Economic development todaro smith 11th edition 01Document Transcript
24 PART ONE Principles and ConceptsERADICATEEXTREME POVERTYAND HUNGERGLOBALPARTNERSHIP FORDEVELOPMENTENSUREENVIRONMENTALSUSTAINABILITYCOMBAT HIV/AIDS.MALARIA AND OTHERDISEASESIMPROVE MATERNALHEALTHREDUCECHILD MORTALITYPROMOTE GENDEREQUALITY ANDEMPOWER WOMENACHIEVE UNIVERSALPRIMARY EDUCATIONThe goal of ensuring environmental sustainability is essential for securingan escape from poverty. This is immediately seen by looking at two of the tar-gets: reduce by half the proportion of people without access to safe drinkingTABLE 1.1 Millennium Development Goals and Targets for 2015Goals TargetsSource: From “Millennium Development Goals” (accessed via www.undp.org). Reprinted with permission from the United Nations Development Programme.1. Eradicate extreme poverty and hunger • Reduce by half the proportion of peopleliving on less than $1 a day• Reduce by half the proportion of people who suffer from hunger2. Achieve universal primary education • Ensure that all boys and girls complete a full course ofprimary schooling3. Promote gender equality and empower • Eliminate gender disparity in primary and secondary education,women preferably by 2005, and at all levels by 20154. Reduce child mortality • Reduce by two-thirds the mortality rate among children under 55. Improve maternal health • Reduce by three-quarters the maternal mortality ratio6. Combat HIV/AIDS, malaria, and other diseases • Halt and begin to reverse the spread of HIV/AIDS• Halt and begin to reverse the incidence of malaria and other majordiseases7. Ensure environmental sustainability • Integrate the principles of sustainable development into countrypolicies and programs; reverse loss of environmental resources• Reduce by half the proportion of people without sustainableaccess to safe drinking water• Achieve significant improvement in lives of at least 100 millionslum dwellers by 20208. Develop a global partnership for development • Develop further an open, rule-based, predictable, nondiscrimina-tory trading and financial system; includes a commitment to goodgovernance, development, and poverty reduction—both nation-ally and internationally• Address the special needs of the least developed countries; in-cludes tariff and quota free access for least developed countries’exports; enhanced program of debt relief for heavily indebted poorcountries (HIPCs) and cancellation of official bilateral debt; andmore generous official development assistance (ODA) for countriescommitted to poverty reduction• Address the special needs of landlocked countries and small islanddeveloping states• Deal comprehensively with the debt problems of developing coun-tries through national and international measures in order tomake debt sustainable in the long term• In cooperation with developing countries, develop and implementstrategies for decent and productive work for youth• In cooperation with pharmaceutical companies, provide access toaffordable essential drugs in developing countries• In cooperation with the private sector, make available the benefitsof new technologies, especially information and communications
water and achieve significant improvement in the lives of at least 100 millionslum dwellers. But more generally, without protecting the environment of thepoor, there is little chance that their escape from poverty can be permanent. Fi-nally, the governments and citizens of the rich countries need to play theirpart in pursuit of the goal of “global partnership for development.”The MDGs were developed in consultation with the developing countries,to ensure that they addressed their most pressing problems. In addition, keyinternational agencies, including the United Nations, the World Bank, the In-ternational Monetary Fund (IMF), the Organization for Economic Cooperationand Development (OECD), and the World Trade Organization (WTO), allhelped develop the Millennium Declaration and so have a collective policycommitment to attacking poverty directly. The MDGs assign specific responsi-bilities to rich countries, including increased aid, removal of trade and invest-ment barriers, and eliminating unsustainable debts of the poorest nations.28However, the MDGs have also come in for some criticism.29For example,some observers believe that the MDG targets were not ambitious enough, go-ing little beyond projecting past rates of improvement 15 years into the future.Moreover, the goals were not prioritized; for example, reducing hunger mayleverage the achievement of many of the other health and education targets. Atthe same time, although the interrelatedness of development objectives wasimplicit in the MDGs formulation, goals are presented and treated in reports asstand-alone objectives; in reality, the goals are not substitutes for each other butcomplements such as the close relationship between health and education. Fur-ther, the setting of 2015 as an end date for the targets could discourage ratherthan encourage further development assistance if it is not met. Moreover, whenthe MDGs measure poverty as the fraction of the population below the $1-a-day line, this is arbitrary and fails to account for the intensity of poverty—thata given amount of extra income to a family with a per capita income of, say, 70cents a day makes a bigger impact on poverty than to a family earning 90 centsper day (see Chapter 5). Other critics have complained that $1 a day is too lowa poverty line and about the lack of goals on reducing rich-country agriculturalsubsidies, improving legal and human rights of the poor, slowing global warm-ing (which is projected to harm Africa and South Asia the most), expandinggender equity, and leveraging the contribution of the private sector. While thereasonableness of some of these criticisms may be questioned, it should be ac-knowledged that the MDGs do have some inherent limitations.1.5 ConclusionsDevelopment economics is a distinct yet very important extension of both tra-ditional economics and political economy. While necessarily also concernedwith efficient resource allocation and the steady growth of aggregate outputover time, development economics focuses primarily on the economic, social,and institutional mechanisms needed to bring about rapid and large-scale im-provements in standards of living for the masses of poor people in developingnations. Consequently, development economics must be concerned with theformulation of appropriate public policies designed to effect major economic,institutional, and social transformations of entire societies in a very short time.25CHAPTER 1 Introducing Economic Development: A Global PerspectiveSector A subset (part) of aneconomy, with four usages ineconomic development:technology (modern andtraditional sectors); activity(industry or product sectors);trade (export sector); andsphere (private and publicsectors).
Otherwise, the gap between aspiration and reality will continue to widen witheach passing year. It is for this reason that the public sector has assumed amuch broader and more determining role in development economics than ithas in traditional neoclassical economic analysis.As a social science, economics is concerned with people and how best toprovide them with the material means to help them realize their full humanpotential. But what constitutes the good life is a perennial question, and henceeconomics necessarily involves values and value judgments. Our very con-cern with promoting development represents an implicit value judgmentabout good (development) and evil (underdevelopment). But developmentmay mean different things to different people. Therefore, the nature and char-acter of development and the meaning we attach to it must be carefullyspelled out. We did this in section 1.3 and will continue to explore these defi-nitions throughout the book.The central economic problems of all societies include traditional ques-tions such as what, where, how, how much, and for whom goods and servicesshould be produced. But they should also include the fundamental question atthe national level about who actually makes or influences economic decisionsand for whose principal benefit these decisions are made. Finally, at the inter-national level, it is necessary to consider the question of which nations andwhich powerful groups within nations exert the most influence with regard tothe control, transmission, and use of technology, information, and finance.Moreover, for whom do they exercise this power?Any realistic analysis of development problems necessitates the supplemen-tation of strictly economic variables such as incomes, prices, and savings rateswith equally relevant noneconomic institutional factors, including the nature ofland tenure arrangements; the influence of social and class stratifications; thestructure of credit, education, and health systems; the organization and motiva-tion of government bureaucracies; the machinery of public administrations; thenature of popular attitudes toward work, leisure, and self-improvement; andthe values, roles, and attitudes of political and economic elites. Economic de-velopment strategies that seek to raise agricultural output, create employ-ment, and eradicate poverty have often failed in the past because economistsand other policy advisers neglected to view the economy as an interdepend-ent social system in which economic and noneconomic forces are continuallyinteracting in ways that are at times self-reinforcing and at other times contra-dictory. As you will discover, underdevelopment reflects many individualmarket failures, but these failures often add up to more than the sum of theirparts, combining to keep a country in a poverty trap. Government can play akey role in moving the economy to a better equilibrium, and in many coun-tries, notably in East Asia, government has done so; but all too often govern-ment itself is part and parcel of the bad equilibrium.Achieving the Millennium Development Goals will be an important mile-stone on the long journey to sustainable and just development. Unfortunately,many of the interim targets are unlikely to be achieved on schedule, nor dothey include all of the critical objectives of development.Despite the great diversity of developing nations—some large, others small;some resource-rich, others resource-barren; some subsistence economies, othersmodern manufactured-good exporters; some private-sector-oriented, others to26 PART ONE Principles and Concepts
a large degree run by the government—most share common problems thatdefine their underdevelopment. We will discuss these diverse structures andcommon characteristics of developing countries in Chapter 2.The oil price shocks of the 1970s, the foreign-debt crisis of the 1980s, andthe twenty-first-century concerns with economic globalization, economic im-balances and financial crises, global warming, and international terrorismhave underlined the growing interdependence of all nations and peoples inthe international social system. What happens to life in Caracas, Karachi,Cairo, and Kolkata will in one way or another have important implications forlife in New York, London, and Tokyo. It was once said that “when the UnitedStates sneezes, the world catches pneumonia.” A more fitting expression forthe twenty-first century would perhaps be that “the world is like the humanbody: If one part aches, the rest will feel it; if many parts hurt, the whole willsuffer.”Developing nations constitute these “many parts” of the global organism.The nature and character of their future development should therefore be amajor concern of all nations irrespective of political, ideological, or economicorientation. There can no longer be two futures, one for the few rich and theother for the very many poor. In the words of a poet, “There will be only onefuture—or none at all.”27CHAPTER 1 Introducing Economic Development: A Global Perspective
2828Case Study 1Progress in the Strugglefor More MeaningfulDevelopment: BrazilThere are two faces of development in Brazil.World-competitive industry coexists with stag-nant, protected sectors. Modern agriculture coexistswith low-productivity traditional practices. ButBrazil is in the midst of a spurt of economic devel-opment that might herald a lasting transformationfor a country often considered synonymous with in-equality and unmet potential. Economic growth hasreturned, health and education have improvedmarkedly, the country’s democratization has proveddurable, and inequality—among the highest in theworld—has at long last started to fall. But there isstill a long way to go to achieve genuine develop-ment in Brazil.Many Brazilians have been frustrated with the un-even pace of development and are known for tellingself-deprecating jokes such as “Brazil is the countryof the future—and always will be.” Brazil has evenbeen cited as an example of a country that has experi-enced “growth without development.” But despitehuge inequities, Brazil has made economic and socialprogress and should not be tarred with the samebrush as countries such as Pakistan, Saudi Arabia, orGabon that have had less social development fortheir levels of growth and investment. Extremelyhigh economic inequality and social divisions dopose a serious threat to further progress in Brazil. Butthere are growing reasons to hope that Brazil mayovercome its legacy of inequality so that the countrymay yet join the ranks of the developed countries.Brazil is of special interest in part because itsgrowth performance from the 1960s through theearly 1980s was the best in Latin America, with atleast some parallels with East Asian export policyand performance, although Brazil had a larger rolefor state-owned enterprises, much lower educationand other social expenditures, and much higherinflation.Brazil’s performance is followed widely in thedeveloping world, as it is the largest and most pop-ulous country in Latin America; with some 193 mil-lion people, it is the world’s fifth-largest country inboth area and population. Brazil is consolidating itsrole as the lead country in the Latin America andCaribbean region; it is a key member of the G20leading economies addressing the aftermath of thefinancial crisis; and one of a group of developingcountries pushing for fairer international traderules. It is one of four influential countries referredto by financial analysts of emerging markets as the“BRICs” (Brazil, Russia, India, and China).Although over two decades of military ruleended in Brazil in 1985, an ongoing debt crisis,years of stagnant incomes, and extremely high in-flation followed. It took drastic policies to reduceinflation, and incomes continued to stagnate in theaftermath. The 1980s and the 1990s have been de-scribed as “lost decades” for development. So therecent signs of palpable progress, especially sinceabout 2004, have been welcomed with relief andgrowing enthusiasm among many Brazilians.Although the country remains politically dividedbetween the center-left and the center-right, astriking convergence has been achieved on policiesagreed to be necessary for equitable and sustainedgrowth, ranging from active poverty reductionprograms to relatively orthodox monetary poli-cies. The economy has been booming, in part dueto commodity exports to China, including soy-beans and steel. One persistent worry is whetherthe economy could continue to grow rapidly ifcommodity prices, which have been much higher
in recent years, revert to their very long term trendsfor decline (see Chapter 12).But despite the nation’s early and now resumedgrowth, other indicators of development in Brazillagged, eventually undermining growth prospects.Benefiting from much higher incomes than CentralAmerican countries and spared the destructivenessof civil war, Brazil, it would seem, should havebeen in a much better position to fight extremepoverty and improve economic equity and socialindicators. Instead, the country has continued tosee a higher percentage of its population in povertythan would be expected for an upper-middle-incomecountry, and despite some recent improvement,Brazil remains one of the countries with the highestlevels of inequality in the world. So how shouldBrazil’s development performance be evaluatedand future priorities chosen?Income and GrowthGrowth is generally necessary, though not sufficient,for achieving development. In 2007, Brazil’s percapita income was $5,860. Using purchasing powerparity (see Chapter 2), its average income was $9,270,about one-fifth of that of the United States but morethan eight times that of Haiti (World Bank data).Growth has been erratic, with substantial swingsover time. Data for growth of gross domestic prod-uct (GDP) per capita are sometimes presented forthe periods 1965–1990, when for Brazil it was 1.4%,and for 1990–2000, when it was 1.5%. This appearsto suggest a remarkable stability. But the former fig-ures combine the booming years from 1967 to 1980and Brazil’s “lost decade of development” of the1980s. Nevertheless, performance through this pe-riod was still better than most other countries ofLatin America. And in 2000–2008, annual per capitagrowth rose to 2.6% (World Bank data).Brazil has had an export policy stressing incen-tives for manufacturing exports, as well as protec-tions for domestic industry, with numerous paral-lels with Taiwan and South Korea in their earlierformative stages (see Chapter 12). Its percentageshare of manufactured exports in total exports grewdramatically, reaching 57% in 1980, although itdropped dramatically during the lost decade of the1980s. Although the share of exports increasedagain to reach 54% by 2000, these still largely repre-sented processed foods and ores. By 2007, this fig-ure had fallen to 47%, reflecting in part an increasein commodity prices; manufactured exports alsocontinued to rise. Brazil’s prolonged status as ahighly indebted country (see Chapter 13) was asubstantial drag on growth performance, as werecontinued problems with infrastructure. Today,however, the Industrial, Technological and ForeignTrade Policy (PITCE) program is actively workingto upgrade the quality and competitiveness ofBrazilian industry.High and growing taxes may have also slowedformal-sector employment growth. The overall taxburden increased from about 25% of gross nationalincome to nearly 40% in the decade from 1993 to2004. Payroll taxes are high and as many as half ofBrazil’s labor force now works in the informal sec-tor, where taxes may be avoided (and labor rightsand regulation circumvented).However, Ricardo Hausmann, Dani Rodrik, andAndrés Velasco argue that Brazil does not lack forproductive investment ideas, nor is concern aboutgovernment behavior the factor holding back in-vestment. Using their decision tree framework toidentify the most binding constraints on economicgrowth (see Chapter 4), Hausmann, Rodrik, andVelasco argue that Brazil has high returns to invest-ment and is most constrained by a lack of savings tofinance its productive opportunities at reasonableinterest rates. In raising domestic savings, Hausmannhas emphasized the importance of “creating a finan-cially viable state that does not over-borrow, over-taxor under-invest.”Technology transfer is critical to more rapidgrowth, competing internationally, and beginningto catch up with advanced countries. Brazil hasmade notable progress. The country is viewed asbeing at the cutting edge of agricultural researchand extension in commercially successful exportcrops such as citrus and soybeans. After a disas-trous attempt to protect the computer industry inthe 1980s was abandoned, Brazil has begun to seethe expansion of a software industry, as also seen inIndia. But Brazil has not absorbed technology to thedegree that East Asian countries have.Social IndicatorsBrazil’s human development statistics compare un-favorably with many other middle-income coun-tries such as Costa Rica and quite a few low-income29
