Economic Development & Classification Systems

IB-SL EconomicsIB-SL Economics

P. MessereP. Messere

Assessing Living Standards

RegionGDP Increase

(% annual average change)

1980-85 1985-90 1990-00

Developed Market Economies 2.5 3.7 2.4

Developing Countries 3 4.5 4.8

E. European countries 3.1 1.5 -2.3

Increase in GDP for World’s regions (1980-2000)

According to the above table, which region has shown the greatest improvement in economic welfare?

Development – What & For Whom?Has an economy developed when economic growth (increased GDP per capita) occurs but the following conditions are also present?

– Incomes for the poorest 25% to 50% of the population remain unchanged

– Large proportion of the population is unable to meet basic needs for food, shelter, sanitation, health care etc…

– Long term unemployment increases with improved productivity

– The growth is fuelled by a few wealthy land owners producing primary goods for export rather than domestic consumption & profits are reinvested abroad, rather than at home

Economic Growth vs. Development

Economic Growth– The increase in real national income

(GDP/GNP) during a given time period, usually one year

– Economic growth is a quantitative concept allowing for comparisons both between countries and over time

Economic Growth vs. Development

Economic Development (Past)– Originally referred to the process of

industrialization (structural transformation of economy primarily dependent on agriculture to one producing manufactured goods) accompanied by increased real per capita GDP/GNP

• Definition proved too narrow for development economists as it did not illustrate true development in terms of increased living standards or quality of life for citizens

Economic Growth vs. Development

Economic Development (recent)– Includes economic growth but must include

reduction of:• Poverty• Income inequality• Unemployment

– Development is qualitative concept accounting for questions of what is being produced and who is getting it?

Development – Broader Context

Classifications of Developing Countries: World Bank (IBRD) World Bank (International Bank for

Reconstruction & Development) System– divides 133 countries (both developed & and

developing) with populations in excess of 1 million into four groups according to per capita income levels:

• Low income: per cap. GNP < $785 in1997• Middle income: $786 - $3,125• Upper middle-income: $3,126 - $9,655• High income: per cap. GNP > $9656 in 1997

Classifications of Developing Countries: World Bank (IBRD) World Bank’s System

– first three groups (per cap. GNP to $9655) comprise 107 mostly developing countries

– last group (high income economies) made up of 26 nations; 24 from First World and other two (Kuwait & UAE) classified as developing

Classifications of Developing Countries: OECD OECD (Organization for Economic

Cooperation & Development) divides third world into four groups:– 61 low-income countries (LICs) with per cap.

income less than $659 including 29 least developed countries (LLDCs)

– 73 middle-income countries (MICs)

– 11 newly industrializing countries (NICs)

– 13 members of OPEC

Alternative Measures of Development

To overcome problem of using GDP growth as measure of development, economists construct measurements based on relatively quantifiable and identifiable variables showing relative living standards and overall human welfare

– Such common indicators include:• ‘Distance’ between richest 10% and poorest 10% in society• Doctors per 1,000 people & average travel time to hospital• Number of people with access to clean drinking water• Average daily caloric intake per person• Road km & other transportation networks in km per capita• Telephones/computers/internet access per 1,000 inhabitants

Alternative Measures of Development (con’t)

– Additional indicators include:• Infant mortality rates

• Life expectancy

• Percentage spent on public education relative to national budget/GDP

• GDP/GNP adjusted for pollution / environmental damage / non-monetary activities such as barter

• Adjusting income figures showing long-run sustainability by factoring in depreciation of environmental capital eg. natural resources

Composite Indexes

No single indicator can show overall development

Composite indexes created where number of different variables used together and indexed in order to make comparisons possible– Physical Quality of Life Index– United Nations Human Development Index (most

commonly used)– Human Poverty Index

Alternative Measures of Development: PQLI

Physical Quality of Life Index (PQLI)– PQLI uses three indicators (weighted equally)

to form a simple composite index where performance of each country is rated on a scale of 1 (worst) to 100 (best):• life expectancy: 100 = 77 yrs, & 28 yrs. = 1• infant mortality:100 = 9 per 1000 & 1 = 229 per

1000• literacy rates (as per country data)

Alternative Measures of Development: United Nations HDI

The United Nations Human Development Index (HDI)– HDI attempts to rank all countries on scale of

0 (lowest human development) to 1 (highest human development) based on three goals:• life expectancy at birth (longevity)• educational attainment (knowledge)• real per capita income (living standard)

The Structural Diversity of Developing Economies Size and income

level

The Structural Diversity of Developing Economies Size and income level Historical background Physical and human resources Ethnic and religious composition Relative importance of public and private

sectors Industrial structure

The Structural Diversity of Developing Economies Size and income

level Historical

background Physical and human

resources Ethnic and religious

composition

Relative importance of public and private sectors

Industrial structure External

dependence Political structure,

power, and interest groups