1. The document discusses the development gap between rich and poor countries as measured by income, poverty, health, education, and urbanization. It shows that while some countries have steadily grown and closed the gap, others have fallen further behind. 2. Historical examples of catch-up include Germany and Japan who rapidly industrialized in the late 19th century and grew to match incomes of early industrializers like the UK and US. However, some formerly wealthy countries like China, Argentina, and the Ottoman Empire experienced economic decline over the 20th century. 3. The UN's Millennium Development Goals set targets to reduce poverty, improve health and education by 2015, with mixed progress reported across different developing regions. Understanding

1. Chapter 1
1
Introduction to Economic
Development

2. 2
After completing this chapter, you will be able to
1. Explain how various data show the differences between countries
in terms of income, poverty, health, education, and urbanization.
This is called the “Development Gap.”
2. Explain that some countries have been steadily growing and
closing the Development Gap while others have fallen further
behind rich countries.
3. Explain that some economies have declined and become poorer
over time.

3. 3
I. Economics and Development Studies
• The nature of development economics: greater scope than traditional
neoclassical economics and political economy.
• Why study development economics? You think up some critical questions.
• The important role of values in development economics
• Economies as social systems:
– Social systems: interdependent relationships between economic and non-
economic factors
– Success or failure of development policy : importance of taking account of
institutional and structural variables along with more traditional economic
variables

4. 4
What do we mean by development?
• Traditional economic
measures
– GDP, GNP (GNI)
– Income per capita
– Utility of that income?
• The new economic view of
development
– Development leads to
improvement in wellbeing
Amartya Sen’s “Capability”
Approach
-Functionings as an achievement
-Capabilities as freedoms enjoyed
in terms of functionings
- Development and happiness
-Well being in terms of high
standard of living, and having
freedoms of choice.
*Capabilities - freedoms that people have, given their personal features and their
command over commodities.  “Beings”
*Functioning - what people do or can do with the commodities of given
characteristics that they come to possess or control.  “Doings”

5. Some Key “Capabilities”
• Some Important “Beings” and
“Doings” in Capability to
Function:
– Being able to live long
– Being well-nourished
– Being healthy
– Being literate
– Being well-clothed
– Being mobile
– Being able to take part in
the life of the community
– Being happy
Three Core Values of Development
1. Sustenance: ability to meet Basic Needs
2. Self-Esteem: to be a Person
3. Freedom: to be able to Choose
The crucial role of women: societies must
empower and invest in women in order to make
the biggest impact on development.
 Three Objectives of Development
1.Increase availability of life-sustaining goods
2. Raise levels of living
3.Expand range of economic and social
choices
5

6. Top 11 Countries in 2009 According to 3 Different Measures
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7. 7

8. Income and Happiness: Comparing Countries
8

9. 9
II. Facts About The Development Gap
•There are differences in economic development between the advanced
economies of the United States, Japan, and Western Europe and the poorer
economies of Africa, Asia, Latin America, and Eastern Europe.
•Differences can be measured in terms of income, life expectancy, health,
education, and level of urbanization.
•The development gap evolves over time. Currently, it is decreasing for some
countries (e.g. recently, China and India) while increasing for others (e.g.
Democratic Republic of the Congo).
•Economic development is not irreversible. Even some rich economies have
displayed protracted decline (Argentina).
•Poor economies tend to grow faster when they do grow, but experience shows
that protracted declines occur more frequently than for rich countries.

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The Income Gap
•Most common measure of income is the GDP per capita.
•GDP is the value of output produced in a country. It is not an exact income
measure because it does not account for net foreign income, foreign aid, and
remittances.
•GDP per capita needs to be expressed in a common currency (usually the
dollar) for comparison across countries.
•A common way to compare income across countries is by using purchasing
power parity (PPP) not the nominal exchange rates.
•PPP rates are defined so that the same basket of goods in any two countries
has the same dollar value.
•Unlike market exchange rates, PPP rates take into account non-tradable
goods and services (e.g., haircuts). The price of non-tradables is tied to local
wages, so they tend to be cheaper in developing nations.

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Classifying countries in terms of GDP per capita (on a PPP basis) shows
great differences. For example, in 2010:
•Luxemburg is richest at $86,000. Democratic Republic of the Congo
is poorest at $350.
•~ $50,000 include the United States, Norway, and Singapore. It also
includes some oil producing countries like Qatar and the United Arab
Emirates.
• Richer Europe: GDP per capita between $20,000 and $40,000
• Middle income countries, with GDP per capita between $5,000 and
$15,000 include Russia, Brazil, and Mexico.
•The poorest countries have less than $1,000 in GDP per capita, of
which CAM is one.