countries, let alone with the advanced industrial-ized countries. As of 2007, Brazil ranked 75th on theUnited Nations Development Program’s 2010 Hu-man Development Index (explained in Chapter 2),four positions lower than would be predicted by itsincome.In Brazil, life expectancy at birth in 2007 was 72years, compared with 79 in South Korea. Brazil’sunder-5 mortality rate is 22 per 1,000 live births,compared with 11 in similar-income Costa Rica andjust 6 in Korea (World Bank data). Although thechild mortality rate is quite poor by the standardsof comparable countries today, Brazil, like most de-veloping countries, has made great progress from1960, when its rate was 159 per 1,000. But about 7percent of all children under the age of 5 still sufferfrom malnutrition in Brazil (World Bank data).Brazil suffers from a high incidence of child la-bor for its income level, as a World Bank studyand reports by the International Labor Office haveunderlined. As many as 7 million children still workin Brazil, despite the country’s having officiallymade the eradication of child labor a priority.(For an analysis of the problems of child labor andappropriate child labor policies, see Chapter 8.) Inthe education sphere, Brazil’s officially reportedadult literacy rate has now risen to 90% (inde-pendent observers have concluded that Brazil’seffective literacy is under 50%), while that of simi-lar-income Costa Rica is 96%. Helping explainthis difference, in Costa Rica, six years of schoolattendance are mandatory, and 99% attendance isreported.The UNDP concluded thatthe unequal distribution of social spending is nodoubt a major factor in maintaining inequality andthus poverty. . . . The bulk of the benefits go to themiddle classes and the rich. Close to a third of thepoorest fifth of the population does not attend pri-mary school. But the sharpest differences show upin secondary and tertiary education. More than90% of the poorest four-fifths of the population donot attend secondary school, and practically nonemake it to universities. Only primary schools endup being relatively targeted to the poor, not be-cause the government succeeds in targeting re-sources, but because richer households send theirchildren to private schools. Public expenditures onsecondary and tertiary education are very badlytargeted to the poor. For scholarships—chiefly tograduate students—four-fifths of the money goesto the richest fifth of the population.In fact, with public universities offering free tuitionto mostly high-income undergrads as well as gradstudents, the distortion is even greater. Moreover,corruption and waste limit the effectiveness of gov-ernment expenditures. And the quality of primaryschools in poor areas remains low.So while the persistence of poverty in Brazil isundoubtedly due in part to mediocre growth rela-tive to East Asia or to Brazil’s potential, the mostimportant explanation is the highly concentrateddistribution of income, worsened by inequitable so-cial spending.Development depends on a healthy, skilled, andsecure workforce. Ultimately, a slower improve-ment in health, education, and community devel-opment can feed back to a slower rate of growth, aprocess that has plagued Brazilian development. Ahopeful sign is the role played now in Brazil by afree press, strengthened basic rights, and a very ac-tive but peaceful political competition. These ele-ments can be a precursor of expanded capabilitiesin Amartya Sen’s analysis.PovertyPerhaps the most important social indicator is theextent of extreme poverty among a country’s peo-ple. Poverty has been high in Brazil for an upper-middle-income country. There has been progress; aWorld Bank study found that Brazil’s average percapita income grew by 220% in the high-growthyears from 1960 to 1980, with a 34% decline in theshare of the poor in the population. On the otherhand, similarly sized Indonesia grew 108% from1971 to 1987, with a 42% decline in poverty inci-dence. And some of the ground gained on povertywas subsequently lost in Brazil in the 1980s and1990s. According to World Bank estimates, in 2005,some 18.3% of the population of Brazil lived on lessthan $2 per day. And 7.8% actually lived in extremepoverty, with incomes below $1 per day (WorldBank, 2007 Global Monitoring Report), worse thansome low-income countries such as Sri Lanka. Butthis may actually be an underestimate. According toa Brazilian government research institute cited bythe United Nations Development Program, an evenmore shocking 15% of Brazilians have incomes of30
less than $1 a day. However, poverty is now falling,and the recent Bolsa Familia (family stipend) gov-ernment program has received high marks foraddressing poverty through its “conditional cashtransfers” of resources to poor families providedthat they keep children vaccinated and in school; itis similar to the Mexican Progresa/Oportunidadasprogram that is the subject of the case study forChapter 8. It must also be mentioned that physicalsecurity remains a pressing problem in Brazil,with violent gangs having extensive sway. Thisproblem can have the greatest negative impact onpeople living in poverty.InequalityFor decades, Brazil’s inequality in income (as wellas in land and other assets) has ranked among theworst in the world. High inequality not only pro-duces social strains but can also ultimately retardgrowth, as examined in detail in Chapter 5. Thedegree of income inequality in Brazil is reflectedin the low share of income going to the bottom60% and the high share to the top 10% of the pop-ulation, as seen in the following income distribu-tion data for Brazil (2007 survey data, reported inWorld Development Indicators, 2010):31Fraction of Population Share Received (%)Lowest 10% 1.1Lowest 20% 3.0Second 20% 6.9Third 20% 11.8Fourth 20% 19.6Highest 20% 58.7Highest 10% 43.0government, the Gini index of inequality (ex-plained in detail in Chapter 5) declined from 56 in2001 to 57 in 2005, showing that inequality can fall,often partly as a result of well-designed policies—such as Bolsa Familia.Land ReformLand is very unequally distributed in Brazil, andthere is both an efficiency and a social equity casefor land reform (a subject discussed in Chapter 9).But land reform has been repeatedly blocked inBrazil by the political power of large plantationowners (fazenderos). In response, impoverishedfarmers in the “landless movement,” or MST, haveincreasingly seized land, often arable but unusedland within large plantations. Thousands of fami-lies have taken part. Farmers have also settled infragile rain forest areas, finding themselves unableto acquire land in areas that are more agricultur-ally suitable and less ecologically sensitive. In re-sponse, the government has initiated a land reformprogram, but the results to date have been modestin relation to the scope of the problem.Sustainability of DevelopmentAs described in Chapter 10, growth that relies onrunning down the natural environment is con-trasted with sustainable development, which pre-serves the ecology on which future income andpeople’s health vitally depend. But Braziliansacross the political spectrum appear determinednot to acknowledge destruction of forests as a gen-uine or pressing problem. Deforestation of theBrazilian Amazon rain forest displays conflicts be-tween short- and long-term development goalsand the consequences of huge inequality and stateintervention on behalf of the rich. Despite theirdestructiveness, economic activities in the Ama-zon often benefited in the past from ill-conceivedsubsidies, now curtailed. Grandiose showcase de-velopment projects and schemes, such as subsi-dized ore mining, charcoal-consuming industries,and cattle ranching, were carried out on a largescale.The encouragement of rain forest settlementseemed to be a politically inexpensive alternativeto land reform. In the end, the best lands becameconcentrated in the hands of large, powerful farm-ers. Rights of indigenous peoples were flagrantlyAs these figures show, the top 10% of incomeearners receive about 43% of national income,while the bottom 40% receive just 10%. In recentyears, inequality in Brazil has moderated, butthese figures still make inequality in Brazil amongthe highest in the world. The UNDP concludesthat high inequality is the reason for the high levelof extreme poverty and the very slow rate ofpoverty reduction. Inequality in assets is alsohigh. Brazilian analysts generally conclude that arecent increase in (and enforcement of) the mini-mum wage also reduced inequality; this had wideimpact as many local government workers receivethe minimum wage. According to the Brazilian
violated, with some terrible atrocities committedby settlers. Ecological campaigners and activistsamong rubber-tappers whose livelihoods werethreatened were attacked and sometimes mur-dered. In the meantime, much of these fragile landsappears to have become irreversibly degraded.Many of the subsidies have now been withdrawn,and at least some protections and “extractive re-serves” have been put in place, but rain forest de-struction is hard to reverse. Forest management inother tropical rain forests has led to a rapid growthin ecotourism and very high, profitable, and sus-tainable fruit yields. Products that can be harvestedwithout serious ecological disruption includefibers, latex, resins, gums, medicines, and game.However, it is clear that this cannot protect land onthe vast scale at risk. Because the rest of the worldbenefits from Brazil’s rain forests through preven-tion of global warming, ecological cleansing, andthe irreplaceable biodiversity needed for future an-tibiotics and other medicines and goods, the inter-national community should be prepared to paysomething to ensure its continuation, such as payingforest dwellers to preserve and protect natural re-sources. Financial support for land reform outsidesensitive areas is one clear direction.Problems of Social InclusionFew discussions about poverty in Brazil pay muchattention to race. But about half of the population ofBrazil is of African or mulatto heritage. As a result,it is sometimes noted that Brazil is the world’slargest black nation after Nigeria. And most of thepoor in Brazil are black or mulatto. Although racialdiscrimination is a crime in Brazil, no one has everbeen sent to jail for it. According to one estimate,the average black worker receives only 41% of thesalary of the average white worker. Most of the mil-lions of Brazilians living in the worst favelas, orshantytown slums, are black. The endemic extremepoverty of the Northeast, which has lagged devel-opment standards of the Southeast for decades,afflicts indigenous and mulatto populations. Al-though the Northeast has only about 30% ofBrazil’s population, 62% of the country’s extremepoor live in the region. Black representation in gov-ernment is shockingly rare, even in the states wherenonwhites make up a majority of the population.University places are overwhelmingly claimed bywhites. Some progress has been made, but Brazilmay need a stronger movement comparable to theU.S. civil rights struggle of the 1960s. But in the ab-sence of overt Jim Crow laws, it is sometimes hardto identify the appropriate target. Some form ofmeaningful affirmative action may be the only wayto begin to overcome the problem.ConclusionIt might be most accurate to say that Brazil has ex-perienced some economic growth without as muchsocial development, rather than the more blanket-ing “growth without development,” which appliesbetter to a few Middle Eastern countries and somelower-income countries such as Pakistan, Gabon,and Equatorial Guinea. But continuing racial dis-parities, unjust treatment of indigenous peoples,lack of access of the poor to fertile land, extremelyhigh inequality and surprisingly high poverty forits income level, and the danger that growth willprove ecologically unsustainable all mean thatBrazil will have to continue its recent efforts tomake social inclusion and human development, aswell as environmental sustainability, top prioritiesif it is to resume rapid economic growth, let aloneachieve true multidimensional development.Part of the explanation for high rates of incomepoverty and poor social indicators in Brazil is therelatively slower growth that has prevailed sincethe early 1980s. But a major explanation is that gov-ernment social spending on health, education, pen-sions, unemployment benefits, and other transfersare going to the well-off, frequently to those in thetop 20% of income distribution. Government policyhas often had the effect of worsening inequalityrather than softening it. The Bolsa Familia programis an important recent exception that has made asubstantial impact in Brazil. Bolsa Familia transfersincome to poor families on the condition that theirchildren stay in school, thus providing current con-sumption as well as the potential of future higherearnings for families trapped in chronic poverty.In November 2002, the left-leaning labor leaderLuiz Inacio Lula da Silva, known universally asLula, was elected president of Brazil on a platformpromising greater equity. This generated a lot of ex-citement in the country, with renewed hopes forgreater social inclusion. Whether this will result re-mains in question; his first term saw some renewal32
of growth and a greater public policy focus onpoverty, with some improvements in the favelasand better rural nutrition, for example, but therate of progress on social inclusion was disap-pointingly slow for many Brazilians. Lula was re-elected in 2006, and the general view is that thefollowing four years went well, and Lula’s Worker’sParty successor, Dilma Rousset—who was impris-oned and tortured during military rule—won33the 2010 presidential election to become the firstwoman to lead Brazil. But many questions remain.Can steady progress be made on the racial divide,physical security, environmental decay, poverty,inequality, high borrowing costs, needed diversifi-cation of exports, and high and inefficient govern-ment spending? If so, the outlook for Brazil isbright. ■SourcesAnderson, Anthony B. “Smokestacks in the rainforest: In-dustrial development and deforestation in the Ama-zon basin.” World Development 18 (1990): 1191–1205.Anderson, Anthony B., ed. Alternatives to Deforestation.New York: Columbia University Press, 1990.Assunção, Juliano, “Land Reform and Landholdings inBrazil,” UNU-WIDER Research Paper No. 2006/137,November 2006.Baer, Werner. The Brazilian Economy: Growth and Develop-ment. Boulder, Colo.: Rienner, 2008.Bank Information Center. Funding Ecological and SocialDestruction: The World Bank and the IMF. Washington,D.C.: Bank Information Center, 1990.Bauman, Renato, and Helson C. Braga. “Export financ-ing in the LDCs: The role of subsidies for export per-formance in Brazil.” World Development 16 (1988):821–833.Binswanger, Hans P. “Brazilian policies that encouragedeforestation in the Amazon.” World Development 19(1991): 821–829.Dinsmoor, James. Brazil: Responses to the Debt Crisis.Washington, D.C.: Inter-American DevelopmentBank, 1990.Downing, Theodore E., Susanna B. Hecht, and Henry A.Pearson, eds. Development or Destruction? The Conver-sion of Tropical Forest to Pasture in Latin America. Boul-der, Colo: Westview Press, 1992. The Economist, Spe-cial Report on Brazil (November 14, 2009): http://www.economist.com/specialreports/displayStory.cfm?story_id=E1_TQRNJQRVErber, Fabio Stefano. “The development of the electron-ics complex and government policies in Brazil.”World Development 13 (1985): 293–310.Fields, Gary. Poverty Inequality and Development. NewYork: Cambridge University Press, 1980.Hausmann, Ricardo, Dani Rodrik, and Andrés Velasco.“Growth diagnostics.” In One Economics, ManyRecipes: Globalization, Institutions, and EconomicGrowth, by Dani Rodrik (Princeton, N.J.: PrincetonUniversity Press, 2007).Hausmann Ricardo: “In search of the chains that holdBrazil back.” October 31, 2008. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1338262.INCRA (Brazilian agency for land reform), http://www.incra.gov.br.Sercovich, Francisco Colman. “Brazil.” World Develop-ment 12 (1984): 575–600.Siddiqi, Faraaz, and Harry Anthony Patrinos. ChildLabor: Issues, Causes, and Interventions. World Bank,n.d. http://www.worldbank.org.United Nations Development Program. Human PovertyReport, 2000–2009 (annual). New York: United Na-tions, 2000–2009.World Bank. Eradicating Child Labor in Brazil. Washing-ton, D.C.: World Bank, 2001.World Bank. Global Monitoring Report, 2007. Washing-ton, D.C.: World Bank, 2007. (See in particular TableA.1, p. 226.)World Bank. World Development Indicators, 2010. Wash-ington, D.C.: World Bank, 2010.Yusuf, Shahid. Globalization and the Challenge for Develop-ing Countries. Washington, D.C.: World Bank, 2001.Notes: The Instituto Brasileiro de Geografia e Estatística (IBGE) provides data on Brazil that supplements that found in the World Development Indica-tors and other international sources. See www.ibge.gov.br/english. This case study benefits greatly from annual exchanges on evolving policies and con-ditions with Brazilian civil servants.
