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Economics of Development
ECON 370
Prof. G. Anderson/ CSUN/ Fall 2003
LECTURE NOTES 1
How to define a developing
country
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Developing countries. Countries with low or
middle levels of GDP per capita as well as five
high-income developing economies -China,
Israel, Kuwait, Singapore, and the United Arab
Emirates (World Bank classification).
Several countries with transition economies are
sometimes grouped with developing countries
based on their low or middle levels of per capita
income, and sometimes with developed countries
based on their high industrialization.
More than 80 percent of the world's population
lives in the more than 100 developing countries
Why are some nations poor?
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Problems of all developing countries can be
understood with reference to issues that are
internal to the structure of developing countries.
Approach: Markets are not intrinsically bad or
intrinsically good. The point is to understand
the conditions under which they fail or function
at an inefficient level and to determine if
appropriate policies can fix such inefficiencies.
Structures of incentives and property rights
arrangement seem correlated with rates of
development; institutions matter.
How do we measure the state of
material well-being of a nation?
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Per capita gross national product (GNP) has been
used for many years to measure development
performance
– But economic development is not, in a definitional
sense, identified with the level or growth of per capita
income
– Universally accepted that development is not just
about income, although income or wealth has a great
deal to do with it.
– Development is also about the removal of poverty: an
increase in life expectancy; access to sanitation, clean
water and health services; reduction of infant
mortality; increased access to knowledge and
schooling, and literacy in particular
A (LIMITED) CONSENSUS HAS EMERGED.
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Universal agreement that the major
features of economic development –
health, life expectancy, literacy – follow
in some natural way from the growth of
per capita GNP
Implicit belief in the power of aggregate
economic forces to positively affect every
other socio-economic outcome that we
associate with development
How do we measure development?
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Most would agree that a minimal requirement for
a “developed” nation is that the physical quality
of life be high, and be so uniformly, rather being
restricted to an affluent minority.
But the notion of a good society goes further,
Political rights and freedom, intellectual and
cultural development, stability of family and a
low crime rate etc.
A high and equally accessible level of material
well-being is probably a prerequisite for most
other kinds of advancements, quite apart from
being a worthy goal in itself.
Income and Growth
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Low per capita incomes are an important feature
of economic underdevelopment and there is little
doubt that the distribution of income across the
world is extraordinarily skewed
How do we calculate per-capita incomes?
– Exchange rate method
– Purchasing Power Parity (PPP) method
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Exchange rate method: Each country’s income
converted into a common currency (typically U.S
dollars) and divided by that country’s population.
Income and Growth
World Development Report: GDP of the
world in 2002: $31 trillion. 20% from low
and middle income countries with 85% of
the world population.
 Switzerland (richest in this study) has a
per-capita income, which is close to 400
times higher than Tanzania.
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Biased estimates
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Underreporting of income is not uncommon in
developing countries. Proportion of income that
is generated for self-consumption is relatively
high in developing countries
A more serious issue is the fact that prices for
many goods in all countries are not appropriate
reflected in exchange rates.
Conventional measures of GNP ignore costs that
arise from externalities – cost of associated
pollution, environmental damage, resource
depletion, human suffering due to displacement
caused by development projects.
Growth experiences
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Per capita incomes in East Asian economies
(Japan, Korea, Taiwan, Singapore, Hong Kong,
Thailand, Malaysia, Indonesia, China) increased
during 1965-90 at an annual rate of 5.5%
Per capita incomes in China increased during
1980-2002 at an annual rate of 8.1%.
Per capita incomes in Latin America and Africa
declined during the 1980s, grew again in the
1990s.
Diverse growth experiences such as these can
change the face of the world in a couple of
decades
Doubling time
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Number of years it takes for income to double at
a given growth rate
Good approximation to the doubling time is
seventy divided by the annual growth rate
expressed in percentage terms.
For example, an East Asian country growing at 5
% per year will double its per-capita income
every fourteen years
In contrast a country growing at 1 % per year
will require 70 years. Percentage growth figures
looks like small figures, but over time, they add
up very fast
Global distribution of income summary
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Over the period 1960-2000, the relative
distribution of world income appears to have
been quite stable.
Huge movements within the distribution.
No ultimate traps to development. Mobility of
countries highest among those in the middle of
the wealth distribution
History of underdevelopment or extreme poverty
appears to put countries at a disadvantage.
But poor countries have also some advantages
Income distribution
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Distribution is not only unequal between
countries but also highly unequal within each
country, particular in developing countries
As economic growth proceeds it initially benefits
the richest groups more than proportionately. At
higher levels of per capita income economic
gains tend to be distributed more equally.
But countries that pursue policies of broad-based
access to infrastructure and resources such as
health and services and education will have a
more equal distribution of incomes
The many faces of underdevelopment
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GDP per capita cannot be used as a reliable
indicator on overall development. Other
important variables are:
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literacy
access to drinking water
low rates of infant mortality
life expectancy
empowerment
Guatemala and Sri Lanka: Guatemala has a
higher per capita income but performs worse on
other important indicators such as life
expectancy, infant mortality and adult literacy
Human development index
HDI takes into account three different
indicators.
 The first is life expectancy at birth, the
second measure educational attainment
and the third is per-capita income.
 Advantages: Simple aggregate measure
 Disadvantage: Ad hoc weighting scheme
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GDP again
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It seems reasonable to suppose GDP is a fairly
good proxy for most aspects of development.
Compare per capita income and other variables
and see how much explanatory power per capita
GDP has over these other basic variables
By and large the relationship between per capita
income alone and each of these variables is
strikingly strong.
Per capita income is a powerful correlate of
development no matter how broadly we conceive
of it
Some structural features
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Demographic characteristics: Very poor countries
are characterised by both high birth rates and
high death rates
Occupational and production structure:
Agriculture is a very important sector in
developing countries
Rapid rural-urban migration: There is a large
movement of labour from rural to urban areas
International trade: All countries are significantly
involved in international trade. Developing
countries often exporters of primary products and
light manufactured products