The 7-I Frameworkof Development:The Path toa SustainableEconomyby Mohit Sauparn and Vivek PundirMBA Class of 2006Emory Uni...
Term Paper: The 7-I’s of Development                                                                  Mohit Sauparn, Vivek...
Term Paper: The 7-I’s of Development                                                                     Mohit Sauparn, Vi...
Term Paper: The 7-I’s of Development                                                                    Mohit Sauparn, Viv...
Term Paper: The 7-I’s of Development                                                                   Mohit Sauparn, Vive...
Term Paper: The 7-I’s of Development                                                                    Mohit Sauparn, Viv...
Term Paper: The 7-I’s of Development                                                                                      ...
Term Paper: The 7-I’s of Development                                                                                      ...
Term Paper: The 7-I’s of Development                                                                                      ...
Term Paper: The 7-I’s of Development                                                                                Mohit ...
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
The 7-I Framework of Development: The Path to a Sustainable Economy
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The 7-I Framework of Development: The Path to a Sustainable Economy

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The 7-I Framework posits a prescription for development of nations. This paper evaluates the framework, and lays down an empirical foundation for it.

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The 7-I Framework of Development: The Path to a Sustainable Economy

  1. 1. The 7-I Frameworkof Development:The Path toa SustainableEconomyby Mohit Sauparn and Vivek PundirMBA Class of 2006Emory University for Prof. Jeff Rosensweig’s BUS503: Global Macroeconomic Perspectives
  2. 2. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek PundirTerm Paper: The 7-I’s of DevelopmentSubmitted to: Prof. Jeff RosensweigGlobal Macroeconomic PerspectivesINTRODUCTIONDevelopment is an issue that has bewildered economists for a long time. In fact, evendefining the term is so hairy that they haven’t been able to agree even on that.Some early economic thought equated development with industrialization andmechanization. Over time this has given way to talk about sustainable development.The government of British Columbia, Canada thinks it means “the advancement of themanagement and use of natural resources to satisfy human needs and improve thequality of human life. For development to be sustainable it must take account of socialand ecological factors, as well as economic ones, of the living and non-living resourcebase, and of the long-term and short-term advantages and disadvantages of alternativeactions.”"In an international context", says InterEnvironment, "(development) refers toimproving the economic and social conditions of poorer countries."The United Nations Strategy for Disaster Reduction accepts the definition provided bythe 1987 Brundtland Commission: "Development that meets the needs of the presentwithout compromising the ability of future generations to meet their own needs. Itcontains within it two key concepts: the concept of "needs", in particular the essentialneeds of the worlds poor, to which overriding priority should be given; and the idea oflimitations imposed by the state of technology and social organization on theenvironments ability to meet present and the future needs." Page 1 of 46
  3. 3. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek PundirWe like the definition used by “Botany from Vermont” website in the context of thedevelopment of biological organisms, “Growth and maturation of an organism or somepart of it.” If one replaces “organism” by “nation”, this definition probably conveys, toa large extent, the concept of development. Admittedly, though, this definition is rathervague, and does not do much to further the operational understanding of the term.Having said that, we think that it does give a flavor of the meaning in a “The Fortune atthe Bottom of the Pyramid” sense. Thus, while a society or nation is clearlyunderdeveloped if it is severely impaired by economic constraints, economic wealth, ofand by itself, is not a guarantee of development. Wealth is a necessary, but notsufficient condition, when it comes to development. If the wealth is distributedextremely unevenly so that while the nation is rich overall, the average citizen liesunder the poverty level, or if the wealth does not translate into health, well-being,political and civil liberties etc., it is effectively meaningless.In this context, Prof. Jeff Rosensweig of Emory University has proposed a 7 I’sframework of development. According to this framework, there are seven essentialcomponents/ pre-requisites of development:1. Investment – Investment is the first prerequisite for development, and the only way to grow