34 PART ONE Principles and ConceptsConcepts for ReviewAbsolute PovertyAttitudesCapabilitiesDeveloping countriesDevelopmentDevelopment economicsFreedomFunctioningsGlobalizationGross domestic productGross national income (GNI)Income per capitaInstitutionsLess developed countriesMillennium Development Goals(MDGs)More developed countries (MDCs)Political economySelf-esteemSocial systemSubsistence economySustenanceTraditional economicsValuesAll boldfaced terms that appear in the text are listed in Concepts for Review at the end of each chapter. A glossary at the back of the book providesquick-reference definitions for these and other, more general economic concepts.Questions for Discussion1. Why is economics central to an understanding ofthe problems of development?2. Is the concept of the developing world a usefulone? Why or why not?3. What do you hope to gain from this course on de-velopment economics?4. Briefly describe the various definitions of the termdevelopment encountered in the text. What are thestrengths and weaknesses of each approach? Doyou think that there are other dimensions of de-velopment not mentioned in the text? If so, de-scribe them. If not, explain why you believe thatthe text description of development is adequate.5. Why is an understanding of development crucialto policy formulation in developing nations? Doyou think it is possible for a nation to agree on arough definition of development and orient itsstrategies accordingly?6. Why is a strictly economic definition of devel-opment inadequate? What do you understandeconomic development to mean? Can you give hypo-thetical or real examples of situations in which acountry may be developing economically but stillbe underdeveloped?7. How does the concept of “capabilities to function”help us gain insight into development goals andachievements? Is money enough? Why or whynot?8. What forces may be at work in giving the Millen-nium Development Goals such a high profile ininternational economic relations?9. What critical issues are raised from the examina-tion of development problems and prospects fac-ing Brazil?10. It has been said that ending extreme poverty andachieving genuine development are possible butnot inevitable and that this gives the study of eco-nomic development its moral and intellectual ur-gency. What is meant by this? Comment andevaluate.Notes and Further Reading1. “Voices of the Poor” boxed quotations throughoutthe text are for the most part drawn from the WorldBank “Voices of the Poor” Web site, http://www.worldbank.org/poverty/voices/overview.htm.The Voices project was undertaken as backgroundfor the World Development Report AttackingPoverty. The results were published for the WorldBank by Oxford University Press in a three-vol-ume series titled Can Anyone Hear Us?, Crying Outfor Change, and From Many Lands, edited by DeepaNarayan.2. See Paul Krugman, “Toward a counter-counter-revolution in development theory,” Proceedings of
Alkire-Foster Multidimensional Poverty Index,introduced in Chapter 5. For earlier backgroundsee Andrew C. Revkin, “A new measure of well-being from a happy little kingdom,” New YorkTimes, October 4, 2005, http://www.nytimes.com/2005/10/04/science/04happ.html.17. Commission on the Measurement of EconomicPerformance and Social Progress, p. 16, www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf accessed November 12, 2010.18. See Goulet, Cruel Choice, pp. 87–94.19. For a description of the “basic needs” approach,see Pradip K. Ghosh, ed., Third World Development:A Basic Needs Approach (Westport, Conn.: Green-wood Press, 1984).20. Goulet, Cruel Choice, p. 124.21. For an early attempt to specify and quantify theconcept of basic needs, see International Labor Or-ganization, Employment, Growth, and Basic Needs(Geneva: International Labor Organization, 1976).A similar view with a focus on the notion of entitle-ments and capabilities can be found in AmartyaSen, “Development: Which way now?” EconomicJournal 93 (1983): 754–757. See also United NationsDevelopment Program, Human Development Report,1994 (New York: Oxford University Press, 1994).22. Goulet, Cruel Choice, p. 90. For an even moreprovocative discussion of the meaning of individ-ual self-esteem and respect in the context of LatinAmerican development, see Paulo Freire, Pedagogyof the Oppressed (New York: Continuum, 1990).23. W. Arthur Lewis, “Is economic growth desirable?”in The Theory of Economic Growth (London: Allen &Unwin, 1963), p. 420. For an outstanding andthoughtful analysis of the importance of freedomin development by a leading Developing Worldintellectual, see Soedjatmoko, Primacy of Freedom.See also Sen, Development as Freedom.24. For a “political freedom index,” see United Na-tions Development Program, Human DevelopmentReport, 1992 (New York: Oxford University Press,1992), pp. 20, 26–33. The Heritage Foundation andthe Wall Street Journal produce an annual “Indexof Economic Freedom.” For 1998 rankings of 154countries from “free” to “repressed,” see the WallStreet Journal, December 1, 1997.25. For a commentary from the UNDP on why itsfreedom index was discontinued, see UnitedNations Development Program, Human Develop-ment Report, 2000, pp. 90–93, esp. box 5.2, at http://hdr.undp.org/docs/statistics/understanding/resources/HDR2000_5_2_freedom_indices.pdf.26. United Nations Development Program, HumanDevelopment Report, 2003—Millennium DevelopmentGoals: A Compact among Nations to End HumanPoverty (New York: Oxford University Press,2003), also available at http://hdr.undp.org/reports/global/2003.27. The United Nations issues annual reports onprogress and challenges toward achieving theMDGs. The 2006 and 2009 reports, on which thissection also draws, can be accessed at http://mdgs.un.org. The World Bank also publishes theGlobal Monitoring Report on the MDGs. The 2010monitoring report found that the global economiccrisis slowed progress on poverty reduction,hunger, child and maternal health, access to cleanwater, and disease control and is expected to haveimpacts beyond 2015. See Global Monitoring Report2010: The MDGs after the Crisis, January 1, 2010, athttp://web.worldbank.org. See Report of the Sec-retary-General, Keeping the Promise: A Forward-Looking Review to Promote an Agreed Action Agendato Achieve the Millennium Development Goals by2015, February 12, 2010 http://www.un.org/ga/search/view_doc.asp?symbol=A/64/665.28. Despite some disappointments of slow rates ofachievement of several targets in some regions, theSeptember 2010 UN summit to review progress onthe MDGs underscored its role as a global rallyingpoint and measure of development success.29. See Jan Vandemoortele, “Can the MDGs foster anew partnership for pro-poor policies?” in NGOsand the Millennium Development Goals: Citizen Ac-tion to Reduce Poverty, ed. Jennifer Brinkerhoff,Stephen C. Smith, and Hildy Teegen (New York:Palgrave Macmillan, 2007). Stephen C. Smith,“Organizational comparative advantages ofNGOs in eradicating extreme poverty andhunger: Strategy for escape from poverty traps,”in the same work, and Sabina Alkire with JamesFoster, “The MDGs: Multidimensionality andInterconnection,” at www.ophi.org.uk/wp-content/uploads/OPHI-RP-8a.pdf.36 PART ONE Principles and Concepts
Comparative EconomicDevelopment372The most striking feature of the global economy is its extreme contrasts. Outputper worker in the United States is about 10 times higher than it is in India andmore than 50 times higher than in the Democratic Republic of Congo (DRC).1Real income per capita is $48,430 in the United States, $2,930 in India, and$280 in the DRC.2If the world were a single country, its income would be dis-tributed more unequally than every nation except Namibia.3There are alsoenormous gaps in measures of welfare. Life expectancy is 78 in the UnitedStates, 65 in India, and just 46 in the DRC. The prevalence of undernourish-ment is less than 2.5% in the United States but 22% in India and 75% in theDRC. Whereas almost all women are literate in the United States, just 51% arein India and 56% in the DRC.4How did such wide disparities come about? Intoday’s world, with so much knowledge and with the movement of people,information, and goods and services so rapid and comparatively inexpensive,how have such large gaps managed to persist and even widen? Why havesome developing countries made so much progress in closing these gapswhile others have made so little?In this chapter, we introduce the study of comparative economic develop-ment. We begin by defining the developing world and describing how devel-opment is measured so as to allow for quantitative comparisons acrosscountries. Average income is one, but only one, of the factors defining a coun-try’s level of economic development. This is to be expected, given the discus-sion of the meaning of development in Chapter 1.Viewed through the lens of human development, the global village appears deeplydivided between the streets of the haves and those of the have-nots.—United Nations Development Program, Human Development Report, 2006Among countries colonized by European powers during the past 500 years, those thatwere relatively rich in 1500 are now relatively poor. . . . The reversal reflects changes inthe institutions resulting from European colonialism.—Daron Acemoglu, Simon Johnson, and James A. Robinson, writing in theQuarterly Journal of Economics, 2002
We then consider ten important features that developing countries tend tohave in common, on average, in comparison with the developed world. Ineach case, we also discover that behind these averages are very substantial dif-ferences in all of these dimensions among developing countries that are im-portant to appreciate and take into account in development policy. These areasare the following:1. Lower levels of living and productivity2. Lower levels of human capital3. Higher levels of inequality and absolute poverty4. Higher population growth rates5. Greater social fractionalization6. Larger rural populations but rapid rural-to-urban migration7. Lower levels of industrialization8. Adverse geography9. Underdeveloped financial and other markets10. Lingering colonial impacts such as poor institutions and often external de-pendence.The mix and severity of these challenges largely set the development con-straints and policy priorities of a developing nation.After reviewing these commonalities and differences among developingcountries, we further consider key differences between conditions in today’sdeveloping countries and those in now developed countries at an early stage oftheir development, and we examine the controversy over whether developingand developed countries are now converging in their levels of development.We then draw on recent scholarship on comparative economic develop-ment to further clarify how such an unequal world came about and remainedso persistently unequal, and we shed some light on the positive factors behindrecent rapid progress in a significant portion of the developing world. It be-comes quite clear that colonialism played a major role in shaping institutionsthat set the “rules of the economic game,” which can limit or facilitate oppor-tunities for economic development. We examine other factors in comparativedevelopment, such as nations’ levels of inequality. We will come to appreciatewhy so many developing countries have such difficulties in achieving eco-nomic development but also begin to see some of the outlines of what can bedone to overcome obstacles and encourage faster progress even among to-day’s least developed countries.The chapter concludes with a comparative case study of Bangladesh andPakistan.2.1 Defining the Developing WorldThe most common way to define the developing world is by per capita income.Several international agencies, including the Organization for Economic Cooper-ation and Development (OECD) and the United Nations, offer classifications of38 PART ONE Principles and Concepts
countries by their economic status, but the best-known system is that of the Inter-national Bank for Reconstruction and Development (IBRD), more commonlyknown as the World Bank. (The World Bank is examined in detail in Box 13.2). Inthe World Bank’s classification system, 210 economies with a population of atleast 30,000 are ranked by their levels of gross national income (GNI) per capita.These economies are then classified as low-income countries (LICs), lower-middle-income countries (LMCs), upper-middle-income countries (UMCs), high-income OECD countries, and other high-income countries. (Often, LMCs andUMCs are informally grouped as the middle-income countries.)With a number of important exceptions, the developing countries are thosewith low-, lower-middle, or upper-middle incomes. These countries aregrouped by their geographic region in Table 2.1, making them easier to iden-tify on the map in Figure 2.1. The most common cutoff points for these cate-gories are those used by the World Bank: Low-income countries are defined ashaving a per capita gross national income in 2008 of $975 or less; lower-middle-income countries have incomes between $976 and $3,855; upper-middle-incomecountries have incomes between $3,856 and $11,906; and high-income coun-tries have incomes of $11,907 or more. Comparisons of incomes for severalcountries are shown graphically in Figure 2.2.Note that a number of the countries grouped as “other high-income economies”in Table 2.1 are sometimes classified as developing countries, such as when thisis the official position of their governments. Moreover, high-income countriesthat have one or two highly developed export sectors but in which significantparts of the population remain relatively uneducated or in poor health for thecountry’s income level may be viewed as still developing. Examples may includeoil exporters such as Saudi Arabia and the United Arab Emirates. Upper-incomeeconomies also include some tourism-dependent islands with lingering devel-opment problems. Even a few of the high-income OECD member countries, no-tably Portugal and Greece, have been viewed as developing countries at least un-til recently. Nevertheless, the characterization of the developing world assub-Saharan Africa, North Africa and the Middle East, Asia except for Japan and,more recently South Korea, and perhaps two or three other high-incomeeconomies, Latin America and the Caribbean, and the “transition” countries ofeastern Europe and Central Asia including the former Soviet Union, remains auseful generalization. In contrast, the developed world constituting the core ofthe high-income OECD is comprised of the countries of western Europe, NorthAmerica, Japan, Australia, and New Zealand.Sometimes a special distinction is made among upper-middle-income ornewly high-income economies, designating some that have achieved relativelyadvanced manufacturing sectors as newly industrializing countries (NICs).Yet another way to classify the nations of the developing world is through theirdegree of international indebtedness; the World Bank has classified countriesas severely indebted, moderately indebted, and less indebted. The United Na-tions Development Program (UNDP) classifies countries according to theirlevel of human development, including health and education attainments aslow, medium, high, and very high. We consider the traditional and new UNDPHuman Development Indexes in detail later in the chapter.Another widely used classification is that of the least developed countries, aUnited Nations designation that as of 2010 included 49 countries, 33 of them inAfrica, 15 in Asia, plus Haiti. For inclusion, a country has to meet each of three39CHAPTER 2 Comparative Economic DevelopmentWorld Bank An organiza-tion known as an “interna-tional financial institution”that provides developmentfunds to developing countriesin the form of interest-bearingloans, grants, and technicalassistance.Low-income countries (LICs)In the World Bank classifica-tion, countries with a grossnational income per capita ofless than $976 in 2008.Middle-income countriesIn the World Bank classifica-tion, countries with a GNI percapita between $976 and$11,906 in 2008.Newly industrializing coun-tries (NICs) Countries at arelatively advanced level ofeconomic development with asubstantial and dynamic in-dustrial sector and with closelinks to the internationaltrade, finance, and investmentsystem.Least developed countriesA United Nations designationof countries with low income,low human capital, and higheconomic vulnerability.
