economic development...

Comparative EconomicDevelopment

37

2

The most striking feature of the global economy is its extreme contrasts. Outputper worker in the United States is about 10 times higher than it is in India andmore than 50 times higher than in the Democratic Republic of Congo (DRC).1

Real income per capita is $48,430 in the United States, $2,930 in India, and$280 in the DRC.2 If the world were a single country, its income would be dis-tributed more unequally than every nation except Namibia.3 There are alsoenormous gaps in measures of welfare. Life expectancy is 78 in the UnitedStates, 65 in India, and just 46 in the DRC. The prevalence of undernourish-ment is less than 2.5% in the United States but 22% in India and 75% in theDRC. Whereas almost all women are literate in the United States, just 51% arein India and 56% in the DRC.4 How did such wide disparities come about? Intoday’s world, with so much knowledge and with the movement of people,information, and goods and services so rapid and comparatively inexpensive,how have such large gaps managed to persist and even widen? Why havesome developing countries made so much progress in closing these gapswhile others have made so little?

In this chapter, we introduce the study of comparative economic develop-ment. We begin by defining the developing world and describing how devel-opment is measured so as to allow for quantitative comparisons acrosscountries. Average income is one, but only one, of the factors defining a coun-try’s level of economic development. This is to be expected, given the discus-sion of the meaning of development in Chapter 1.

Viewed through the lens of human development, the global village appears deeplydivided between the streets of the haves and those of the have-nots.

—United Nations Development Program, Human Development Report, 2006

Among countries colonized by European powers during the past 500 years, those thatwere relatively rich in 1500 are now relatively poor. . . . The reversal reflects changes inthe institutions resulting from European colonialism.

—Daron Acemoglu, Simon Johnson, and James A. Robinson, writing in the Quarterly Journal of Economics, 2002

We then consider ten important features that developing countries tend tohave in common, on average, in comparison with the developed world. Ineach case, we also discover that behind these averages are very substantial dif-ferences in all of these dimensions among developing countries that are im-portant to appreciate and take into account in development policy. These areasare the following:

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 de-pendence.

The mix and severity of these challenges largely set the development con-straints and policy priorities of a developing nation.

After reviewing these commonalities and differences among developingcountries, we further consider key differences between conditions in today’sdeveloping countries and those in now developed countries at an early stage oftheir development, and we examine the controversy over whether developingand developed countries are now converging in their levels of development.

We then draw on recent scholarship on comparative economic develop-ment to further clarify how such an unequal world came about and remainedso persistently unequal, and we shed some light on the positive factors behindrecent rapid progress in a significant portion of the developing world. It be-comes quite clear that colonialism played a major role in shaping institutionsthat set the “rules of the economic game,” which can limit or facilitate oppor-tunities for economic development. We examine other factors in comparativedevelopment, such as nations’ levels of inequality. We will come to appreciatewhy so many developing countries have such difficulties in achieving eco-nomic development but also begin to see some of the outlines of what can bedone to overcome obstacles and encourage faster progress even among to-day’s least developed countries.

The chapter concludes with a comparative case study of Bangladesh andPakistan.

2.1 Defining the Developing World

The most common way to define the developing world is by per capita income.Several international agencies, including the Organization for Economic Cooper-ation and Development (OECD) and the United Nations, offer classifications of

38 PART ONE Principles and Concepts

countries by their economic status, but the best-known system is that of the Inter-national Bank for Reconstruction and Development (IBRD), more commonlyknown as the World Bank. (The World Bank is examined in detail in Box 13.2). Inthe World Bank’s classification system, 210 economies with a population of atleast 30,000 are ranked by their levels of gross national income (GNI) per capita.These economies are then classified as low-income countries (LICs), lower-middle-income countries (LMCs), upper-middle-income countries (UMCs), high-income OECD countries, and other high-income countries. (Often, LMCs andUMCs are informally grouped as the middle-income countries.)

With a number of important exceptions, the developing countries are thosewith low-, lower-middle, or upper-middle incomes. These countries aregrouped by their geographic region in Table 2.1, making them easier to iden-tify on the map in Figure 2.1. The most common cutoff points for these cate-gories are those used by the World Bank: Low-income countries are defined ashaving a per capita gross national income in 2008 of $975 or less; lower-middle-income countries have incomes between $976 and $3,855; upper-middle-incomecountries have incomes between $3,856 and $11,906; and high-income coun-tries have incomes of $11,907 or more. Comparisons of incomes for severalcountries are shown graphically in Figure 2.2.

Note that a number of the countries grouped as “other high-income economies”in Table 2.1 are sometimes classified as developing countries, such as when thisis the official position of their governments. Moreover, high-income countriesthat have one or two highly developed export sectors but in which significantparts of the population remain relatively uneducated or in poor health for thecountry’s income level may be viewed as still developing. Examples may includeoil exporters such as Saudi Arabia and the United Arab Emirates. Upper-incomeeconomies also include some tourism-dependent islands with lingering devel-opment problems. Even a few of the high-income OECD member countries, no-tably Portugal and Greece, have been viewed as developing countries at least un-til recently. Nevertheless, the characterization of the developing world assub-Saharan Africa, North Africa and the Middle East, Asia except for Japan and,more recently South Korea, and perhaps two or three other high-incomeeconomies, Latin America and the Caribbean, and the “transition” countries ofeastern Europe and Central Asia including the former Soviet Union, remains auseful generalization. In contrast, the developed world constituting the core ofthe high-income OECD is comprised of the countries of western Europe, NorthAmerica, Japan, Australia, and New Zealand.

Sometimes a special distinction is made among upper-middle-income ornewly high-income economies, designating some that have achieved relativelyadvanced manufacturing sectors as newly industrializing countries (NICs).Yet another way to classify the nations of the developing world is through theirdegree of international indebtedness; the World Bank has classified countriesas severely indebted, moderately indebted, and less indebted. The United Na-tions Development Program (UNDP) classifies countries according to theirlevel of human development, including health and education attainments aslow, medium, high, and very high. We consider the traditional and new UNDPHuman Development Indexes in detail later in the chapter.

Another widely used classification is that of the least developed countries, aUnited Nations designation that as of 2010 included 49 countries, 33 of them inAfrica, 15 in Asia, plus Haiti. For inclusion, a country has to meet each of three

39CHAPTER 2 Comparative Economic Development

World Bank An organiza-tion known as an “interna-tional financial institution”that provides developmentfunds to developing countriesin the form of interest-bearingloans, grants, and technicalassistance.

Low-income countries (LICs)In the World Bank classifica-tion, countries with a grossnational income per capita ofless than $976 in 2008.

Middle-income countriesIn the World Bank classifica-tion, countries with a GNI percapita between $976 and$11,906 in 2008.

Newly industrializing coun-tries (NICs) Countries at arelatively advanced level ofeconomic development with asubstantial and dynamic in-dustrial sector and with closelinks to the internationaltrade, finance, and investmentsystem.

Least developed countriesA United Nations designationof countries with low income,low human capital, and higheconomic vulnerability.


