1. Development Economics II Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

2. Feb. 11, 20102 Development Economics Agenda Feb. 11 1.Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches 2.Structural characteristics of Low Economic Development 2.1 Commonalities 2.2 Differentiation processes 3.Development: Specific Measures and Patterns 3.1 Absolute Poverty 3.2 Inequality

3. Feb. 11, 20103 Dollar value (exchange rate parity*) of GNI pc = (GDP + net factor incomes from abroad) / population = a “first phase”–indicator of development (1950’s concept) * “Atlas method” Threshold values of 2008: LICs: GNI pc ≤ $ 975 LMICs: GNI pc $ 976 - $ 3,855 UMICs: GNI pc $ 3,856 – $ 11,905 --------------------------------------------- = “Developing Countries (DCs)” HICs: GNI pc ≥ $ 11,906 1 Development: General Measures and Patterns 1.1 Simple country classifications GNI p.c. (exchange rate parity)

4. Feb. 11, 20104 (3*)Norway$ 87,070HIC (22)Germany$ 42,440HIC (56)Saudi Arabia$ 15,500HIC (75)Russian Fed.$ 9,620UMIC (82)Brazil$ 7,350UMIC (127) China$ 2,940LMIC (163) India$ 1,070LMIC (179) Ghana$ 670LIC (210) Burundi$ 140LIC http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf * # 1 and 2 only approximates: Liechtenstein, Bermuda GNI p.c., 2008 1 Development: General Measures and Patterns 1.1 Simple country classifications

5. Feb. 11, 20105 Income groupings 2006 http://en.wikipedia.org/wiki/File:World_Bank_income_groups.svg 1 Development: General Measures and Patterns 1.1 Simple country classifications

6. Feb. 11, 20106  Dollar value (exchange rate parity) of GNI pc = (GDP + net factor incomes from abroad) / population  Dollar value (Purchasing Power Parity) of GNI p.c. Explanation for deviations  high share of non-tradables in LICs, unlimited supply of labor, dualistic economies... = a modified “first phase”–indicator of development Exchange rate parity vs PPP: Towards more holistic approaches 1 Development: General Measures and Patterns 1.1 Simple country classifications

7. Feb. 11, 20107 XRtPPP (3)Norway$ 87,070$ 58,500 (4) (22)Germany$ 42,440$ 35,940(29) (56)Saudi Arabia$ 15,500$ 22,950(53) (75)Russian Fed.$ 9,620$ 15,630(71) (82)Brazil$ 7,350$ 10,070(95) (127) China$ 2,940$ 6,020(122) (163) India$ 1,070$ 2,060(155) (179) Ghana$ 670$ 1,430(181) (210) Burundi$ 140$ 380(208) http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf GNI p.c., 2008 1 Development: General Measures and Patterns 1.1 Simple country classifications

8. Feb. 11, 20108 1.Longevity as measured by life expectancy at birth 2.Knowledge: by a weighted average of adult literacy (2/3) and mean years of schooling (1/3) 3.Standard of living: GDP p.c. at Purchasing Power Parity* and adjusted for diminishing marginal utility of income Standardized from 0 to 1 Index = (actual value – minimum value) / (maximum value – minimum value) Classification: low, middle, high “human development” = a “third phase”–indicator of development Human Development Indicator (HDI) 1 Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches

9. Feb. 11, 20109

10. 10 Gender-related Development Index (UNDP) Human Assets Index (ECOSOC, based on nutrition, health, education, and literacy) Gross National Happiness Index (Bhutan)... and many more!  Bonini‘s paradox?  Synergies and corollaries exist, but not necessarily “trickle down“ effects Further approaches 1 Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches

11. Feb. 11, 201011 http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI07section1-intro.pdf

12. Feb. 11, 201012 http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI07section1-intro.pdf

13. Feb. 11, 201013 Synergies and corollaries exist, but not necessarily “trickle down“ effects! Further approaches 1 Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches

14. Feb. 11, 201014 Development Economics Agenda Feb. 11 1.Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches 2.Structural characteristics of Low Economic Development 2.1 Commonalities 2.2 Differentiation processes 3.Development: Specific Measures and Patterns 3.1 Absolute Poverty 3.2 Inequality