40 PART ONE Principles and ConceptsTABLE 2.1 Classification of Economies by Region and Income, 2010East Asia and the PacificAmerican Samoa‡ ASM UMCCambodia* KHM LICChina CHN LMCFiji‡ FJI UMCIndonesia IDN LMCKiribati*‡ KIR LMCKorea, Dem. Rep. (North) PRK LICLao PDR*† LAO LICMalaysia MYS UMCMarshall Islands‡ MHL LMCMicronesia, Fed. Sts.‡ FSM LMCMongolia† MNG LMCMyanmar* MMR LICPalau‡ PLW UMCPapua New Guinea‡ PNG LMCPhilippines PHL LMCSamoa*‡ WSM LMCSolomon Islands*‡ SLB LMCThailand THA LMCTimor-Leste*‡ TLS LMCTonga‡ TON LMCVanuatu*‡ VUT LMCVietnam VNM LICEurope and Central AsiaAlbania ALB LMCArmenia† ARM LMCAzerbaijan† AZE LMCBelarus BLR UMCBosnia and Herzegovina BIH UMCBulgaria BGR UMCGeorgia GEO LMCKazakhstan† KAZ UMCKosovo KSV LMCKyrgyz Republic† KGZ LICLatvia LVA UMCLithuania LTU UMCMacedonia, FYR† MKD UMCMoldova† MDA LMCMontenegro MNE UMCPoland POL UMCRomania ROU UMCRussian Federation RUS UMCSerbia SRB UMCTajikistan† TJK LICTurkey TUR UMCTurkmenistan† TKM LMCUkraine UKR LMCUzbekistan† UZB LICLatin America and the CaribbeanArgentina ARG UMCBelize‡ BLZ LMCBolivia† BOL LMCBrazil BRA UMCChile CHL UMCColombia COL UMCCosta Rica CRI UMCCuba‡ CUB UMCDominica‡ DMA UMCDominican Republic‡ DOM UMCEcuador ECU LMCEl Salvador SLV LMCGrenada‡ GRD UMCGuatemala GTM LMCGuyana‡ GUY LMCHaiti*‡ HTI LICHonduras HND LMCJamaica‡ JAM UMCMexico MEX UMCNicaragua NIC LMCPanama PAN UMCParaguay† PRY LMCPeru PER UMCSt. Kitts and Nevis‡ KNA UMCSt. Lucia‡ LCA UMCSt. Vincent and theGrenadines‡ VCT UMCSuriname‡ SUR UMCUruguay URY UMCVenezuela, RB VEN UMCMiddle East and North AfricaAlgeria DZA UMCDjibouti* DJI LMCEgypt, Arab Rep. EGY LMCIran, Islamic Rep. IRN LMCIraq IRQ LMCJordan JOR LMCLebanon LBN UMCLibya LBY UMCMorocco MAR LMCSyrian Arab Rep. SYR LMCTunisia TUN LMCWest Bank and Gaza WBG LMCYemen, Rep.* YEM LICSouth AsiaAfghanistan*† AFG LICBangladesh* BGD LICBhutan*† BTN LMCIndia IND LMCMaldives*‡ MDV LMCNepal*† NPL LICPakistan PAK LMCSri Lanka LKA LMCSub-Saharan AfricaAngola* AGO LMCBenin* BEN LICBotswana† BWA UMCBurkina Faso*† BFA LICBurundi*† BDI LICCameroon CMR LMCCape Verde‡ CPV LMCCentral African Rep.*† CAF LICChad*† TCD LICComoros*‡ COM LICCongo, Dem. Rep.* COD LICCongo, Rep. COG LMCCôte d’Ivoire CIV LMCEritrea* ERI LICEthiopia*† ETH LICGabon GAB UMCGambia, The* GMB LICGhana GHA LICGuinea* GIN LICGuinea-Bissau*‡ GNB LICKenya KEN LICLesotho*† LSO LMCLiberia* LBR LICMadagascar* MDG LICMalawi*† MWI LICMali*† MLI LICMauritania* MRT LICMauritius‡ MUS UMCMayotte MYT UMCMozambique* MOZ LICNamibia NAM UMCNiger*† NER LICNigeria NGA LMCRwanda*† RWA LICSao Tome and Principe*‡ STP LMCSenegal* SEN LICSeychelles‡ SYC UMCSierra Leone* SLE LICSomalia* SOM LICSouth Africa ZAF UMCSudan* SDN LMCSwaziland† SWZ LMCTanzania* TZA LICTogo* TGO LICUganda*† UGA LICZambia*† ZMB LICZimbabwe† ZWE LICCountry Code Class Country Code Class Country Code Class
criteria: low income, low human capital, and high economic vulnerability. Otherspecial UN classifications include landlocked developing countries (of whichthere are 30, half of them in Africa) and small island developing states (of whichthere are 38).5Finally, the term emerging markets was introduced at the Interna-tional Finance Corporation to suggest progress (avoiding the then-standardphrase Third World that investors seemed to associate with stagnation). While theterm is appealing, we do not use it in this text for three reasons. First, “emergingmarket” is widely used in the financial press to suggest the presence of activestock and bond markets; although financial deepening is important, it is only oneaspect of economic development. Second, referring to nations as “markets” maylead to an underemphasis on some non-market priorities in development. Third,usage varies and there is no established or generally accepted designation ofwhich markets should be labeled emerging and which as yet to emerge.The simple division of the world into developed and developing countriesis sometimes useful for analytical purposes. Many development models applyacross a wide range of developing country income levels. However, the wideincome range of the latter serves as an early warning for us not to overgeneral-ize. Indeed, the economic differences between low-income countries in sub-Saharan Africa and South Asia and upper-middle-income countries in EastAsia and Latin America can be even more profound than those between high-income OECD and upper-middle-income developing countries.41CHAPTER 2 Comparative Economic DevelopmentTABLE 2.1 (Continued)High-Income OECD CountriesAustralia AUSAustria AUTBelgium BELCanada CANCzech Rep. CZEDenmark DNKFinland FINFrance FRAGermany DEUGreece GRCHungary HUNIceland ISLIreland IRLItaly ITAJapan JPNKorea, Rep. (South) KORLuxembourg LUXNetherlands NLDNew Zealand NZLNorway NORPortugal PRTSlovak Republic SVKSpain ESPSweden SWESwitzerland CHEUnited Kingdom GBRUnited States USAOther High-Income EconomiesAndorra ANDAntigua and Barbuda‡ ATGAruba‡ ABWBahamas, The‡ BHSBahrain‡ BHRBarbados‡ BRBBermuda BMUBrunei Darussalam BRNCayman Islands CYMChannel Islands CHICroatia HRVCyprus CYPEstonia ESTEquatorial Guinea* GNQFaeroe Islands FROFrench Polynesia‡ PYFGreenland GRLGuam‡ GUMHong Kong, China HKGIsle of Man IMNIsrael ISRKuwait KWTLiechtenstein LIEMacao, China MACMalta MLTMonaco MCONetherlands Antilles‡ ANTNew Caledonia‡ NCLNorthern Mariana Islands‡ MNPOman OMNPuerto Rico‡ PRIQatar QATSan Marino SMRSaudi Arabia SAUSingapore‡ SGPSlovenia SVNTaiwan, China TWNTrinidad and Tobago‡ TTOUnited Arab Emirates ARECountry Code Class Country Code Class Country Code Class* least developed countries† landlocked developing countries‡ small island developing statesSource: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010) and WDI online; United Nations; and http://www.iso.org.
43CHAPTER 2 Comparative Economic DevelopmentWest Bank and GazaVanuatuTongaTimor-LesteSolomon IslandsSingaporeSeychellesSanMarinoSamoaTuvaluQatarPalauNauruMauritiusMaltaMaldivesLebanonKuwaitIsraelFijiFederated States of MicronesiaMarshall IslandsCyprusComorosBrunei DarussalamBahrainZimbabweZambiaVietnamUzbekistanUnited ArabEmiratesUkraineUgandaTurkmenistanTurkeyTunisiaThailandTanzaniaTajikistanSyrianArab Rep.SwitzerlandSwedenSwazilandSudanSri LankaSouth AfricaSomaliaSloveniaSlovak RepublicSerbiaSaudi ArabiaRwandaR u s s i a n F e d e r a t i o nRomaniaRep. ofYemenRep. ofKoreaPolandPhilippinesPapua NewGuineaPakistanOmanNorwayNigeriaNigerNepalNamibiaMyanmarMozambiqueMongoliaMoldovaMalaysiaMalawiMadagascarLithuaniaLibyaLesothoLatviaLaoP.D.R.Kyrgyz RepublicKenyaKazakhstanJordanJapanItalyIslamic Republicof IranIraqIndonesiaIndiaHungaryGreeceGermanyGeorgiaGabonFYR MacedonianceFinlandEthiopiaEstoniaEritreaEquatorial GuineaDjiboutiDenmarkDem. Rep.of CongoDem. PeoplesRep. of KoreaCzech RepublicCroatiaCongoC h i n aChadCentralAfricanRepublicCameroonCambodiaBurundiBulgariaBotswanaBosnia and HerzegovinaBhutanBelgiumBelarusBangladeshAzerbaijanAustriaA u s t r a l i aNew ZealandArmeniaArab Rep.of EgyptAngolaeriaAlbaniaMontenegroAfghanistanRéunion (Fr)NewCaledonia(Fr)N. Mariana Islands (US)Mayotte(Fr)Guam (US)American Samoa (US)Sub-Saharan Africa$952Europe & Central Asia$6,051South Asia$880East Asia & Pacific$2,180China$2,360India$950Russian Federation$7,560
2.2 Basic Indicators of Development:Real Income, Health, and EducationIn this section, we examine basic indicators of three facets of development:real income per capita adjusted for purchasing power; health as measuredby life expectancy, undernourishment, and child mortality; and educationalattainments as measured by literacy and schooling.Purchasing Power ParityIn accordance with the World Bank’s income-based country classificationscheme, gross national income (GNI) per capita, the most common measure ofthe overall level of economic activity, is often used as a summary index of the rel-ative economic well-being of people in different nations. It is calculated as the to-tal domestic and foreign value added claimed by a country’s residents withoutmaking deductions for depreciation (or wearing out) of the domestic capitalstock. Gross domestic product (GDP) measures the total value for final use ofoutput produced by an economy, by both residents and nonresidents. Thus GNIcomprises GDP plus the difference between the income residents receive fromabroad for factor services (labor and capital) less payments made to nonresidentswho contribute to the domestic economy. Where there is a large nonresident pop-ulation playing a major role in the domestic economy (such as foreign corpora-tions), these differences can be significant (see Chapter 12). In 2008, the total na-tional income of all the nations of the world was valued at more than U.S. $58trillion, of which over $42 trillion originated in the economically developed high-income regions and less than $16 trillion was generated in the less developed na-tions, despite their representing about five-sixths of the world’s population.44 PART ONE Principles and Concepts0SwitzerlandUnited StatesUnited KingdomGhanaBangladeshUgandaMozambiqueEthiopiaPakistanIndiaNigeriaChinaBrazilMexicoCanada10,000 20,000 30,000 40,000 50,000 60,000CountryAnnual income per capita (2008 U.S. $)Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.:World Bank, 2010), tab. 1.1.FIGURE 2.2 Income Per Capita in Selected Countries (2008)Gross national income (GNI)The total domestic and for-eign output claimed by resi-dents of a country, consistingof gross domestic product(GDP) plus factor incomesearned by foreign residents,minus income earned in thedomestic economy bynonresidents.Value added The portionof a product’s final value thatis added at each stage ofproduction.Depreciation (of the capitalstock) The wearing out ofequipment, buildings, infra-structure, and other forms ofcapital, reflected in write-offsto the value of the capitalstock.Capital stock The totalamount of physical goodsexisting at a particular timethat have been produced foruse in the production of othergoods and services.Gross domestic product(GDP) The total finaloutput of goods and servicesproduced by the country’seconomy within the country’sterritory by residents andnonresidents, regardless of itsallocation between domesticand foreign claims.
In 2008 Norway had 312 times the per capita income of Ethiopia and 84times that of India.Per capita GNI comparisons between developed and less developedcountries like those shown in Figure 2.2 are, however, exaggerated by theuse of official foreign-exchange rates to convert national currency figuresinto U.S. dollars. This conversion does not measure the relative domesticpurchasing power of different currencies. In an attempt to rectify this prob-lem, researchers have tried to compare relative GNIs and GDPs by usingpurchasing power parity (PPP) instead of exchange rates as conversion factors.PPP is calculated using a common set of international prices for all goods andservices. In a simple version, purchasing power parity is defined as the numberof units of a foreign country’s currency required to purchase the identical quan-tity of goods and services in the local developing country market as $1 wouldbuy in the United States. In practice, adjustments are made for differing relativeprices across countries so that living standards may be measured more accu-rately.6Generally, prices of nontraded services are much lower in developingcountries because wages are so much lower. Clearly, if domestic prices arelower, PPP measures of GNI per capita will be higher than estimates usingforeign-exchange rates as the conversion factor. For example, China’s 2008 GNIper capita was only 6% of that of the United States using the exchange-rate con-version but rises to 13% when estimated by the PPP method of conversion. In-come gaps between rich and poor nations thus tend to be less when PPP is used.Table 2.2 provides a comparison of exchange-rate and PPP GNI per capitafor 26 countries, eight each from Africa, Asia, and Latin America, plus theUnited Kingdom and United States. Measured in PPP dollars, the gap be-tween the United States and Burundi would be 127 to 1 instead of the 342-to-1gap using official foreign-exchange rates.Table 2.3 broadens these comparisons to include regions and income group-ings, as well as six illustrative country examples at ascending income levels,along with basic health and education indicators. In the first column of Table 2.3,incomes are measured at market or official exchange rates and suggest that in-come of a person in the United States is 320 times that of a person in the Demo-cratic Republic of Congo. But again, this is literally unbelievable, as many serv-ices cost much less in the DRC than in the United States. The PPP rates give abetter sense of the amount of goods and services that could be bought evaluatedat U.S. prices and suggest that real U.S. incomes are closer to 173 times that of theDRC—still a level of inequality that stretches the imagination. Overall, the aver-age real income per capita in high-income countries is more than 28 times that inlow-income countries and 7 times higher than in middle-income countries.Indicators of Health and EducationBesides average incomes, it is necessary to evaluate a nation’s average healthand educational attainments, which reflect core capabilities. Table 2.3 showssome basic indicators of income, health (life expectancy, the rate of under-nourishment, the under-5 mortality rate, and the crude birth rate), and educa-tion (male and female adult literacy). Life expectancy is the average number ofyears newborn children would live if subjected to the mortality risks prevail-ing for their cohort at the time of their birth. Undernourishment means con-suming too little food to maintain normal levels of activity; it is what is often45CHAPTER 2 Comparative Economic DevelopmentPurchasing power parity (PPP)Calculation of GNI using acommon set of internationalprices for all goods and ser-vices, to provide more accu-rate comparisons of livingstandards.
called the problem of hunger. High fertility can be both a cause and a conse-quence of underdevelopment, so the birth rate is reported as another basicindicator. Literacy is the fraction of adult males and females reported or esti-mated to have basic abilities to read and write; functional literacy is generallylower than the reported numbers.Table 2.3 shows these data for the low-, lower-middle-, upper-middle-, andhigh-income country groups. The table also shows averages from six develop-ing regions (East Asia and the Pacific, Latin America and the Caribbean, theMiddle East and North Africa, South Asia, and sub-Saharan Africa) and fromsix illustrative countries: the DRC, India, Egypt, Brazil, Malaysia, and theUnited States.Note that in addition to big differences across these income groupings, thelow-income countries are themselves a very diverse group with greatly differ-ing development challenges. India’s real income is nearly ten times that of theDRC. Its overall life expectancy is 16 years longer. While about three-quartersare undernourished in the DRC, 22% are undernourished in India. Of every1,000 live births, 199 of these children will die before their fifth birthday in the46 PART ONE Principles and ConceptsTABLE 2.2 A Comparison of Per Capita GNI in Selected Developing Countries,the United Kingdom, and the United States, Using OfficialExchange-Rate and Purchasing Power Parity Conversions, 2008Argentina 7,190 13,990Bangladesh 520 1,450Brazil 7,300 10,070Burundi 140 380Cameroon 1,150 2,170Chile 9,370 13,240China 2,940 6,010Costa Rica 6,060 10,950Ghana 630 1,320Guatemala 2,680 4,690India 1,040 2,930Indonesia 1,880 3,590Kenya 730 1,550Malawi 280 810Malaysia 7,250 13,730Mexico 9,990 14,340Nicaragua 1,080 2,620Sierra Leone 320 770South Korea 21,530 27,840Sri Lanka 1,780 4,460Thailand 3,670 7,760Uganda 420 1,140United Kingdom 46,040 36,240United States 47,930 48,430Venezuela 9,230 12,840Zambia 950 1,230GNI Per Capita (U.S. $)Country Exchange Rate Purchasing Power ParitySource: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010) tab. 1.1.
