ECON 390 ISSUES AND PROBLEMS IN DEVELOPING ECONOMIES

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ECON 390 ISSUES AND PROBLEMS IN DEVELOPING
ECONOMIES

• Lecture 2 Comparative Development

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Goals for today

• Class updates homework assignment for next
  week, etc.
• Classifying countries as developed and developing
• Income-based approach
• Sens Capabilities approach
• Millenium Development Goals
• Characteristics of Developing Countries
• HDI Human Development Index

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Classifying countries as developed and developing
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(No Transcript)
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Comparison on the basis of incomes
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But is comparing incomes enough? Sens
Capabilities approach

• Sources of disparity between real incomes and
  actual advantages
• Personal heterogeneities
• Environmental diversities
• Variations in social climate
• Differences in established patterns of behavior
• Capabilities freedom that a person has in
  terms of the choice of functionings, given his
  personal features and his command over
  commodities

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What is the process of development?

• Development is a multidimensional process
  involving the following
• major changes in social structures, popular
  attitudes, and national institutions
• acceleration of economic growth
• reduction of inequality
• eradication of poverty

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MDG specific goals and targets

• Eradicate extreme poverty and hunger
• By 2015 Halve the proportion of people living
  on less than 1/day
• Achieve universal primary education
• By 2015 Ensure that all boys and girls
  complete primary school
• Promote gender equality and empower women
• By 2015 Eliminate gender disparities at all
  levels
• Reduce child mortality
• By 2015 Reduce by 2/3 the mortality rate among
  children under 5
• Improve maternal health
• By 2015 Reduce by ¾ the ratio of women dying
  in childbirth
• Combat HIV/AIDS, malaria and other diseases
• By 2015 Halt and begin to reverse the spread
  of HIV/AIDS and the incidence of malaria and
  other major diseases
• Ensure environmental sustainability
• By 2015 Reduce by ½ the proportion of people
  without access to safe drinking water
• Develop a global partnership for development
• Further develop an open trading and financial
  system
• Address special needs of LDCs, especiallys
  landlocked, small-island states
• Deal with debt problems of developing economies
• Etc.

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Millennium Development Goals Source Human
Development Report 2005
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Characteristics of Developing Economies

• Low living standards
• Low productivity
• High rates of population growth
• Dominant agricultural sector
• Prevalence of imperfect markets and limited
  information

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Low living standards

• Income
• Gross national income (GNI) per capita, using
  purchasing power parity (PPP) to convert to US
• Growth rate of income
• Inequality
• Poverty rates
• Health
• Education

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Measuring incomes GNI

• GNI?GDP!
• GDP total value of final goods and services
  produced in the economy
• GNI GDP income residents receive from abroad
  payments made to nonresidents

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Comparing incomes across countries

• Key issue what exchange rate do we use?
  Options include
• Official exchange rate
• PPP
• Example Peru and the United States
• Official exchange rate in 2003
• 1 3.48 Nuevo Sole
• PPP in 2003 1 1.5 Nuevo Sole

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Looking at growth rates of GNI
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Income inequality

• Measure Gini coefficient
• aggregate measure of income inequality,
• ranges from 0 (perfect equality) to 100 (perfect
  inequality)

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Poverty rates

• Measure
• International poverty line 1/day.
• Headcount measure of population whose income
  is below this poverty line

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Income inequality /poverty data
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Quality of health

• Key indicators
• Life expectancy
• Infant mortality rates
• of population with access to sanitation
• of population with access to safe water
• of population with HIV/AIDS, malaria, etc.

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Quality of health data
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Level of education
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Measure of living standards Human Development
Index (HDI)

• Composed by taking average of three separate
  indices
• Life expectancy
• Income
• Education

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Income index

• Goal to compare income (GDP per capita,
  converted using a PPP exchange rate) to a lower
  goalpost of 100 PPP, and an upper goalpost
  of 40,000 PPP.
• Problem need to account for diminishing
  marginal utility of income
• Result Adjust income by taking its natural log
• Calculating income index
• (logGNI per cap -log100)/(log40,000-log100
  )

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Life expectancy index

• Goal to compare life expectancy to a lower
  goalpost of 25 years, and an upper goalpost
  of 85 years.
• Calculating life expectancy index
• (life expectancy 25)/(85-25)

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Education index

• Goal to combine measures of literacy and school
  enrollment
• Calculating adult literacy index
• (Adult literacy rate 0)/(100-0)
• Calculating gross enrollment index
• (school enrollment rate 0)/(100-0)
• Calculating education index
• 2/3(adult literacy index)1/3(gross enrollment
  index)

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HDI data