12. 12
The poverty headcount ratio measures the number of the world’s population
living on less than $2 a day (in a PPP basis).
•This is the measure used by the World Bank to gauge “extreme poverty.”
•According to this definition, 70% of the population in South Asia (Pakistan,
India, Bangladesh, and neighbors) lives in extreme poverty.
•Likewise, nearly 70% of the population of Sub-Saharan Africa fits that
definition.
•In East Asia and the Pacific, 33% of the population lives below the poverty
line.
•In total, this adds up to approximately 2.53 billion people. Almost half of the
world’s population lives in poverty.
The Poverty Gap

13. Poverty headcount ratio in 2008 at PL of $2 a day in 2005 Prices (PPP basis).
13

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The Health Gap
•There are large differences in life expectancy and infant mortality between developed
and developing countries.
•Life expectancy measures the number of years a newborn infant would live if health and
living conditions at the time of its birth remained the same throughout its life.
• Reflects the health conditions and quality of health care
•Achild born in a developed country is usually expected to live longer than a child born
in a developing country.
• In general, life expectancy is highly positively correlated with income.
•There are some exceptions. Cuba (79) is an example of a poor country with high life
expectancy.

15. 2010 life expectancy (years) at birth in regions and in Selected Countries.
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•The infant mortality rate measures the probability that a child will die before
reaching the age of 1. It is computed as the number of children dying before age 1
per 1,000 live births in the same year.
• It is negatively correlated with income.
• It is highest in Sub-Saharan Africa and South Asia.
• Sierra Leone has an infant mortality rate of 134 per 1,000 live births.
• By comparison, the US has an infant mortality rate of 6.5 per 1,000 live births.
•Government policy can make a difference in lowering child mortality. For
example, Cuba has an infant mortality rate of 4.6, which is lower than that of the
US.

17. Infant Mortality Rates in 2010 (Per 1,000 Live Births)
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•Countries that invest in near-universal, quality education can realize high
productivity gains and economic growth.
•Many poor countries cannot afford a good educational system, contributing to
the perpetuation of the development gap.
•There are improvements in primary school enrollment in developing countries,
but many lag behind developed nations in terms of secondary school enrollment.
•Secondary school enrollment is pupils enrolled in secondary education divided
by the population in the age group. (Can be greater than 100%)
• UK has a secondary school enrollment rate of 178%, while Niger’s is only 12%.
•South Korea is successful in economic growth and educational attainment. ~
97% of people between ages of 25-34 have achieved secondary education.
The Education Gap

19. Secondary School Enrollment (Gross) in 2009, by Region
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20. 20
The Urbanization Gap
•Urbanization rate measures proportion of population living in urban areas (>200,000
people) as opposed to rural areas.
•Development drives urbanization, which is increasing rapidly across the world. In
2010, the global rate exceeded 50% for the first time.
•InAfrica, Ethiopia, and Rwanda urbanization rates are below 20% while Djibouti and
Gabon have urbanization rates close to 90%.
•InAsia, Nepal is the least urbanized at 18.2%. South Korea, on the other hand, has an
urbanization rate of 81%, higher than Japan’s 67%.
•In LatinAmerica, Guyana is the least urbanized at 28.5%. Brazil,Argentina, and
Venezuela have urbanization rates above 90%.

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•The recent acceleration of urbanization is not necessarily due to attractive higher levels
of income in urban areas. Many people living is large cities live in extreme poverty with
little basic infrastructure (safe water, electricity, gas, transportation, sewage).
•Most of the world’s largest cities are in the developing world. These include: Mexico
City (Mexico), Sao Paulo (Brazil), Mumbai (India), Shanghai (China), Djakarta
(Indonesia), Kolkata (India) and Cairo (Egypt).
•There is a great need for public policy to address how to improve housing,
infrastructure, health and education in large cities of the developing world.

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•The development gap, as measured by income, poverty, health, education
and urbanization, is a “formal fact” of the economics of development. It
raises the important questions in the economics of development:
Why did some countries develop earlier than others?
•To frame development issues, we need a dynamic (over time) view of
economic development:
How is the development gap is evolving over time?
•Some countries have made great progress toward closing the gap, while
for others the gap has widened.
•Countries that are falling further behind rich countries usually experience
economic stagnation and even decline.

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Differences in Economic Growth
•Notably, the highest growth rates in GDP per capita in the last 3 decades have been in
East Asia, the Pacific and South Asia.
•By contrast, the lowest growth rates in GDP per capita in the last 3 decades have been in
Sub-Saharan Africa, the Middle East, North Africa, Latin America, and the Caribbean.
•There has been wide variation between countries. Between 1980 and 2010, China grew
on average at over 8% a year. Botswana, India, Thailand, and Singapore grew at over 4%
a year during the same period.
•On the other hand, Liberia, SaudiArabia, Cote D’Ivoire, Georgia, Niger, Moldova,
Togo, Gabon, Burundi, Venezuela, and Nicaragua experience economic contraction
during the period.
III. The evolving development gap

24. Average annual growth rate (1980-2010) of GDP per capita (PPP) in 2005 Prices.
24

25. Average annual growth rate (1980-2010) of
GDP per capita (PPP) in constant 2005 prices
for selected countries.
25

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Population Growth
•Population growth contributes to GDP growth because of larger labor force and
thus should increase economic output. However, if output growth is slower than
population growth, GDP per capita falls.
•Noticeably, the world’s poorest region, Sub-SaharanAfrica has had the highest
population growth. Likewise population growth has been high in the Middle East
and NorthAfrica, SouthAsia, LatinAmerica, and the Caribbean.
•If this trend continues, the proportion of the world’s population living in poverty
will increase.