DRC, compared with 69 in India. And the birth rate is about twice as high inthe DRC as in India. In one area, the DRC seems to fare better: It reportshigher levels of both male and female literacy than India does. If India ap-pears to do better overall, both still face enormous development challenges asseen by comparing these statistics even to Malaysia.2.3 Holistic Measures of LivingLevels and CapabilitiesThe Traditional Human Development IndexThe most widely used measure of the comparative status of socioeconomic de-velopment is presented by the United Nations Development Program (UNDP)in its annual series of Human Development Reports. The centerpiece of these re-ports, which were initiated in 1990, is the construction and refinement of its47CHAPTER 2 Comparative Economic DevelopmentTABLE 2.3 Commonality and Diversity: Some Basic IndicatorsIncome GroupLow 523 1,354 59 30 118 32 76 63Lower middle 2,073 4,589 68 15 64 20 87 73Upper middle 7,852 12,208 71 6 23 17 95 92High 39,687 37,665 80 5 7 12CountryDem. Rep. Congo(LIC) 150 280 48 75 199 45 78 56India (LMC) 1,040 2,930 64 22 69 23 75 51Egypt (LMC) 1,800 5,470 70 <5 25 25 75 58Brazil (UMC) 7,300 10,070 72 6 22 16 90 90Malaysia (UMC) 7,250 13,730 74 <5 6 20 99 94United States(high-income) 47,930 48,430 78 <5 8 14RegionEast Asia and thePacific 2,644 10,461 72 12 29 14 96 90Latin America andthe Caribbean 6,768 10,312 73 9 23 19 92 91Middle East andNorth Africa 3,237 7,343 71 7 34 24 82 65South Asia 963 2,695 64 22 76 24 73 50Sub-Saharan Africa 1,077 1,949 52 28 144 38 74 57Europe and Central Asia 7,350 11,953 70 6 22 14 99 97Countryor GroupSource: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), multiple tables.aMost recent year between 2004 and 2006.bMost recent year between 2005 and 2008.Prevalence ofUndernourish-menta(%)2008IncomePer Capita(U.S. $)2008 PPPPer Capita(U.S. $)2008LifeExpectancy(years)2007 Under-5Mortalityper 1,000Live Births2008CrudeBirth RateAdult LiteracybMale Female
informative Human Development Index (HDI). The HDI attempts to rank allcountries on a scale of 0 (lowest human development) to 1 (highest human de-velopment) based on three goals or end products of development: longevity asmeasured by life expectancy at birth, knowledge as measured by a weighted av-erage of adult literacy (two-thirds) and gross school enrollment ratio (one-third), and standard of living as measured by real per capita gross domesticproduct adjusted for the differing purchasing power parity of each country’scurrency to reflect cost of living and for the assumption of diminishing mar-ginal utility of income. Using these three measures of development and ap-plying a formula to data for 177 countries, the HDI ranks countries into fourgroups: low human development (0.0 to 0.499), medium human development(0.50 to 0.799), high human development (0.80 to 0.90), and very high humandevelopment (0.90 to 1.0).Calculation of the traditional HDI underwent a number of changes sinceits inception. (The new 2010 version of the HDI is introduced in the next sec-tion.) In particular, in the past a relatively complicated formula was used toconvert PPP income into “adjusted” income (meaning income adjusted fordiminishing marginal utility so that well-being increases with income but ata decreasing rate). More recently, adjusted income is found by simply takingthe log of current income. Then, to find the income index, one subtracts thelog of 100 from the log of current income, on the assumption that real percapita income can not possibly be less than $100 PPP.7The difference givesthe amount by which the country has exceeded this “lower goalpost.” To putthis achievement in perspective, consider it in relation to the maximum thata developing country might reasonably aspire to over the coming genera-tion. The UNDP takes this at $40,000 PPP. So we then divide by the differ-ence between the log of $40,000 and the log of $100 to find the country’s rel-ative income achievement. This gives each country an index number thatranges between 0 and 1. For example, for the case of Bangladesh, whose 2007PPP GDP per capita was estimated by the UNDP to be $1,241, the income in-dex is calculated as follows:(2.1)The effect of diminishing marginal utility is clear. An income of $1,241,which is just 3% of the maximum goalpost of $40,000, is already enough toreach more than two-fifths of the maximum value that the index can take.Note that a few countries have already exceeded the $40,000 PPP income tar-get; in such cases, the UNDP assigned the maximum value of $40,000 PPPincome, and so the country gets the maximum income index of 1.To find the life expectancy (health proxy) index, the UNDP starts with acountry’s current life expectancy at birth and subtracts 25 years. The latter isthe lower goalpost, the lowest that life expectancy could have been in anycountry over the previous generation. Then the UNDP divides the result by 85years minus 25 years, or 60 years, which represents the range of life expectan-cies expected over the previous and next generations. That is, it is anticipatedthat 85 years is a maximum reasonable life expectancy for a country to try toachieve over the coming generation. For example, for the case of Bangladesh,Income index =[log(1,241) - log(100)][log(40,000) - log(100)]= 0.42048 PART ONE Principles and ConceptsDiminishing marginal utilityThe concept that the subjectivevalue of additional consump-tion lessens as total consump-tion becomes higher.Human Development Index(HDI) An index measuringnational socioeconomic devel-opment, based on combiningmeasures of education,health, and adjusted real in-come per capita.
whose population life expectancy in 2007 was 65.7 years, the life expectancyindex is calculated as follows:(2.2)Notice that no diminishing marginal utility of years of life are assumed; thesame holds for the education index. The education index is made up of twoparts, with two-thirds weight on literacy and one-third weight on school en-rollment. Because gross school enrollments can exceed 100% (because of olderstudents going back to school), this index is also capped at 100%. For the caseof Bangladesh, adult literacy is estimated (rather uncertainly) at 53.5%, so(2.3)For the gross enrollment index, for Bangladesh it is estimated that 52.1% of itsprimary, secondary, and tertiary age population are enrolled in school, so thecountry receives the following value:(2.4)Then, to get the overall education index, the adult literacy index is multipliedby two-thirds and the gross enrollment index is multiplied by one-third. Thischoice reflects the view that literacy is the fundamental characteristic of an ed-ucated person. In the case of Bangladesh, this gives us(2.5)In the final index, each of the three components receives equal, or one-third,weight. Thus(2.6)For the case of Bangladesh,(2.7)One major advantage of the HDI is that it does reveal that a country can domuch better than might be expected at a low level of income and that substan-tial income gains can still accomplish relatively little in human development.Further, the HDI points up that disparities in income are greater than dis-parities in other indicators of development, at least health and education.Moreover, the HDI reminds us that by development we clearly mean broad hu-man development, not just higher income. Many countries, such as some of thehigher-income oil producers, have been said to have experienced “growth with-out development.” Health and education are inputs into the national productionHDI =13(0.420) +13(0.678) +13(0.530) = 0.543+13(education index)HDI =13(income index) +13(life expectancy index)=23(0.535) +13(0.521) = 0.530Education index =23(adult literacy index) +13(gross enrollment index)Gross enrollment index =52.1 - 0100 - 0= 0.521Adult literacy index =53.5 - 0100 - 0= 0.535Life expectancy index =65.7 - 2585 - 25= 0.67849CHAPTER 2 Comparative Economic Development
function in their role as components of human capital, meaning productiveinvestments embodied in persons. Improvements in health and education arealso important development goals in their own right (see Chapter 8). We can-not easily argue that a nation of high-income individuals who are not welleducated and suffer from significant health problems that lead to their livingmuch shorter lives than others around the globe has achieved a higher level ofdevelopment than a low-income country with high life expectancy and wide-spread literacy. A better indicator of development disparities and rankingsmight be found by including health and education variables in a weightedwelfare measure rather than by simply looking at income levels, and the HDIoffers one very useful way to do this.There are other criticisms and possible drawbacks of the HDI. One is thatgross enrollment in many cases overstates the amount of schooling because inmany countries a student who begins primary school is counted as enrolledwithout considering whether the student drops out at some stage. Equal (one-third) weight is given to each of the three components, which clearly has somevalue judgment behind it, but it is difficult to determine what this is. Note thatbecause the variables are measured in very different types of units, it is difficulteven to say precisely what equal weights mean. Finally, there is no attention tothe role of quality. For example, there is a big difference between an extra yearof life as a healthy, well-functioning individual and an extra year with a sharplylimited range of capabilities (such as being confined to bed). Moreover, thequality of schooling counts, not just the number of years of enrollment. Finally,it should be noted that while one could imagine better proxies for health andeducation, measures for these variables were chosen partly on the criterion thatsufficient data must be available to include as many countries as possible.Table 2.4 shows the 2009 Human Development Index (using 2007 data) fora sample of 24 developed and developing nations ranked from low to veryhigh human development (column 3) along with their respective real GDP percapita (column 4) and a measure of the differential between the GDP per capitarank and the HDI rank (column 5). A positive number shows by how much acountry’s relative ranking rises when HDI is used instead of GDP per capita, anda negative number shows the opposite. Clearly, this is one of the critical issues forthe HDI. If country rankings did not vary much when the HDI is used instead ofGDP per capita, the latter would serve as a reliable proxy for socioeconomic de-velopment, and there would be no need to worry about such things as health andeducation indicators. We see from Table 2.4 that the country with the lowestHDI (0.340) in 2007 was Niger, and the one with the highest (0.971) was Norway.It should be stressed that the HDI has a strong tendency to rise with percapita income, as wealthier countries can invest more in health and education,and this added human capital raises productivity. But what is so striking isthat despite this expected pattern, there is still such great variation betweenincome and broader measures of well-being as seen in Tables 2.4 and 2.5. Forexample, Senegal and Rwanda have essentially the same average HDI despitethe fact that real income is 92% higher in Senegal. And Costa Rica has a higherHDI than Saudi Arabia, despite the fact that Saudi Arabia has more than dou-ble the real per capita income of Costa Rica. Many countries have an HDI sig-nificantly different from that predicted by their income. South Africa has anHDI of 0.683, but it ranks just 129th, 51 places lower than to be expected from50 PART ONE Principles and ConceptsHuman capital Productiveinvestments in people, suchas skills, values, and healthresulting from expenditureson education, on-the-jobtraining programs, and med-ical care.
its middle-income ranking. But similarly ranked São Tomé and Príncipe (num-ber 131) ranks 17 places higher than expected from its income level.For the countries listed in Table 2.5 with GDP per capita near $1,000, theHDI ranges dramatically from 0.371 to 0.543. Correspondingly, literacy ratesrange from just 26% to 71%. Life expectancy ranges from only 44 to 61. Amongcountries with GDP per capita near $1,500, literacy ranges from 32% to 74%and enrollment from 37% to 60%, with corresponding variations in the HDI.For the countries in Table 2.5 with GDP per capita near $2,000, the HDI ranges,from 0.511 to 0.710. Life expectancy ranges from 48 to 68. The literacy rateranges from 56% to 99%. For countries listed in Table 2.5 with GDP per capitanear $4,000, the HDI index ranges from 0.654 to 0.768. Life expectancy rangesfrom 65 to 74, and literacy rates range strikingly from 56% in Morocco to essen-tially universal literacy in Tonga. These dramatic differences show that theHuman Development Index project is worthwhile. Ranking countries only byincome—or for that matter only by health or education—causes us to miss im-portant differences in countries’ development levels.51CHAPTER 2 Comparative Economic DevelopmentTABLE 2.4 2009 Human Development Index for 24 Selected Countries (2007 Data)Low Human DevelopmentNiger 182 0.340 627 Ϫ6Afghanistan 181 0.352 1,054 Ϫ17Dem. Rep. Congo 176 0.389 298 5Ethiopia 171 0.414 779 0Rwanda 167 0.460 866 1Côte d’Ivoire 163 0.484 1,690 Ϫ17Malawi 160 0.493 761 12Medium Human DevelopmentBangladesh 146 0.543 1,241 9Pakistan 141 0.572 2,496 Ϫ9India 134 0.612 2,753 Ϫ6South Africa 129 0.683 9,757 Ϫ51Nicaragua 124 0.699 2,570 6Gabon 103 0.755 15,167 Ϫ49China 92 0.772 5,383 10Iran 88 0.782 10,955 Ϫ17Thailand 87 0.783 8,135 Ϫ5High Human DevelopmentSaudi Arabia 59 0.843 22,935 Ϫ19Costa Rica 54 0.854 10,842 19Cuba 51 0.863 6,876 44Chile 44 0.878 13,880 15Very High Human DevelopmentUnited Kingdom 21 0.947 35,130 Ϫ1United States 13 0.956 45,592 Ϫ4Canada 4 0.966 35,812 14Norway 1 0.971 53,433 4CountrySource: Data from United Nations Development Program, Human Development Report, 2009, tab. 1.GDP Rankminus HDIRankRelativeRankingHumanDevelopmentIndex (HDI)GDPPer Capita(PPP, U.S. $)
Average income is one thing, but sometimes even in a middle-incomecountry, many people live in poverty. When the aggregate HDI for variouscountries was adjusted for income distribution, the relative rankings of manydeveloping nations also changed significantly.8For example, Brazil had such ahighly unequal distribution that its ranking slipped, while Sri Lanka saw itsHDI ranking rise due to its more egalitarian distribution.The HDI also ranges greatly for groups within countries. The impact of so-cial exclusion can be seen vividly in Guatemala, where the Q’eqchi ethnicgroup had an HDI rank similar to Cameroon, and the Poqomchi ranked belowZimbabwe, as seen in Figure 2.3a. Regional differences across districts can beseen in Kenya, where the HDI of the capital area of Nairobi ranks as high asTurkey, but Kenya’s Turkana district’s HDI is lower than that of any countryaverage, as shown in Figure 2.3b. Rural-urban differences are illustrated withthe case of China, where as Figure 2.3c shows, urban Shanghai’s HDI wasnearly as high as that of Greece, while rural Gansu has an HDI on a par with52 PART ONE Principles and ConceptsTABLE 2.5 2009 Human Development Index Variations for Similar Incomes (2007 Data)GDP Per Capita near PPP $1,000Madagascar 932 0.543 145 59.9 70.7 61.3Haiti 1,140 0.532 149 61.0 62.1 52.1Rwanda 866 0.460 167 49.7 64.9 52.2Mali 1,083 0.371 178 48.1 26.2 46.9Afghanistan 1,054 0.352 181 43.6 28.0 50.1GDP Per Capita near PPP $1,500Kenya 1,542 0.541 147 53.6 73.6 59.6Ghana 1,334 0.526 152 56.5 65.0 56.5Côte d’Ivoire 1,690 0.484 163 56.8 48.7 37.5Senegal 1,666 0.464 166 55.4 41.9 41.2Chad 1,477 0.392 175 48.6 31.8 36.5GDP Per Capita near PPP $2,000Kyrgyzstan 2,006 0.710 120 67.6 99.3 77.3Laos 2,165 0.619 133 64.6 72.7 59.6Cambodia 1,802 0.593 137 60.6 76.3 58.5Sudan 2,086 0.531 150 57.9 60.9 39.9Cameroon 2,128 0.523 153 50.9 67.9 52.3Mauritania 1,927 0.520 154 56.6 55.8 50.6Nigeria 1,969 0.511 158 47.7 72.0 53.0GDP Per Capita near PPP $4,000Tonga 3,748 0.768 99 71.7 99.2 78.0Sri Lanka 4,243 0.759 102 74.0 90.8 68.7Honduras 3,796 0.732 112 72.0 83.6 74.8Bolivia 4,206 0.729 113 65.4 90.7 86.0Guatemala 4,562 0.704 122 70.1 73.2 70.5Morocco 4,108 0.654 130 71.0 55.6 61.0CountrySource: Data from United Nations Development Program, Human Development Report, 2009, tab. 1.LifeExpectancy(years)GDP PerCapita(U.S. $) HDIHDIRankAdultLiteracy(%)CombinedGross EnrollmentRatio
