April 18, 2024
Economic Development
Thirteenth Edition
Chapter 2
Comparative
economic
development
Dr. Moeen ud Din
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
2 2.1 Defining the Developing World
• The World Bank ranks countries on Gross
National Income (GNI) per capita
• Low-Income Countries (LICs)
• Lower-Middle Income Countries (LMCs)
• Upper-Middle Income Countries (UMCs)
• High-income OECD countries
• Other high-income countries
(See Table 2.1 and Figure 2.1)
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.1
3 Classification of Economies by Country, Code & Class, Region, and Income, 2018
Source: Data from World Bank, World Development Indicators, 2018
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.1
4 Classification of Economies by Country, Code & Class, Region, and Income, 2018
Source: Data from World Bank, World Development Indicators, 2018
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.1
5 Classification of Economies by Country, Code & Class, Region, and Income, 2018
Source: Data from World Bank, World Development Indicators, 2018
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.1
6 Classification of Economies by Country, Code & Class, Region, and Income, 2018
Source: Data from World Bank, World Development Indicators, 2018
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.1
7 Classification of Economies by Country, Code & Class, Region, and Income, 2018
Source: Data from World Bank, World Development Indicators, 2018
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Figure 2.1
8 Nations of the World, Classified by GNI Per Capita
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
9 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 (see Table 2.2)
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
10 Figure 2.2
Income Comparisons for Selected Countries, 2017
Source: World Development Indicators
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
11 Table 2.2
Comparison of Per Capita GNI in Selected Developing Countries, Canada, the
United Kingdom, and the United States, Using Official Exchange-Rate and
Purchasing Power Parity Conversions, 2017
Source: World Bank World Development Indicators
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.3
12 Commonality and Diversity: Some Basic Indicators of Health and Education
Source for health indicators: WDI. Source for education indicators: UNDP.
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Table 2.3
13 Commonality and Diversity: Some Basic Indicators of Health and Education
Source for health indicators: WDI. Source for education indicators: UNDP.
Source for health indicators: WDI. Source for education indicators: UNDP.
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
14 2.3 Holistic Measures of Living Levels and Capabilities
• Income is one indicator, but needs to be supplement with others
• Health e.g., Life Expectancy
• Education
• Other indicators are considered in various indices
• The New Human Development Index (NHDI), or simply “HDI”
• Introduced by UNDP in November 2010
• NHDI as an attempt to create and use holistic measure of living levels;
considers income, health, and education
• NHDI 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
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
15 Why is the new New HDI considered an improvement
over linear measures such as the Traditional HDI?
Calculating with a geometric mean
• How does the New HDI compare with the better-known (but no longer active)
Traditional HDI? And other linear combinations of national indexes?
• Probably most consequential: The HDI is now computed with a geometric
mean, instead of an arithmetic mean
• A geometric mean is also used to build up the overall education index
from its two components
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
16 Why is the new HDI considered an improvement over
linear measures such as the Traditional HDI?
Calculating with a geometric mean
• Traditional HDI added the three components, divided by 3 (arithmetic mean)
• The New HDI takes the cube root of the product of the 3 component indexes
• The traditional HDI linear calculation assumed one component traded off
against another as perfect substitutes, a strong assumption
• The reformulation now allows for imperfect substitutability - widely
considered a more plausible way to frame the tradeoffs
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
17 Calculating with a geometric mean in the New HDI
• The New HDI takes the geometric mean, which is the cube root of the
product of the three component indexes Ilife1/3 , IEducation1/3 , and IIncome1/3,
which may be written as:
NHDI = (Ilife1/3 * IEducation1/3 * IIncome1/3)
Or
NHDI = (Ilife* IEducation * IIncome) 1/3
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
18 Calculating with a geometric mean in the New HDI
(Continued)
• This reformulation allows for imperfect substitutability
• Addresses “how well-rounded” a country’s performance is across the
three dimensions
• Other differences (choices) made in the components of the sub-indices
We can see these elements in the textbook’s Example of Ghana
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
19 Calculating the New HDI: Example
• Example: Ghana
• Indicator Value
• Life expectancy at birth (years) 64.6
• Mean years of schooling 7.0
