BENIFITS OF ECONOMY

1. AU, October , 2019
By Hassan Abdi
Development Economics
AGEC 581
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Chapter 2. Characteristics of underdeveloped
economies

3. Defining the Developing World
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 The most common way to define the developing world is by
per capita income.
 Ways of classifying the developing world:
1. Levels of gross national income (GNI) per capita:
2. low-income countries (LICs),
 Lower-middle-income countries (LMCs),
 Upper-middle-income countries (UMCs),
 High income OECD countries, and other high-income
countries.
3. Degree of international indebtedness:
 Severely indebted, orgaiation for economic cooperation&
development.
 Moderately indebted, and
 Less indebted
4. Level of human development, including health and
education attainments as low, medium, high, and very

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 Newly industrializing countries (NICs) Countries at a
relatively advanced level of economic development with a
substantial and dynamic industrial sector and with close links
to the international trade, finance, and investment system.
 Least developed countries A United Nations designation of
countries with low income, low human capital, and high
economic vulnerability.

5. Common features of developing countries
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1. Lower levels of living and productivity
2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates.
5. Greater social fractionalization
6. Larger rural populations but rapid rural-to-urban
migration
7. Lower levels of industrialization
8. Adverse geography
9. Underdeveloped financial and other markets
10. Lingering colonial impacts such as poor institutions and
often external dependence.
 The mix and severity of these challenges largely set
the development constraints and policy priorities of a
developing nation.

6. Lower Levels of Human Capital
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 Human capital—health, education, and skills—is vital to
economic growth and human development.
 Compared with developed countries, much of the
developing world has lagged in its average levels of
 nutrition, health (as measured by life expectancy or undernourishment),
and
 education (measured by literacy),
 The under-5 mortality is 17 times higher in low-
income countries than in high-income countries (See
the figure)

7. Lower Levels of Living and Productivity
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 There is a vast gulf in productivity between advanced
economies such as the United States and developing
nations
 There is also a wide range among the developing
countries.
 At very low income levels a vicious circle may set in,
whereby low 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.
 This is known as a poverty trap or
 “circular and cumulative causation.”

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 Primary enrollment rates (percentage of
students of primary age enrolled in school) and
the primary school pupil-to-teacher ratio for the
four country income groups and for five major
developing regions. (See the table)
 Enrollments have strongly improved in recent years, but
problems.
 Student attendance and completion,
 Attainment of basic skills such as functional literacy,

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 Moreover, there are strong synergies
(complementarities) between progress in health and
education
 For example, under-5 mortality rates improve as
mothers’ education levels rise,

12. Higher Levels of Inequality and Absolute Poverty
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 The scale of global inequality is immense( huge ).
 Globally, the poorest 20% of people receive just 1.5% of
world income
 The enormous gap in per capita incomes between rich
and poor nations is not the only manifestation of the
huge global economic disparities
 To appreciate the breadth and depth of deprivation in
developing countries,
it is also necessary to look at the gap between rich and
poor within individual developing countries.
 Very high levels of inequality are found in many middle income
countries

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 Besides averages, we must look within nations at how
income is distributed:
 to ask who benefits from economic development and why.
 Extreme poverty is due in part to low human capital but
also to social and political exclusion and other
deprivations
 Development economists use the concept of absolute
poverty to represent a specific minimum level of income
needed to satisfy the basic physical needs of food, clothing,
and shelter in order to ensure continued survival.
 Not only do poverty and inequality result from distorted
growth( one sided) none s, but they can also cause it.

14. Higher Population Growth Rates
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 Rapid population growth began in Europe and other now
developed countries.
 Recent decades, most population growth has been centered
in the developing world.
 More than five sixths of all the people in the world now live in
developing countries.
 High birth rates .
 Developing countries characterized are not only by higher
rates of population growth, but they must also contend with
greater dependency burdens than rich nations
 Dependency burden The proportion of the total population
aged 0 to 15 and 65+, which is considered economically
unproductive and therefore not counted in the labor force.