India, and the HDI of rural Guizhou is below that of Cambodia. An earlier UNstudy found similarly that in South Africa whites enjoy a high HDI level whilethat for blacks was much lower.9Clearly, the United Nations Human Development Index has made a majorcontribution to improving our understanding of what constitutes develop-ment, which countries are succeeding (as reflected by rises in their HDI overtime), and how different groups and regions within countries are faring. By53CHAPTER 2 Comparative Economic Development0.80.7IndiaIndonesiaBotswanaCameroonZimbabwe0.60.50.4(a) Large ethnic differences in HDI in Guatemala (b) Wide inequalities in human developmentbetween districts in Kenya(c) Rural-urban differences intensify regional disparities in ChinaHDI,20040.80.7TurkeySouthAfrica0.60.50.40.30.2HDI,20040.81.00.9GreeceUrbanChinaRuralIndiaCambodiaBotswanaUrbanShanghaiRuralUrbanGansuRuralUrbanGuizhouRural0.70.60.5HDI,2004NigerMali BusiaKenyaNairobiMombassaTurkanaUnitedArabEmiratesQ’eqchiAchiLadinoGuatemalaPoqomchiSource: From Human Development Report, 2005, figs. 10–12. Reprinted with permission from the United NationsDevelopment Programme.FIGURE 2.3 Human Development Disparities within Selected Countries
combining social and economic data, the HDI allows nations to take a broadermeasure of their development performance, both relatively and absolutely.Although there are some valid criticisms, the fact remains that the HDI andits new version considered in the next section, when used in conjunction withtraditional economic measures of development, greatly increase our under-standing of which countries are experiencing development and which are not.And by modifying a country’s overall HDI to reflect income distribution, gen-der, regional, and ethnic differentials, as presented in recent Human Develop-ment Reports, we are now able to identify not only whether a country is de-veloping but also whether various significant groups within that country areparticipating in that development.10The New Human Development IndexIn November 2010, the UNDP introduced its New Human Development Index(NHDI), intended to address some of the criticisms of the HDI. The index isstill based on standard of living, education, and health. But it has eight notablechanges, each with strengths but also a few potential drawbacks.What Is New in the New HDI1. Gross national income (GNI) per capita replaces gross domestic product(GDP) per capita. This should be an unambiguous improvement: GNI re-flects what citizens can do with income they receive, whereas that is nottrue of value added in goods and services produced in a country that go tosomeone outside it, and income earned abroad still benefits some of thenation’s citizens. As trade and remittance flows have been expanding rap-idly, and as aid has been better targeted to very low-income countries, thisdistinction has become increasingly important.2. The education index has been completely revamped. Two new compo-nents have been added: the average actual educational attainment of thewhole population and the expected attainment of today’s children. Each ofthese changes to the index has implications. Use of actual attainment—av-erage years of schooling—as an indicator is unambiguously an improve-ment. Estimates are regularly updated, and the statistic is easily comparedquantitatively across countries. And even though it is at best a very roughguide to what is actually learned—on average, a year of schooling in Maliprovides students with much less than a year of schooling in Norway—this is the best measure we have at present because more detailed data onquality that are credible and comparable are simply not available.3. Expected educational attainment, the other new component, is somewhatmore ambiguous: it is not an achievement but a UN forecast. Historyshows that much can go wrong to derail development plans. Neverthe-less, there have also been many development upside surprises, such asrapid improvements in educational attainment in some countries; there is arisk that low expectations will prove discouraging. Note that life expectancy,which remains the indicator for health, is also a projection based on pre-vailing conditions.54 PART ONE Principles and Concepts
4. The two previous components of the education index, literacy and enroll-ment, have been correspondingly dropped. In contrast to expected attain-ment, literacy is clearly an achievement, and even enrollment is at least amodest achievement. However, literacy has always been badly and tooinfrequently measured and is inevitably defined more modestly in a lessdeveloped country. And enrollment is no guarantee that a grade will becompleted or for that matter that anything is learned or that students (orteachers) even attend.5. The upper goalposts (maximum values) in each dimension have been in-creased to the observed maximum rather than given a predefined cutoff.In some ways, this returns the index to its original design, which was crit-icized for inadequately recognizing small gains by countries starting atvery low levels.6. The lower goalpost for income has been reduced. This is based on esti-mates for Zimbabwe in 2007 that, if the data and their interpretation holdup, represent a historic low for recorded income.117. Another minor difference is that rather than using the common logarithm(log) to reflect diminishing marginal benefit of income, the NHDI nowuses the natural log (ln), as used in the fifth equation in Box 2.1. This re-flects a more usual construction of indexes.8. Possibly the most consequential change is that the NHDI is computedwith a geometric mean, as we examine next.The component indexes of the NHDI are computed by the same method as forthe HDI, such as seen for the case of life expectancy in Equation 2.2 (and, forthe case of China in the NHDI, as in the first equation in Box 2.1). We start bytaking the difference between the country’s actual achievement and the mini-mum goalpost value and then divide the result by the difference between theoverall maximum goalpost and minimum goalpost values. But in calculating55CHAPTER 2 Comparative Economic DevelopmentBOX 2.1 Computing the NHDI: The Case of ChinaLife expectancy indexMean years of schooling index =7.5 - 013.2 - 0= 0.568=73.5 - 2083.2 - 20= 0.847Expected years of schooling indexEducation indexIncome indexHuman Development Index=320.847 * 0.589 * 0.584 = 0.663=ln17,2632 - ln11632ln1108,2112 - ln11632= 0.584=20.568 * 0.553 - 00.951 - 0= 0.589=11.4 - 020.6 - 0= 0.553Indicator ValueLife expectancy at birth (years) 73.5Mean years of schooling (years) 7.5Expected years of schooling (years) 11.4GNI per capita (PPP U.S. $) 7,263Note: Values are rounded.Source: UNDP, Human Development Report, 2010, pp. 216–217.Example: China
the overall index, in place of the arithmetic mean, a geometric mean of thethree indexes is used (a geometric mean is also used to build up the overall ed-ucation index from its two components). Let’s look at why this change is im-portant and how the calculations are done.Computing the NHDI The use of a geometric mean in the NHDI is very im-portant. When using an arithmetic mean (adding up the component indexesand dividing by three) in the HDI, the effect is to assume perfect substitutabil-ity across income, health, and education. For example, a higher value of theeducation index could compensate, one for one, for a lower value of the healthindex. In contrast, use of a geometric mean ensures that poor performance inany dimension directly affects the overall index. Thus, allowing for imperfectsubstitutability is a beneficial change; but there is active debate about whetherusing the geometric mean is the most appropriate way to accomplish this.12Thus as the UNDP notes, the new calculation “captures how well roundeda country’s performance is across the three dimensions.” Moreover, the UNDPargues, “that it is hard to compare these different dimensions of well-beingand that we should not let changes in any of them go unnoticed.”So in the NHDI, instead of adding up the health, education, and income in-dexes and dividing by 3, the NHDI is calculated with the geometric mean:(2.8)where H stands for the health index, E stands for the education index, and Istands for the income index. This is equivalent to taking the cube root of theproduct of these three indexes. The calculations of the NHDI are illustrated forthe case of China in Box 2.1.Table 2.6 shows the 2010 values of the NHDI for a set of 31 countries. SouthKorea has achieved the status of a fully developed country, ranking betweenJapan and Switzerland. Countries such as Qatar, Guatemala, Côte d’Ivoire,Angola, and South Africa perform more poorly on the NHDI than would bepredicted from their income level, while the reverse is true of South Korea,Chile, Bangladesh, Madagascar, and Ghana. No doubt, exploration of alterna-tive indexes will continue; and the NHDI may be a transitional step in its on-going improvement. The UNDP now also offers the Inequality-Adjusted Hu-man Development Index (IHDI)—which imposes a penalty on the HDI thatincreases as inequality across people becomes greater—and the Gender In-equality Index (GII), as well as an important innovation, the MultidimensionalPoverty Index (MPI), which is examined in detail in Chapter 5.2.4 Characteristics of the Developing World:Diversity within CommonalityAs noted earlier, there are important historical and economic commonalitiesamong developing countries that have led to their economic development prob-lems being studied within a common analytical framework in development eco-nomics. These widely shared problems are examined here in detail on an issue-by-issue basis. At the same time, however, it is important to bear in mind thatthere is a great deal of diversity throughout the developing world, even withinthese areas of broad commonality. The wide range of income, health, education,NHDI = H1/3E1/3I1/356 PART ONE Principles and Concepts
nations, including India and the Democratic Republic of Congo but also awide range among these and other developing countries. And as we haveseen, all countries with averages below what is defined as high income areconsidered developing in most taxonomies (and some in the high-incomerange as defined by the World Bank are still considered developing). Thelower average levels but wide ranges of income in developing areas are seenin Table 2.3. Even when adjusted for purchasing power parity and despite ex-traordinary recent growth in China and India, the low- and middle-incomedeveloping nations, with more than five-sixths (84%) of the world’s people,received slightly more than two-fifths (41%) of the world’s income in 2008, asseen in Figure 2.4.At very low income levels, in fact, a vicious circle may set in, whereby lowincome leads to low investment in education and health as well as plant andequipment and infrastructure, which in turn leads to low productivity andeconomic stagnation. This is known as a poverty trap or what Nobel laureateGunnar Myrdal called “circular and cumulative causation.”14However, it isimportant to stress that there are ways to escape from low income, as you willsee throughout this book. Further, the low-income countries are themselves avery diverse group with greatly differing development challenges.15Indeed, some star performers among now high-income economies such asSouth Korea and Taiwan were once among the poorest in the world. Somemiddle-income countries are also relatively stagnant, but others are growingrapidly—China most spectacularly, as reviewed in the case study at the end ofChapter 4. Indeed, income growth rates have varied greatly in different devel-oping regions and countries, with rapid growth in East Asia, slow or even no58 PART ONE Principles and ConceptsEast Asia and Pacific15%South Asia6%Europe andCentral Asia8%Latin Americaand Caribbean9%Middle East andNorth Africa3%Sub-SaharanAfrica2%High-Incomecountries57%Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.:World Bank, 2010), p. 34.FIGURE 2.4 Shares of Global Income, 2008
growth in sub-Saharan Africa, and intermediate levels of growth in otherregions. Problems of igniting and then sustaining economic growth are exam-ined in depth in Chapters 3 and 4.One common misperception is that low incomes result from a country’sbeing too small to be self-sufficient or too large to overcome economic inertia.However, there is no necessary correlation between country size in populationor area and economic development (in part because each has different advan-tages and disadvantages that can offset each other).16The 12 most populous countries include representatives of all four cate-gories: low-, lower-middle-, upper-middle-, and high-income countries (seeTable 2.7). The 12 least populous on the list include primarily lower-middle-and upper-middle-income countries, although the 12th least populous coun-try, São Tomé and Príncipe, has a per capita income of just $1,030. And fourvery small but high-income European countries that are UN members (Andorra,Monaco, Liechtenstein, and San Marino) would appear on the list if compara-ble World Bank income data were available.Lower Levels of Human CapitalHuman capital—health, education, and skills—is vital to economic growthand human development. We have already noted the great disparities in hu-man capital around the world while discussing the Human Development In-dex. Compared with developed countries, much of the developing world haslagged in its average levels of nutrition, health (as measured, for example, bylife expectancy or undernourishment), and education (measured by literacy),as seen in Table 2.3. The under-5 mortality is 17 times higher in low-incomecountries than in high-income countries, although progress has been madesince 1990, as shown graphically in Figure 2.5.59CHAPTER 2 Comparative Economic DevelopmentTABLE 2.7 The 12 Most and Least Populated Countries and Their Per Capita Income, 20081. China 1,325 2,940 1. Palau 20 8,6302. India 1,140 1,040 2. St. Kitts and Nevis 49 10,8703. United States 304 47,930 3. Marshall Islands 60 3,2704. Indonesia 227 1,880 4. Dominica 73 4,7505. Brazil 192 7,300 5. Antigua and Barbuda 87 13,2006. Pakistan 166 950 6. Seychelles 87 10,2207. Bangladesh 160 520 7. Kiribati 97 2,0408. Nigeria 151 1,170 8. Tonga 104 2,6909. Russian Federation 142 9,660 9. Grenada 104 5,88010. Japan 128 38,130 10. St. Vincent and the Grenadines 109 5,05011. Mexico 106 9,990 11. Micronesia 110 2,46012. Philippines 90 1,890 12. S˜ao Tomé and Príncipe 160 1,030Most PopulousSource: The World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs 1.1 and 1.6.Least PopulousaPopulation(millions)GNI PerCapita(U.S. $)Population(thousands)GNI PerCapita(U.S. $)aCriteria for inclusion in the least-populous rankings: United Nations member as of mid-2010, with 2008 comparable population and GNI per capita data in tab. 1.6 in the source.