• Expected years of schooling 11.4
• GNI per capita (PPP $) 1,684
*Note: Example from 12th Ed. Numbers are rounded. Source: http://hdr.undp.org/sites/default/files/hdr_2013_en_technotes.pdf
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
20 Calculating the New HDI: Example
• Life expectancy index = (64.6 – 20) / (83.6 – 20) = 0.701
– Mean years of schooling sub-index = (7.0 - 0) / (13.3 – 0) = 0.527
– Expected years of schooling sub-index = (11.4 – 0) / (18.0 – 0) = 0.634
• Education Index = ([√0.527*0.634] – 0) / (0.971 – 0) = 0.596
• Income index = [ln(1,684) - ln100)] / [ln(87,478) - ln(100)]
= 0.417
• NHDI = (0.7011/3 * 0.5961/3 * 0.4171/3) = 0.558
– Comparative examples of underlying data and indexes across countries on supplemental slides
*Note: Example from 12th Ed. Numbers are rounded. Source: http://hdr.undp.org/sites/default/files/hdr_2013_en_technotes.pdf
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
21 Other key differences between the New HDI and
Traditional HDI
• Traditional HDI is still widely taught; students may encounter it in other
classes
• A summary of other key differences between the New HDI and the
Traditional HDI (in addition to using a geometric mean) follows:
‒ Gross national income per capita replaces gross domestic product per
capita
‒ Revised education components: the New HDI uses the average actual
educational attainment of the whole population, and the expected
attainment of today’s children (not enrollment)
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
22 Other key differences between the New HDI
and Traditional HDI
‒ The maximum values in each dimension have been increased to the
observed maximum rather than given a predefined cutoff
‒ The lower goalpost for income has been reduced due to new evidence on
lower possible income levels
‒ Note: Please be sure to review example country comparisons to get a sense of how
much HDI rankings can differ from income rankings
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
23
Note on HDI And Policy
• Just that correlation not very strong between income and
HDI
• HDI can be altered by policy
• Example (if a partial one): South Africa
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
24 Table 2.4
2018 Human Development Index and its Components
for Selected Countries
Source: United Nations Development Program
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
25 Table 2.4
2018 Human Development Index and its Components
for Selected Countries (Continue)
Source: United Nations Development Program
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
26 Table 2.5
HDI for Countries with Similar Income Levels
Data Source: 2016 Human Development Report 2016, Table 1, Pages 198-201 (New York: United Nations Development Program), 2015 data.
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
27 Table 2.5
HDI for Countries with Similar Income Levels
Data Source: 2016 Human Development Report 2016, Table 1, Pages 198-201 (New York: United Nations Development Program), 2015 data.
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
28 Figure 2.3
Improvements in Human Development Since 1990, by Region
Source: Human Development Report Office, UNDP – Human Development Report, 2016, p. 27
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
29 Comparing characteristics among developing countries
• Ten points of comparison - both among developing countries, and between
developing and 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 – quality of institutions
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
30 Figure 2.4
Under-5 Mortality Rates, 1990 and 2017
Source: World Development Indicators
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
31 Table 2.6
The 12 Most- and Least-Populated Countries and
Their Per Capita Income, 2017
Source: World Bank World Development Indicators
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
32 Table 2.7
Primary School Enrolment and Pupil–Teacher Ratios, 2017
Source: World Development Indicators
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
33 Table 2.8
Crude Birth Rates Around the World, 2018
Source: Population Reference Bureau: Births per 1,000 population
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
34 Table 2.8
Crude Birth Rates Around the World, 2018
Source: Population Reference Bureau: Births per 1,000 population
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
Share of the Population Employed in the Agricultural, April 18, 2024
Industrial, and Service Sectors in Selected Countries,
35 1990–92 and 2008–2011 (%)
Source: World Bank, World Development Indicators, 2013 (Washington, D.C.: World Bank, 2013), tab. 2.3
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
36 Figure 2.5
The growth of real output per person since 1750
Source: Data from Maddison Project Database
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
37 2.6 Are Living Standards Converging across Countries?
• A Great Divergence followed the Industrial Revolution
• Two reasons to think (re-)convergence likely
1) Diminishing returns to capital
(though as economies develop, they often find ways to compensate)
1) Diffusion of ideas across countries, so can skip trial and error and grow fast
while catching up
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
38 2.6 Are Living Standards Converging across Countries?