TABLE 2.1 Classification of Economies by Region and Income, 2010

East Asia and the PacificAmerican Samoa‡ ASM UMCCambodia* KHM LICChina CHN LMCFiji‡ FJI UMCIndonesia IDN LMCKiribati*‡ KIR LMCKorea, Dem. Rep. (North) PRK LICLao PDR*† LAO LICMalaysia MYS UMCMarshall Islands‡ MHL LMCMicronesia, Fed. Sts.‡ FSM LMCMongolia† MNG LMCMyanmar* MMR LICPalau‡ PLW UMCPapua New Guinea‡ PNG LMCPhilippines PHL LMCSamoa*‡ WSM LMCSolomon Islands*‡ SLB LMCThailand THA LMCTimor-Leste*‡ TLS LMCTonga‡ TON LMCVanuatu*‡ VUT LMCVietnam VNM LICEurope and Central AsiaAlbania ALB LMCArmenia† ARM LMCAzerbaijan† AZE LMCBelarus BLR UMCBosnia and Herzegovina BIH UMCBulgaria BGR UMCGeorgia GEO LMCKazakhstan† KAZ UMCKosovo KSV LMCKyrgyz Republic† KGZ LICLatvia LVA UMCLithuania LTU UMCMacedonia, FYR† MKD UMCMoldova† MDA LMCMontenegro MNE UMCPoland POL UMCRomania ROU UMCRussian Federation RUS UMCSerbia SRB UMCTajikistan† TJK LICTurkey TUR UMCTurkmenistan† TKM LMCUkraine UKR LMCUzbekistan† UZB LIC

Latin America and the CaribbeanArgentina ARG UMCBelize‡ BLZ LMCBolivia† BOL LMCBrazil BRA UMCChile CHL UMCColombia COL UMCCosta Rica CRI UMCCuba‡ CUB UMCDominica‡ DMA UMCDominican Republic‡ DOM UMCEcuador ECU LMCEl Salvador SLV LMCGrenada‡ GRD UMCGuatemala GTM LMCGuyana‡ GUY LMCHaiti*‡ HTI LICHonduras HND LMCJamaica‡ JAM UMCMexico MEX UMCNicaragua NIC LMCPanama PAN UMCParaguay† PRY LMCPeru PER UMCSt. Kitts and Nevis‡ KNA UMCSt. Lucia‡ LCA UMCSt. Vincent and the

Grenadines‡ VCT UMCSuriname‡ SUR UMCUruguay URY UMCVenezuela, RB VEN UMCMiddle East and North AfricaAlgeria DZA UMCDjibouti* DJI LMCEgypt, Arab Rep. EGY LMCIran, Islamic Rep. IRN LMCIraq IRQ LMCJordan JOR LMCLebanon LBN UMCLibya LBY UMCMorocco MAR LMCSyrian Arab Rep. SYR LMCTunisia TUN LMCWest Bank and Gaza WBG LMCYemen, Rep.* YEM LICSouth AsiaAfghanistan*† AFG LICBangladesh* BGD LICBhutan*† BTN LMCIndia IND LMCMaldives*‡ MDV LMCNepal*† NPL LICPakistan PAK LMCSri Lanka LKA LMC

Sub-Saharan AfricaAngola* AGO LMCBenin* BEN LICBotswana† BWA UMCBurkina Faso*† BFA LICBurundi*† BDI LICCameroon CMR LMCCape Verde‡ CPV LMCCentral African Rep.*† CAF LICChad*† TCD LICComoros*‡ COM LICCongo, Dem. Rep.* COD LICCongo, Rep. COG LMCCôte d’Ivoire CIV LMCEritrea* ERI LICEthiopia*† ETH LICGabon GAB UMCGambia, The* GMB LICGhana GHA LICGuinea* GIN LICGuinea-Bissau*‡ GNB LICKenya KEN LICLesotho*† LSO LMCLiberia* LBR LICMadagascar* MDG LICMalawi*† MWI LICMali*† MLI LICMauritania* MRT LICMauritius‡ MUS UMCMayotte MYT UMCMozambique* MOZ LICNamibia NAM UMCNiger*† NER LICNigeria NGA LMCRwanda*† RWA LICSao Tome and Principe*‡ STP LMCSenegal* SEN LICSeychelles‡ SYC UMCSierra Leone* SLE LICSomalia* SOM LICSouth Africa ZAF UMCSudan* SDN LMCSwaziland† SWZ LMCTanzania* TZA LICTogo* TGO LICUganda*† UGA LICZambia*† ZMB LICZimbabwe† ZWE LIC

Country Code Class Country Code Class Country Code Class

criteria: low income, low human capital, and high economic vulnerability. Otherspecial UN classifications include landlocked developing countries (of whichthere are 30, half of them in Africa) and small island developing states (of whichthere are 38).5 Finally, the term emerging markets was introduced at the Interna-tional Finance Corporation to suggest progress (avoiding the then-standardphrase Third World that investors seemed to associate with stagnation). While theterm is appealing, we do not use it in this text for three reasons. First, “emergingmarket” is widely used in the financial press to suggest the presence of activestock and bond markets; although financial deepening is important, it is only oneaspect of economic development. Second, referring to nations as “markets” maylead to an underemphasis on some non-market priorities in development. Third,usage varies and there is no established or generally accepted designation ofwhich markets should be labeled emerging and which as yet to emerge.

The simple division of the world into developed and developing countriesis sometimes useful for analytical purposes. Many development models applyacross a wide range of developing country income levels. However, the wideincome range of the latter serves as an early warning for us not to overgeneral-ize. Indeed, the economic differences between low-income countries in sub-Saharan Africa and South Asia and upper-middle-income countries in EastAsia and Latin America can be even more profound than those between high-income OECD and upper-middle-income developing countries.


TABLE 2.1 (Continued)

High-Income OECD CountriesAustralia AUSAustria AUTBelgium BELCanada CANCzech Rep. CZEDenmark DNKFinland FINFrance FRAGermany DEUGreece GRCHungary HUNIceland ISLIreland IRLItaly ITAJapan JPNKorea, Rep. (South) KORLuxembourg LUXNetherlands NLDNew Zealand NZLNorway NORPortugal PRTSlovak Republic SVK

Spain ESPSweden SWESwitzerland CHEUnited Kingdom GBRUnited States USAOther High-Income EconomiesAndorra ANDAntigua and Barbuda‡ ATGAruba‡ ABWBahamas, The‡ BHSBahrain‡ BHRBarbados‡ BRBBermuda BMUBrunei Darussalam BRNCayman Islands CYMChannel Islands CHICroatia HRVCyprus CYPEstonia ESTEquatorial Guinea* GNQFaeroe Islands FROFrench Polynesia‡ PYFGreenland GRL

Guam‡ GUMHong Kong, China HKGIsle of Man IMNIsrael ISRKuwait KWTLiechtenstein LIEMacao, China MACMalta MLTMonaco MCONetherlands Antilles‡ ANTNew Caledonia‡ NCLNorthern Mariana Islands‡ MNPOman OMNPuerto Rico‡ PRIQatar QATSan Marino SMRSaudi Arabia SAUSingapore‡ SGPSlovenia SVNTaiwan, China TWNTrinidad and Tobago‡ TTOUnited Arab Emirates ARE

Country Code Class Country Code Class Country Code Class

* least developed countries† landlocked developing countries‡ small island developing states

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010) and WDI online; United Nations; and http://www.iso.org.

http://www.iso.org


FIGURE 2.1 Nations of the World, Classified by GNI Per Capita

FormerSpanishSahara

US VirginIslands (US)

Puerto Rico (US)

British VirginIslands (UK)

The GambiaSt. Lucia

São Tomé and Príncipe

Monaco

Luxembourg

Liechtenstein

Kiribati

Grenada

Dominica

Cape Verde

Andorra

St. Vincent and the Grenadines

St. Kitts and Nevis

Barbados

The Bahamas

Antigua and Barbuda

Martinique (Fr)

Uruguay

U n i t e d S t a t e s

UnitedKingdom

Trinidadand Tobago

Togo

S

Suriname

Spain

Sierra Leone

Senegal

R.B. deVenezuela

Portugal

Peru

Paraguay

PanamaNicaragua

The Netherlands

Morocco

Mexico

Mauritania

Mali

Liberia

Jamaica

Ireland

Iceland

FaeroeIslands(Den)

