Measurements of Economic Development ISP

8/6/2019 Measurements of Economic Development ISP

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What is Economic Development and Economic Growth

Economic Growth Economic Development

Relates to the problems of developed countries. Relates to the problems of under developed countries.

According to Maddison: Raising of income levels indeveloped countries.

While in poor countries is called economic development.

In fact, the term development and growth have nothing to do with the type of economy. The distinction b/w the tworelates to the nature and causes of change.

While growth is a gradual and steady change in thelong run which comes about by a gradual increasein the rate of savings and population.

According to Schumpeter: defines development as aspontaneous change in the stationary state which forever,alters and displaces the equilibrium state previouslyexisting.

Note: This view has been widely accepted by majorityof economicsts.

According to Kindleberger: Economic growth meansmore output.

While economic development implies both more output andchanges in the technical and institutional arrangement bywhich it is produced and distributed.

According to Friedmann: He defines growth as an

expansion of the system in one or moredimentions without a change in its structure,

Development as an innovative process leading to the structural

transformation of social system.

Conclusion: Economic growth is related to aquantitative sustained increase in the counrtysper capita output or income accompanied byexpansion in its labour force, consumption,capital and volume of trade.

On the other hand, economic development is a wider concept.It includes growth + change. It is related to qualitativechanges in economic wants, goods, incentives,institutions, productivity and knowledge.


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Measurements of Economic Development

Four ways1. GNP

Economys real national income over a long period of time.But it is not satisfactory due to the following reasons.

A. Real national income is the countrys total output of final goods andservices in real terms rather then in money terms. Thus prices changes will

have to be ruled out while calculation real national income.B.This is unrealistic variation in prices are inevitable.

- Over a long period of time refers to sustainable increase in income notshort term due to fluctuation in business cycle.

C. This measures fails to take into consideration of changes in the growthof population. Because if growth accompanied by a faster growth in

population, there will be no economic growth.D. GNP does not reveal the cost to the society of environmental pollution,

urbanization, industrialization and population growth.- It consider natural resources to be free.


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E. It tells nothing regarding distribution of income in the economy.

In addition to above there are certain conceptual difficulties in themeasurement of GNP which are as under:

- It is always measured in money but there are no. of goods and serviceswhich are difficult to measure in terms of money e.g. painting as hobby.

Kitchen gardening, services of family members- Fear of double counting due to intermediate products.- GNP does not make distinction b/w valuable services as bringing upchildren and manufacturing of cigarettes. It equates bads and goods.- Difficulties of accounting transfer payments. e.g individuals getpension, unemployment allowance, interest on public loans. Fact is thatthese are part of an individual income.- Capital gains or losses due to increase or decrease in the market valueof capital assets or change in demand. Because such changes do notresult from current economic activities.


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Difficulties are as under:

- It may not raise the real standard of living of the masses. It is possible thatPCI raising but Per capital consumption may decrease due to increase in

saving.- It is possible masses remain poor due to increased income goes to few richinstead of to the many poor.

- Real PCI fails to measure adequately changes in output due to changes inprice level.

- International comparisons of the real GNP per capita are inaccurate due toexchange rate conversion of different currencies into a common currency. ie.

USA dollar. These nominal exchange rate do not reflect the relative purchasingpower of different currencies.

- The rates of exchange are based on goods internationally traded but thereare number of goods which are not traded, hence are priced low.

Economist therefore, prefer to measure GNP per capita in terms of

purchasing power parity.- The measure fails to take into account problems associated with basic needslike nutrition, health, sanitation, housing, water etc.

- The improvement in living standards by providing the basic needs are notmeasured by GNP per capita.

Despite of the above factors, it is most widely used measure of

economic development.


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Welfare.There is also a tendency to measure economic development from the point ofview of economic welfare. Economic development is regarded as a processwhereby there is an increase in the consumption of goods and services of

individuals.-Okum and Richardson describe economic development as a sustained

improvement in material well-being. i.e. increasing flow of goods andservices.