Table 2.8 shows primary enrollment rates (percentage of students of pri-mary age enrolled in school) and the primary school pupil-to-teacher ratio forthe four country income groups and for five major developing regions. Enroll-ments have strongly improved in recent years, but student attendance andcompletion, along with attainment of basic skills such as functional literacy,remain problems. Indeed, teacher truancy remains a serious problem in SouthAsia and sub-Saharan Africa.17Moreover, there are strong synergies (complementarities) between progressin health and education (examined in greater depth in Chapter 8). For exam-ple, under-5 mortality rates improve as mothers’ education levels rise, as seenin the country examples in Figure 2.6.60 PART ONE Principles and ConceptsTABLE 2.8 Primary School Enrollment and Pupil-Teacher Ratios, 2010Income GroupLow 80 45Lower Middle 87 23aUpper Middle 94 22High 95 15RegionEast Asia and Pacific 93a19Latin America and the Caribbean 94 25Middle East and North Africa 91 24South Asia 86 40aSub-Saharan Africa 73 49Europe and Central Asia 92 16Net Primary School Primary Pupil-TeacherRegion or Group Enrollment (%) RatioSource: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs 2.11 and 2.12.aData for 2009160140120100806040200Deathsper1,000livebirthsLow-incomecountriesAll developingcountriesMiddle-incomecountriesHigh-incomecountries19902005Source: International Bank for Reconstruction and Development/World Bank, World De-velopment Indicators, 2007 (Washington, D.C.: World Bank, 2007), p. 36. Reprinted withpermission.FIGURE 2.5 Under-5 Mortality Rates, 1990 and 2005
The well-performing developing countries are much closer to the devel-oped world in health and education standards than they are to the lowest-income countries.18Although health conditions in East Asia are relativelygood, sub-Saharan Africa continues to be plagued by problems of malnourish-ment, malaria, tuberculosis, AIDS, and parasitic infections. Despite progress,South Asia continues to have high levels of illiteracy, low schooling attainment,and undernourishment. Still, in fields such as primary school completion, low-income countries are also making great progress; for example, enrollments inIndia are up from 68% in the early 1990s to a reported 94% by 2008.Higher Levels of Inequality and Absolute PovertyGlobally, the poorest 20% of people receive just 1.5% of world income. Thelowest 20% now roughly corresponds to the approximately 1.4 billion peopleliving in extreme poverty on less than $1.25 per day at purchasing power par-ity.19Bringing the incomes of those living on less than $1.25 per day up to thisminimal poverty line would require less than 2% of the incomes of the world’swealthiest 10%.20Thus the scale of global inequality is immense.But the enormous gap in per capita incomes between rich and poor nationsis not the only manifestation of the huge global economic disparities. To ap-preciate the breadth and depth of deprivation in developing countries, it isalso necessary to look at the gap between rich and poor within individual de-veloping countries. Very high levels of inequality—extremes in the relativeincomes of higher- and lower-income citizens—are found in many middle-income countries, partly because Latin American countries historically tend to61CHAPTER 2 Comparative Economic Development200150100500Deathsper1,000livebirthsTanzania(2004–05)Bolivia(2003)Egypt(2005)Philippines(2003)Bangladesh(2004)No educationMother’s EducationSome primaryComplete primary/some secondaryComplete secondary/some higherSource: International Bank for Reconstruction and Development/World Bank, World Development Indicators, 2007(Washington, D.C.: World Bank, 2007), p. 119. Reprinted with permission.FIGURE 2.6 Correlation between Under-5 Mortality and Mother’s Education
be both middle-income and highly unequal. Several African countries, includ-ing Sierra Leone, Lesotho, and South Africa, also have among the highestlevels of inequality in the world.21Inequality is particularly high in manyresource-rich developing countries, notably in the Middle East and sub-SaharanAfrica. Indeed, in many of these cases, inequality is substantially higher thanin most developed countries (where inequality has in many cases been rising).But inequality varies greatly among developing countries, with generallymuch lower inequality in Asia. Consequently, we cannot confine our attentionto averages; we must look within nations at how income is distributed to askwho benefits from economic development and why.Corresponding to their low average income levels, a large majority of the ex-treme poor live in the low-income developing countries of sub-Saharan Africaand South Asia. Extreme poverty is due in part to low human capital but also tosocial and political exclusion and other deprivations. Great progress has alreadybeen made in reducing the fraction of the developing world’s population livingon less than $1.25 per day and raising the incomes of those still below that level,but much remains to be done, as we examine in detail in Chapter 5.Development economists use the concept of absolute poverty to representa specific minimum level of income needed to satisfy the basic physical needsof food, clothing, and shelter in order to ensure continued survival. A prob-lem, however, arises when one recognizes that these minimum subsistencelevels will vary from country to country and region to region, reflecting differ-ent physiological as well as social and economic requirements. Economistshave therefore tended to make conservative estimates of world poverty in or-der to avoid unintended exaggeration of the problem.The incidence of extreme poverty varies widely around the developingworld. The World Bank estimates that the share of the population living on lessthan $1.25 per day is 9.1% in East Asia and the Pacific, 8.6% in Latin America andthe Caribbean, 1.5% in the Middle East and North Africa, 31.7% in South Asia,and 41.1% in sub-Saharan Africa.22The share of world population living belowthis level had fallen encouragingly to an estimated 21% by 2006, but indicationsare that the global economic crisis slowed poverty reduction and that in somecountries, poverty has actually increased.23But as Figure 2.7 shows, the numberliving on less than $1.25 per day has fallen from about 1.9 billion in 1981 to about1.4 billion in 2005; this despite a more than 40% increase in world population.Extreme poverty represents great human misery, and so redressing it is atop priority of international development. Development economists have alsoincreasingly focused on ways in which poverty and inequality can lead toslower growth. That is, not only do poverty and inequality result from distortedgrowth, but they can also cause it. This relationship, along with measurementsof inequality and poverty and strategies to address these problems, is exam-ined in depth in Chapter 5; because of their central importance in develop-ment, poverty reduction strategies are examined throughout the text.Higher Population Growth RatesGlobal population has skyrocketed since the beginning of the industrial era, fromjust under 1 billion in 1800 to 1.65 billion in 1900 and to over 6 billion by 2000.The United Nations estimates that the “day of 7 billion” will occur in late 2011 or62 PART ONE Principles and ConceptsAbsolute poverty The situa-tion of being unable or onlybarely able to meet the subsis-tence essentials of food,clothing, shelter, and basichealth care.
early 2012. Rapid population growth began in Europe and other now developedcountries. But in recent decades, most population growth has been centered inthe developing world. Compared with the developed countries, which oftenhave birth rates near or even below replacement (zero population growth) levels,the low-income developing countries have very high birth rates. More than five-sixths of all the people in the world now live in developing countries.But population dynamics varies widely among developing countries. Pop-ulations of some developing countries, particularly in Africa, continue to growrapidly. From 1990 to 2008, population in the low-income countries grew at2.2% per year, compared to 1.3% in the middle-income countries (the high-incomecountries grew at 0.7% per year, reflecting both births and immigration).24Middle-income developing countries show greater variance, with somehaving achieved lower birth rates closer to those prevailing in rich countries.As seen in Table 2.3, the birth rate is about three times as high in the low-income countries as in the high-income countries. In sub-Saharan Africa, theannual birth rate is 39 per 1,000—four times the rate in high-income countries.Intermediate but still relatively high birth rates are found in South Asia (24),the Middle East and North Africa (24), and Latin America and the Caribbean(19). East Asia and the Pacific have a moderate birth rate of 14 per 1,000, partlythe result of birth control policies in China. The very wide range of crudebirth rates around the world is illustrated in Table 2.9. As of 2010, the averagerate of population growth was about 1.4% in the developing countries.A major implication of high birth rates is that the active labor force has to sup-port proportionally almost twice as many children as it does in richer countries.63CHAPTER 2 Comparative Economic Development02,0001,2001,4001,6001,8001,000200400600800Populationlivingunder$1.25perday(millions)200520021999199619931990198719841981Sub-Saharan AfricaSouth AsiaRest of the Developing WorldEast Asia and the PacificSource: International Bank for Reconstruction and Development / The World Bank:“The Developing World is Poorer Than We Thought, But No Less Successful in the FightAgainst Poverty” by Shaohua Chen and Martin Ravallion, Aug. 26, 2008. Reprintedwith permission from The World Bank.FIGURE 2.7 Number of People Living in Poverty by Region, 1981–2005Crude birth rate The num-ber of children born alive eachyear per 1,000 population.
By contrast, the proportion of people over the age of 65 is much greater in thedeveloped nations. Both older people and children are often referred to as aneconomic dependency burden in the sense that they must be supported finan-cially by the country’s labor force (usually defined as citizens between theages of 15 and 64). In low-income countries, there are 66 children under 15 foreach 100 working-age (15–65) adults, while in middle-income countries, thereare 41 and in high-income countries just 26. In contrast, low-income countrieshave just 6 people over 65 per 100 working-age adults, compared with 10 inmiddle-income countries and 23 in high-income countries. Thus the total de-pendency ratio is 72 per 100 in low-income countries and 49 per 100 in high-income countries.25But in rich countries, older citizens are supported by theirlifetime savings and by public and private pensions. In contrast, in developingcountries, public support for children is very limited. So dependency has afurther magnified impact in developing countries.We may conclude, therefore, that not only are developing countries charac-terized by higher rates of population growth, but they must also contend withgreater dependency burdens than rich nations, though with a wide gulf be-tween low- and middle-income developing countries. The circumstances andconditions under which population growth becomes a deterrent to economicdevelopment is a critical issue and is examined in Chapter 6.Greater Social FractionalizationLow-income countries often have ethnic, linguistic, and other forms of socialdivisions, sometimes known as fractionalization. This is sometimes associ-ated with civil strife and even violent conflict, which can lead developing soci-eties to divert considerable energies to working for political accommodationsif not national consolidation. It is one of a variety of governance challengesmany developing nations face. There is some evidence that many of the fac-tors associated with poor economic growth performance in sub-SaharanAfrica, such as low schooling, political instability, underdeveloped financialsystems, and insufficient infrastructure, can be statistically explained by highethnic fragmentation.26The greater the ethnic, linguistic, and religious diversity of a country, themore likely it is that there will be internal strife and political instability. Some of64 PART ONE Principles and ConceptsFractionalization Significantethnic, linguistic, and othersocial divisions within acountry.Dependency burden Theproportion of the total popu-lation aged 0 to 15 and 65+,which is considered economi-cally unproductive and there-fore not counted in the laborforce.TABLE 2.9 Crude Birth Rates Around the World, 2009Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tab. 2.1.45+ Afghanistan, Angola, Burkina Faso, Dem. Rep. of Congo, Niger, Somalia, Uganda, Zambia40–44 Benin, Mali, Nigeria, Rwanda, Sierra Leone, Timor-Leste35–39 Côte d’Ivoire, Ethiopia, Kenya, Madagascar, Senegal30–34 Comoros, Ghana, Guatemala, Pakistan, Papua New Guinea, Sudan, Zimbabwe25–29 Bolivia, Cambodia, Egypt, Paraguay, Philippines, Saudi Arabia20–24 Algeria, Dominican Republic, India, Mexico, Peru, South Africa15–19 Argentina, Brazil, Costa Rica, Sri Lanka, Vietnam10–14 China, Cuba, Hungary, United Kingdom, United States<10 Austria, Germany, Japan, South Korea, Serbia, Taiwan
the most successful development experiences—South Korea, Taiwan, Singapore,and Hong Kong—have occurred in culturally homogeneous societies.But today, more than 40% of the world’s nations have more than five sig-nificant ethnic populations. In most cases, one or more of these groups faceserious problems of discrimination, social exclusion, or other systematic dis-advantages. Over half of the world’s developing countries have experiencedsome form of interethnic conflict. Ethnic and religious conflicts leading towidespread death and destruction have taken place in countries as diverse asAfghanistan, Rwanda, Mozambique, Guatemala, Mexico, Sri Lanka, Iraq, India,Kyrgyzstan, Azerbaijan, Somalia, Ethiopia, Liberia, Sierra Leone, Angola,Myanmar, Sudan, the former Yugoslavia, Indonesia, and the Democratic Re-public of Congo.Conflict can derail what had otherwise been relatively positive develop-ment progress, as in Côte d’Ivoire since 2002 (see Chapter 14 and the casestudy for Chapter 5). There is, however, a heartening trend since the late1990s toward more successful resolution of conflicts and fewer new con-flicts. If development is about improving human lives and providing awidening range of choice to all peoples, racial, ethnic, caste, or religious dis-crimination is pernicious. For example, throughout Latin America, indige-nous populations have significantly lagged behind other groups on almostevery measure of economic and social progress. Whether in Bolivia, Brazil,Peru, Mexico, Guatemala, or Venezuela, indigenous groups have benefitedlittle from overall economic growth. To give just one illustration, three-quar-ters of Guatemala’s native population is poor, compared to about 50% of therest of the population. Being indigenous makes it much more likely that anindividual will be less educated, in poorer health, and in a lower socioeco-nomic stratum than other citizens.27This is particularly true for indigenouswomen. Moreover, descendents of African slaves brought forcefully to thewestern hemisphere continue to suffer discrimination in countries such asBrazil.Ethnic and religious diversity need not necessarily lead to inequality, tur-moil, or instability, and unqualified statements about its impact cannot bemade. There have been numerous instances of successful economic and socialintegration of minority or indigenous ethnic populations in countries as di-verse as Malaysia and Mauritius. And in the United States, diversity is oftencited as a source of creativity and innovation. The broader point is that theethnic and religious composition of a developing nation and whether or notthat diversity leads to conflict or cooperation can be important determinantsof the success or failure of development efforts.28Larger Rural Populations but Rapid Rural-to-Urban MigrationOne of the hallmarks of economic development is a shift from agriculture tomanufacturing and services. In developing countries, a much higher share ofthe population lives in rural areas, as seen in Table 2.10. Although moderniz-ing in many regions, rural areas are poorer and tend to suffer from missingmarkets, limited information, and social stratification. A massive populationshift is also under way as hundreds of millions of people are moving from ruralto urban areas, fueling rapid urbanization, with its own attendant problems.65CHAPTER 2 Comparative Economic Development
The world as a whole has just crossed the 50% threshold: For the first time inhistory, more people live in cities than in rural areas. But sub-Saharan Africaand most of Asia remain predominantly rural. Migration and agriculture is-sues are examined in Chapters 7 and 9.Lower Levels of Industrialization and Manufactured ExportsOne of the most widely used terminologies for the original Group of Seven(G7) countries29and other advanced economies such as smaller Europeancountries and Australia is the “industrial countries.” Industrialization is as-sociated with high productivity and incomes and has been a hallmark ofmodernization and national economic power. It is no accident that mostdeveloping-country governments have made industrialization a high nationalpriority, with a number of prominent success stories in Asia.Table 2.11 shows the structure of employment of men and women and valueadded in the agricultural, industrial, and service sectors. In developed coun-tries, agriculture represents a very small share of employment and output—about 1% in the United States and United Kingdom—although productivity isnot disproportionately low. And the share of employment in industry in thesetwo countries, for example, is actually smaller now than in some developingcountries, particularly among women, as developed countries switch to theservice sector. An often suggested but controversial “pattern of development” isthat the share of employment in industry begins to slowly decline (and the serv-ice sector continues to expand) after developed-country status is reached (seeChapter 3). There is wide variation in activity by sector around the developingworld. However, in most African and Asian countries, agriculture still providesa substantial share of employment, in some cases even a majority. In LatinAmerica, the share of agricultural employment is smaller but still substantial.Along with lower industrialization, developing nations have tended to havea higher dependence on primary exports. Most developing countries havediversified away from agricultural and mineral exports to some degree. The66 PART ONE Principles and ConceptsTABLE 2.10 The Urban Population in Developed Countriesand Developing RegionsWorld 6,810 50More developed countries 1,232 75Less developed countries 5,578 44Sub-Saharan Africa 836 35Northern Africa 205 50Latin America and the Caribbean 580 77Western Asia 231 64South-central Asia 1,726 31Southeast Asia 597 43East Asia 1,564 51Eastern Europe 295 69Region Population (millions, 2009) Urban Share (%)Source: Population Reference Bureau, 2009 World Data Sheet.