Honduras

Haiti

Guyana

Guinea-BissauGuinea

Guatemala

Ghana

Fra nc

E

El Salvador

Ecuador

Cuba

Côted'Ivoire

Costa Rica

Colombia

Chile

C a n a d a

Burkina Faso

B r a z i l

Bolivia

Benin

Belize

Be

Argentina

Alg erDominicanRepublic

NetherlandsAntilles (Neth)

Isle of Man (UK)

Greenland (Den)

Gibraltar (UK)

French Polynesia (Fr)

French Guiana(Fr)

Channel Islands (UK)

Cayman Islands (UK)

Bermuda(UK)

Aruba(Neth)

Guadeloupe (Fr)

Middle East & North Africa$2,794

Latin America & Caribbean$5,540

Brazil$5,910

Upper-middle-income countries ($3,706–$11,455)

Lower-middle-income countries ($936–$3,705)

Low-income countries ($935 or less)

High-income countries ($11,456 or more)

no data

GNI per capita, World Bank Atlas method, 2007

Income

Source: Data from Atlas of Global Development, 2nd ed., pp. 10–11. © Collins Bartholomew Ltd., 2010.Note: This map reflects income data for 2007. The data in the text refer to 2008; thus there are some modest differences.


West Bank and Gaza

Vanuatu

Tonga

Timor-Leste

Solomon Islands

Singapore

Seychelles

SanMarino

Samoa

Tuvalu

Qatar

Palau

Nauru

Mauritius

Malta

Maldives

Lebanon

KuwaitIsrael

Fiji

Federated States of Micronesia

Marshall Islands

Cyprus

Comoros

Brunei Darussalam

Bahrain

Zimbabwe

Zambia

Vietnam

Uzbekistan

United ArabEmirates

Ukraine

Uganda

TurkmenistanTurkey

Tunisia

Thailand

Tanzania

Tajikistan

SyrianArab Rep.

Switzerland

Sweden

Swaziland

Sudan

Sri Lanka

South Africa

Somalia

SloveniaSlovak Republic

Serbia

Saudi Arabia

Rwanda

R u s s i a n F e d e r a t i o n

Romania

Rep. ofYemen

Rep. ofKorea

Poland

Philippines

Papua NewGuinea

Pakistan

Oman

Norway

Nigeria

Niger

Nepal

Namibia

Myanmar

Mozambique

MongoliaMoldova

Malaysia

Malawi

Madagascar

Lithuania

Libya

Lesotho

Latvia

LaoP.D.R.

Kyrgyz Republic

Kenya

Kazakhstan

Jordan

Japan

Italy

Islamic Republicof Iran

Iraq

Indonesia

India

Hungary

Greece

Germany

Georgia

Gabon

FYR Macedonia

nce

Finland

Ethiopia

Estonia

Eritrea

Equatorial Guinea

Djibouti

Denmark

Dem. Rep.of Congo

Dem. People'sRep. of Korea

Czech Republic

Croatia

Congo

C h i n a

Chad

CentralAfrican

RepublicCameroon

Cambodia

Burundi

Bulgaria

Botswana

Bosnia and Herzegovina

Bhutan

Belgium

Belarus

Bangladesh

Azerbaijan

Austria

A u s t r a l i a

New Zealand

Armenia

Arab Rep.of Egypt

Angola

eria

Albania

Montenegro

Afghanistan

Réunion (Fr)New

Caledonia(Fr)

N. Mariana Islands (US)

Mayotte(Fr)

Guam (US)

American Samoa (US)

Sub-Saharan Africa$952

Europe & Central Asia$6,051

South Asia$880

East Asia & Pacific$2,180

China$2,360

India$950

Russian Federation$7,560

2.2 Basic Indicators of Development: Real Income, Health, and Education

In this section, we examine basic indicators of three facets of development:real income per capita adjusted for purchasing power; health as measuredby life expectancy, undernourishment, and child mortality; and educationalattainments as measured by literacy and schooling.

Purchasing Power Parity

In accordance with the World Bank’s income-based country classificationscheme, gross national income (GNI) per capita, the most common measure ofthe overall level of economic activity, is often used as a summary index of the rel-ative economic well-being of people in different nations. It is calculated as the to-tal domestic and foreign value added claimed by a country’s residents withoutmaking deductions for depreciation (or wearing out) of the domestic capitalstock. Gross domestic product (GDP) measures the total value for final use ofoutput produced by an economy, by both residents and nonresidents. Thus GNIcomprises GDP plus the difference between the income residents receive fromabroad for factor services (labor and capital) less payments made to nonresidentswho contribute to the domestic economy. Where there is a large nonresident pop-ulation playing a major role in the domestic economy (such as foreign corpora-tions), these differences can be significant (see Chapter 12). In 2008, the total na-tional income of all the nations of the world was valued at more than U.S. $58trillion, of which over $42 trillion originated in the economically developed high-income regions and less than $16 trillion was generated in the less developed na-tions, despite their representing about five-sixths of the world’s population.


0Switzerland

United StatesUnited Kingdom

GhanaBangladesh

UgandaMozambique

Ethiopia

PakistanIndia

NigeriaChinaBrazil

MexicoCanada

10,000 20,000 30,000 40,000 50,000 60,000

Co

un

try

Annual income per capita (2008 U.S. $)

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.:World Bank, 2010), tab. 1.1.

FIGURE 2.2 Income Per Capita in Selected Countries (2008)

Gross national income (GNI)The total domestic and for-eign output claimed by resi-dents of a country, consistingof gross domestic product(GDP) plus factor incomesearned by foreign residents,minus income earned in thedomestic economy by nonresidents.

Value added The portionof a product’s final value thatis added at each stage of production.

Depreciation (of the capitalstock) The wearing out ofequipment, buildings, infra-structure, and other forms ofcapital, reflected in write-offsto the value of the capitalstock.

Capital stock The totalamount of physical goods existing at a particular timethat have been produced foruse in the production of othergoods and services.

Gross domestic product(GDP) The total final output of goods and servicesproduced by the country’seconomy within the country’sterritory by residents andnonresidents, regardless of itsallocation between domesticand foreign claims.

In 2008 Norway had 312 times the per capita income of Ethiopia and 84times that of India.

Per capita GNI comparisons between developed and less developedcountries like those shown in Figure 2.2 are, however, exaggerated by theuse of official foreign-exchange rates to convert national currency figuresinto U.S. dollars. This conversion does not measure the relative domesticpurchasing power of different currencies. In an attempt to rectify this prob-lem, researchers have tried to compare relative GNIs and GDPs by usingpurchasing power parity (PPP) instead of exchange rates as conversion factors.PPP is calculated using a common set of international prices for all goods andservices. In a simple version, purchasing power parity is defined as the numberof units of a foreign country’s currency required to purchase the identical quan-tity of goods and services in the local developing country market as $1 wouldbuy in the United States. In practice, adjustments are made for differing relativeprices across countries so that living standards may be measured more accu-rately.6 Generally, prices of nontraded services are much lower in developingcountries because wages are so much lower. Clearly, if domestic prices arelower, PPP measures of GNI per capita will be higher than estimates usingforeign-exchange rates as the conversion factor. For example, China’s 2008 GNIper capita was only 6% of that of the United States using the exchange-rate con-version but rises to 13% when estimated by the PPP method of conversion. In-come gaps between rich and poor nations thus tend to be less when PPP is used.

