The document outlines the common characteristics of developing countries, including lower living standards, high inequality, and rapid population growth, as well as the classification of economies based on gross national income per capita. It discusses key indicators of development such as gross national income (GNI), gross domestic product (GDP), and the new human development index (HDI) aimed at assessing living levels more holistically. Additionally, it highlights the diversity within commonalities among developing nations, addressing issues like social fractionalization, underdeveloped markets, and the varied impact of geography on development.

1. CHARACTERISTICS OF DEVELOPING
COUNTRIES
TOPIC IV

2. Common characteristics of developing countries
• These features in common are on average and with great
diversity, in comparison with developed countries:
– Lower levels of living and productivity
– Lower levels of human capital
– Higher levels of inequality and absolute poverty
– Higher population growth rates
– Greater social fractionalization
– Larger rural population - rapid migration to cities
– Lower levels of industrialization and manufactured
exports
– Adverse geography
– Underdeveloped financial and other markets
– Colonial Legacies - poor institutions etc.

3. 2.1 Defining the Developing World
• World Bank Scheme- ranks countries on
GNP/capita
• In the World Bank’s classification system, 210 economies
with a population of at least 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 and UMCs are informally grouped as the middle-
income countries.)

4. • Low-income countries are defined as having 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-income countries have incomes
between $3,856 and $11,906;
• High-income countries have incomes of
$11,907 or more.

5. High-income countries that have one or two
highly developed export sectors but in which
significant parts of the population remain
relatively uneducated or in poor health for the
country’s income level may be viewed as still
developing(oil exporters such as Saudi Arabia and
the United Arab Emirates).
Upper-income economies also include some
tourism-dependent islands with lingering
development problems. Even a few of the high-
income OECD member countries, notably Portugal
and Greece, have been viewed as developing
countries at least until recently.
Other high-income economies

6. Figure 2.1 Nations of the World, Classified by GNI Per
Capita
Source: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew
Ltd., 2010.

7. 2.2 Basic Indicators of Development: Real Income, Health, and
Education
• Gross National Income (GNI)
• Gross Domestic Product (GDP)
• PPP method instead of exchange rates as
conversion factors
WHAT ARE THE DIFFERENCES OF GNI AND GDP?

8. 8

9. 9

10. GNI VS GDP VS GNP
• GDP (Gross Domestic Product) is a measure of
(national income = national output = national
expenditure) produced in a particular country.
• GNP (Gross National Product) = GDP + net property
income from abroad. This net income from abroad
includes dividends, interest and profit.
• GNI (Gross National Income) = (similar to GNP)
includes the value of all goods and services
produced by nationals – whether in the country or
not.
10

11. The use of official foreign-exchange rates to convert national
currency figures into U.S. dollars does not measure the relative
domestic purchasing power of different currencies.
Researchers have tried to compare relative GNIs and GDPs by
using purchasing power parity (PPP) instead of exchange rates
as conversion factors.
PPP is calculated using a common set of international prices for
all goods and services.
In a simple version, purchasing power parity is defined as the
number of units of a foreign country’s currency required to
purchase the identical quantity of goods and services in the local
developing country market as $1 would buy in the United
States.
What Is a Purchasing Power Parity?

12. Purchasing power parity (PPP) is a price index very
similar in content and estimation to the consumer
price index, or CPI. Whereas the CPI shows price
changes over time, a PPP provides a measure of
price level differences across countries.

13. Prices of nontraded services are much lower in developing
countries because wages are so much lower.
Clearly, if domestic prices are lower, PPP measures of GNI per
capita will be higher than estimates using foreign-exchange
rates as the conversion factor.
For example, China’s 2008 GNI per capita was only 6% of that
of the United States using the exchange-rate conversion but
rises to 13% when estimated by the PPP method of conversion.
Income gaps between rich and poor nations thus tend to be less
when PPP is used.