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IV. Stories of catch-up and decline
• The development gap emerged because some countries developed
earlier than others.
• In historical perspective the “Industrial Revolution”:
• The British economy began to expand and change rapidly in the
late 18th century.
• The American economy and much of continental Europe started
in the 19th century.
• Germany and Japan started late, but caught up very rapidly.
• The record is not all good. Examples of rich countries that
subsequently declined include China, Argentina, and the Ottoman
Empire (Turkey).

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The Historical Catch-Up of Japan
•At end of the Tokugawa (Shogun) period, Japan was a feudal society and remained
closed to the outside world.
•In 1867, the Meiji emperor implemented a comprehensive program of social and
political reforms designed to mimic the “institutions” of industrialized countries.
•The Japanese government made large infrastructure investments and promoted
industrialization. Business conglomerates emerged and transformed the economy.
•At the beginning of the “Meiji Restoration,” Japanese income per capita was estimated
at less than 30% that of the U.S. and UK. By 1940 the ratio was over 40%.
•Growth after WWII was even more striking. Japan saw rapid and consistent growth
based on high-quality, low-cost manufacturing.
•By the 1980s, the Japanese economy overtook the UK, and reached 80% of the U.S. per
capita income.

29. Japan’s per capita income, as % of levels in the UK and the US.
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30. 30
•Germany was established as a unified country only after 1871.
•After unification, the government under Bismark launched an industrialization
program. Unification helped development of larger markets, as tariffs between German
states were abolished.
•Anew innovation, the universal bank lent money to firms and, also, held equity in
industrial enterprises. Allowed the financing of large investments that produced
economies of scale (steel, rail, chemicals, etc.) helping the economy grow rapidly.
• By the beginning of WWI, German income was around 80% of the UK level.
•After WWII the (West) German economy also recovered rapidly, surpassing UK
income per capita by the 1960s.
The historical catch-up of Germany

31. German per capita income as a % of levels in the UK.
31

32. •Alexander Gerschenkron: “the advantages of (economic) backwardness”. Latecomers
can achieve a faster industrialization that would allow them to catch up to early
industrializers.
• They adapt/use existing technologies
• They reach economies of scale quickly and in various industrial sectors
•Growth is paced by large volumes of capital investment by both the private and public
sectors
•State policy should encourage private capital formation, building infrastructure,
assuring competition in domestic markets, and shielding “infant industries” from foreign
competition.
32
Catch-Up application

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•When we look at history, some of the currently poor countries and regions of the world
were once the richest.
•China was once the richest country in the world with higher living standards than
Europe until around the 15th century and higher than Japan until about the 19th century.
During the 19th and 20th century Chinese growth continually lagged and did not start
growing again until recently (1980s).
•After 1453, Eastern Europe was dominated by the Ottoman Empire. But the Empire
declined throughout the 19th century and eventually collapsed during WWI.
•Argentina was one of the richest countries in early 20th century, mainly due to high
agricultural productivity. In 1900s Argentina income levels were 80% of the U.S. By
2000, income levels declined to about 30% of U.S.
Economic Decline

34. Estimates of GDP per capita in china and Europe in 1990 international dollars.
34

35. GDP per capita of Argentina as a % of levels in the UK and the US.
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Stories of catch-up and decline
• There are many other examples of former world powers that have declined and become
poor countries and/or regions of the world today.
• To date, there are no examples of prolonged economic decline in industrialized
countries. However, the period of industrialization is still short (about 250 years).
• An important question is then, why do some wealthy countries begin to decline and
ultimately become poor?
• Undoubtedly, this question will become more important as the fear that competition of
developing countries, such as China and India, who will undermine the economies of
rich countries, increases over time.

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V. The Millennium Development Goals
• Millennium Development goals (MDGs)
– Eight goals adopted by the United Nations in 2000
• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

38. MDGs and Targets for 2015
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40. 40
Conclusions
• Development Economics is importance
• It is necessary to include non-economic variables in designing
development strategies
• Countries need to try in achieving the Millennium Development
Goals

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Concepts for Review
• Absolute Poverty
• Attitudes
• Capabilities
• Developing countries
• Development
• Development economics
• Freedom
• Functionings
• Globalization
• Gross domestic product
• Gross national income (GNI)
• Income per capita
• Institutions
• Less developed countries (LDCs)
• Millennium Development Goals (MDGs)
• More developed countries (MDCs)
• Political economy Self-esteem
• Social system
• Subsistence economy
• Sustenance
• Traditional economics
• Values