Table 2.2 provides a comparison of exchange-rate and PPP GNI per capitafor 26 countries, eight each from Africa, Asia, and Latin America, plus theUnited Kingdom and United States. Measured in PPP dollars, the gap be-tween the United States and Burundi would be 127 to 1 instead of the 342-to-1gap using official foreign-exchange rates.

Table 2.3 broadens these comparisons to include regions and income group-ings, as well as six illustrative country examples at ascending income levels,along with basic health and education indicators. In the first column of Table 2.3,incomes are measured at market or official exchange rates and suggest that in-come of a person in the United States is 320 times that of a person in the Demo-cratic Republic of Congo. But again, this is literally unbelievable, as many serv-ices cost much less in the DRC than in the United States. The PPP rates give abetter sense of the amount of goods and services that could be bought evaluatedat U.S. prices and suggest that real U.S. incomes are closer to 173 times that of theDRC—still a level of inequality that stretches the imagination. Overall, the aver-age real income per capita in high-income countries is more than 28 times that inlow-income countries and 7 times higher than in middle-income countries.

Indicators of Health and Education

Besides average incomes, it is necessary to evaluate a nation’s average healthand educational attainments, which reflect core capabilities. Table 2.3 showssome basic indicators of income, health (life expectancy, the rate of under-nourishment, the under-5 mortality rate, and the crude birth rate), and educa-tion (male and female adult literacy). Life expectancy is the average number ofyears newborn children would live if subjected to the mortality risks prevail-ing for their cohort at the time of their birth. Undernourishment means con-suming too little food to maintain normal levels of activity; it is what is often


Purchasing power parity (PPP)Calculation of GNI using acommon set of internationalprices for all goods and ser-vices, to provide more accu-rate comparisons of livingstandards.

called the problem of hunger. High fertility can be both a cause and a conse-quence of underdevelopment, so the birth rate is reported as another basicindicator. Literacy is the fraction of adult males and females reported or esti-mated to have basic abilities to read and write; functional literacy is generallylower than the reported numbers.

Table 2.3 shows these data for the low-, lower-middle-, upper-middle-, andhigh-income country groups. The table also shows averages from six develop-ing regions (East Asia and the Pacific, Latin America and the Caribbean, theMiddle East and North Africa, South Asia, and sub-Saharan Africa) and fromsix illustrative countries: the DRC, India, Egypt, Brazil, Malaysia, and theUnited States.

Note that in addition to big differences across these income groupings, thelow-income countries are themselves a very diverse group with greatly differ-ing development challenges. India’s real income is nearly ten times that of theDRC. Its overall life expectancy is 16 years longer. While about three-quartersare undernourished in the DRC, 22% are undernourished in India. Of every1,000 live births, 199 of these children will die before their fifth birthday in the


TABLE 2.2 A Comparison of Per Capita GNI in Selected Developing Countries,the United Kingdom, and the United States, Using Official Exchange-Rate and Purchasing Power Parity Conversions, 2008

Argentina 7,190 13,990Bangladesh 520 1,450Brazil 7,300 10,070Burundi 140 380Cameroon 1,150 2,170Chile 9,370 13,240China 2,940 6,010Costa Rica 6,060 10,950Ghana 630 1,320Guatemala 2,680 4,690India 1,040 2,930Indonesia 1,880 3,590Kenya 730 1,550Malawi 280 810Malaysia 7,250 13,730Mexico 9,990 14,340Nicaragua 1,080 2,620Sierra Leone 320 770South Korea 21,530 27,840Sri Lanka 1,780 4,460Thailand 3,670 7,760Uganda 420 1,140United Kingdom 46,040 36,240United States 47,930 48,430Venezuela 9,230 12,840Zambia 950 1,230

GNI Per Capita (U.S. $)

Country Exchange Rate Purchasing Power Parity

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010) tab. 1.1.

DRC, compared with 69 in India. And the birth rate is about twice as high inthe DRC as in India. In one area, the DRC seems to fare better: It reportshigher levels of both male and female literacy than India does. If India ap-pears to do better overall, both still face enormous development challenges asseen by comparing these statistics even to Malaysia.

2.3 Holistic Measures of Living Levels and Capabilities

The Traditional Human Development Index

The most widely used measure of the comparative status of socioeconomic de-velopment is presented by the United Nations Development Program (UNDP)in its annual series of Human Development Reports. The centerpiece of these re-ports, which were initiated in 1990, is the construction and refinement of its


TABLE 2.3 Commonality and Diversity: Some Basic Indicators

Income GroupLow 523 1,354 59 30 118 32 76 63Lower middle 2,073 4,589 68 15 64 20 87 73Upper middle 7,852 12,208 71 6 23 17 95 92High 39,687 37,665 80 5 7 12CountryDem. Rep. Congo

(LIC) 150 280 48 75 199 45 78 56India (LMC) 1,040 2,930 64 22 69 23 75 51Egypt (LMC) 1,800 5,470 70 <5 25 25 75 58Brazil (UMC) 7,300 10,070 72 6 22 16 90 90Malaysia (UMC) 7,250 13,730 74 <5 6 20 99 94United States

(high-income) 47,930 48,430 78 <5 8 14RegionEast Asia and the

Pacific 2,644 10,461 72 12 29 14 96 90Latin America and

the Caribbean 6,768 10,312 73 9 23 19 92 91Middle East and

North Africa 3,237 7,343 71 7 34 24 82 65South Asia 963 2,695 64 22 76 24 73 50Sub-Saharan Africa 1,077 1,949 52 28 144 38 74 57Europe and Central Asia 7,350 11,953 70 6 22 14 99 97

Country or Group

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), multiple tables.aMost recent year between 2004 and 2006.

bMost recent year between 2005 and 2008.

Prevalence ofUndernourish-

menta (%)

2008Income

Per Capita (U.S. $)

2008 PPP Per Capita

(U.S. $)

2008Life

Expectancy(years)

2007 Under-5Mortalityper 1,000

Live Births

2008Crude

Birth Rate

Adult Literacyb

Male Female

informative Human Development Index (HDI). The HDI attempts to rank allcountries on a scale of 0 (lowest human development) to 1 (highest human de-velopment) based on three goals or end products of development: longevity asmeasured by life expectancy at birth, knowledge as measured by a weighted av-erage of adult literacy (two-thirds) and gross school enrollment ratio (one-third), and standard of living as measured by real per capita gross domesticproduct adjusted for the differing purchasing power parity of each country’scurrency to reflect cost of living and for the assumption of diminishing mar-ginal utility of income. Using these three measures of development and ap-plying a formula to data for 177 countries, the HDI ranks countries into fourgroups: low human development (0.0 to 0.499), medium human development(0.50 to 0.799), high human development (0.80 to 0.90), and very high humandevelopment (0.90 to 1.0).

Calculation of the traditional HDI underwent a number of changes sinceits inception. (The new 2010 version of the HDI is introduced in the next sec-tion.) In particular, in the past a relatively complicated formula was used toconvert PPP income into “adjusted” income (meaning income adjusted fordiminishing marginal utility so that well-being increases with income but ata decreasing rate). More recently, adjusted income is found by simply takingthe log of current income. Then, to find the income index, one subtracts thelog of 100 from the log of current income, on the assumption that real percapita income can not possibly be less than $100 PPP.7 The difference givesthe amount by which the country has exceeded this “lower goalpost.” To putthis achievement in perspective, consider it in relation to the maximum thata developing country might reasonably aspire to over the coming genera-tion. The UNDP takes this at $40,000 PPP. So we then divide by the differ-ence between the log of $40,000 and the log of $100 to find the country’s rel-ative income achievement. This gives each country an index number thatranges between 0 and 1. For example, for the case of Bangladesh, whose 2007PPP GDP per capita was estimated by the UNDP to be $1,241, the income in-dex is calculated as follows:

(2.1)

The effect of diminishing marginal utility is clear. An income of $1,241,which is just 3% of the maximum goalpost of $40,000, is already enough toreach more than two-fifths of the maximum value that the index can take.Note that a few countries have already exceeded the $40,000 PPP income tar-get; in such cases, the UNDP assigned the maximum value of $40,000 PPPincome, and so the country gets the maximum income index of 1.

