Economic Conditions in Developing Countries An economics lecture by Professor Dave Abler of Penn State University retrieved from: http://450.aers.psu.edu/economic_conditions.cfm This lecture provides a broad overview of economic conditions in developing countries. Specific topics covered include:  Daily life in developing countries  Some terminology to get us started  Economic growth vs. economic development  Selected socioeconomic statistics  Common socioeconomic characteristics of developing countries  Key socioeconomic differences among developing countries Daily Life in Developing Countries The differences between day-to-day life in developing countries and the U.S. are huge and can be very difficult for us to comprehend. Virtually everything – what people own, what they do for a living, what they do in their leisure time, what they expect out of life for themselves and their children, the way they think about themselves and others, the things they take for granted, and more – differs dramatically. According to the World Bank, nearly 1 billion people live below the international poverty line of $1.08 in consumption expenditures per person per day in 1993 purchasing power parity (PPP) adjusted U.S. dollars. (Purchasing power parity is defined below.) That's about $1.53 per person per day in today's dollars. Another 1.5 billion are only a little better off, living on less than $2.15 per day in 1993 PPP adjusted U.S. dollars. These are commonly referred to as the "$1-a-day" and "$2-a-day" poverty lines. So what would it be like living on $1.53 per day? An article from USA Today may be helpful in putting things into perspective.  Get rid of your car and all of your furniture and appliances except one chair and one table – no TV, stereo, refrigerator, dishwasher, clothes washer, dryer, or even lamps.  Get rid of all your clothing except your oldest, most beaten-up shirt and pair of jeans. If you're the head of the family, you can keep one pair of shoes. If not, get rid of them too.  Remove the food from the kitchen. You can keep one small bag of flour, some sugar and salt, and a few potatoes, onions, cabbages or dry beans. You'll cook with firewood or dried cow dung.  Shut off the water, gas and electricity. While you're at it, dismantle the bathroom. Your new bathroom will be the local stream or pond. You'll get your drinking water from there too.  Move out of the house and into the toolshed. Your neighborhood will be a small village or shantytown. http://450.aers.psu.edu/economic_conditions.cfm  Don't waste any time on newspapers, books and magazines. They'll be meaningless to you because you'll give up literacy.  Hold $10 in case of emergency – no bank account, pension plan or insurance policies.  Cultivate three acres as a tenant farmer. If the weather's good, you can expect $300 to $500 per year in cash crops. You'll pay one third ...

1. Economic Conditions in Developing Countries
An economics lecture by Professor Dave Abler of Penn State
University retrieved from:
http://450.aers.psu.edu/economic_conditions.cfm
This lecture provides a broad overview of economic conditions
in developing countries.
Specific topics covered include:
socioeconomic statistics
countries
Daily Life in Developing Countries
The differences between day-to-day life in developing countries
and the U.S. are huge and
can be very difficult for us to comprehend. Virtually everything
– what people own, what
they do for a living, what they do in their leisure time, what
they expect out of life for
themselves and their children, the way they think about
themselves and others, the things
they take for granted, and more – differs dramatically.
According to the World Bank, nearly 1 billion people live below
the international poverty line

2. of $1.08 in consumption expenditures per person per day in
1993 purchasing power parity
(PPP) adjusted U.S. dollars. (Purchasing power parity is defined
below.) That's about $1.53
per person per day in today's dollars. Another 1.5 billion are
only a little better off, living on
less than $2.15 per day in 1993 PPP adjusted U.S. dollars.
These are commonly referred to
as the "$1-a-day" and "$2-a-day" poverty lines.
So what would it be like living on $1.53 per day? An article
from USA Today may be helpful
in putting things into perspective.
car and all of your furniture and appliances
except one chair and one
table – no TV, stereo, refrigerator, dishwasher, clothes washer,
dryer, or even
lamps.
-
up shirt and pair of
jeans. If you're the head of the family, you can keep one pair of
shoes. If not, get rid
of them too.
bag of flour, some sugar
and salt, and a few potatoes, onions, cabbages or dry beans.
You'll cook with
firewood or dried cow dung.