Limitations- Problem arises when weights are to be attached to the consumption to

individuals. Bcz consumption of goods and services depends on taste andpreferences of individuals. Therefore, not correct to give same weight while

constructing welfare index.Difficulty in valuation of output. Output is valued at market price while welfare

is measured by increase in real national output.From the welfare point of view, the question is not what to produce rather how

it is produced. As the increase in real output involved real cost (pains andsacrifices) and social costs.

e.g. Long working hours and deterioration of working conditions of laborforce.

- it is not possible the increase in national income might improve theeconomic welfare. It will make rich more richer and poor more poorer due to

income inequality.


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Social IndicatorsSocial indicators are often referred to as the basic needs for development.

Basic needs focus on alleviation of poverty by providing basic human needs

to the people.The provision of basic needs such as health, food, water, sanitation, education

and housing affects poverty for a short period of time as compared toGNP/GNP per capita which aims at increasing productivity and income over

long period of time.The merit of this measure is that it is concerned with ends. Economic

development is a means to these ends.This measure tells us how different countries prefer to allocate resources

among alternative uses. Whether more on education, or health or etc.Hicks and streeten took six social indicators for basic needs.

Basic Need Indicator

Health Life expectancy at birth.Education Primary school enrolment as % of Population

Food Calorie supply per head.Water Supply Infant mortality and % of population

with access to potable water.Sanitation Infant mortality and % of population

with access to sanitation.Housing -


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Limitations:

- No unanimity among economists as to number and type of items to beincluded in such an index.

- Problem of assigning weights to the various items as may depend upon thesocial, economic and political set-up of a country. If each country assign itsown weights then the index will not be suitable for international comparison.These are concerned with current welfare and are not related to the future.

Conclusion:

Describe by drawing diagram.


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Human Development Indices

Economists tried to measure social indicators by constructing HD indices.Two are most important.

1. Physical quality of life index2. Human development index

Physical quality of life indexIt was developed by M.D. Morris in 1979.

It is a composite index relating to 23 LDCs for comparative purpose.The indicators included are: infant mortality, life expectancy at age one and basic

literacy. However, the index can include wide variety of social indicators suchas drinking water, nutrition and sanitation etc.

The index shows improvement in quality of life when peoples enjoy thefruits of economic development.

Each indicator is placed on a scale of 0 to 100. Where 0 represents absolutelyworse performance.

How it is calculated?By averaging the three indicators giving equal weights to each and the index

is also scaled from 0 to 100.If indicators of basic literacy rate and life expectancy are +ve, the best

performance is shown as the max and vice versa.Infant mortality rate is a ve indicator and its performance is the best as the

minimum.


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FormulaFor +ve variables

Achievement level= Actual value - Min. value / Max. value Min. value

For - ve variablesAchievement level= Max. value Actual value / Max. value Min. value

- Each indicator is sensitive to distribution effects. i.e. improvement in theseindicators signifies an increase in the proportion of people benefiting from

them.Moris set the values of maximum and minimum values of component Indicators

Dimension Max. Value Min. Value Difference

Infant Mortality Rate 229 9 220

Life Expectancy at ageone.

77 38 39

Basic Literacy Rate 180 0 180


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On the basis of above values, Moris presents the following correlation.

N=150 Infant Mortality Life Expectancy

Life Expectancy at ageone.

-0.92 + -

Literacy -0.92 0.897


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good indicators of the Physical quality of life. While

literacy indicates the potential of development.

Limitations- It is a limited measure of basic needs.- It supplements but does not supplant (supersede) the

GNP.- It does not explain the changing structure of economic

and social organizations, hence does not measure the eco.Dev.

- It does not measure total welfare.- Main criticism is using equal weights for the threevariables, which will not be useful for comparative

analysis.Conclusion

- It can be used to identify the regions ofunderdevelopment and groups of society suffering from

the neglect or failure of social policy.- It identif the indicators where immediate action is


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Human Development Index (HDI)

Human development is a process of enlarging peoples choices. Themost critical ones are to lead a long and healthy life, to be educatedand to enjoy a decent standard of living. Additional choices include

political freedom, guaranteed human rights and self-respect.