To find the life expectancy (health proxy) index, the UNDP starts with acountry’s current life expectancy at birth and subtracts 25 years. The latter isthe lower goalpost, the lowest that life expectancy could have been in anycountry over the previous generation. Then the UNDP divides the result by 85years minus 25 years, or 60 years, which represents the range of life expectan-cies expected over the previous and next generations. That is, it is anticipatedthat 85 years is a maximum reasonable life expectancy for a country to try toachieve over the coming generation. For example, for the case of Bangladesh,

Income index =[ log (1,241) - log (100)]

[log (40,000) - log (100)]= 0.420


Diminishing marginal utilityThe concept that the subjectivevalue of additional consump-tion lessens as total consump-tion becomes higher.

Human Development Index(HDI) An index measuringnational socioeconomic devel-opment, based on combiningmeasures of education,health, and adjusted real in-come per capita.

whose population life expectancy in 2007 was 65.7 years, the life expectancyindex is calculated as follows:

(2.2)

Notice that no diminishing marginal utility of years of life are assumed; thesame holds for the education index. The education index is made up of twoparts, with two-thirds weight on literacy and one-third weight on school en-rollment. Because gross school enrollments can exceed 100% (because of olderstudents going back to school), this index is also capped at 100%. For the caseof Bangladesh, adult literacy is estimated (rather uncertainly) at 53.5%, so

(2.3)

For the gross enrollment index, for Bangladesh it is estimated that 52.1% of itsprimary, secondary, and tertiary age population are enrolled in school, so thecountry receives the following value:

(2.4)

Then, to get the overall education index, the adult literacy index is multipliedby two-thirds and the gross enrollment index is multiplied by one-third. Thischoice reflects the view that literacy is the fundamental characteristic of an ed-ucated person. In the case of Bangladesh, this gives us

(2.5)

In the final index, each of the three components receives equal, or one-third,weight. Thus

(2.6)For the case of Bangladesh,

(2.7)

One major advantage of the HDI is that it does reveal that a country can domuch better than might be expected at a low level of income and that substan-tial income gains can still accomplish relatively little in human development.

Further, the HDI points up that disparities in income are greater than dis-parities in other indicators of development, at least health and education.Moreover, the HDI reminds us that by development we clearly mean broad hu-man development, not just higher income. Many countries, such as some of thehigher-income oil producers, have been said to have experienced “growth with-out development.” Health and education are inputs into the national production

HDI =13

(0.420) +13

(0.678) +13

(0.530) = 0.543

+13

(education index) HDI =13

(income index) +13

(life expectancy index)

=23

(0.535) +13

(0.521) = 0.530

Education index =23

(adult literacy index) +13

(gross enrollment index)

Gross enrollment index =52.1 - 0100 - 0

= 0.521

Adult literacy index =53.5 - 0100 - 0

= 0.535

Life expectancy index =65.7 - 2585 - 25

= 0.678


function in their role as components of human capital, meaning productiveinvestments embodied in persons. Improvements in health and education arealso important development goals in their own right (see Chapter 8). We can-not easily argue that a nation of high-income individuals who are not welleducated and suffer from significant health problems that lead to their livingmuch shorter lives than others around the globe has achieved a higher level ofdevelopment than a low-income country with high life expectancy and wide-spread literacy. A better indicator of development disparities and rankingsmight be found by including health and education variables in a weightedwelfare measure rather than by simply looking at income levels, and the HDIoffers one very useful way to do this.

There are other criticisms and possible drawbacks of the HDI. One is thatgross enrollment in many cases overstates the amount of schooling because inmany countries a student who begins primary school is counted as enrolledwithout considering whether the student drops out at some stage. Equal (one-third) weight is given to each of the three components, which clearly has somevalue judgment behind it, but it is difficult to determine what this is. Note thatbecause the variables are measured in very different types of units, it is difficulteven to say precisely what equal weights mean. Finally, there is no attention tothe role of quality. For example, there is a big difference between an extra yearof life as a healthy, well-functioning individual and an extra year with a sharplylimited range of capabilities (such as being confined to bed). Moreover, thequality of schooling counts, not just the number of years of enrollment. Finally,it should be noted that while one could imagine better proxies for health andeducation, measures for these variables were chosen partly on the criterion thatsufficient data must be available to include as many countries as possible.

Table 2.4 shows the 2009 Human Development Index (using 2007 data) fora sample of 24 developed and developing nations ranked from low to veryhigh human development (column 3) along with their respective real GDP percapita (column 4) and a measure of the differential between the GDP per capitarank and the HDI rank (column 5). A positive number shows by how much acountry’s relative ranking rises when HDI is used instead of GDP per capita, anda negative number shows the opposite. Clearly, this is one of the critical issues forthe HDI. If country rankings did not vary much when the HDI is used instead ofGDP per capita, the latter would serve as a reliable proxy for socioeconomic de-velopment, and there would be no need to worry about such things as health andeducation indicators. We see from Table 2.4 that the country with the lowestHDI (0.340) in 2007 was Niger, and the one with the highest (0.971) was Norway.

It should be stressed that the HDI has a strong tendency to rise with percapita income, as wealthier countries can invest more in health and education,and this added human capital raises productivity. But what is so striking isthat despite this expected pattern, there is still such great variation betweenincome and broader measures of well-being as seen in Tables 2.4 and 2.5. Forexample, Senegal and Rwanda have essentially the same average HDI despitethe fact that real income is 92% higher in Senegal. And Costa Rica has a higherHDI than Saudi Arabia, despite the fact that Saudi Arabia has more than dou-ble the real per capita income of Costa Rica. Many countries have an HDI sig-nificantly different from that predicted by their income. South Africa has anHDI of 0.683, but it ranks just 129th, 51 places lower than to be expected from


Human capital Productiveinvestments in people, suchas skills, values, and healthresulting from expenditureson education, on-the-jobtraining programs, and med-ical care.

its middle-income ranking. But similarly ranked São Tomé and Príncipe (num-ber 131) ranks 17 places higher than expected from its income level.

For the countries listed in Table 2.5 with GDP per capita near $1,000, theHDI ranges dramatically from 0.371 to 0.543. Correspondingly, literacy ratesrange from just 26% to 71%. Life expectancy ranges from only 44 to 61. Amongcountries with GDP per capita near $1,500, literacy ranges from 32% to 74%and enrollment from 37% to 60%, with corresponding variations in the HDI.For the countries in Table 2.5 with GDP per capita near $2,000, the HDI ranges,from 0.511 to 0.710. Life expectancy ranges from 48 to 68. The literacy rateranges from 56% to 99%. For countries listed in Table 2.5 with GDP per capitanear $4,000, the HDI index ranges from 0.654 to 0.768. Life expectancy rangesfrom 65 to 74, and literacy rates range strikingly from 56% in Morocco to essen-tially universal literacy in Tonga. These dramatic differences show that theHuman Development Index project is worthwhile. Ranking countries only byincome—or for that matter only by health or education—causes us to miss im-portant differences in countries’ development levels.