14. 2.3 Holistic Measures of Living Levels and Capabilities
• Health
• Life Expectancy
• Education
• HDI as a holistic measure of living levels
•
• HDI can be calculated for groups and regions in a
country
– HDI varies among groups within countries
– HDI varies across regions in a country
– HDI varies between rural and urban areas

15. Table 2.3 Commonality and Diversity: Some Basic
Indicators

16. Average income is one thing, but sometimes even in a
middle-income country, many people live in poverty.
When the aggregate HDI for various countries was
adjusted for income distribution, the relative rankings
of many developing nations also changed significantly

17. Figure 2.3 Human Development Disparities within Selected
Countries

18. Figure 2.3 Human Development Disparities within Selected
Countries (continued)

19. Table 2.4 2009 Human Development Index for 24
Selected Countries (2007 Data)

20. Table 2.5 2009 Human Development Index Variations for Similar
Incomes (2007 Data)

21. The New Human Development Index
• Introduced by UNDP in November 2010
• Intended to address some of the criticisms of the
HDI
• The index is still based on standard of living,
education, and health
• It has eight notable changes.

23. 1- Gross national income (GNI) per capita replaces gross
domestic product (GDP) per capita.
2- The education index has been completely revamped.
Two new components have been added:
---The average actual educational attainment of the whole
population;
--- The expected attainment of today’s children.

24. The two previous components of the education index,
literacy and enrollment, have been correspondingly
dropped.
In contrast to expected attainment, literacy is clearly an
achievement, and even enrollment is at least a modest
achievement.
However, literacy has always been badly and too
infrequently measured and is inevitably defined more
modestly in a less developed country.
And enrollment is no guarantee that a grade will be
completed or for that matter that anything is learned or that
students (or teachers) even attend.

25. This captures the average number of years that children today could
be expected to attain in adulthood if enrolment rates stay at their
current levels. Formally, expected years of schooling in year t.
Where Ei
t
is the enrolment of children of age i, and Pi
t
is the
population of age i in that year. n is the theoretical maximum age of
schooling.
Thus, if all the school-age population is enrolled in school, eyst
=n,
but with less than one hundred percent enrolment, eyst will
generally be lower than n and will recast the enrolment information
into the same units in which we are measuring the education of
adults (years of schooling).
The expected attainment of today’s children

26. The upper goalposts (maximum values) in each dimension have been
increased to the observed maximum rather than given a predefined
cutoff.
In some ways, this returns the index to its original design, which was
criticized for inadequately recognizing small gains by countries
starting at very low levels.
The lower goalpost for income has been reduced. This is based on
estimates for Zimbabwe in 2007 that, if the data and their
interpretation hold up, represent a historic low for recorded income.

27. The upper values are now set to observed maxima over the time
series between 1980 and the most recent year available, while the
lower bounds are set equal to subsistence minima

28. The shift to the geometric mean addresses the issue of perfect
substitutability.
Possibly the most consequential change is that the NHDI is
computed with a geometric mean.

29. When using an arithmetic mean (adding up the component indexes
and dividing by three) in the HDI, the effect is to assume perfect
substitutability across income, health, and education.
For example, a higher value of the education index could
compensate, one for one, for a lower value of the health index.
In contrast, use of a geometric mean ensures that poor performance
in any dimension directly affects the overall index.
Thus, allowing for imperfect substitutability is a beneficial change;
but there is active debate about whether using the geometric mean
is the most appropriate way to accomplish this.

30. South Korea has achieved the status of a fully developed country,
ranking between Japan and Switzerland.
Countries such as Qatar, Guatemala, Côte d’Ivoire,
Angola, and South Africa perform more poorly on the NHDI than would
be predicted from their income level, while the reverse is true of South
Korea, Chile, Bangladesh, Madagascar, and Ghana.
No doubt, exploration of alternative indexes will continue; and the
NHDI may be a transitional step in its ongoing
improvement.

31. Table 2.6 The
2010 New
Human
Development
Index (NHDI),
2008 Data

32. 2.4 Characteristics of the Developing World:
Diversity within Commonality
1. Lower levels of living and productivity
2. Lower levels of human capital (health,
education, skills)
3. Higher Levels of Inequality and Absolute
Poverty
–Absolute Poverty
–World Poverty
4. Higher Population Growth Rates
–Crude Birth rates

33. 2.4 Characteristics of the Developing World: Diversity within
Commonality
5. Greater Social Fractionalization
6. Larger Rural Populations but Rapid Rural-to-
Urban Migration
7. Lower Levels of Industrialization and
Manufactured Exports
8. Adverse Geography
– Resource endowments