Lord Meghnad Desai and Amartya Sen and Dr. Mahboob ul Haqdeveloped the HDI and UNDP incorporated it into its first HDI report in

1990.HDI is a composite index of three social indicators i.e. Life expectancy,

adult literacy and years of schooling.It also takes into account GDP per capita.Before the HDI is calculated, an index is created for each of the

indicators i.e. Life expectancy index, Education index and GDP index.For calculating indices Max and Min. values are chosen for each of the

indicator.


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Goalpost for calculating HDI

Indicator Max. Value Min.Value

Life expectancy at birth (years) 85 25

Adult literacy rate (%) 100 0

Combined gross enrolment ratio (%) 100 0

GDP per capita (PPP US $) 40,000 100


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Goalposts for the HDI


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Performance in each dimension is expressed as a valueb/w 0 to 1 by applying the following formula:

Dimension Index= Actual value - Min. value / Max. value

Min. valueThen HDI is estimated as a simple average of the threedimension indices.

HDI for each country shows the level of eco. Dev.Countries having HDI value below 0.5 are considered to

have low level of human development.Those having value between 0.5 to 0.8 ----------medium level

andThose which have above 0.8 ----------a high level of human

development.Note: it possible that countries can have similar GDP percapita but different HDI values. Or similar HDI values but

different GDP per capita.Therefore, countries having higher GDP per capita then

HDI rank, they have considerable potential for distributingthe benefits of hi her income more e uitabl .


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HDI values and Rank in The Year 2010

Country Value Rank

Norway 0.938 1

Australia - 2USA - 4

UK - 26

Sri Lanka 0.658 91

India 0.519 119

Pakistan 0.49 125

Nepal 0.428 138


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How to estimate PPP PPP helps determine the consumer spending power in different

currencies.

Purchasing power parity may also be used to compare the spendingpower of two currencies against a basket of related goods, such asgroceries.

The estimation is done in four steps.

Step 1.

Determine which two currencies you would like to compare forpurchasing power parity. The formula for purchasing power parityrequires two prices in different currencies to calculate the price ratio:

S (purchase power parity ratio) = Price 1/Price 2

In this case, P1 refers to one price in a specific currency, and P2

refers to another price in a different currency.

For instance, suppose you want to calculate the purchasing priceparity between the United States and Mexico. Your comparisonprices will be in U.S. dollars and Mexican pesos.


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How to estimate PPP

Step 2.

Determine which product is commonly available inboth the United States and Mexico. For simplicity,we'll compare the price of Coca Cola in bothcountries.

Step 3. Find the prices of Coca Cola in Mexico and the

United States. Assume for this example that a 12-ounce can of Coca Cola costs $1.50 in U.S. dollarsand 9 Mexican pesos. Divide the 9 pesos by $1.50.The result is the price ratio for purchasing power

parity. To illustrate the calculation refer to thefollowing: S = P1/P2 S = 9/1.50 S = 6


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How to estimate PPP

Step 4.

Compare the result of the purchasing power parity to the currencyexchange rate between the United States and Mexico. Assume thatthe exchange rate between the Mexican peso and U.S. dollar is 5.7pesos for every dollar. It is important to note that for purchasingpower parity to exist, the exchange rate and the purchasing powerparity ratio must be equal. The purchasing power parity ratio of 6and a 5.7 peso per dollar exchange rate between the currencies in

Mexico and the United States indicates that the purchasing power ofthe peso and the dollar are similar but not exact. This means thatMexican and U.S. consumers have similar purchasing power withtheir respective currencies.

However, if the exchange rate increases to 17 pesos per dollar andthe purchasing power parity ratio remained at 6,

This means that loss of purchasing power for Mexican consumersrelative to the U.S. consumers.


