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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 .
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Development Economics Ch. 1 Introduction
Development Economics • Studiestheeconomictransformation of developingcountries. • DevelopingCountries: A group of lowincomecountriesunitedbycommoneconomiccharacteristicsandoften a commonhistory of colonialism. • WDR: pcincomethreshold $9,000 • Of 5.6 billionworld pop., 4.5 billion is belowthethreshold
WDR Classification(Accordingto 2007 GNI perCapita) • Low Income Countries: $935 or less • Lower Middle Income Countries: $936 - $3,705. • Upper Middle Income Countries: $3,706 – $11,455. • High Income Countries: $11,456 or more.
Two strands of the textbook: • Dependency Theories: Emphasise on the international environment that underdeveloped countries are a part of it. • Market Failures and the Potential for gov’t intervention; • Incomplete information • Incentives • Strategic Behaviour
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.
How do wemeasure “development”? • In a developed society people are well fed, well clothed, possess access to variety of commodities, have some leisure and entertainment, and live in a healthy environment. • Society that is free of discrimination, having political rights and freedoms, intellectual and cultural development, low crime rates…
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 povertyandundernutrition, • Increase in life expectancy, • Access tosanitation, cleandrinkingwater, andhealthservices, • Reduction in infantmortality, • Increasedaccesstoknowledgeandschooling, andliteracy. * Economicdevelopment is fueledby p c income, but GNP is not alwayscorrelatedwithotherindicators.
Two questions to understand development: • How average levels of economic attainment (i.e. P c GNP) influence development? • How the distribution of economic attainment influences development?
IncomeandGrowth • MeasurementIssues: • Low p c incomesare an importantfeature of economicunderdevelopment, • Exchange Rate Method:To be abletomake a comparison; nationalcurrenciesareconvertedinto $ anddividedbycountry’spopulation, BIASED! UNDERESTIMATED! • Underreporting of income (taxcollectionsys., ruralpopulation) • Pricesformanygoods in allcountriesare not reflectedappropriately in exchangerates (duetoprices of non-tradedgoodsandservices). • PurchasingPowerParityMeasurement of Income: PennWorldTablesbyHestonSummers => NationalAccountsdenominated in a set of internationalprices in a commoncurrency. • Market Pricesareusedtocomparehighlydisparategoods, not efficient in imperfectmarkets. • GNP ignorecoststhatarisefromexternalities => correctedbyimputing “shadowprices”.
Income and Growth -2- • InternationalComparison Program:detailedpricecomparisonsfor a set of benchmarkcountries. • Then, price of eachitem is dividedbyitscorrespondingprice in the U.S., relativepricesarefound. • Nationalincomefor a country is estimatedbyvaluingitsoutput at theseprices (bydividing GNP bytheserelativeprices). • PPP reduces in theworldincomedistribution.
Historical Experience • Btw. 1960 – 1985: P c incomes of richest 5% of theworldwasabout 29 timesthepoorest 5%. • DiverseGrowthExperiences: (Parente & Prescott, 1993) • 1965 – 1990: p c incomes of East Asianeconomiesgrewby 5.5% annually, • 1980 – 1993: p c income in Chinagrewby 8.2% annualy, • Growthfor 102 countriesaveragesto 1.9% annualyover 1960 – 1985. • P c incomefellby 11% during 1980s in L. America, • Much of Africastagnatedordeclinedduring 1980s. • Doubling Time: thenumber of years it takesforincometodouble (70/r).
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.
