Economic development todaro smith 11th edition 01


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Economic development todaro smith 11th edition 01

  1. 1. 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 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
  2. 2. 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).
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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):, 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. (Brazilian agency for land reform),, 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. 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 This case study benefits greatly from annual exchanges on evolving policies and con-ditions with Brazilian civil servants.
  11. 11. 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, 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
  12. 12. the World Bank Annual Conference on DevelopmentEconomics, 1992 (Washington, D.C.: World Bank,1993), p. 15. See also Syed Nawab Haider Naqvi,“The significance of development economics,”World Development 24 (1996): 975–987.3. For a classic argument on the role of values in de-velopment economics, see Gunnar Myrdal, TheChallenge of World Poverty (New York: Pantheon,1970), ch. 1. A more general critique of the idea thateconomics can be “value-free” is to be found inRobert Heilbroner’s “Economics as a ‘value-free’science,” Social Research 40 (1973): 129–143, and hisBehind the Veil of Economics (New York: Norton,1988). See also Barbara Ingham, “The meaning ofdevelopment: Interactions between ‘new’ and ‘old’ideas,” World Development 21 (1993): 1816–1818;Paul P. Streeten, Strategies for Human Develop-ment (Copenhagen: Handelshøjskolens Forlag,1994), pt. 1; Selo Soemardjan and Kenneth W.Thompson, eds., Culture, Development, and Democ-racy (New York: United Nations University Press,1994); and Mozaffar Qizilbash, “Ethical develop-ment,” World Development 24 (1996): 1209–1221.4. Soedjatmoko, The Primacy of Freedom in Develop-ment (Lanham, Md.: University Press of America,1985), p. 11.5. Dudley Seers, “The meaning of development,” pa-per presented at the Eleventh World Conference ofthe Society for International Development, NewDelhi (1969), p. 3. See also Richard Brinkman,“Economic growth versus economic development:Toward a conceptual clarification,” Journal of Eco-nomic Issues 29 (1995): 1171–1188; and P. JegadishGandhi, “The concept of development: Its dialec-tics and dynamics,” Indian Journal of Applied Eco-nomics 5 (1996): 283–311.6. Denis Goulet, The Cruel Choice: A New Concept in theTheory of Development (New York: Atheneum, 1971),p. 23. Reprinted with permission from Ana MariaGoulet.7. Amartya Sen, Development as Freedom (New York:Knopf, 1999). p. 14. See also Sen, Commodities andCapabilities (Amsterdam: Elsevier, 1985). We thankSabina Alkire and James Foster for their helpfulsuggestions on updating this section for theEleventh Edition to reflect Professor Sen’s latestthinking on his capability approach including ideasreflected in his recent book The Idea of Justice.8. Sen, Development as Freedom, p. 75.9. Ibid., pp. 70–71.10. Sen, Commodities and Capabilities, pp. 25–26. FromCommodities and Capabilities by Amartya Sen. Copy-right © 1999 by Amartya Sen. Reprinted with per-mission.11. Ibid., p. 21. Sen points out that even if we identifyutility with “desire fulfillment,” we still sufferfrom twin defects of “physical-condition neglect”and “valuation neglect.” He notes that “valuing isnot the same thing as desiring.” Ignoring a per-son’s objectively deprived physical condition justbecause the person considers this subjectivelyunimportant yields an obviously defective meas-ure of well-being. The paper by Foster and Handyis “External Capabilities,” in Arguments for a BetterWorld: Essays in Honor of Amartya Sen, eds. KaushikBasu and Ravi Kanbur, (Oxford: Oxford UniversityPress, 2008).12. Ibid., pp. 10–11. From Commodities and Capabilitiesby Amartya Sen. Copyright © 1999 by AmartyaSen. Reprinted with permission.13. See, for example, William Easterly, “The politicaleconomy of growth without development: A casestudy of Pakistan,” in In Search of Prosperity: Ana-lytic Narratives on Economic Growth, ed. Dani Rodrik(Princeton, N.J.: Princeton University Press, 2003).14. Sen, Commodities and Capabilities, p. 52.15. See Richard Layard, Happiness: Lessons from a NewScience (New York: Penguin, 2005), esp. pp. 32–35and 62–70. The data on happiness and satisfactionare based on an average of the two responses. Formore on the underlying data and analysis, see For a cri-tique of some aspects of this research, see MartinWolf, “Why progressive taxation is not the routeto happiness,” Financial Times, June 6, 2007, p. 12.For an excellent review of the literature through2010 that puts the data and their interpretation inuseful perspective, see Carol Graham, Happinessaround the World: The Paradox of Happy Peasants andMiserable Millionaires, (New York: Oxford Univer-sity Press, 2010).16. For the revised happiness index formula being-considered in Bhutan, see The formula is closely related to the35CHAPTER 1 Introducing Economic Development: A Global Perspective
  13. 13. 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, Commission on the Measurement of EconomicPerformance and Social Progress, p. 16, 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 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 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 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, at 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 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 PART ONE Principles and Concepts
  14. 14. 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
  15. 15. 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
  16. 16. 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.
  17. 17. 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
  18. 18. 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
  19. 19. 42 PART ONE Principles and ConceptsFIGURE 2.1 Nations of the World, Classified by GNI Per CapitaFormerSpanishSaharaUS VirginIslands (US)PuertoRico (US)British VirginIslands (UK)The GambiaSt. LuciaSão Tomé and PríncipeMonacoLuxembourgLiechtensteinKiribatiGrenadaDominicaCape VerdeAndorraSt. Vincent and the GrenadinesSt. Kitts and NevisBarbadosThe BahamasAntigua and BarbudaMartinique (Fr)UruguayU n i t e d S t a t e sUnitedKingdomTrinidadand TobagoTogoSSurinameSpainSierra LeoneSenegalR.B. deVenezuelaPortugalPeruParaguayPanamaNicaraguaThe NetherlandsMoroccoMexicoMauritaniaMaliLiberiaJamaicaIrelandIcelandFaeroeIslands(Den)HondurasHaitiGuyanaGuinea-BissauGuineaGuatemalaGhanaFra ncEEl SalvadorEcuadorCubaCôtedIvoireCosta RicaColombiaChileC a n a d aBurkina FasoB r a z i lBoliviaBeninBelizeBeArgentinaAlg erDominicanRepublicNetherlandsAntilles (Neth)Isle of Man (UK)Greenland (Den)Gibraltar (UK)French Polynesia (Fr)French Guiana(Fr)Channel Islands (UK)Cayman Islands (UK)Bermuda(UK)Aruba(Neth)Guadeloupe (Fr)Middle East & North Africa$2,794Latin America & Caribbean$5,540Brazil$5,910Upper-middle-income countries ($3,706–$11,455)Lower-middle-income countries ($936–$3,705)Low-income countries ($935 or less)High-income countries ($11,456 or more)no dataGNI per capita,World Bank Atlas method, 2007IncomeSource: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew Ltd., 2010.Note: This map reflects income data for 2007. The data in the text refer to 2008; thus there are some modest differences.
  20. 20. 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
  21. 21. 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.
  22. 22. 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.
  23. 23. 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.
  24. 24. 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
  25. 25. 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.
  26. 26. 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
  27. 27. 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.
  28. 28. 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. $)
  29. 29. 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
  30. 30. 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.,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