TABLE 2.4 2009 Human Development Index for 24 Selected Countries (2007 Data)

Low Human DevelopmentNiger 182 0.340 627 �6Afghanistan 181 0.352 1,054 �17Dem. Rep. Congo 176 0.389 298 5Ethiopia 171 0.414 779 0Rwanda 167 0.460 866 1Côte d’Ivoire 163 0.484 1,690 �17Malawi 160 0.493 761 12Medium Human DevelopmentBangladesh 146 0.543 1,241 9Pakistan 141 0.572 2,496 �9India 134 0.612 2,753 �6South Africa 129 0.683 9,757 �51Nicaragua 124 0.699 2,570 6Gabon 103 0.755 15,167 �49China 92 0.772 5,383 10Iran 88 0.782 10,955 �17Thailand 87 0.783 8,135 �5High Human DevelopmentSaudi Arabia 59 0.843 22,935 �19Costa Rica 54 0.854 10,842 19Cuba 51 0.863 6,876 44Chile 44 0.878 13,880 15Very High Human DevelopmentUnited Kingdom 21 0.947 35,130 �1United States 13 0.956 45,592 �4Canada 4 0.966 35,812 14Norway 1 0.971 53,433 4

Country

Source: Data from United Nations Development Program, Human Development Report, 2009, tab. 1.

GDP Rankminus HDI

RankRelativeRanking

HumanDevelopmentIndex (HDI)

GDPPer Capita

(PPP, U.S. $)

Average income is one thing, but sometimes even in a middle-incomecountry, many people live in poverty. When the aggregate HDI for variouscountries was adjusted for income distribution, the relative rankings of manydeveloping nations also changed significantly.8 For example, Brazil had such ahighly unequal distribution that its ranking slipped, while Sri Lanka saw itsHDI ranking rise due to its more egalitarian distribution.

The HDI also ranges greatly for groups within countries. The impact of so-cial exclusion can be seen vividly in Guatemala, where the Q’eqchi ethnicgroup had an HDI rank similar to Cameroon, and the Poqomchi ranked belowZimbabwe, as seen in Figure 2.3a. Regional differences across districts can beseen in Kenya, where the HDI of the capital area of Nairobi ranks as high asTurkey, but Kenya’s Turkana district’s HDI is lower than that of any countryaverage, as shown in Figure 2.3b. Rural-urban differences are illustrated withthe case of China, where as Figure 2.3c shows, urban Shanghai’s HDI wasnearly as high as that of Greece, while rural Gansu has an HDI on a par with


TABLE 2.5 2009 Human Development Index Variations for Similar Incomes (2007 Data)

GDP Per Capita near PPP $1,000Madagascar 932 0.543 145 59.9 70.7 61.3Haiti 1,140 0.532 149 61.0 62.1 52.1Rwanda 866 0.460 167 49.7 64.9 52.2Mali 1,083 0.371 178 48.1 26.2 46.9Afghanistan 1,054 0.352 181 43.6 28.0 50.1GDP Per Capita near PPP $1,500Kenya 1,542 0.541 147 53.6 73.6 59.6Ghana 1,334 0.526 152 56.5 65.0 56.5Côte d’Ivoire 1,690 0.484 163 56.8 48.7 37.5Senegal 1,666 0.464 166 55.4 41.9 41.2Chad 1,477 0.392 175 48.6 31.8 36.5GDP Per Capita near PPP $2,000Kyrgyzstan 2,006 0.710 120 67.6 99.3 77.3Laos 2,165 0.619 133 64.6 72.7 59.6Cambodia 1,802 0.593 137 60.6 76.3 58.5Sudan 2,086 0.531 150 57.9 60.9 39.9Cameroon 2,128 0.523 153 50.9 67.9 52.3Mauritania 1,927 0.520 154 56.6 55.8 50.6Nigeria 1,969 0.511 158 47.7 72.0 53.0GDP Per Capita near PPP $4,000Tonga 3,748 0.768 99 71.7 99.2 78.0Sri Lanka 4,243 0.759 102 74.0 90.8 68.7Honduras 3,796 0.732 112 72.0 83.6 74.8Bolivia 4,206 0.729 113 65.4 90.7 86.0Guatemala 4,562 0.704 122 70.1 73.2 70.5Morocco 4,108 0.654 130 71.0 55.6 61.0

Country

Source: Data from United Nations Development Program, Human Development Report, 2009, tab. 1.

LifeExpectancy

(years)

GDP PerCapita(U.S. $) HDI

HDIRank

AdultLiteracy

(%)

CombinedGross Enrollment

Ratio

India, and the HDI of rural Guizhou is below that of Cambodia. An earlier UNstudy found similarly that in South Africa whites enjoy a high HDI level whilethat for blacks was much lower.9

Clearly, the United Nations Human Development Index has made a majorcontribution to improving our understanding of what constitutes develop-ment, which countries are succeeding (as reflected by rises in their HDI overtime), and how different groups and regions within countries are faring. By


0.8

0.7

India

Indonesia

Botswana

CameroonZimbabwe

0.6

0.5

0.4(a) Large ethnic differences in HDI in Guatemala (b) Wide inequalities in human development

between districts in Kenya

(c) Rural-urban differences intensify regional disparities in China

HD

I, 2

004

0.8

0.7Turkey

SouthAfrica0.6

0.5

0.4

0.3

0.2

HD

I, 2

004

0.8

1.0

0.9Greece

Urban

China

Rural

IndiaCambodia

Botswana

UrbanShanghai

Rural

Urban

Gansu

Rural

Urban

Guizhou

Rural

0.7

0.6

0.5

HD

I, 2

004

NigerMali Busia

Kenya

Nairobi

Mombassa

Turkana

UnitedArab

Emirates

Q’eqchi

Achi

Ladino

Guatemala

Poqomchi

Source: From Human Development Report, 2005, figs. 10–12. Reprinted with permission from the United Nations Development Programme.

FIGURE 2.3 Human Development Disparities within Selected Countries

combining social and economic data, the HDI allows nations to take a broadermeasure of their development performance, both relatively and absolutely.

Although there are some valid criticisms, the fact remains that the HDI andits new version considered in the next section, when used in conjunction withtraditional economic measures of development, greatly increase our under-standing of which countries are experiencing development and which are not.And by modifying a country’s overall HDI to reflect income distribution, gen-der, regional, and ethnic differentials, as presented in recent Human Develop-ment Reports, we are now able to identify not only whether a country is de-veloping but also whether various significant groups within that country areparticipating in that development.10

The New Human Development Index

In November 2010, the UNDP introduced its New Human Development Index(NHDI), intended to address some of the criticisms of the HDI. The index isstill based on standard of living, education, and health. But it has eight notablechanges, each with strengths but also a few potential drawbacks.

What Is New in the New HDI

1. Gross national income (GNI) per capita replaces gross domestic product(GDP) per capita. This should be an unambiguous improvement: GNI re-flects what citizens can do with income they receive, whereas that is nottrue of value added in goods and services produced in a country that go tosomeone outside it, and income earned abroad still benefits some of thenation’s citizens. As trade and remittance flows have been expanding rap-idly, and as aid has been better targeted to very low-income countries, thisdistinction has become increasingly important.

2. The education index has been completely revamped. Two new compo-nents have been added: the average actual educational attainment of thewhole population and the expected attainment of today’s children. Each ofthese changes to the index has implications. Use of actual attainment—av-erage years of schooling—as an indicator is unambiguously an improve-ment. Estimates are regularly updated, and the statistic is easily comparedquantitatively across countries. And even though it is at best a very roughguide to what is actually learned—on average, a year of schooling in Maliprovides students with much less than a year of schooling in Norway—this is the best measure we have at present because more detailed data onquality that are credible and comparable are simply not available.