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From Karachi to the ParisMahbub ul Haqand the idea of human development

Hearing French President Nicolas Sarkozys impassioned speech in 2009

calling for fundamental reforms in how we measure progress and criticizingthe focus on gross domestic product (GDP) in evaluating well-being, onemight be forgiven for believing this to be the latest crowning achievement inWestern thought about development. Speaking in Paris Sarkozy introducedthe work of a commission of eminent economists. They called for broader

measures of progress that take into account inequality, environmentalsustainability, non market production and quality of life.

In fact, the talking points for Sarkozys speech began to be written more than40 years ago, almost 4,000 miles from the City of Light. In 1968 Mahbub ul Haq,

then Chief Economist of Pakistans Planning Commission, spoke in Karachion his countrys economic development. The economy had been growing at

more than 6 percent a year for a decade, and many of those gathered expectedto hear a comprehensive exposition of the success of government policies byHaq, one of Pakistans brightest minds and the author of the Five-Year Plan

that generated this economic boom.Some years later Haq convinced the United Nations Development Programme

(UNDP) to produce a report by independent researchers that would offer analternative to the single-minded concentration on GDP so prevalent among

international organizations and economiststhe Human Development Report

(HDR).


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Economic Growth and Income Distribution: The

Kuznets Hypothesis

There has been much controversy among economists over the issue

whether economic growth increases or decreases income distribution.

-Professor Kuznets was the first to study the phenomena empirically.

-He observed that in the early stages of economic growth relative

income inequality increases, stabilizes for a time and then decline in

the late stages. This is also known as inverted U shaped hypothesis of

income distribution.

He constructed different Lorenze curves for DCs and LDCs and

derived their Geni coefficients.

Lorenze Curve: The curve which measures the income inequality.Gini Coefficient: It also measures the degree of income inequality. Its

value ranges from 0 to 1.

0= means complete equality, 1= means complete inequality.

He observed 0.37 for DCs and 0.44 for LDCs. the results shows that

income inequality is more in LDCs.


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How to measure Gini CoefficientGini Coefficient= A/A+B

Greater the ratio, the more unequal is the distribution of income.

Causes of increase in inequality with development- With the transition from a traditional agricultural society to modern

industrial economy, the inequalities increases. Industrial sector increasesrapidly and due to this the income of the peoples related to industrial sector

increases more then subsistence agriculture sector.

- With technological advancement and increase in financial facilities in urbanareas, a new class of entrepreneurs emerges which leads to diversificationin manufacturing, trade and business. Consequently, income and profits of

the persons increases.- Biasness in the allocation of financial resources in urban and rural areas

for development.Causes of reduction in inequality with development- Per capita income of the highest income groups fall bcz their share of

income from propert decreases.- Per capita income of the lowest income groups rises when the govt. takes

legislative decisions w.r. t education, health services, inheritance and

income taxation, social security, full employment and economic relief .


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Three Core Values of Development

Sustenance

Self -esteem Freedom Sustenance- The ability to meet basic needs.

All peoples have some basic needs without which life would beimpossible. The basic needs includes food, shelter, health andprotection. When any of these is absent or in critically short supply,

a condition of absolute underdevelopment exists.A basic function of all economic activity, therefore, is to provide asmany people as possible with the means of overcoming thehelplessness and misery arising from a lack of food, shelter, healthand protection.

Without sustain and continuous economic progress at the individual aswell as the societial level, the realization of the human potential

would not be possible.Self-esteem:A sense of worth and self respect of not being used as a

tool by others for their own ends.


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Three Core Values of DevelopmentAll peoples and societies seek some basic form of self-esteem,

although they may call it authenticity, identity, dignity , respect and

honor.The nature and form of this self-esteem may vary from society to

society and from culture to culture.Today national prosperity has become an almost universal measure of

worth. Worthiness and esteem are increasingly conferred only oncountries that possess economic wealth and technological power.

Freedom form Servitude:Freedom means emancipation from alienating material conditions of life

and from social servitude to other people, misery, oppressiveinstitutions and dogmatic beliefs, especially that poverty ispredestination.

Freedom involves an expanded rage of choices for societies and theirmembers together with a minimization of external constraints in thepursuit of some social goal i.e. development.