the economy. While a consumption binge can inflate growth figures for a short while, no development or growth can be sustained without judicious investment into productive assets/ capital.2. Intellectual capital (investment in broad-based education) – While economists have gone to great length discussing capital investments, not many (with the exception of developmental economists like Nobel-laureate Amartya Sen) have done significant work that indicates intellectual capital is often as important as, if not more important than, physical capital in the development of a nation.3. Incentives – While there may be many pieces of the puzzle in place, a nation will not develop unless its incentive structure encourages people to work hard, to save, to invest etc. Page 2 of 46
  4. 4. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek Pundir4. Incorrupt society – Corruption can be a huge bugbear for development, and according to Prof. Rosensweig, an incorrupt society is an absolute must-have for development.5. Infrastructure – Good infrastructure is absolutely essential for the holistic economic development of a nation.6. Information – Information wants to be free. And how freely information can flow in the country, in view of legal, regulatory, technical and cultural framework, is an indicator of development as well.7. Internationalization – How integrated the country’s economy is with the rest of the world is another factor that affects its stage of development. The higher the internationalization, the quicker will the nation develop.While this framework has sound theoretical basis, and provides a solid prescriptiveformula for nations aspiring to achieve economic growth for the millions mired inpoverty, we are not aware of any empirical study validating it. This paper attempts a“first cut” empirical study of the framework.METHODO LOGYOur methodology is relatively simple. We sought to test a causal relationship betweendevelopment and the 7I’s using multivariate regression.The challenge was to operationalize the 7 I’s so as to be able to devise some sort ofmeasures for them. While some of these I’s initially appear to be rather touchy-feely,we believe that it is possible to use hard variables as proxies for these.While development was a contentious issue, both of us agreed that the best way to thinkabout sustainable development is to think of purchasing power parity adjusted per capitagross domestic product as it gives a very good sense of the average standard of living inthe country. Page 3 of 46
  5. 5. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek PundirInvestment was relatively simple, as there are already several measures of investment.Our task was simply to choose the one that provided the best explanation of varianceand “goodness of fit”.For broad-based intellectual development, we thought of several candidates, includingpublic spending in education as a percentage of GDP, research and developmentspending as a percentage of GDP, enrolment in primary schools, etc.Incentives were the toughest ones to find a proxy for. The only direct way to somehowmeasure incentives is to conduct a comprehensive study of all countries, with thebenefit of local knowledge, and then to assign subjective ratings to the incentivestructure using some sort of a composite scale. We simplified that. Incentives are onlyas good as their effect. So, we decided to measure incentives in terms of their efficacy –if a nation saves more, we assume that it incentivizes saving. Similarly, if a nationworks more hours per week then it incentivizes hard-work.To measure corruption, we turned to the Transparency International’s world corruptionperception index, and used that as a reliable measure of incorrupt society.Infrastructure was another relatively simple one – roads, rails, airports etc. were allindicators of the country’s infrastructure. To adjust for sizes, we used density, ratherthan absolute numbers.Information dissemination was a sticky one. We turned to the Freedom House’s reportto figure out how the countries rate on civil liberties (speech, media etc). We also usedthe penetration of communication methods like cellphones and landlines as candidates.For measuring internationalization we simply picked up various measures ofinternational trade as they relate to the GDP, with the intention of using the one withmost explanatory power in the model.While we were armed with hard data on these factors, we were aware that our resultswould be ballpark results, not the exact numbers since the data were not available forthe same recent period for all parameters, and some data were unavailable for somenations. Page 4 of 46