middle-income countries are rapidly catching up with the developed worldin the share of manufactured goods in their exports, even if these goods are typ-ically less advanced in their skill and technology content. However, the low-income countries, particularly those in Africa, remain highly dependent on arelatively small number of agricultural and mineral exports. Africa will need tocontinue its efforts to diversify its exports. We examine this in Chapter 12.Adverse GeographyMany analysts argue that geography must play some role in problems of agri-culture, public health, and comparative underdevelopment more generally.Landlocked economies, common in Africa, often have lower incomes thancoastal economies.30As can be observed on the map on the inside cover, de-veloping countries are primarily tropical or subtropical, and this has meantthat they suffer more from tropical pests and parasites, endemic diseases suchas malaria, water resource constraints, and extremes of heat. A great concerngoing forward is that global warming is projected to have its greatest negativeimpact on Africa and South Asia (see Chapter 10).3167CHAPTER 2 Comparative Economic DevelopmentTABLE 2.11 Share of the Population Employed in the Industrial Sector in Selected Countries, 2004–2008 (%)AfricaEgypt 28 43 13 26 6 38 46 51 49Ethiopia 12 6 44 27 17 13 61 77 42Madagascar 82 83 25 5 2 17 13 16 57Mauritius 10 8 4 36 26 29 54 66 67South Africa 11 7 3 35 14 34 54 80 63AsiaBangladesh 42 68 19 15 13 29 43 19 52Indonesia 41 41 14 21 15 48 38 44 37Malaysia 18 10 10 32 23 48 51 67 42Pakistan 36 72 20 23 13 27 41 15 53Philippines 44 24 15 18 11 32 39 65 53South Korea 7 8 3 33 16 37 60 74 60Thailand 43 40 12 22 19 44 35 41 44Vietnam 56 60 22 21 14 40 23 26 38Latin AmericaColombia 27 6 9 22 16 36 51 78 55Costa Rica 18 5 7 28 13 29 54 82 64Mexico 19 4 4 31 18 37 50 77 59Nicaragua 42 8 19 20 18 30 38 73 51Developed CountriesUnited Kingdom 2 1 1 32 9 24 66 90 76United States 2 1 1 30 9 22 68 90 77Agriculture ServicesSource: World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs. 2.3 and 4.2.Note: Ethiopia agricultural employment reflects limited coverage.MalesMales FemalesShareof GDP(2008) FemalesShareof GDP(2008) Male FemaleShareof GDP(2008)Industry
The extreme case of favorable physical resource endowment is the oil-richPersian Gulf states. At the other extreme are countries like Chad, Yemen,Haiti, and Bangladesh, where endowments of raw materials and minerals andeven fertile land are relatively minimal. However, as the case of the Democra-tic Republic of Congo shows vividly, high mineral wealth is no guarantee ofdevelopment success. Conflict over the profits from these industries has oftenled to a focus on the distribution of wealth rather than its creation and to so-cial strife, undemocratic governance, high inequality, and even armed conflict,in what is called the “curse of natural resources.”Clearly, geography is not destiny; high-income Singapore lies almost di-rectly on the equator, and parts of southern India have exhibited enormouseconomic dynamism in recent years. However, the presence of common andoften adverse geographic features in comparison to temperate zone countriesmeans it is beneficial to study tropical and subtropical developing countriestogether for some purposes. Redoubled efforts are now under way to extendthe benefits of the green revolution and tropical disease control to sub-SaharanAfrica. In section 2.7 of this chapter, we add further perspectives on the possi-ble indirect roles of geography in comparative development.Underdeveloped MarketsImperfect markets and incomplete information are far more prevalent in de-veloping countries, with the result that domestic markets, notably but notonly financial markets, have worked less efficiently, as examined in Chapters 4,11, and 15. In many developing countries, legal and institutional foundationsfor markets are extremely weak.Some aspects of market underdevelopment are that they often lack (1) a legalsystem that enforces contracts and validates property rights; (2) a stable andtrustworthy currency; (3) an infrastructure of roads and utilities that results inlow transport and communication costs so as to facilitate interregional trade; (4)a well-developed and efficiently regulated system of banking and insurance,with broad access and with formal credit markets that select projects and allocateloanable funds on the basis of relative economic profitability and enforce rules ofrepayment; (5) substantial market information for consumers and producersabout prices, quantities, and qualities of products and resources as well as thecreditworthiness of potential borrowers; and (6) social norms that facilitate suc-cessful long-term business relationships. These six factors, along with the exis-tence of economies of scale in major sectors of the economy, thin markets formany products due to limited demand and few sellers, widespread externalities(costs or benefits that accrue to companies or individuals not doing the produc-ing or consuming) in production and consumption, and poorly regulated com-mon property resources (e.g., fisheries, grazing lands, water holes) mean thatmarkets are often highly imperfect. Moreover, information is limited and costlyto obtain, thereby often causing goods, finances, and resources to be misallo-cated. And we have come to understand that small externalities can interact inways that add up to very large distortions in an economy and present the realpossibility of an underdevelopment trap (see Chapter 4). The extent to whichthese imperfect markets and incomplete information systems justify a more ac-tive role for government (which is also subject to similar problems of incomplete68 PART ONE Principles and ConceptsImperfect market A marketin which the theoreticalassumptions of perfect com-petition are violated by theexistence of, for example, asmall number of buyers andsellers, barriers to entry, andincomplete information.Incomplete informationThe absence of informationthat producers and con-sumers need to make efficientdecisions resulting in under-performing markets.Resource endowment A na-tion’s supply of usable factorsof production including min-eral deposits, raw materials,and labor.Infrastructure Facilities thatenable economic activity andmarkets, such as transporta-tion, communication and dis-tribution networks, utilities,water, sewer, and energy sup-ply systems.
and imperfect information) is an issue that we will be dealing with in later chap-ters. But their existence remains a common characteristic of many developing na-tions and an important contributing factor to their state of underdevelopment.32Lingering Colonial Impacts andUnequal International RelationsColonial Legacy Most developing countries were once colonies of Europe orotherwise dominated by European or other foreign powers, and institutionscreated during the colonial period often had pernicious effects on developmentthat in many cases have persisted to the present day. Despite important varia-tions that proved consequential, colonial era institutions often favored extrac-tors of wealth rather than creators of wealth, harming development then andnow. Both domestically and internationally, developing countries have moreoften lacked institutions and formal organizations of the type that have bene-fited the developed world: Domestically, on average, property rights have beenless secure, constraints on elites have been weak, and a smaller segment of soci-ety has been able to gain access to and take advantage of economic opportuni-ties.33Problems with governance and public administration (see Chapter 11),as well as poorly performing markets, often stem from poor institutions.Decolonization was one of the most important historical and geopoliticalevents of the post–World War II era. More than 80 former European colonieshave joined the United Nations. But several decades after independence, theeffects of the colonial era linger for many developing nations, particularly theleast developed ones.Colonial history matters not only or even primarily because of stolen re-sources but also because the colonial powers determined whether the legaland other institutions in their colonies would encourage investments by(and in) the broad population or would instead facilitate exploitation of hu-man and other resources for the benefit of the colonizing elite and create orreinforce extreme inequality. Development-facilitating or development-inhibiting institutions tend to have a very long life span. For example, whenthe colonial lands conquered were wealthier, there was more to steal. Inthese cases, colonial powers favored extractive (or “kleptocratic”) institu-tions at the expense of ones that encouraged productive effort. When settlerscame in large numbers to live permanently, incomes ultimately were rela-tively high, but the indigenous populations were largely annihilated by dis-ease or conflict, and descendents of those who survived were exploited andblocked from advancement.In a related point of great importance, European colonization often createdor reinforced differing degrees of inequality, often correlated with ethnicity,which have also proved remarkably stable over the centuries. In some re-spects, postcolonial elites in many developing countries largely took over theexploitative role formerly played by the colonial powers. High inequalitysometimes emerged as a result of slavery in regions where comparative ad-vantage in crops such as sugarcane could be profitably produced on slaveplantations. It also emerged where a large, settled indigenous populationcould be coerced into labor. This history had long-term consequences, particu-larly in Latin America.34Where inequality was extreme, the result has been69CHAPTER 2 Comparative Economic Development
less movement toward democratic institutions, less investment in publicgoods, and less widespread investment in human capital (education, skills,and health). These are among the ways in which extreme inequality is harmfulto development and so is also an important long-term determinant of compar-ative development. We return to these themes later in this chapter.The European colonial powers also had a dramatic and long-lasting im-pact on the economies and political and institutional structures of their Africanand Asian colonies by their introduction of three powerful and tradition-shattering ideas: private property, personal taxation, and the requirement thattaxes be paid in money rather than in kind. These innovations were intro-duced in ways that facilitated elite rule rather than broad-based opportunity.The worst impact of colonization was probably felt in Africa, especially if onealso considers the earlier slave trade. Whereas in former colonies such as Indialocal people played a role in colonial governance, in Africa most governancewas administered by expatriates.In Latin America, a longer history of political independence plus a moreshared colonial heritage (Spanish and Portuguese) has meant that in spiteof geographic and demographic diversity, the countries possess relativelysimilar economic, social, and cultural institutions and face similar problems,albeit with particular hardships for indigenous peoples and descendants ofslaves. Latin American countries have long been middle-income but rarelyadvanced to high-income status—reflecting a situation now known as the“middle-income trap.” In Asia, different colonial heritages and the diversecultural traditions of the people have combined to create different institu-tional and social patterns in countries such as India (British), the Philippines(Spanish and American), Vietnam (French), Indonesia (Dutch), Korea (Japanese),and China (not formally colonized but dominated by a variety of foreignpowers).35To a widely varying degree newly independent nations continuedto experience foreign domination by former colonial powers and the UnitedStates, and in a number of countries by the Soviet Union, particularly duringthe Cold War period. The diversity of colonial experiences is one of the im-portant factors that help explain the wide spectrum of development out-comes in today’s world.External Dependence Relatedly, developing countries have also been lesswell organized and influential in international relations, with sometimesadverse consequences for development. For example, agreements withinthe World Trade Organization (WTO) and its predecessors concerning mat-ters such as agricultural subsidies in rich countries that harm developing-country farmers and one-sided regulation of intellectual property rightshave often been relatively unfavorable to the developing world (seeChapter 12). During debt crises in the 1980s and 1990s, the interests of inter-national banks often prevailed over those of desperately indebted nations(discussed in Chapter 13). More generally, developing nations have weakerbargaining positions than developed nations in international economic rela-tions. Developing nations often also voice great concern over various formsof cultural dependence, from news and entertainment to business practices,lifestyles, and social values. The potential importance of these concerns shouldnot be underestimated, either in their direct effects on development in its70 PART ONE Principles and Concepts
broader meanings or indirect impacts on the speed or character of nationaldevelopment.Developing nations are also dependent on the developed world for envi-ronmental preservation, on which hopes for sustainable development depend.Of greatest concern, global warming is projected to harm developing regionsmore than developed ones; yet both accumulated and current greenhouse gasemissions still originate predominantly in the high-income countries. Thus thedeveloping world endures what may be called environmental dependence, inwhich it must rely on the developed world to cease aggravating the problemand to develop solutions, including mitigation at home and assistance in de-veloping countries.2.5 How Low-Income Countries Today Differfrom Developed Countries in Their Earlier StagesThe position of developing countries today is in many important ways signifi-cantly different from that of the currently developed countries when they em-barked on their era of modern economic growth. We can identify eight signifi-cant differences in initial conditions that require a special analysis of thegrowth prospects and requirements of modern economic development:1. Physical and human resource endowments2. Per capita incomes and levels of GDP in relation to the rest of the world3. Climate4. Population size, distribution, and growth5. Historical role of international migration6. International trade benefits7. Basic scientific and technological research and development capabilities8. Efficacy of domestic institutionsWe will discuss each of these conditions with a view to formulating require-ments and priorities for generating and sustaining economic growth in devel-oping countries.Physical and Human Resource EndowmentsContemporary developing countries are often less well endowed with naturalresources than the currently developed nations were at the time when the lat-ter nations began their modern growth. Some developing nations are blessedwith abundant supplies of petroleum, minerals, and raw materials for whichworld demand is growing; most less developed countries, however—especiallyin Asia, where more than half of the world’s population resides—are poorlyendowed with natural resources. Moreover, in parts of Africa, where naturalresources are more plentiful, and geologists anticipate that there is far more71CHAPTER 2 Comparative Economic Development
yet to be discovered, heavy investments of capital are needed to exploit them,which until very recently has been strongly inhibited by domestic conflict andperhaps Western attitudes. A new wave of investments from China and other“nontraditional investors” has begun to change the picture, though critics areraising concerns about the process.The difference in skilled human resource endowments is even more pro-nounced. The ability of a country to exploit its natural resources and to initiateand sustain long-term economic growth is dependent on, among other things,the ingenuity and the managerial and technical skills of its people and its accessto critical market and product information at minimal cost.36 The populations oftoday’s low-income developing nations are often less educated, less informed,less experienced, and less skilled than their counterparts were in the early daysof economic growth in the West. Paul Romer argues that today’s developing na-tions “are poor because their citizens do not have access to the ideas that are usedin industrial nations to generate economic value.”37For Romer, the technologygap between rich and poor nations can be divided into two components, a phys-ical object gap, involving factories, roads, and modern machinery, and anidea gap, including knowledge about marketing, distribution, inventory control,transactions processing, and worker motivation. This idea gap, and whatThomas Homer-Dixon calls the ingenuity gap (the ability to apply innovativeideas to solve practical social and technical problems), between rich and poor na-tions lies at the core of the development divide. No such human resource gapsexisted for the now developed countries on the eve of their industrialization.Relative Levels of Per Capita Income and GDPThe people living in low-income countries have, on average, a lower level ofreal per capita income than their developed-country counterparts had in thenineteenth century. First of all, nearly 40% of the population of developingcountries is attempting to subsist at bare minimum levels. Obviously, the aver-age standard of living in, say, early-nineteenth-century England was nothingto envy or boast about, but it was not as economically debilitating or precari-ous as it is today for a large fraction of people in the 40 or so least developedcountries, the people now often referred to as the “bottom billion.”Second, at the beginning of their modern growth era, today’s developednations were economically in advance of the rest of the world. They couldtherefore take advantage of their relatively strong financial position to widenthe income gaps between themselves and less fortunate countries in a long pe-riod of income divergence. By contrast, today’s developing countries begantheir growth process at the low end of the international per capita income scale.Climatic DifferencesAlmost all developing countries are situated in tropical or subtropical climaticzones. It has been observed that the economically most successful countriesare located in the temperate zone. Although social inequality and institutionalfactors are widely believed to be of greater importance, the dichotomy is morethan coincidence. Colonialists apparently created unhelpful “extractive” insti-tutions where they found it uncomfortable to settle. But also, the extremes of72 PART ONE Principles and Concepts
heat and humidity in most poor countries contribute to deteriorating soilquality and the rapid depreciation of many natural goods. They also con-tribute to the low productivity of certain crops, the weakened regenerativegrowth of forests, and the poor health of animals. Extremes of heat and hu-midity not only cause discomfort to workers but can also weaken their health,reduce their desire to engage in strenuous physical work, and generally lowertheir levels of productivity and efficiency. As you will see in Chapter 8,malaria and other serious parasitic diseases are often concentrated in tropicalareas. There is evidence that tropical geography does pose significant prob-lems for economic development and that special attention in developmentassistance must be given to these problems, such as a concerted internationaleffort to develop a malaria vaccine.38Population Size, Distribution, and GrowthIn Chapter 6, we will examine in detail some of the development problemsand issues associated with rapid population growth. At this point, it is suffi-cient to note that population size, density, and growth constitute another im-portant difference between less developed and developed countries. Beforeand during their early growth years, Western nations experienced a very slowrise in population growth. As industrialization proceeded, population growthrates increased primarily as a result of falling death rates but also because ofslowly rising birth rates. However, at no time did European and North Ameri-can countries have natural population growth rates in excess of 2% per an-num, and they generally averaged much less.By contrast, the populations of many developing countries have been in-creasing at annual rates in excess of 2.5% in recent decades, and some are stillrising that fast today. Moreover, the concentration of these large and growingpopulations in a few areas means that many developing countries have con-siderably higher person-to-land ratios than the European countries did intheir early growth years. Finally, in terms of comparative absolute size, withthe exception of the former Soviet Union, no country that embarked on a long-term period of economic growth approached the present-day population sizeof India, Egypt, Pakistan, Indonesia, Nigeria, or Brazil. Nor were their rates ofnatural increase anything like that of present-day Kenya, the Philippines,Bangladesh, Malawi, or Guatemala. In fact, many observers doubt whetherthe Industrial Revolution and the high long-term growth rates of contempo-rary developed countries could have been achieved or proceeded so fast andwith so few setbacks and disturbances, especially for the very poor, had theirpopulations been expanding so rapidly.The Historical Role of International MigrationIn the nineteenth and early twentieth centuries, a major outlet for excess ruralpopulations was international migration, which was both widespread andlarge-scale. More than 60 million people migrated to the Americas between 1850and 1914, a time when world population averaged less than a quarter of its cur-rent levels. In countries such as Italy, Germany, and Ireland, periods of famineor pressure on the land often combined with limited economic opportunities in73CHAPTER 2 Comparative Economic Development