Amartya Sen writes of development as freedom.Lewis stressed the relationship b/w economic growth and freedom from

servitude when he concluded that the advantage of economicgrowth is not that wealth increases happiness, but that it increasesthe range of human choice.


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Objectives of Development

1. To increase the availability and widen the distribution of basic life-

sustaining goods such as food, shelter, health and protection. 2. To raise levels of living, including, in addition to higher incomes,

the provision of more jobs, better education, and greater attention tocultural and human values which leads not only to enhance materialwell-being but also to generate individual and national self-esteem.

3. To expand the range of economic and social choices.


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Characteristics of the DevelopingWorld

Lower Levels of livingand Productivity:

At low level of income the viciouscircle of poverty set in.

Low income Low saving- lowinvestment in education, health,plant and equipment andinfrastructure--- Lowproductivity and economicstagnation.

But it does not mean that a countrywill always remain in povertysituation. There are ways toescape from poverty trap.


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Characteristics of the Developing World

Some economies such as S.Korea, Taiwan were once among the

poorest in the world. But now they are nearly developed economies. Some middle income counrtries are relatively stagnant, but othersare growing rapidly e.g China.

100 years ago most of the USA population was engaged inagriculture and now there is only 1-2 % population engaged inagriculture while the rest of in manufacturing sector due toadvancement in technology.

2. Lower Level of Human Capital It increases the ability to generate new ideas of production goods

and services. Health, education and skill is vital to economic growthand human development.

Compared with developed world, much of the developing countrieshas lagged in its average levels of nutrition, health, education.

Under 5 years mortality is still 15 times higher in low-incomecountries than in developed nations.


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A well performing countries are much closer to

the developed world in health and educationstandards than they are to the lowest-incomecountries. e.g East Asian countries like S.korea,Taiwan, Hongkong etc.

Sub Saharan Agrican countries are still have a

problems of malnourishment, malaria, TB, AIDSetc.

Despite progress south Asia continues to havehigh illiteracy, low schooling attainment andunder nourishment.

3. High Level of Inequality and Absolute Poverty The poorest 40 percent of the worlds population

account for only 5 percent of global income. On theother hand, the richest 20 percent account for 75

percent of world income (United Nations DevelopmentProgramme).


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Characteristics of the Developing World Poverty is the principal cause of hunger and under nourishment. The number of hungry people world wide has reached 963 million,

or roughly 15 percent of the estimated world population. Thisrepresents an increase of 142 million over the figure for 199092(FAO, 2009).

Poverty and inequality are closely related, and inequality appears tohave been on the rise worldwide in recent decades at both nationaland international levels. More than 80 percent of the worldspopulation lives in countries where income differentials arewidening.

Bringing the incomes of those living on less than $1 per day up thisminimal poverty line would require less than 2% of the incomes ofthe worlds richest. This shows that the scale of global inequality inimmense.

The same level of high level of inequality exists in individual LDCs.

Several African countries such as Sierra Leone, Lesotho and SouthAfrica are among those who have the highest level of incomeinequality in the world.

.


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Extreme poverty is due in part to low human capital butalso to social and political exclusion and otherdeprivations.

The magnitude and extent of poverty in any countrydepend on two factors:

A). The average level of national income. B). The degree of inequality in its distribution.

Thus for any given level of PCI, the more unequal thedistricution, the greater the incidence of poverty.Similarly, for any given distribution, the lower the

average income level, the greater the incidence ofpoverty.

The incidence of poverty varied widely aroung thedeveloping world which is shown is table given below.


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Region

Share of pop. Living less then $1 per

day (%)

East Asia and the Pacific 9.1

Latin America and the Caribbean 8.6

Middle East and Noth Agrica 1.5

South Asia 31.7

Sub Saharan Africa 41.1

Source: World Bank, 2006.


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Poverty essentially consists of two elements, a narrowlydefinedincome poverty and a broader concept of human poverty(referred to as thepoverty of opportunities by late Dr. Mahbub ulHaq).