3. Expected educational attainment, the other new component, is somewhatmore ambiguous: it is not an achievement but a UN forecast. Historyshows that much can go wrong to derail development plans. Neverthe-less, there have also been many development upside surprises, such asrapid improvements in educational attainment in some countries; there is arisk that low expectations will prove discouraging. Note that life expectancy,which remains the indicator for health, is also a projection based on pre-vailing conditions.


4. The two previous components of the education index, literacy and enroll-ment, have been correspondingly dropped. In contrast to expected attain-ment, literacy is clearly an achievement, and even enrollment is at least amodest achievement. However, literacy has always been badly and tooinfrequently measured and is inevitably defined more modestly in a lessdeveloped country. And enrollment is no guarantee that a grade will becompleted or for that matter that anything is learned or that students (orteachers) even attend.

5. The upper goalposts (maximum values) in each dimension have been in-creased to the observed maximum rather than given a predefined cutoff.In some ways, this returns the index to its original design, which was crit-icized for inadequately recognizing small gains by countries starting atvery low levels.

6. The lower goalpost for income has been reduced. This is based on esti-mates for Zimbabwe in 2007 that, if the data and their interpretation holdup, represent a historic low for recorded income.11

7. Another minor difference is that rather than using the common logarithm(log) to reflect diminishing marginal benefit of income, the NHDI nowuses the natural log (ln), as used in the fifth equation in Box 2.1. This re-flects a more usual construction of indexes.

8. Possibly the most consequential change is that the NHDI is computedwith a geometric mean, as we examine next.

The component indexes of the NHDI are computed by the same method as forthe HDI, such as seen for the case of life expectancy in Equation 2.2 (and, forthe case of China in the NHDI, as in the first equation in Box 2.1). We start bytaking the difference between the country’s actual achievement and the mini-mum goalpost value and then divide the result by the difference between theoverall maximum goalpost and minimum goalpost values. But in calculating


BOX 2.1 Computing the NHDI: The Case of China

Life expectancy index

Mean years of schooling index =7.5 - 0

13.2 - 0= 0.568

=73.5 - 2083.2 - 20

= 0.847

Expected years of schooling index

Education index

Income index

Human Development Index

= 320.847 * 0.589 * 0.584 = 0.663

=ln17,2632 - ln11632

ln1108,2112 - ln11632 = 0.584

=20.568 * 0.553 - 0

0.951 - 0= 0.589

=11.4 - 020.6 - 0

= 0.553Indicator ValueLife expectancy at birth (years) 73.5Mean years of schooling (years) 7.5Expected years of schooling (years) 11.4GNI per capita (PPP U.S. $) 7,263

Note: Values are rounded.

Source: UNDP, Human Development Report, 2010, pp. 216–217.

Example: China

the overall index, in place of the arithmetic mean, a geometric mean of thethree indexes is used (a geometric mean is also used to build up the overall ed-ucation index from its two components). Let’s look at why this change is im-portant and how the calculations are done.

Computing the NHDI The use of a geometric mean in the NHDI is very im-portant. When using an arithmetic mean (adding up the component indexesand dividing by three) in the HDI, the effect is to assume perfect substitutabil-ity across income, health, and education. For example, a higher value of theeducation index could compensate, one for one, for a lower value of the healthindex. In contrast, use of a geometric mean ensures that poor performance inany dimension directly affects the overall index. Thus, allowing for imperfectsubstitutability is a beneficial change; but there is active debate about whetherusing the geometric mean is the most appropriate way to accomplish this.12

Thus as the UNDP notes, the new calculation “captures how well roundeda country’s performance is across the three dimensions.” Moreover, the UNDPargues, “that it is hard to compare these different dimensions of well-beingand that we should not let changes in any of them go unnoticed.”

So in the NHDI, instead of adding up the health, education, and income in-dexes and dividing by 3, the NHDI is calculated with the geometric mean:

(2.8)

where H stands for the health index, E stands for the education index, and Istands for the income index. This is equivalent to taking the cube root of theproduct of these three indexes. The calculations of the NHDI are illustrated forthe case of China in Box 2.1.

Table 2.6 shows the 2010 values of the NHDI for a set of 31 countries. SouthKorea has achieved the status of a fully developed country, ranking betweenJapan and Switzerland. Countries such as Qatar, Guatemala, Côte d’Ivoire,Angola, and South Africa perform more poorly on the NHDI than would bepredicted from their income level, while the reverse is true of South Korea,Chile, Bangladesh, Madagascar, and Ghana. No doubt, exploration of alterna-tive indexes will continue; and the NHDI may be a transitional step in its on-going improvement. The UNDP now also offers the Inequality-Adjusted Hu-man Development Index (IHDI)—which imposes a penalty on the HDI thatincreases as inequality across people becomes greater—and the Gender In-equality Index (GII), as well as an important innovation, the MultidimensionalPoverty Index (MPI), which is examined in detail in Chapter 5.

2.4 Characteristics of the Developing World:Diversity within Commonality

As noted earlier, there are important historical and economic commonalitiesamong developing countries that have led to their economic development prob-lems being studied within a common analytical framework in development eco-nomics. These widely shared problems are examined here in detail on an issue-by-issue basis. At the same time, however, it is important to bear in mind thatthere is a great deal of diversity throughout the developing world, even withinthese areas of broad commonality. The wide range of income, health, education,

NHDI = H1/3E1/3I1/3


and HDI indicators already reviewed is sometimes called a “ladder of develop-ment.”13 Different development problems call for different specific policy re-sponses and general development strategies. This section examines the ten ma-jor areas of “diversity within commonality” in the developing world.

Lower Levels of Living and Productivity

As we noted at the outset of the chapter, there is a vast gulf in productivitybetween advanced economies such as the United States and developing


TABLE 2.6 The 2010 New Human Development Index (NHDI), 2008 Data

Very High Human DevelopmentNorway (1) 0.938 81.0 12.6 17.3 58,810 2 0.954United States (4) 0.902 79.6 12.4 15.7 47,094 5 0.917Canada (8) 0.888 81.0 11.5 16.0 38,668 6 0.913South Korea (12) 0.877 79.8 11.6 16.8 29,518 16 0.918United Kingdom (26) 0.849 79.8 9.5 15.9 35,087 �6 0.860Qatar (38) 0.803 76.0 7.3 12.7 79,426 �36 0.737High Human DevelopmentChile (45) 0.783 78.8 9.7 14.5 13,561 11 0.840Costa Rica (62) 0.725 79.1 8.3 11.7 10,870 7 0.768Brazil (73) 0.699 72.9 7.2 13.8 10,607 �3 0.728Medium Human DevelopmentDominican Rep. (88) 0.663 72.8 6.9 11.9 8,273 �9 0.695China (89) 0.663 73.5 7.5 11.4 7,258 �4 0.707Botswana (98) 0.633 55.5 8.9 12.4 13,204 �38 0.613Indonesia (108) 0.600 71.5 5.7 12.7 3,957 2 0.663South Africa (110) 0.597 52.0 8.2 13.4 9,812 �37 0.581Tajikistan (112) 0.580 67.3 9.8 11.4 2,020 22 0.709Vietnam (113) 0.572 74.9 5.5 10.4 2,995 7 0.646Guatemala (116) 0.560 70.8 4.1 10.6 4,694 �13 0.583India (119) 0.519 64.4 4.4 10.3 3,337 �6 0.549Pakistan (125) 0.490 67.2 4.9 6.8 2,678 �4 0.523Low Human DevelopmentKenya (128) 0.470 55.6 7.0 9.6 1,628 10 0.541Bangladesh (129) 0.469 66.9 4.8 8.1 1,587 12 0.543Ghana (130) 0.467 57.1 7.1 9.7 1,385 14 0.556Madagascar (135) 0.435 61.2 5.2 10.2 953 22 0.550Papua New Guinea (137) 0.431 61.6 4.3 5.2 2,227 �10 0.447Haiti (145) 0.404 61.7 4.9 6.8 949 13 0.493Angola (146) 0.403 48.1 4.4 4.4 4,941 �47 0.353Côte d’Ivoire (149) 0.397 58.4 3.3 6.3 1,625 �10 0.420Afghanistan (155) 0.349 44.6 3.3 8.0 1,419 �12 0.358Ethiopia (157) 0.328 56.1 1.5 8.3 992 �2 0.357Dem. Rep. of Congo (168) 0.239 48.0 3.8 7.8 291 0 0.390Zimbabwe (169) 0.140 47.0 7.2 9.2 176 0 0.472

Source: Data from Human Development Report 2010, Table 1, pp. 143–146. © 2010 by the United Nations Development Programme.