3. dismantle the bathroom.
Your new bathroom will be the local stream or pond. You'll get
your drinking water
from there too.
he house and into the toolshed. Your
neighborhood will be a small
village or shantytown.
http://450.aers.psu.edu/economic_conditions.cfm
They'll be meaningless
to you because you'll give up literacy.
– no bank account, pension
plan or insurance
policies.
good, you can expect $300
to $500 per year in cash crops. You'll pay one third of that to
the landlord and
another tenth to the moneylender.
because you'll be lucky
if you live past 55 or 60.

4. Terminology
How should we define the countries we're studying in this
course? A lot of terms have
sprung up over the years, some better than others.
Third World. This term is based on an old division of the globe
into the first world (North
America, Western Europe, Japan), second world (communist
countries), and third world (all
other countries). This division is outdated. Communism as an
economic system is dead,
even in countries such as China that still call themselves
communist.
Developing Countries. This term, and the term less-developed
countries, are the two
most popular. For this reason they'll be the terms we use most
often in this course.
However, we need to bear in mind that they can be misleading.
Many of the developing
countries aren't developing at all in economic terms. Per capita
income (which is just total
income divided by total population, or average income per
person) usually rises over time,
but there are developing countries where it's actually falling.
For example, per capita
income in the Haiti fell by about a third between 1990 and
2005.
This terminology can also be misleading because the so-called
developed countries such as
the U.S. continue to grow economically. In fact, the U.S. of 50

5. years ago, which was by far
the wealthiest country in the world at that time, would be
considered a relatively poor
country today. The developing vs. developed country
terminology doesn't imply that all
developing countries are experiencing similar development or
that developed countries have
reached a preferred or final stage of development.
Low-Income Countries and Middle-Income Countries.
Technically speaking, these
terms are the most accurate and the least subject to confusion
about what they actually
mean. They refer to countries that have relatively low levels of
per capita income. The
World Bank divides countries into three groups based on their
per capita incomes: low-
income, middle-income, and high-income. The cutoffs in U.S.
dollars as of 2005 were: low-
income, $875 or less; middle-income, $876 to $10,725; high-
income, $10,726 or more. The
middle-income group is sometimes split up into lower-middle
($876 to $3,465) and upper-
middle ($3,466 to $10,725). These cutoffs are updated annually.
For the purposes of this course, a developing country or less-
developed country is defined
as a low-income or middle-income country.
As a caveat, per capita income is one useful indicator of
economic performance but it by no
means is the entire story. Per capita income doesn't tell us

6. whether income is evenly or
unevenly distributed among the people of a country. A country
with a high per capita
income could still have a lot of very poor people. It also doesn't
deal adequately with
environmental or natural resource degradation.
The low-income and middle-income country groups include the
countries of eastern Europe
and the former Soviet Union that lived under communism until
the late 1980s or early
1990s. I won't be talking about these countries in any of the
lectures in this course. It's not
that they're unimportant – far from it. Rather, it's because the
economic problems and
adjustments facing these countries as they move toward a
market economy are much
different from those facing other low-income and middle-
income countries. However, term
papers on these countries are welcome.
Other Terms. People sometimes talk about the north vs. south.
The north refers to
developed countries, which for the most part lie north of the
equator. The south refers to
developing countries, which for the most part lie south of the
equator. Other terms, such as
rich and poor, are used at times as well.
Economic Growth vs. Economic Development
People sometimes use the terms economic growth and economic
development
interchangeably. To economists and others working on

7. economic development, however,
they mean different things. Economic growth refers to a rise
either in total national income
or in per capita income. Of these two, per capita income is
much better because per capita
income can only go up if total income is rising faster than
population. There are some
countries where total income is growing but per capita is falling
because population is
growing even faster.
For the purposes of this course, economic growth means a rise
in per capita income.
Economic development is a much broader concept than
economic growth. It implies an
improvement in the quality of human life, which is much more
than increasing per capita
income. It also entails reducing poverty and enhancing
individual economic opportunities.
Some economists take the concept of economic development
even farther, extending it to
include better education, improved health and nutrition,
conservation of natural resources, a
cleaner environment, and a richer cultural life.
Selected Socioeconomic Statistics
To give us some feel for socioeconomic conditions in
developing countries vs. developed
countries, here are some basic statistics for the ten largest
developing countries in terms of
population (China, India, Indonesia, Brazil, Pakistan,
Bangladesh, Nigeria, Mexico,

8. Philippines, Vietnam). Also shown for purposes of comparison
are statistics for the three
largest developed countries in terms of population (U.S., Japan,
Germany).
Country
Population
(millions),
2005
Population
Growth Rate,
1990-2005
(%/year)
Per Capita
Income,
U.S. $,
2005
Per Capita
Growth Rate,
1990-2005
(%/year)*
PPP-Adjusted
Per Capita
Income, U.S.
$, 2005
China 1305 1.4 1740 8.9 8610

9. India 1095 1.7 730 4.6 3460
Indonesia 221 1.4 1280 3.0 3720
Brazil 186 1.5 3550 1.2 8230
Pakistan 156 2.4 690 1.7 2350
Bangladesh 142 2.1 470 2.9 2090
Nigeria 132 2.5 560 1.1 1040
Mexico 103 1.4 7310 1.3 10030
Philippines 83 2.0 1320 1.8 5300
Vietnam 83 1.5 620 6.3 3010
U.S. 296 1.1 43560 2.1 41950
Japan 128 0.2 38950 1.0 31410
Germany 82 0.3 34870 1.1 29210
*Growth rate in inflation-adjusted per capita income
Source: World Bank, World Development Indicators 2007
In the table above, PPP refers to purchasing power parity. One
major problem when
comparing incomes across countries is that the cost of living
can differ significantly from one
country to another. Some things such as housing tend to be less
expensive in developing
countries than in developed countries. Other things, such as
imported consumer goods,

10. tend to be more expensive. On the whole, taking into account all
goods and services, the
cost of living tends to be lower in developing countries than in
developed countries. The cost
of living can also differ substantially within countries, which
you should know yourselves
from living in State College if you're from a rural area (where
costs tend to be lower) or a
large city (where costs tend to be higher).
The usual per capita income figures don't take into account
cost-of-living differences
between countries and for this reason can lead to misleading
conclusions about differences
across countries in standards of living. The PPP estimates of per
capita income adjust the
usual figures for a country for cost-of-living differences that
country and a benchmark
country (roughly the U.S.). In other words, roughly speaking,
the U.S. is the "reference"
country for comparison purposes.
A short example might help illustrate the logic behind the PPP
procedure. Suppose per
capita income in country ABC is $5000, and that the cost of
living in the U.S. is on average
200% higher than in ABC (in other words, it's 3 times greater in
the U.S. than in ABC). If
someone who was making $10000 per year in ABC moved to the
U.S., she or he would need
to earn $30000 (= 3 x $10000) in the U.S. to have the same
standard of living as before.
Again, it should be noted that the countries of the former Soviet
Union are not included

11. here. Russia, for example, had 143 million people in 2005.
Ukraine, the second most
populous country of the former Soviet Union, had 47 million
people in 2005.
http://www.worldbank.org/data/wdi2007/
The table below presents some statistics on poverty and human
welfare for our ten
developing countries and three developed countries.
Country
% Population Below
International Poverty
Line, 2000-2004
% Population
Undernourished,
2002-2004
Infant Morality
Rate (per 1000
live births),
2005
Life Expectancy
at Birth (years),
2005
China 10 12 23 72

12. India 33 20 56 64
Indonesia 7 6 28 68
Brazil 8 7 31 71
Pakistan 17 24 79 65
Bangladesh 41 30 54 64
Nigeria 71 9 100 44
Mexico 3 5 22 75
Philippines 15 18 25 71
Vietnam 2 16 16 71
U.S. 0 ** 6 78
Japan 0 ** 3 82
Germany 0 ** 4 79
**Less than 1%
Source: World Bank, World Development Indicators 2007
As noted above, the international poverty line is defined as
consumption expenditures of
less than $1.08 per person per day in 1993 purchasing power
parity (PPP) adjusted U.S.
dollars, or about $1.53 per person per day in today's dollars.
This is a much more stringent
definition of poverty than the one we use in the U.S. (which is
currently $20,650 for a 4-

13. person household). That's low, but this is much, much lower.
Common Socioeconomic Characteristics of Developing
Countries
As the figures in the tables above indicate, developing countries
can differ dramatically from
each other. Nevertheless, they do have many socioeconomic
characteristics in common.
Low Standards of Living. Standards of living tend to be low in
developing countries, not
only in comparison to developed countries but also in
comparison to small, elite groups
within developing countries. Low standards of living manifest
themselves in many ways,
including low incomes, high rates of poverty, inadequate
housing, poor health, malnutrition,
limited or no education, high infant mortality rates, and low life
expectancy.
http://www.worldbank.org/data/wdi2007/
Low Levels of Productivity. The productivity with which
capital, labor, land and other
inputs into production are used varies significantly from one
country to another. Productivity
depends on the technologies used by producers, the human
capital of the labor force, and
the quality and quantity of the country's infrastructure. In
general, all these things are
scarce in developing countries, which largely explains their low
standards of living. More

14. about this later in the course.
Relatively High Rates of Population Growth. Both age-adjusted
birth rates and age-
adjusted death rates tend to be high in developing countries,
with birth rates significantly
higher than death rates. The result is relatively high rates of
population growth in most
developing countries, particularly African countries.
One result of high birth rates in developing countries is that
children under the age of 15
make up over one-third of the total population in low-income
countries, compared with
about one-sixth in high-income countries. This means that, in
low-income countries, the
average adult worker has to support about twice as many
children as the average adult
worker in a high-income country, and on a substantially lower
income. (The U.S. and other
high-income countries have their own concerns in the form of
an "old age" dependency
burden.)
Dependence on Agriculture. Most people in developing
countries live and work in rural
areas. About two-thirds of people in low-income countries live
in rural areas, compared to
about one-third in middle-income countries and one-fourth or
less in developed countries.
Nearly two-thirds of the labor force in low-income countries is
employed in production
agriculture, while the corresponding figure for middle-income
countries is over one-fourth.
In high-income countries, less than 5% of the labor force is in

15. production agriculture (in the
U.S. it's only about 1%).
Large Percentage of Income Spent on Food. Families and
households have much less
income in developing countries than their counterparts in
developed countries, and a high
percentage of what they do have is spent on food. In low-
income countries, households on
average spend 47% of their income on food. In middle-income
countries, it's 29% and in
high-income countries it's only 13%. For the U.S. the figure is
10%, split between food
consumed at home (6%) and dining out (4%).
Dependence on Primary Exports. To a much greater degree than
developed countries,
the economies of developing countries are oriented toward the
production of primary
products (agriculture, fuel, forestry, raw materials) rather than
secondary activities
(manufacturing) or tertiary activities (services). For developing
countries as a whole about
45-50% of all exports are from primary commodities. Another
10-15% are from textiles and
clothing, which are labor-intensive products. Among developed
countries, less than 20% of
all exports are from primary commodities, and only 5% are from
textiles and clothing.
The result is that prices of primary commodities are of great
importance to developing
countries. Primary commodity prices tend to be quite volatile.
The general trend in inflation-

16. adjusted primary commodity prices over the last 50 years has
been downward.
Rapid Urbanization. The predominance of agriculture, rural
areas, and primary
commodities is diminishing rapidly in most developing
countries as people move in large
numbers from rural areas to cities. As much as 90% of
population growth and economic
growth in developing countries will be concentrated in cities in
the future. A large
percentage of these people will live in poverty, without access
to adequate water or
sanitation facilities. By 2010 developing countries will contain
eight of the planet's ten
megacities (cities with ten million or more inhabitants), with
Mexico City, São Paulo,
Mumbai, Delhi, Kolkata, and Shanghai at the top of the list.
According to World Bank
projections there will be 27 megacities by 2015, and the urban
population of developing
countries will exceed four billion. That's more than the total
world population 25 years ago.
Key Socioeconomic Differences among Developing Countries
In each of the common characteristics listed above we could
also find key differences
among developing countries. There are other differences as
well.