Income poverty is defined as the lack of necessities for minimummaterial wellbeing determined by the national poverty line.

Human poverty means the denial of choices and opportunities for atolerable life in all economic and social aspects.

Three poverty measures are commonly used; a) Head count ratio (HCR): It measures the incidence of poverty. It is

the proportion of population below the national or internationalpoverty line as the case may be.

b) Poverty gap ratio; It measures the depth of the poverty. It is a gap b/w poor peoples living standard and the poverty line

which shows the shortfall of the poors expenditure from the povertyline expressed as an average of all people in the population. It issimply the sum of all the poverty gaps in the population.

c) Severity of poverty measure; It measures the severity of poverty.In this measure the weight given to each poor person is proportionalto the square of the income shortfall of the poor from the povertyline.


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Poverty Measurement

It gives more weight to the poorest.

Formula of Poverty Measurement

Where 0 Yi= is the average real spending of the household member i (per

capital expenditure for person i) Z= is the poverty line.

N= Total sample size. M= is the no. of poor people (below poverty line) = coefficient reflecting different degree of importance, while a govt.

might accord to the depth or severity of poverty.


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Poverty line in Historical Perspective

Year Poverty Line

1989-99 673.40

2000-01 723.40

2004-05 878.64

2005-06 948.47


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In case of Pakistan, poverty line iscaloriebased.

Expenditure on calorie intake of 2350

calories per adult equivalent per day,along with consumption expenditure onnonfood items, is aggregated to constructa poverty line. This poverty line is adjustedat the time of the poverty estimation afteraccounting for the inflationary impact inintervening years


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Latest Estimates of Poverty in Pak.

The Task Force on Food Security based on the WorldBank estimates of poverty head count ratio of 29.2percent in 2004-05 estimated that poverty head countincreased to 33.8 percent in 2007-08 and 36.1 percent in

2008-09 or about 62 million people in 2008-09 werebelow the poverty line.

Reasons of Increase in Poverty Since 2008,global increase in POL prices,

commodity prices and financial meltdown has resulted indecrease in global economic growth and shrinking globaltrade to a level not seen since the Second World War

and the Great Depression of the 1930s.


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4. Higher Population Growth Rates

World Population was approximately 1 billion in 1800 It rose to 1.65 billion in 1900.

Then to 6 billion in 2000.

Initially the rapid population growth was in Europe and now developedcountries.

But in recent decades rapid growth recorded in developing world.

From 1990 to 2005

Population growth of low income countries: 2%

Population middle income countries: 1.1%

Population growth of high income countries: 0.7% Implications of high birth rates in LDCs High dependency ratio: Children under age 15 are almost 35% of total

population, while it is 17% in developed countries. LDCs have to feedmore as compared to developed nations.


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Population the state of Pakistan Pakistan is the worlds sixth most populous country. With

an estimated population of 169.9 million as at endJune2009, and an annual growth rate of 2.05 percent, it is

expected that Pakistan will become the 4

th

largest nationby 2050.Opportunity which needs to be materialized With a median age of around 20 years, Pakistan is also

a young country. It is estimated that there are

currently approximately 104 million Pakistanis below theage of 30 years. Total working age population is 121.01million, with the size of the employed labour forceestimated at 52.71 million as of 200809


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Comparison of Fertility rates

of different countries.


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Characteristics of the Developing World5. Greater Social FractionalizationLow income counturies more often have ethnic, linguistic and other

forms of social divisions. This is associated with civil strife and evenviolent conflict. It is one of a variety of governance challenges manydeveloping nations face.

William Easterly and Ross Levine in their study concluded that in Sub-Saharan Africa low schooling, political instability, underdevelopedfinancial systems and insufficient infrastructure are the result of high

ethnic fragmentation.One of the major advantage of the end of 45 years cold war b/w USAand USSR has been a decline in foreign military and politicalcompetition in the developing world. But the indirect cost of thiswithdrawal has been the acceleration of ethnic tribal and religiousconflict e.g violent disintegration of Yugoslavia and conflict in

Afghanistan.