34. 2.4 Characteristics of the Developing World: Diversity within
Commonality
9. Underdeveloped Financial and Other
markets
– Imperfect markets
– Incomplete information
10. Colonial Legacy and External Dependence
– Institutions
– Private property
– Personal taxation
– Taxes in cash rather than in kind

35. Figure 2.4 Shares of Global Income, 2008
The low- and middle-income developing nations, with more than
five-sixths (84%) of the world’s people, received slightly more than
two-fifths (41%) of the world’s income in 2008(Figure 2.4)
Lower Levels of Living and Productivity

36. • Income leads to low investment in education and
health as well as plant and equipment and
infrastructure, which in turn leads to low
productivity and economic stagnation.

37. Table 2.7 The 12 Most and Least Populated Countries and Their Per
Capita Income, 2008
One common misperception is that low incomes result from a
country’s being too small to be self-sufficient or too large to
overcome economic inertia. However, there is no necessary
correlation between country size in population or area and economic
development (in part because each has different advantages and
disadvantages that can offset each other)

38. Lower Levels of Human Capital
• Human capital—health, education, and skills—is
vital to economic growth and human development.
Figure 2.5 Under-5 Mortality Rates, 1990 and 2005

39. Table 2.8 Primary School Enrollment and Pupil-Teacher Ratios, 2010
Enrollments have strongly improved in recent years, but student
attendance and completion, along with attainment of basic skills
such as functional literacy, remain problems. Indeed, teacher
truancy remains a serious problem in South Asia and sub-Saharan
Africa.

41. Figure 2.6 Correlation between Under-5 Mortality and Mother’s
Education

42. Higher Levels of Inequality and
Absolute Poverty
• The scale of global inequality is immense.
• Globally, the poorest 20% of people receive just 1.5% of world
income.
• The lowest 20% now roughly corresponds to the
approximately 1.4 billion people living in extreme poverty on
less than $1.25 per day at purchasing power parity.
• Bringing the incomes of those living on less than $1.25 per
day up to this minimal poverty line would require less than
2% of the incomes of the world’s wealthiest 10%.

43. Figure 2.7 Number of People Living in Poverty by Region, 1981–
2005

44. The incidence of extreme poverty varies widely around the developing world.
The share of the population living on less than $1.25 per day is:
• 9.1% in East Asia and the Pacific
• 8.6% in Latin America and the Caribbean
• 1.5% in the Middle East and North Africa
• 31.7% in South Asia,
•41.1% in sub-Saharan Africa.
The share of world population living below this level had fallen encouragingly to
an estimated 21% by 2006.
Living on less than $1.25 per day has fallen from about 1.9 billion in 1981 to
about 1.4 billion in 2005; this despite a more than 40% increase in world
population.

45. Higher Population Growth Rates
• Global population has skyrocketed since the beginning of the
industrial era, from just under 1 billion in 1800 to 1.65 billion
in 1900 and to over 6 billion by 2
• In recent decades, most population growth has been
centered in the developing world. Compared with the
developed countries, which often have birth rates near or
even below replacement (zero population growth) levels, the
low-income developing countries have very high birth rates.

46. Table 2.9 Crude Birth Rates Around the World, 2009
Crude birth rate: The number of children born alive each
year per 1,000 population.

47. Populations of some developing countries, particularly in Africa,
continue to grow rapidly.
From 1990 to 2008, population in the low-income countries grew at
2.2% per year, compared to 1.3% in the middle-income countries
(the high-income countries grew at 0.7% per year, reflecting both
births and immigration).
A major implication of high birth rates is that the active labor force
has to support proportionally almost twice as many children as it
does in richer countries.
Both older people (65+) and children(0 to 15) are often referred to
as an economic dependency burden in the sense that they must be
supported financially by the country’s labor force

48. • In low-income countries, there are 66 children under 15 for each 100
working-age (15–65) adults, while in middle-income countries, there are 41
and in high-income countries just 26.
• In contrast, low-income countries have just 6 people over 65 per 100
working-age adults, compared with 10 in middle-income countries and 23 in
high-income countries.
• Thus the total dependency ratio is 72 per 100 in low-income countries and 49
per 100 in high income countries.
• But in rich countries, older citizens are supported by their lifetime savings and
by public and private pensions.
• In contrast, in developing countries, public support for children is very
limited. So dependency has a further magnified impact in developing
countries.

49. Greater Social Fractionalization
Low-income countries often have ethnic, linguistic,
and other forms of social divisions, sometimes
known as fractionalization.
•Civil strife
•Violent conflict
•Governance challenges
The greater the ethnic, linguistic, and religious
diversity of a country, the more likely it is that
there will be internal strife and political instability.

50. • The most successful development experiences—
South Korea, Taiwan, Singapore Hong Kong—have
occurred in culturally homogeneous societies.
• Ethnic and religious conflicts leading to
widespread death and destruction have taken
place in countries as diverse as
• Afghanistan, Rwanda, Mozambique, Guatemala, Mexico, Sri Lanka, Iraq, India,
Kyrgyzstan, Azerbaijan, Somalia, Ethiopia, Liberia, Sierra Leone, Angola,
Myanmar, Sudan, the former Yugoslavia, Indonesia, and the Democratic Republic
of Congo.

51. There have been numerous instances of successful economic and social
integration of minority or indigenous ethnic populations in countries as
diverse as: Malaysia and Mauritius.
In the United States, diversity is often cited as a source of creativity and
innovation.
The broader point is that the ethnic and religious composition of a
developing nation and whether or not that diversity leads to conflict
or cooperation can be important determinants of the failure or success
of development efforts.
Alesina, Alberto, et al, 2003. " Fractionalization," Journal of Economic
Growth, Springer, vol. 8(2), pages 155-94.

52. Table 2.10 The Urban Population in Developed Countries and
Developing Regions
Larger Rural Populations but Rapid Rural-to-
Urban Migration

53. Lower Levels of Industrialization and
Manufactured Exports
• Along with lower industrialization, developing
nations have tended to have higher dependence
on primary exports.
• Most developing countries have versified away
from agricultural and mineral exports to some
degree. The

54. Table 2.11 Share of the Population Employed in the Industrial
Sector in Selected Countries, 2004-2008 (%)

55. Adverse Geography
• Geography must play some role in problems of
agriculture, public health, and comparative
underdevelopment more generally.
• Landlocked economies, common in Africa
• Primarily tropical or subtropical countries(tropical pests
and parasites, endemic diseases such as malaria, water resource constraints, and
extremes of heat)
• Curse of natural resources (Democratic Republic of
Congo: (high mineral wealth, Conflict over profits from these
industries, social strife, undemocratic governance, high inequality,
and even armed conflict)

56. • The oil-rich Persian Gulf states.
• Chad, Yemen, Haiti and Bangladesh
• Geography is not destiny.
High-income Singapore lies almost directly on the
equator, and parts of southern India have
exhibited enormous economic dynamism in recent
years.

57. Underdeveloped Markets
-Imperfect markets
- incomplete information
Causes: Domestic and financial markets have worked Less efficiently.
Thin markets for many products due to limited demand and few
sellers, widespread externalities (costs or benefits that accrue to
companies or individuals not doing the producing or consuming) in
production and consumption, and poorly regulated common property
resources (e.g., fisheries, grazing lands, water holes) mean that
markets are often highly imperfect.
Moreover, information is limited and costly to obtain, thereby often
causing goods, finances, and resources to be misallocated.

58. Some aspects of market underdevelopment are that
they often lack:
1- A legal system that enforces contracts and validates property rights;
2- A stable and trustworthy currency;
3- An infrastructure of roads and utilities that results in
low transport and communication costs so as to facilitate interregional
trade;
4- a well-developed and efficiently regulated system of banking and
insurance, with broad access and with formal credit markets that select
projects and allocate loanable funds on the basis of relative economic
profitability and enforce rules of repayment

59. 5- substantial market information for consumers
and producers about prices, quantities, and
qualities of products and resources as well as
the creditworthiness of potential borrowers.
6- social norms that facilitate successful long-
term business relationships.

60. 2.5 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages
• Eight differences
– Physical and human resource endowments
– Per capita incomes and levels of GDP in relation to the rest of the
world
– Climate
– Population size, distribution, and growth
– Historic role of international migration
– International trade benefits
– Basic scientific/technological research and development capabilities
– Efficacy of domestic institutions

61. 2.6 Are Living Standards of Developing
and Devolved Nations Converging?
• At the dawn of the industrial era, average real living
standards in the richest countries were no more than
three times as great as those of the poorest. To day,
the ratio approaches 100 to 1.
• In comparing development performance, it is
appropriate to consider whether, with strenuous
economic development efforts being made throughout
the developing world, living standards of developing
and developed nations are exhibiting convergence.

62. • There are two important reasons to expect that
developing countries would be “catching up” by
growing faster on average than developed
countries:
1- Technology transfer (borrow technologies,
business models, and marketing procedures):
Today’s developing countries do not have to
“reinvent the wheel”.
Even if royalties must be paid, it is cheaper to
replicate technology than to undertake original
R&D, partly because one does not have to pay for
mistakes and dead ends along the way.
62

63. • They should be able to grow much faster than
today’s developed countries are growing now or
were able to grow in the past, when they had to
invent the technology as they went along and
proceed step by step through the historical stages
of innovation.
63

64. This is known as an “advantage of backwardness,”
• The later a country begins its modern economic
growth, the shorter the time needed to double
output per worker.
These countries doubled its output per person:
• Britain in 60 years
• United States in 45 years
• South Korea in less than 12 years
• China in less than nine.
64

65. 2- Factor accumulation:
Today’s developed countries have high levels of
physical and human capital; this would explain their
high levels of output per person.
The marginal product of capital and the profitability
of investments would be lower in developed
countries where capital intensity is higher, provided
that the law of diminishing returns applies.
•The impact of additional capital on output would be
expected to be smaller in a developed country that
already has a lot of capital in relation to the size of its
workforce than in a developing country where
capital is scarce.
65

66. • Given one or both of these conditions, technology
transfer and more rapid capital accumulation,
incomes would tend toward convergence in the
long run as the faster-growing developing countries
would be catching up with the slower-growing
developed countries.
• Even if incomes did not eventually turn out to be
identical, they would at least tend to be equalized
conditional on key variables such as population
growth rates and savings rates.
66

67. Figure 2.8 Relative Country Convergence: World, Developing
Countries, and OECD

68. Figure 2.8 Relative Country Convergence: World, Developing
Countries, and OECD (cont’d)

69. Figure 2.9 Growth Convergence versus Absolute Income
Convergence

70. Figure 2.10 Country Size, Initial Income Level, and
Economic Growth

71. 2.7 Long-Run Causes of Comparative Development
• Schematic Representation
– Geography
– Institutional quality- colonial and post-colonial
– Colonial legacy- pre colonial comparative
advantage
– Evolution and timing of European development
– Inequality- human capital
– Type of colonial regime

72. Figure 2.11 Schematic Representation of Leading Theories of
Comparative Development

73. Nature and Role of Economic
Institutions
• Institutions provide “rules of the game” of economic life
• Provide underpinning of a market economy
• Include property rights; contract enforcement
• Can work for improving coordination,
• Restricting coercive, fraudulent and anti-competitive behavior
• Providing access to opportunities for the broad population-
• Constraining the power of elites, and managing conflict
• Provision of social insurance
• Provision of predictable macroeconomic stability

74. Role of Institutions
• Acemoglu, Johnson, and Robinson’s “reversal
of fortune” and extractive institutions
• Bannerjee and Iyer, “property rights
institutions.” Landlords versus cultivators

75. Concepts for Review
• Absolute poverty
• Brain drain
• Capital stock
• Convergence
• Crude birth rate
• Dependency burden
• Depreciation (of the capital stock)
• Diminishing Marginal Utility
• Divergence
• Economic Institutions
• Fractionalization
• Free trade
• Gross domestic product (GDP)
• Gross national income (GNI)
• Human capital
• Human Development Index (HDI)

76. Concepts for Review (cont’d)
• Imperfect market
• Incomplete information
• Infrastructure
• Least developed countries
• Low-income countries (LICs)
• Middle-income countries
• Newly industrializing countries
(NICs)
• Purchasing power parity (PPP)
• Research and development (R&D)
• Resource endowment
• Terms of trade
• Value added
• World Bank