  6. 6. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek PundirAN AL YSI SAfter trying several different models, we decided on this model, which we are quitehappy with as it explains over 85% of the variance in PPP-adjusted GDP per capita.Goodness of fit statistics:Observations 208.000Sum of weights 208.000DF 198.000R² 0.859Adjusted R² 0.852MSE 12801210.958RMSE 3577.878MAPE 64.820DW 2.005Cp 10.000AIC 3413.682SBC 3447.057PC 0.156The equation for this regression line is as follows:GDPPCPPP = -8204.53112615424 +61.9373042307306*BAL+2387.32901048343*CORRUPTION +880.87796966936*R&D%+30.8696289658526*ENROLGIRLS -56.8623451913472*INFO+7.83828124045985*CELL -4.17308720949926*SAVING%+89.0292019987179*FDI% +0.60806418126927*AIRDENSOne variable that we really wanted in the model was the number of work hours perweek, but couldn’t do so as the ILO data that we were able to retrieve had too few data-points. Page 5 of 46
  7. 7. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek Pundir GDPPCPPP / Standardized coefficients (95% conf. interval) CORRUPTION 0.7 0.6 0.5 Standardized coefficients CELL 0.4 FDI% 0.3 ENROLGIRLS 0.2 AIRDENS R&D% BAL 0.1 0 SAVING% INFO -0.1 -0.2 VariableThe most amazing thing is that as it turns out, a corruption free society (as indicated bycorruption above) is paramount for economic growth followed closely by free flow ofinformation (as indicated by cell and negative of info above). The next good thing agovernment can do is make the economic climate conducive to foreign directinvestment.Model parameters: Source Value Standard error t Pr > |t| Lower bound (95%) Upper bound (95%)Intercept -8204.531 2166.061 -3.788 0.000 -12476.041 -3933.022BAL 61.937 33.176 1.867 0.063 -3.486 127.360CORRUPTION 2387.329 219.421 10.880 < 0.0001 1954.627 2820.031R&D% 880.878 520.037 1.694 0.092 -144.644 1906.400ENROLGIRLS 30.870 16.008 1.928 0.055 -0.699 62.439INFO -56.862 185.242 -0.307 0.759 -422.163 308.438CELL 7.838 0.943 8.310 < 0.0001 5.978 9.698SAVING% -4.173 32.954 -0.127 0.899 -69.159 60.813FDI% 89.029 13.152 6.769 < 0.0001 63.093 114.966AIRDENS 0.608 1.505 0.404 0.687 -2.359 3.575The model is overall quite good. However, as we observe from the T and p valuesabove, civic liberties, savings as a % of GDP and air flights per sq. km of land aren’tstatistically significant in the model. We believe that a major reason is the lack of gooddata on these factors. A dataset that has more data on these should validate the positivecoefficients (we asked our statistical software to estimate missing values – whichexplains the low significance). Page 6 of 46
  8. 8. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek PundirStandardized coefficients: Source Value Standard error t Pr > |t| Lower bound (95%) Upper bound (95%)BAL 0.086 0.046 1.867 0.063 -0.005 0.177CORRUPTION 0.486 0.045 10.880 < 0.0001 0.398 0.574R&D% 0.052 0.031 1.694 0.092 -0.009 0.113ENROLGIRLS 0.054 0.028 1.928 0.055 -0.001 0.110INFO -0.011 0.035 -0.307 0.759 -0.079 0.058CELL 0.352 0.042 8.310 < 0.0001 0.268 0.435SAVING% -0.006 0.046 -0.127 0.899 -0.096 0.084FDI% 0.236 0.035 6.769 < 0.0001 0.167 0.305AIRDENS 0.014 0.034 0.404 0.687 -0.053 0.081Even in terms of standardized coefficients (real coefficients, stripped of units),corruption-freeness, information flow, and FDI turn out to be the most influentialfactors, and these should be the priorities of any developing nation. GDPPCPPP / Standardized residuals 4 3 Standardized residuals 2 1 0 0 10000 20000 30000 40000 50000 60000 70000 -1 -2 -3 GDPPCPPP Page 7 of 46
  9. 9. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek Pundir Pred(GDPPCPPP) / Standardized residuals 4 3Standardized residuals 2 1 0 -10000 0 10000 20000 30000 40000 50000 60000 70000 -1 -2 -3 Pred(GDPPCPPP) Pred(GDPPCPPP) / GDPPCPPP 70000 60000 50000 40000GDPPCPPP 30000 20000 10000 0 -10000 0 10000 20000 30000 40000 50000 60000 70000 -10000 Pred(GDPPCPPP) Page 8 of 46
  10. 10. Term Paper: The 7-I’s of Development Mohit Sauparn, Vivek Pundir Standardized residuals / GDPPCPPP Obs196 Obs181 Obs166 Obs151 Obs136 Observations Obs121 Obs106 Obs91 Obs76 Obs61 Obs46 Obs31 Obs16 Obs1 -4 -3 -2 -1 0 1 2 3 4 Standardized residualsThe residual charts above further strengthen our belief in a good fit, and validate themodel further.Having said that, we believe that if more data is available, it would be worthwhile toconduct a factor analysis, and then run an explanatory multivariate regression. Thecleaner data, with more data points, combined with this analysis could lead to the 7I’sexplaining up to 92% of the variance in the standards of living in different countries.Having gone over the statistical relationship of development and the 7 I’s, we decidedto have a quick look at how GDP growth relates to the PPP-adjusted GDP per-capita.In the chart below, the bars represent the PPP-adjusted GDP per-capita, and are scaledto the left y-axis. The line with rhombus data-points represents the GDP growth %, andis measured on the right y-axis. The data are arranged in descending order of PPP-adjusted GDP per-capita. The smooth, thick line is a trend-line for GDP growth. Whilethere are wild variations in GDP growth, the trend-line is unequivocal about therelationship. There is a clear, non-linear relation between GDP growth and PPP-adjusted GDP per-capita, and growth peaks around the middle values of PPP-adjustedGDP per-capita. While the developed nations are slow to grow (matured?), the“emerging economies” are really driving growth. Page 9 of 46

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