• Latter elated to “advantages of backwardness” (Gerschenkron), or “the
latecomer’s advantage”
• But - at least until this century - evidence of unconditional national average
income convergence has been unconvincing
• Continued evidence of divergence between middle- and low-income countries
• There is also evidence of “per capita income convergence,” weighting changes
in per capita income by population size
• (We consider “conditional” convergence - observed after accounting for other
factors - in a general way in context of the Solow neoclassical growth model)
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Figure 2.7
39
Relative Country Convergence: World, Developing
Countries, and OECD
Data Source: Penn World Table
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Figure 2.7
40
Relative Country Convergence: World, Developing
Countries, and OECD
Data Source: Penn World Table
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
Figure 2.7
41
Relative Country Convergence: World, Developing
Countries, and OECD
Data Source: Penn World Table
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
42 Figure 2.8
Growth Convergence versus Absolute Income Convergence
Data Source: Penn World Table
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
43 Nature and Role of Economic Institutions
• Institutions provide “rules of the game” of economic life
• Follows general framework of Nobel Laureate Douglass North
• Salient institutions include the nature and extent of:
• Property rights
• Contract enforcement
• Restriction of coercive, fraudulent and anti-competitive behavior
• Provision of access to opportunities for the broad population
• Constraining the power of elites
• Conflict management
• Other institutions provide improved coordination; social insurance; and
predictable macroeconomic stability
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
44 The Nature and Role of Economic Institutions:
Some Warnings and Hints
• Most importantly: Good institutions may both cause development, and improve
because of development
• In addition:
‒ The institutions on the previous slide are correlated
‒ It is not clear which of these institutions matter most
‒ Unclear how specific in form institutions must be to fulfill their main function
‒ Progress may be made when only some institutions are of high quality; but further
progress may require improving quality of additional institutions
‒ The specifics of their relative importance, and the sequence of improving them, may
well vary by country
‒ China provides an important case of transitional institutions
‒ Note : A “free market economy” is not the only example of a market economy
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
45
Figure 2.9
Schematic
Representation of
Leading Theories
of Comparative
Development
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
46 Explaining Long-Run Causes of Comparative Development:
Fig. 2.10 Summary
• Arrow 1: Geography: Important in pre-modern era; limited effect in modern era
• Arrow 2: However, exogenous geography affected how colonists viewed
opportunities they could exploit in colonies; and so, in part…
• Arrow 3: Geography was a determinant of whether colonists created extractive
or inclusive institutions; this fact facilitates analysis of role of institutions
• Arrow 4: Geography presumably affected indigenous institutions…
• Arrow 5: A Note: Difficult to quantify; but colonial institutions may have been
influenced by indigenous institutions
• Arrow 6: Geography affected comparative advantages: resources and people
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
47 Explaining Long-Run Causes of Comparative Development:
Fig. 2.10 Summary (Continued)
• Arrow 7: Geography helps explain “motivation” for institutions:
• extractive when comparative advantage (CA) was in activities with (a range of)
increasing returns (e.g., sugar cane, mining)
• inclusive when CA was in constant returns activities (e.g., wheat)
• Arrow 8-9: Reflects that state of development of the colonizer also had an effect
• Arrow 10: Key: Institutions were persistent from colonial to post-colonial periods
• Arrow 11: Bad institutions created high inequality which also had bad effects on
growth and development outcomes
• Arrow 12: Especially difficult to reform institutions with high inequality
• Results (arrows 14-22): “Bad” institutions and high inequality led to slower
growth and slow improvement of human capital and
other development outcomes
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
48
Role of Institutions and Inequality: Findings
• Acemoglu, Johnson, and Robinson:
• “reversal of fortune” and extractive institutions
• Bannerjee and Iyer:
• “Property rights institutions.” Landlords versus
cultivators
• Easterly:
• “Inequality does cause underdevelopment”
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
49 How Low-Income Countries Trying to Launch Accelerated Growth
Today Differ from Developed Countries in Their Earlier Stages
• Eight Relatively Widespread Aspects of Differences:
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. Historic role of international migration
6. International trade benefits
7. Basic scientific/technological research and development capabilities
8. Efficacy of domestic institutions
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
April 18, 2024
50
THANKS
dr.moeenuddin
Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith
