Summary: Michael P. Todaro and Stephen C. Smith, Economic Development, 11th Edition, Ch 2.

Oleh Kelompok 2  

                                           Azka Azifa                                                

Ratna Anggraeni R 

Safira Andrista   

                             

Comparative Economic Development        

 Michael P. Todaro and Stephen C. Smith, Economic Development, 11th Edition, Ch 2.

Introduction Comparative Economic Development

When we are talking about global economy, first thing that come up to our mind are the rich and the poor. It shows an extreme contrast among countries. We call it developed and developing countries. The characteristics of developing countries are listed below:

1. Lower levels of living and productivity

2. Lower levels of human capital

3. Higher levels of inequality and absolute poverty

4. Higher population growth rates

5. Greater social fractionalization

6. Larger rural populations but rapid rural-to-urban migration

7. Lower levels of industrialization

8. Adverse geography

9. Underdeveloped financial and other markets

10. Lingering colonial impacts such as poor institutions and often external dependence.

2.1 How we define The Developing World?

There are many parameters to measure whether a country is developing or already developed. First, is by per capital income. Second, is by economic status that famous with The International Bank for Reconstruction and Development (IBRD). Moreover, talking about developing country is not merely income and economic. But if the country could not guarantee the access of education and health, they still calculated as a developing country.  Tourism dependent and international indebtedness also counted. There is another word that we should know is Emerging Market. It is widely used in the financial press o suggest the presence of active stock and bond markets.

2.2 Basic Indicators of Development

To see the country economic power, economist finds tools to measure it. First is using Gross National Income (GNI) per capita that measure of the overall level of economic activity. It is calculated as the total domestic and foreign value added claimed by a country’s residents without making deductions for depreciation of the domestic capital stock. Second, Gross Domestic Product (GDP) measures the total value for final use of output produced by an economy, by both residents and nonresidents. The number of units of a foreign country’s currency required purchasing the identical quantity of goods and services in the local developing country market as $1 would buy in the United States.

Health and education are core capabilities for a country. It measures by life expectancy which is the average number of years newborn children would live if subjected to the mortality risks. Undernourishment is consuming too little food to maintain normal levels of activity.

2.3 Holistic Measures of Living Levels and Capabilities

When we are talking about maintaining a country, we are not only talking about income, but also human development. Human Development Index (HDI) is an index measuring national socioeconomic development, based on education, health, and real income per capita. It shows how the country manages the people by giving sufficient facility because education and health are input for human capital. Then, Diminishing Marginal Utility is the concept that the subjective value of additional consumption lessens as total consumption become higher.

Facing the change of the world, UNDP introduced its new Human Development Index to replace the old one. There are 8 differences:

1.       GNI replaces GDP

2.       The average actual educational attainment of the whole population and the expected attainment of today’s children had been added.

3.       Expected educational attainment is not an achievement but a UN forecast.

4.       Literacy is an achievement.

5.       The upper goalposts have been increased.

6.       The lower goalpost for income has been reduced.

7.       NHDI uses the natural log (ln).

8.       NHDI computed with a geometric mean.

2.4 Characteristics of the Developing World: Diversity within Commonality

There is a gret deal of diversity throughout the developing world, even within these board commonality.

Lower Levels of Livig and Productivity

There is a vast gulf in productivity between advanced economies and developing nations. All countries with averages below what is defined as high income are considered developing in most taxonomies.

One common misperception is thatt low incomes result from a country’s being too samall to be self-sufficient or too large to overcome economic inertia. There is no necessary corelation between country size in population or area and economic development.

Lower Level of Human Capital

Compared with developed countries, much of the developing world has lagged in its average levels of nutrition, health, and education. The well-performing developing countries are much closer to the developed world in health and education standards than they are to the lowest income countries.

Higher Level of Inequality and Absolute Poverty

The scale of global inequality is immense. Other than enormous gap in per capita incomes between rich and poor nations, the gap between rich and poor within individual developing countries is necessary tp be looked at.

Development economist use the concept of absolute poverty – the situation of being unable or only barely able to meet the subsistence essentials of food, clothing, shelter and basic health care)– to represent a spesific minimum level of income needed to statisfy the basc physical needs in order to ensure continued survival.

Higher Populatin Growth Rates

Rapid population growth begin in Europe and other now developed countries. But in recent decades, most population growth has been centered in the developing world. Compared with mot developed countries, the low-income developing countries have very high birth rates (more than five-sixths of al people in the world now live in developing countries). Developing countries must also contend with greater dependency burden – the proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labor force – than rich nations.

Greater Social Fractionalization

Low-income countries often have ethnic, linguistic, and other forms of social divisions, sometimes known as fractionalization. The greater the ethnic, linguistic and religious diversity of a country, the more likely it is that there will be internal strive and political instability.

Conflict can derail what had otherwise been relatively positive development progress. If development is about improving human lives and providing a widening range of choice to all peoples, racial, ethnic, caste od reigious discrimination is pernicious.  The ethnic and religous composition of a developing nation and whether or not that diversity leads to conflict or cooperation can be important determinants of the success or failure of developent efforts.

Larger Rural Populations but Rapid Rural-to-Urban Migration

In developing countries, a much higher share of the populaion lives in rural areas. Although modernizing in many regions, rural areas are poorer and tend to suffer from missing markets, limited information, and social stratification.

Lower Levels of Industrialization and Manufactured Exports

Industrialization is associated with high productivity and incomes and has been a hallmark of modernization and national economic power. Most developing country governments have made industrialization a high national priority.

Along with lower industrialization, developing nations have tended to have a higher dependence on primary exports. Most developing countrie have diversified away from agricultural andmineral exports to some degree. The middle-income countries are rapidly catching up with the developed world in the share of manufactured goods in their expors.

Adverse Geography

Many analysts argue that geography must play some role in problems of agriculture, public health, and comparative underdvelopment more generally.

Underdeveloped Markets

Some aspects of market underdevelopment are that they often lack:

·         legal system tht enforces contacts validates property rights

·         stable and trustworthy currency

·         infrastucture of roads and utilities

·         a well-deeloped and efficiently regulated system of banking and insurance

·         substatial market information

·         social norms

Lingering Colonial Impacts and Unequal International Relations

The diversity of colonial experiences is one of the important factors that help explain the wide spectrum of development outcomes in today’s world.

Developing countries have also been well organized and influeantal in international realations. More generally, developing nations have weaker bargaining postions than developed nations in international economic relations, and also voice great concern over various of cultural dependence, from news and entertainment to bussiness practices, lifestyles and social values.

2.5 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages

Physical and Human resources Endowments

Contemporary developing countries are often less well endowed with natural resources than the currently developed nations were at the time when the latter nations began their modern growth. And the population of today’s low-income developing nations are often less educated, less informed, less experienced, and less skilled than their counterparts were in the early days of economic growth in the west.

Relative Levels od Per Capita Income and GDP

The people living in low-income countries hae, on average, a lower level of real per capita income than their developed country counterparts had in the nineteeth century. But, today’s developing countries began their growth process at the low end of the international per capita income scale.

Climatic Differences

Almost all developing countries are situated in tropical or subtropical climatic zones. There is evidrnce thet tropical geography does pose significant problems for economic development and that special attention in development assistance must be given to these problems.

Population Size, Distribution and Growth

Before and during their early growth years, western nations experienced a very slow rise in population growth. By contrastm the population of many developing countries have been increasing, and some are still rising that fast today.

The Historical Role of International Migration

Where developing countries are successful at becoming lower-cost producers of competitive products with the developed countries, the latter have often resorted to various fors of tariffs and nontariff barriers barriers to trade.

Basic Scientific and Techological Reseach and Development Caoabilities

Today, the process of scientific and technological advance in all its stages, from basic research to product development, is heavily concentrated in the rich nations, despite the emergence of Chna and India as destination for research and development (R&D) activities of multinational corporations.

Efficiacy of Domestic Institutions

By the time of their early industrialization, many developed countries, had economic rules in place that provided relatively broad access to opportunity for individuals with enterpreneurial drive. High inequality and poor institutions facilitating extraction rather than providing incentives for productivities for productivity were often esablished by colonial powers. As Douglass North stresses, even if the formal rules “may be chnged overnight, the informal rules usually change only ever so gradually”.

2.6 Are Living Standards of Developing and Developed Nations Converging?

Divergence is a tendency for per capita income or output to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time.

Convergence is the tendency for per capita income or outcome to grow faster in lower-income countries so that lower-income countries are “catching up” over time. 

Relative Country Convergence

 The most widely used approach is simply to examine whether poorer countries are growing faster than richer countries. When the poor countries are on a path to eventually catch up to the income levels of rich countries, the relative gap in incomes would be shrinking, as the income of richer countries would become a smaler multiple of income of poorer countries.

Absolute Country Convergence

A process of absolute country convergence is a stronger standard than, and appears only with a lag after a process of relative country convergence.

Population-Weighted Relative Country Convergence

This approach weight the importance of a coutry’s per capita income growth rate proportionately to the size of its population.

Worls-as-One-Country Convergence

The most importance difference from population-weighted country convergence is that a world-as-one-country convergence study can take into account changes in equality within countries as well as between them.

2.7 Long-Run Causes Of Comparative Development

The longrun causes of comparative development will be explain in schematic.

Econimic Instiutions

“Humanly devised” constraints that shape interactions (or “rule of the game”) in an economy, including formal rules embodied in constitutions, laws, contracts, and markeet regulstions, plus informal rules reflected in norms of behavior and conduct, values, custom, and generally accepted ways of doing things.

Development strategies that lead to greater human capital, improve access to new technologies, produce better-quality pubic goods, improve market functioning, address deep-rooted problems of poverty, improve access to finance, prevent environmental degradation, and foster a vibrant civil society all promote developtment.

2.8 Conclusing Observation

There may be some “advantages of backwardness” in development, such as the ability to use existing, proven technologies rather than having to reinvent the wheel and even leapfrogging over older technology standards that developed countries have become locked into. These advantages are especially helpful if an economy can successfully manage to get sustained modern economic growth under way, as, for example, in Taiwan, South Korea, China, and a few other cases. However, for most very poor countries, backwardness comes with severe disadvantages, many of which have been compounded by legacies of colonialism, slavery, and Cold War dictatorships. In either case, countries will generally have to do more than simply emulate policies followed by today’s developed countries while they were in their early stages of development.

Economic and social development will often be impossible without cor-responding changes in the social, political, legal, and economic institutions of a nation, such as land tenure systems, forms of governance, educational structures, labor market relationships, property rights, contract law, civic freedoms, the distribution and control of physical and financial assets, laws of taxation and inheritance, and provision of credit. But fundamentally, every developing country confronts its own constraints on feasible policy options and other special circumstances, and each will have to find its own path to effective economic and social institutions.