by Region and Income, 2007

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Table 2.1 Classification of Economies by

Region and Income, 2007 (continued)
(Latin America and the Caribbean)

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(Sub-Saharan Africa)

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Table 2.1 Classification of Economies by
Region and Income, 2007 (continued)

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Figure 2.1 Nations of the World,
Classified by GNI Per Capita

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Measuring Development for Quantitative
Comparison across Countries
• Gross National Income (GNI)
• Gross Domestic Product (GDP)

• PPP (Purchasing Power Parity – Calculation
of GNI using a common set of international
price for all goods and services, to provide
more accurate comparisons of living
standards) method instead of exchange
rates as conversion factors (see figure 2.2)
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Figure 2.2 Income Per Capita in
Selected Countries

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Table 2.2 A Comparison of Per Capita
GNI, 2005

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Some Basic Indicators of
Development
• Health

• Life Expectancy
• Education
• HDI as a holistic measure of living levels
– HDI also varies for groups within countries
– HDI also varies by region in a country
– HDI also reflects rural-urban differences
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Table 2.3 Commonality and
Diversity: Some Basic Indicators

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Holistic Measures of Living
Levels and Capabilities

The Traditional Human Development Index

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Origin of HDI:

• The index was developed in 1990 by Pakistani 
economist Mahbub ul Haq and Sir Richard Jolly, 
with help from Gustav Ranis of Yale University 
and Lord Meghnad Desai of the 
London School of Economics


Dimensions of HDI
• Life expectancy at birth, as an index of population health 
and longevity 
• Knowledge and education, as measured by the adult 
literacy rate (with two­thirds weighting) and the 
combined primary, secondary, and tertiary 
gross enrollment ratio (with one­third weighting)
 
• Standard of living, as measured by the natural logarithm 
of gross domestic product (GDP) per capita at 
purchasing power parity (PPP) in United States dollars. 


Calculation of HDI
 To construct the index, fixed minimum and 
maximum values have been established for each 
of these indicators:
• Life expectancy at birth: 25 years and 85 years
• Adult literacy rate: 0 & 100 %
• Combined gross enrolment ratio: 0% & 100 %
• Real GDP per capita (PPP$): $100 & $40,000 
(PPP$)

Calculation of HDI
• Individual indices can be computed according to the 
general formula:
• Index = Actual xi value – minimum xi value/
        Maximum xi value – minimum xi value
For eg: the life expectancy at birth in a country is 63.7 
years the index of life expectancy for the country 
would be:
Life expectancy index = 63.7­25/85­25 = 40/60 = 
0.645


Calculation of HDI
• The adult literacy rate is 61.0%.
Adult literacy index =61.0-0/100-0=0.61
• Combined gross enrolment ratio is 63.8%
Combined gross enrolment index
=63.8-0/100-0=0.638
• Education index=2/3(0.61)+1/3(0.638)=0.62
Real GDP is 3452,then adjusted GDP
=log(3452)-log(100)/log(40000)-log(100)=0.591
• Therefore HDI = (0.645+0.62+0.591)/3 =0.619


Categories of HDI:
• Very High Human Development Index – HDI 
0.900 to 1.0
• High Human Development Index – HDI 0.800 
to 0.900 

• Medium Human Development Index – HDI 
0.500 to 0.799
• Low Human Development Index – HDI below 
0.500


Relationship between individual 
development and human development in 
general
• If two people in a relatively unequal society 
have an HDI of 0.5 and 0.25, respectively, and 
both increase their level of development by 0.25, 
they will affect general development in the same 
magnitude.
• In a more equal society, however, an increase
    in the HDI of the poorer person should count 
more.


Limitations of HDI:
 Not a comprehensive measure of human development. It only 
focuses on three dimensions of capabilities. 
 The HDI is not designed to assess progress in human 
development over a short­term period because two of its 
component indicators—adult literacy and life expectancy at birth
—are not responsive to short­term policy changes.
  Like any average country measure, the HDI does not account for 
variations in human development within the country.
  Countries with the same HDI may be very different in how 
human development is distributed, either from region to region, 

or from social group to social group.


Figure 2.3 Human Development
Disparities within Selected Countries

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Figure 2.3 Human Development Disparities
within Selected Countries (continued)

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Table 2.4 Human Development for
23 Selected Countries (2004 Data)

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Table 2.4 Human Development for 23
Selected Countries (2004 Data)
(continued)

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