15. Greater Social Fractionalization
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 Fractionalization Significant ethnic, linguistic, and
other social divisions within a country.
 There is some evidence that many of the factors
associated with poor economic growth performance
in sub-Saharan
 Africa, such as low schooling,
 political instability,
 underdeveloped financial systems, and
 insufficient infrastructure, can be statistically
explained by high ethnic fragmentation
 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.

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 Ethnic and religious diversity need not
necessarily lead to inequality, turmoil, or
instability, and unqualified statements about its
impact cannot be made.
 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.
 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

17. Larger Rural Populations but Rapid Rural-to-Urban Migration
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 One of the hallmarks of economic development is
a shift from agriculture to manufacturing and
services
 In developing countries, a much higher share of
the population lives in rural areas,
 rural areas are poorer and tend to suffer from
missing markets, limited information, and social
stratification
 A massive population shift is also under way as
hundreds of millions of people are moving from
rural to urban areas,

18. Lower Levels of Industrialization and Manufactured Exports
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 Industrialization is associated with high productivity and incomes and has
been a hallmark of modernization and national economic power.
 Along with lower industrialization, developing nations have tended to have
a higher dependence on primary exports.
Adverse Geography
 Many analysts argue that geography must play some role in problems of
agriculture, public health, and comparative underdevelopment more
generally.
 Landlocked economies, common in Africa, often have lower incomes than
coastal economies.
 Developing countries are primarily tropical or subtropical, that they suffer
more from:
 tropical pests and parasites,
 endemic diseases such as malaria,
 water resource constraints, and
 extremes of heat.
 The extreme case of favorable physical resource endowment is the oil-

19. Underdeveloped Markets
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 Imperfect markets and incomplete information are far more
prevalent in developing countries.
 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
4. A well-developed and efficiently regulated system financial
institutions
5. Substantial market information for consumers and
producers

20. How Low-Income Countries today differ from developed
countries in their earlier stages can be summarized in
eight core issues:
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1. Physical and human resource endowments
2. Per capita incomes and levels of GDP in
relation to the rest of the world
3. Climate
4. Population size, distribution, and growth
5. Historical role of international migration
6. International trade benefits
7. Basic scientific and technological research and
development capabilities
8. Efficacy of domestic institutions

21. Conclusion
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 The feature of DCs can be seen from four
perspectives:
1. Economic characteristics
2. Demographic characteristics
3. Technological characteristics
4. Socio-politico-cultural characteristics

22. Economic characteristics
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It has a number of features:
1. Low level of income associated with absolute and
relative poverty
2. Low rate of saving and low capital formation
3. Low productivity level in all sectors of economic
activities
4. High international indebtedness

23. Poverty, Inequality and development
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Measuring Inequality and Poverty
 Measuring Inequality:
 Personal or size distribution of income deals with the individual
persons or households and the total income they receive
 Functional or factor share distribution of income uses the share of
total national income that each of the factors of production receives
 Personal or size distribution of income
 Quintiles and Deciles
 Lorenz Curve
 Gini Coefficients
 Coefficient of Variation (CV)

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 Quintiles and Deciles
 Divide the population into successive quintiles or
deciles according to ascending income levels and then
determine the proportion of N.I received by each
income group
 Common measure of income inequality is the ratio of
incomes received by the top 20% and bottom 40% of
the population

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Lorenz curves
Show the actual quantitative relationship
between the percentage of income
recipients and the percentage of total
income they received during a time period
(year)
Depict the variance of the size distribution
of income from perfect equality

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 Gini coefficient
 Is measured graphically by dividing the
area between the perfect equality line
and the Lorenz curve by the total area
lying to the right of the equality line in a
Lorenz curve diagram
 Ranges in value from 0 (perfect equality)
to 1 (perfect inequality)
 Satisfies the properties of anonymity,
scale independence, population
independence, and transfer principles

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Coefficient of Variation (CV)
 Is sample SD divided by the sample mean
also satisfies the properties of anonymity,
scale independence, population
independence, and transfer principles
Functional or factor share distribution of
income:
 Influence of non-market forces minimizes the
application of this measure
 All inequality measures are measuring
relative income