15. Feb. 11, 201015  Adverse geography (?)  Lower levels of living, characterized by low incomes, high (income) inequality, poor health, and inadequate education (incl. Illiteracy)  High rates of population growth and dependency burdens  Large rural populations but rapid rural-to-urban migration  Substantial dependence on agricultural production and primary-product exports, high export concentration ratios  Lower levels of industrialization and manufactured exports Common characteristics of DCs 2 Structural charateristics of Low Economic Development 2.1 Commonatlities

16. Feb. 11, 201016  Lower levels of human capital and low levels of productivity (lack of complementary capital); scarcity of jobs in the urban “formal” sector, “informal” employment (sponge function)  Low sophistication of financial and other markets, imperfect markets prevailing  Lack of “good governance”, weak institutions Common characteristics of DCs 2 Structural charateristics of Low Economic Development 2.1 Commonatlities

17. Feb. 11, 201017 Developing countries may differ in  size  historical / colonial background  endowments of physical and human resources  ethnic and religious composition  relative importance of its public and private sectors  degree of dependence on external economic and political forces  distribution of power within the nation 2 Structural charateristics of Low Economic Development 2.1 Commonatlities 2.2 Differentiation processes Differences

18. Feb. 11, 201018 Newly Industrializing Economies (NICs) Characteristics:  rapid economic growth  rapid changes in sector composition (  speeding up the Fourastié process) Differentiation processes include: Catching up... 2 Structural charateristics of Low Economic Development 2.1 Commonatlities 2.2 Differentiation processes

19. Feb. 11, 201019 Possible Causes:  high investment into education  subtle combination of opening up to world markets and protection of “infant industries”  strong influence of the government on the economy  relatively equal distribution of income and wealth (IBRD, inofficial) Catching up... 2 Structural charateristics of Low Economic Development 2.1 Commonatlities 2.2 Differentiation processes

20. Feb. 11, 201020 http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI07section1-intro.pdf  Convergence vs divergence  Neo-classical growth theory vs New Growth theory

21. Feb. 11, 201021 Least Developed Countries  Extremely low per capita income (>$ 750)  Low level of human development as measured by the Human Assets Index (HAI)  High vulnerabilty to economic shocks as measured by the Economic Vulnarability Index (EVI), based on agricultural output, export earnings, disadvantages from population size and natural disasters ECOSOC 2003 and falling behind... 2 Structural charateristics of Low Economic Development 2.1 Commonatlities 2.2 Differentiation processes

22. Feb. 11, 201022 DCs among transformation economies  Transformation from a centrally planned economy with predominance of collective property to a de-centrally planned economy (coordinated by markets) with a predominance of private property of producer goods  Low or lower-middle income p.c., (relatively) high HDI  Comparatively high importance of industry, albeit obsolete technologies posing high stress on the environment  Dualistic structure of foreign trade (West/East)  Budget deficits and current account deficits (M>X)... or dramatic changes in institutions 2 Structural charateristics of Low Economic Development 2.1 Commonatlities 2.2 Differentiation processes

23. Feb. 11, 201023 Development Economics Agenda Feb. 11 1.Development: General Measures and Patterns 1.1 Simple country classifications 1.2 Holistic approaches 2.Structural characteristics of Low Economic Development 2.1 Commonalities 2.2 Differentiation processes 3.Development: Specific Measures and Patterns 3.1 Absolute Poverty 3.2 Inequality

24. Feb. 11, 201024  “unable to command sufficient resources to satisfy basic needs“  international poverty line: $ 1 (1.25) or $ 2 per day in PPP  national poverty lines based on local household surveys  total poverty gap (TPG) Absolute poverty 3 Development: Specific Measures and Patterns 3.1 Absollute Poverty

25. Feb. 11, 201025  What is bad about inequality?  Gini Coefficient Inequality 3 Development: Specific Measures and Patterns 3.1 Absollute Poverty 3.2 Inequality

26. Feb. 11, 201026 Gini Coefficient 3 Development: Specific Measures and Patterns 3.1 Absollute Poverty 3.2 Inequality

27. Feb. 11, 201027  What is bad about inequality?  Gini Coefficient  Kuznets Curve Inequality 3 Development: Specific Measures and Patterns 3.1 Absollute Poverty 3.2 Inequality

28. Feb. 11, 201028 http://www2.wwnorton.com/college/econ/dev 6/exercises.htm  chapter 1, Tasks 1 + 2 Development Economics Exercise (optional)