Over half of the LDCs have recently experience some form ofinterethnic conflict. Just in the 1990s ethnic and religious conflictsleading to widespread death and destruction took place in Rwanda,Mozambique, Sri Lanka, Iraq, Ethiopia, Afghanistan, Haiti, Sudanetc.


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7. Lower level of industrialization and

manufactured exports.Industrialization is associated with high productivity and

incomes and has been a hallmark of modernization.

Table on next slide shows that in developed countries agri.Represents a very small share of employment andoutput. But it does not mean that the sector has lowproductivity.

Moreover the countries have smaller share of employmentin industry due to shift to services sector.

In most Asian and African countries agri. Still hassubstantial share in employment.

In Latin America, the share of agri. employment is smallerrelative to Asian and African countries.


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Share of the population employed in different sectors

Agriculture Sector Industrial Sector Services Sector

Country M F

Share of

GDP M F

Share of

GDP M F

Share

ofGD

P

1. Africa

Ghana 60 56 14 14 15 23 27 36 39

Madagascar 77 79 28 7 6 16 16 15 56

Uganda 60 ,- 33 11 5 25 28 17 43

2. Asia

B/desh 50 59 20 12 18 27 38 23 53

Indonesia 43 45 18 20 15 46 36 41 48

Pakistan 38 65 22 22 16 25 46 20 53

3. Latin AmericaColombia 32 8 15 21 16 34 48 76 53

Costa Rice 21 5 9 26 13 30 52 82 62

Mexico 21 5 4 30 19 26 49 76 70

4. Dev.count.

UK 2 1 1 33 9 26 65 90 73

USA 2 1 1 30 10 22 68 90 77


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Under developed Financial And OtherMarkets In many LDCs legal and institutional foundations are

either absent or extremely weak. A good legal systemenforces contracts and validate property rights, a stable

and trustworthy currency, an infrastructure of roads andutilities that results in low transport and communicationcost, a well-developed system of banking and insurance,formal credit markets that select projects and allocateloanable funds on the basis of economic profitability,

substantial market information for consumers andproducers about prices, quantities and qualities ofproducts.

Thin markets for many products due to limited demand.

Information is limited and costly to obtain which often

causes goods, finances and resources to be


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Lingering Colonial Impacts

A number of developing countries were once colonies of Europe or theotherwise dominated by European powers.

Colonial-era institutions often favored extractors of wealth rather thancreators of wealth harming development then and now.

Developing countries have more often lacked institutions and formalorganizations that have benefited the developed nations e.g.

Domestically on average property rights have been less secured, lesseffective constraints on elite, a smaller segment of population hasbeen able to gain access to advantage of economic opportunities.

Colonization created or reinforced inequalities. For example, postcolonial elites played the same exploitative role formerly played by thecolonial powers.

It also emerged where settled indigenous population was put into labourwork. E.g in countries of Latin America.

This resulted in less movement towards democratic institutions, lessinvestment in public goods, less development of human capital.


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Characteristics of the Developing World8. External Dependence

Developing countries have been less influential in international relations,

with sometimes adverse consequences for development. e.g., WTO (AOA,subsidies and SPS agreements). Weak bargaining position.

9. Relative Importance of the Public and Private Sectors and Civil Society.

Most developing countries have mixed economic systems i.e. have both public and

private ownership.The division b/w two and their relative importance depends upon political

circumstances. The Latin American and Southeast Asian countries have largerprivate sectors relative to South Asia and African countries.

Countries with severe skilled human capital have tended to put greater emphasis onmore state owned enterprises so that the manpower be effectively usedthrough coordinating administrative and entrepreneurial activities. e.g in Africa.But due to economic failure and financial difficulties in Ghana, Senegal, Kenya

etc. Many developing countries have moved towards decentralized economies.Examples are central Asian states.

Developed countries have vibrant civil societies. NGOs and other non profitorganizations play key in social innovation and development through theircapacities in social problem solving, specialized knowledge, targeted publicgoods provisions and advocacy activities.

Measurements of Economic Development ISP

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