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31. Measuring Absolute Poverty
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 A situation where a population or sections of the
population are able to maintain minimum levels of
living (IPL)
 Absolute poverty is measured using
 Headcount (H)
 Headcount Index (H/N)
 Poverty Gap(total income shortfall)
 FGT Index has desirable properties of a poverty
measure

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 P2 measure is used as a standard poverty
measure by the World Bank and most UN
agencies
 The Human Poverty Index (HPI) is used by the
UNDP and measures poverty as three key
deprivations- survival, knowledge, and economic
provisions

33. Characteristics of Poverty Groups
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 Rural poverty
 Women and poverty
 Ethnic minorities and poverty
Read more on this section.

34. Dimensions of poverty
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 Measuring techniques
 Lorenze curve (box curve)
 Gini ration
 Absolute poverty
 Relative poverty: reflects extreme differences in levels of
living between top and bottom strata of society
 Poverty line
 Lorenze curve uses to look into the inequality in land,
income or any opportunity.
 The curve uses two parameters:
 Percentage of population
 Percentage of income

35. Why is inequality bad?
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 Extreme inequality leads to economic inefficiency
and curtails growth.
 Extreme inequality undermines social stability and
solidarity.
 Extreme inequality is viewed as unfair.

36. Kuznets’ Inverted- U Hypothesis
 In the early stages of growth, distribution of income
will tend to worsen, where as later stages it will
improve
Read more about:
 Reasons for the inverted- U curve
 Evidence on the inverted U- hypothesis
 Relation between economic growth and
inequality
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37. Relation between economic growth and
poverty
 Traditionally, it was considered that there is trade-off between
growth and poverty.
 Why are similar rates of growth associated with different rates
of poverty reduction?
 Redistribution of growth benefits reduces poverty
 Initial inequality in income enhances poverty
 Sectoral composition of growth (agriculture versus modern,
rural versus urban)
 Efforts to reduce poverty lead to higher growth and higher
growth leads to reduction in poverty.
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38. Demographic characteristics
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 Very high rate of population growth
 High population density
 High dependency ratio
 Low life expectancy at birth
 Low literacy rates and poor working skills

39. Population trap
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 Malthus (British economist)
 Population grows at a geometric ratio but food at an
arithmetic ratio
 Richard Nelson developed (American Economist)
developed population trap based on the Malthusian
theory.
 Income generating force
 Income destroying force
 popn increases if income is injected in the economy
o b’se in poor countries most income spent on food and
health.

40. Theory Demographic transition (Change)
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 The relationship between demographic change and
economic change.
 “Development is the best contraceptive”
 Primary factors for population growth:
 Death rate
 Birth rate
 Inflow
 Outflow

41. Microeconomic theory of fertility behavior
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 In poor countries there is a tendency to be parent.
 Children are considered as economic security.
 Choice between goods and children
 Aim of the given family is to maximize welfare:
 Either by children or goods or both
 Children and goods are taken as substitutes
 Demand for surviving child is a function of level of income
(Y), cost of having children (Pc), price of goods and services
(Pgs):
Cd=f(y, pc, pgs ,..)

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 Total fertility ratio (TFR): Number children in productive
age
 Working women people ratio (WWPR)
The higher is the WWPR, the lower will be the total fertility
ratio.
 Percentage of women literacy:
The higher the percentage of women literacy, the lower will
be the TFR.

43. Technological characteristics
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 Refers to features pertaining to production
 Production process naturally influenced by
production methods
 Process technology
 Production technology
 Technological dualism
 Traditional sector
 Modern sector

44. Sociological features
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 Social and cultural feature of under development
 Social Dualism:
Traditional/primitive society
 Less educated
 Superstitious: believe in superstition
 Fatalistic attitude or belief dominates
o Fatalism is an obstacle for change or development
 Backward supply curve ( b’se of low aspiration, low
want, low education)
Modern society