Lecture 2 Differences and Commonalities among Developing Countries

Lecture 2 Differences and Commonalities among Developing Countries Lecture Outline I-Defining the developing world: Indicators of development A-GDP per capita: nominal, real, PPP B-Human Development Index (UNDP: 1990) II-Diversity and common features A-Structural diversity B-Common characteristics III-How Developing Countries Today Differ from Developed Countries in Their Earlier IV-Are living standards of developing and developed countries converging? Introduction: Terminology choice relates to theory Under-developed economies: gap to fill (catch-up of target to meet) linear and standardized process (Rostow) Developing countries: less pejorative, more convenient and frequent but same limitations and supposes improvements North/South: appeared in the 1970s stress persistent cleavage between industrialized and others drawback: geographical (or even predetermination) outcome Poor countries poverty is important feature but does not capture inequality aspect idea that situation derives solely from lack of resources (but false) Third world: analogy with Tiers Etat (A. Sauvy: 1952) relates to the common hope for development not valid anymore because of growing heterogeneity: end of unity Transversal and longitudinal differences can be exploited to identify determinants of development Heterogeneity is necessary to run regressions but raises issues: Generalization / representativeness (context specific) Misimpression: outliers Are development outcomes predetermined? No: diversity of success stories and tragedies 1

Policy implications can only be derived based on Within estimations: fixed effects wipe out time-invariant features I-Defining the developing world Gap between poorest and richest developing countries is greater than that between upper middle and richest: *Newly industrialized countries *Oil exporters (Kuwait, Qatar...) [UN classify them as dving] *Least developed countries Widely used classification: World Bank (GNI) LIC: <800, LMIC :< 3200, UMIC: <10,000 $ Cf. Table 2.1 in TS Is per-capita GDP a good indicator of development? Some problems: 1. cost of living PPP adjusted 2. underreporting + low quality data 3. home production 4. black markets 5. other important dimensions: literacy, health. Human Development Index: 2

Holistic measure of living levels: Human Development Index (UNDP, 1990) HDI = (income index +life expectancy + education index)/3 income= (log INC- log min INC)/ (log max INC-log min INC) where INC is PPP per capita income Life Exp (LE) = (LE - min LE)/ (max LE min LE) x 100 Education = (2 x alphab + scol)/3 3

Indicators Overall, however, GDP per-capita is not perfect but still a good measure since it s a good PROXY for other things, i.e. GDP is positively related to education and positively related to life expectancy. II-Diversity and commonalities A-The Structural Diversity of Developing Economies Size and income level (Table 2.2) 4

Historical background Physical and human resources Ethnic and religious composition Relative importance of public and private sectors Industrial structure (Table 2.3) External Dependence II-Diversity and commonalities B-Common Characteristics of Developing Nations Low levels of living HDI (income, health and education 5

-- Relative growth rates of national and per capita income (Table 2.5) Low levels of productivity High rates of population growth and dependency burdens (Table 2.11) Substantial dependence on agricultural production and primary exports (Table 2.12 and Figure 2.4) 6

Prevalence of imperfect markets III-How Developing Countries Today Differ from Developed Countries in Their Earlier Stages Development is a very recent phenomenon 7

III-How Developing Countries Today Differ from Developed Countries in Their Earlier Stages Physical and human resource endowments Per Capita incomes and levels of GDP in relation to the rest of the world Climate Population size, distributions and growth Historical role of international migration International trade benefits Basic R&D capabilities Stability and flexibility of political-social institutions Efficacy of domestic economic institutions IV-Are living standards of developing and developed countries converging? Evidence of unconditional convergence is hard to find (Figure 2.5) There is some (controversial) evidence of conditional convergence. Also see Figure 2.6 on global disparities. 8

CONCLUSION Under-development should be seen in the national and international context in terms of causes and solutions: National eco and soc forces: institution, geography, population International eco and soc forces: globalization (trade and finance), political relationships and aid. Development require an appropriate national strategy but also a modification of the international economic order to make it more responsive to the development needs of poor nations Backwardness entails both advantages (catch-up) and disadvantages (lagging institutions) Recent successful stories indicate that development is not inevitable despite poverty traps and numerous failures. 9