17. Standards of Living. Standards of living, while low in
comparison to developed countries,
do vary tremendously among developing countries. The PPP per
capita income column in
the table above gives you some flavor of these differences. In
2005, PPP estimated per
capita income in developing countries ranged from $640 in
Burundi to $13,920 in Argentina.
Levels of Productivity. While levels of productivity tend to be
low on the whole, there are
many companies in developing countries that are as
technologically sophisticated as their
developed country counterparts. Autos, computers, consumer
electronics, financial services
and oil and gas are but a few of the many sectors where a
number of developing countries
employ state-of-the-art technology.
What makes developing countries interesting and different from
countries such as the U.S.
50 or 100 years ago is this coexistence of traditional and
modern technologies. Outside of a
state-of-the-art automobile plant, people may be digging a new
sewer line by hand. In
many countries, you can go 20 or 30 miles outside of a city and
go back 100 years.
Population Growth Rates. Although developing countries as a
whole have relatively high
rates of population growth, there are significant differences
from one country to another.
China's population growth rate, for example, is actually less
than the U.S. rate. On the other
hand, Nigeria and many other African countries have very high
rates of population growth.

18. Size. Over 80 developing countries have fewer than 5 million
people. At the other end of
the scale, we have China with over 1.3 billion people and India
with now over 1 billion.
Geographic size also varies. Leaving aside Russia, China (9.6
million square kilometers) and
Brazil (8.5 million square kilometers) are the two largest
developing countries. At the
opposite end are some extremely small countries such as
Swaziland (17000 square
kilometers).
Is population size or geographic size an economic plus or
minus? Statistical studies
generally don't turn up too many major differences in economic
performance between small
and large countries (after accounting for other factors that
affect performance).
Historical Background. Most African and Asian countries were
at one point colonies of
western European countries. Slavery had a devastating impact
on many parts of Africa.
Colonization introduced western institutions not indigenous to
many areas of Asia and Africa
(such as private property, personal taxation, and monetary
transactions). These institutions
would in most cases have been introduced sooner or later
anyway, but their premature
introduction did have many disruptive effects. Colonialists
generally failed to invest in the
human capital and physical capital of their colonies. They also
tended to draw national

19. boundaries more for their own ease of administration than on
the basis of local social,
political and economic conditions.
Latin America has a longer history of political independence
than most of Asia or Africa.
However, Spanish and Portuguese colonization definitely left its
mark. For example,
indigenous peoples were typically thrown off the land by
colonialists and were isolated both
socially and economically. The effects of this continue to be
felt. Being indigenous in Latin
America is still almost synonymous with being poor. Land
distribution continues to be a
politically volatile issue. The poor treatment of indigenous
peoples has led to political
instability in countries and regions where a large percentage of
the population is indigenous
– for example, Bolivia, Guatemala, Peru, and the Mexican state
of Chiapas.
One caveat: while no one should deny the importance of
historical background, this in no
way excuses, justifies, or minimizes the importance of a number
of serious economic policy
mistakes made in many developing countries in the last few
decades.
Natural and Physical Resources. Developing countries vary
tremendously in terms of
natural resources, human capital, and physical capital. The
Persian Gulf oil states represent
one extreme in terms of a favorable resource endowment. Some

20. developing countries lie in
tropical forest regions, others in arid or semi-arid regions.
Large developing countries like
China and India encompass many different ecosystems.
Summary
The six key points in this lecture are:
1. The differences between day-to-day life in developing
countries and the U.S. are
huge. What people own, what they do for a living, what they do
in their leisure time,
what they expect out of life for themselves and their children,
the way they think
about themselves and others, and the things they take for
granted all differ
dramatically.
2. A lot of differing terminology is used to describe the
countries we're studying in this
course – developing countries, less-developed countries, low-
income or middle-
income countries, and the south. These are all countries with
relatively low levels of
per capita income.
3. Economic growth and economic development are two
different concepts. Economic
growth means a rise in per capita income. Economic
development is a much broader

21. concept. It implies an improvement in the quality of human life,
which entails not
only increasing per capita income but also reducing poverty and
enhancing individual
economic opportunities.
4. In order to make accurate comparisons across countries,
statistics on income and
expenditures should be adjusted for cross-country differences in
the cost of living. In
other words, they should be corrected for purchasing power
parity (PPP).
5. Compared to developed countries, most developing countries
share several
characteristics in common: low standards of living, low levels
of productivity,
relatively high rates of population growth, a large percentage of
consumer income
spent on food, dependence on primary exports, and rapid rates
of urban growth.
6. Developing countries differ among themselves in their
standards of living, levels of
productivity, geographic size, population, population growth
rates, historical
background, industrial structure, and natural and physical
resources.

22. Professor Dave Abler
Penn State University
207 Armsby Building
University Park, PA 16802
USA
Email: [email protected]
© 2002-2010 Dave Abler except where noted. All rights
reserved worldwide
Copyright Permission to use in course granted 9/25/2010
mailto:[email protected]
Unit Assignment
There are 2 parts to this Assignment:
PART 1: Comparing Growth Rates
First, prepare yourself for the Assignment by reading the
following three articles or webpages:
Professor Dave Alber’s Lecture can be found in the Doc Sharing
area of the course.
Abler, D. (n.d.) Notes for aLecture on Economic conditions in
developing countries. Copyright permission granted September
25, 2010.
Khan’s (2001) article by going to the International Monetary
Fund Website (see the Webliography).
Khan, M. H. (2001). Rural poverty in developing countries:
Implications for public policy. Economic Issues NO. 26.
International Monetary Fund. Retrieved July 6, 2012.

23. You can find the most up-to-date report on the World Bank
website. (See Webliography).
The World Bank Group. (2012). Prospects for the Global
Economy. Washington D.C.
After you have read the items listed above, access the “Data &
Research” tab in the World Bank Websiteand compare growth
rates between two countries of your choice. Specifically, select
one developed country (such as U.S., England, Canada,
Germany, etc.), and select one developing country (such as
Angola, Bangladesh, Chad, Nigeria, etc.).
Find and transfer their 2007–2011 GDP growth (annual %) data
into your Assignment. Identify and explain possible factors that
may be adding to the differences between their GDP growth
rates.
PART 2: Loanable Funds Market
Answer questions 1a and 1b:
1. Analyze each of the following changes in the market for
loanable funds. Explain what happens to private savings, private
investment spending, and the rate of interest if the following
events occur. Assume the economy is closed (no transactions
are made with foreign countries).
a. The government reduces the size of its deficit to zero.

24. b. At any given interest rate, consumers decide to save more.
Assume the budget balance is zero.
Assignment Part 1
The goal of this Assignment is to provide opportunities for you
to learn about other countries while also improving your written
and oral communication skills. This Assignment is intended to
prepare you for the challenges of their chosen professions in
business, government, non-profits, and academics. Having an
understanding of business etiquette in America is essential for
anyone seeking a career in business. Having an understanding of
business etiquette in other countries gives a competitive
advantage, which is essential in Macroeconomics.
Your company has a product that it is interested in marketing in
a foreign country. Conduct Internet research on a country of
your choice to learn about etiquette, customs, and protocol for
the chosen country. Summarize your findings in a 1–2 page
report that your colleagues and management would find
beneficial.
In addition, enclose a memo that includes at least 5 etiquette
tips unique to the selected country. Use complete sentences. Be
sure to paraphrase the information collected and use appropriate
citations. Also discuss how knowing about global business
etiquette practices would be beneficial for topics in
Macroeconomics.
Required Format:
Correct citations within answers
Standard English with no spelling or punctuation errors
Correct references at the bottom of the last page

25. Part 2 at least 150 word and use references
Suppose that the economy is currently at potential output. Also,
suppose that you are an economic policy maker and that a
college economics student asks you to rank, if possible, your
most preferred to least preferred type of shock: positive demand
shock, negative demand shock, positive supply shock, and
negative supply shock. How would you rank them and why?