Introduction to Development Economics: Concepts, Indicators, and Historical Trends, Slides of Development Economics

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Development Economics

Ch. 1 Introduction

Development Economics

• Studies the economic transformation of

developing countries.

• Developing Countries: A group of low income

countries united by common economic

characteristics and often a common history of

colonialism.

– WDR: pc income threshold $12,

– Of 5.6 billion world pop., 4.5 billion is below the

threshold of high income countries

Selected World Development Indicators

Population Pop. Age

Composition

GNI PPP GNI

Mio. 2012 Av. Annual Growth %00 – 12 Density per sq. km. % ages 0-14 $ billions $ pc $ billions $ p c World 7,046 1.2 54 26 70,571 10,015 85,463.2 12, LI 846 2.2 56 39 494.1 584 1,173.7 1, LMI 2,507 1.6 122 31 4706.2 1,877 9,808.1 3, UMI 2391 0.8 56 22 16,704.9 6,987 25,679.4 10, HI 1,302 0.6 25 17 48,952.3 37,595 49,167.5 37,

Selected World Development Indicators

GDP pc

Growth %

Life Expectancy

at Birth

Adult Literacy Rate % Carbondioxide

Emissions pc per

metric tons

2012 Male Female Age 15 and older 2004 World 1.0 68 72 84 4.

LI 3.6 58 61 61 0.

LMI 2.5 64 68 71 2.

UMI 4.5 71 75 94 5.

HI 0.7 76 82 99 13.

Examples

• Informal institutions replace the formal

constructs in underdeveloped countries,

• Widespread externalities are created,

• Inequality in distribution of income and

wealth, esp. its effect on other economic

indicators such as growth, p c income…

• Integrating the theoretical and empirical

work.

Developing Countries

• Incomplete information,

• Weak legal structure,

• Exposure to developed world,

• Resulting strategic and economic

considerations.

A Yardstick: GNP

• P c GNP: per head value of final goods and

services produced by the people of a country

over a given year.

– Captures the state of material well being of a

country.

– But, development is not just about “income”.

Multidimensionality

• Removal of poverty and undernutrition,

– Increase in life expectancy,

– Access to sanitation, clean drinking water, and

health services,

– Reduction in infant mortality,

– Increased access to knowledge and schooling, and

literacy.

* Economic development is fueled by p c income,

but GNP is not always correlated with other

indicators.

Income and Growth

• (^) Measurement Issues:
  • (^) Low p c incomes are an important feature of economic underdevelopment,
  • (^) Exchange Rate Method: To be able to make a comparison; national currencies are converted into $ and divided by country’s population, BIASED! UNDERESTIMATED! - (^) Underreporting of income (tax collection sys., rural population) - (^) Prices for many goods in all countries are not reflected appropriately in exchange rates (due to prices of non-traded goods and services).
  • (^) Purchasing Power Parity Measurement of Income: Penn World Tables by Heston Summers => National Accounts denominated in a set of international prices in a common currency.
  • (^) Market Prices are used to compare highly disparate goods, not efficient in imperfect markets.
  • (^) GNP ignore costs that arise from externalities => corrected by imputing “shadow prices”.

Income and Growth -2-

• International Comparison Program: detailed price

comparisons for a set of benchmark countries.

• Then, price of each item is divided by its

corresponding price in the U.S., relative prices

are found.

• National income for a country is estimated by

valuing its output at these prices (by dividing GNP

by these relative prices).

• PPP reduces in the world income distribution.

Historical Experience -2-

• Quah (1993) used p c income data to

construct mobility matrices for countries:

– First, converted all p c incomes to fractions of the

world’s average p c income,

– Created categories such as ¼, ½,1, 2, and ∞.

– Comparing two points in time.

Historical Experince -3-

• 26% of countries who were between half of the world

average and world average in 1962, transited to being world

average and twice the world average in 1984.

• Middle income countries are exhibiting greatest mobility.

• Lowest mobility is between the poorest and richest

countries.