NHDI rank

ExpectedYears of

Schooling(years)

NHDIValue

LifeExpectancy

at Birth(years)

MeanYears of

Schooling(years)

GNI PerCapita (PPP

2008 $)

GNI PerCapita

Rank Minus NHDI Rank

Non-incomeNHDI Value

nations, including India and the Democratic Republic of Congo but also awide range among these and other developing countries. And as we haveseen, all countries with averages below what is defined as high income areconsidered developing in most taxonomies (and some in the high-incomerange as defined by the World Bank are still considered developing). Thelower average levels but wide ranges of income in developing areas are seenin Table 2.3. Even when adjusted for purchasing power parity and despite ex-traordinary recent growth in China and India, the low- and middle-incomedeveloping nations, with more than five-sixths (84%) of the world’s people,received slightly more than two-fifths (41%) of the world’s income in 2008, asseen in Figure 2.4.

At very low income levels, in fact, a vicious circle may set in, whereby lowincome leads to low investment in education and health as well as plant andequipment and infrastructure, which in turn leads to low productivity andeconomic stagnation. This is known as a poverty trap or what Nobel laureateGunnar Myrdal called “circular and cumulative causation.”14 However, it isimportant to stress that there are ways to escape from low income, as you willsee throughout this book. Further, the low-income countries are themselves avery diverse group with greatly differing development challenges.15

Indeed, some star performers among now high-income economies such asSouth Korea and Taiwan were once among the poorest in the world. Somemiddle-income countries are also relatively stagnant, but others are growingrapidly—China most spectacularly, as reviewed in the case study at the end ofChapter 4. Indeed, income growth rates have varied greatly in different devel-oping regions and countries, with rapid growth in East Asia, slow or even no


East Asia and Pacific 15%

South Asia 6%

Europe and Central Asia

8%

Latin America and Caribbean

9%

Middle East andNorth Africa

3%

Sub-SaharanAfrica

2%

High-Incomecountries

57%

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.:World Bank, 2010), p. 34.

FIGURE 2.4 Shares of Global Income, 2008

growth in sub-Saharan Africa, and intermediate levels of growth in otherregions. Problems of igniting and then sustaining economic growth are exam-ined in depth in Chapters 3 and 4.

One common misperception is that low incomes result from a country’sbeing too small to be self-sufficient or too large to overcome economic inertia.However, there is no necessary correlation between country size in populationor area and economic development (in part because each has different advan-tages and disadvantages that can offset each other).16

The 12 most populous countries include representatives of all four cate-gories: low-, lower-middle-, upper-middle-, and high-income countries (seeTable 2.7). The 12 least populous on the list include primarily lower-middle-and upper-middle-income countries, although the 12th least populous coun-try, São Tomé and Príncipe, has a per capita income of just $1,030. And fourvery small but high-income European countries that are UN members (Andorra,Monaco, Liechtenstein, and San Marino) would appear on the list if compara-ble World Bank income data were available.

Lower Levels of Human Capital

Human capital—health, education, and skills—is vital to economic growthand human development. We have already noted the great disparities in hu-man capital around the world while discussing the Human Development In-dex. Compared with developed countries, much of the developing world haslagged in its average levels of nutrition, health (as measured, for example, bylife expectancy or undernourishment), and education (measured by literacy),as seen in Table 2.3. The under-5 mortality is 17 times higher in low-incomecountries than in high-income countries, although progress has been madesince 1990, as shown graphically in Figure 2.5.


TABLE 2.7 The 12 Most and Least Populated Countries and Their Per Capita Income, 2008

1. China 1,325 2,940 1. Palau 20 8,6302. India 1,140 1,040 2. St. Kitts and Nevis 49 10,8703. United States 304 47,930 3. Marshall Islands 60 3,2704. Indonesia 227 1,880 4. Dominica 73 4,7505. Brazil 192 7,300 5. Antigua and Barbuda 87 13,2006. Pakistan 166 950 6. Seychelles 87 10,2207. Bangladesh 160 520 7. Kiribati 97 2,0408. Nigeria 151 1,170 8. Tonga 104 2,6909. Russian Federation 142 9,660 9. Grenada 104 5,880

10. Japan 128 38,130 10. St. Vincent and the Grenadines 109 5,05011. Mexico 106 9,990 11. Micronesia 110 2,46012. Philippines 90 1,890 12. Sao Tomé and Príncipe 160 1,030

Most Populous

Source: The World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs 1.1 and 1.6.

Least PopulousaPopulation(millions)

GNI PerCapita(U.S. $)

Population(thousands)

GNI PerCapita(U.S. $)

aCriteria for inclusion in the least-populous rankings: United Nations member as of mid-2010, with 2008 comparable population and GNI per capita data in tab. 1.6 in the source.

Table 2.8 shows primary enrollment rates (percentage of students of pri-mary age enrolled in school) and the primary school pupil-to-teacher ratio forthe four country income groups and for five major developing regions. Enroll-ments have strongly improved in recent years, but student attendance andcompletion, along with attainment of basic skills such as functional literacy,remain problems. Indeed, teacher truancy remains a serious problem in SouthAsia and sub-Saharan Africa.17

Moreover, there are strong synergies (complementarities) between progressin health and education (examined in greater depth in Chapter 8). For exam-ple, under-5 mortality rates improve as mothers’ education levels rise, as seenin the country examples in Figure 2.6.


TABLE 2.8 Primary School Enrollment and Pupil-Teacher Ratios, 2010

Income GroupLow 80 45Lower Middle 87 23a

Upper Middle 94 22High 95 15RegionEast Asia and Pacific 93a 19Latin America and the Caribbean 94 25Middle East and North Africa 91 24South Asia 86 40a

Sub-Saharan Africa 73 49Europe and Central Asia 92 16

Net Primary School Primary Pupil-Teacher Region or Group Enrollment (%) Ratio

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs 2.11 and 2.12.aData for 2009

160

140

120

100

80

60

40

20

0D

eath

s p

er 1

,000

live

bir

ths

Low-incomecountries

All developingcountries

Middle-incomecountries

High-incomecountries

1990

2005

Source: International Bank for Reconstruction and Development/World Bank, World De-velopment Indicators, 2007 (Washington, D.C.: World Bank, 2007), p. 36. Reprinted withpermission.

FIGURE 2.5 Under-5 Mortality Rates, 1990 and 2005

The well-performing developing countries are much closer to the devel-oped world in health and education standards than they are to the lowest-income countries.18 Although health conditions in East Asia are relativelygood, sub-Saharan Africa continues to be plagued by problems of malnourish-ment, malaria, tuberculosis, AIDS, and parasitic infections. Despite progress,South Asia continues to have high levels of illiteracy, low schooling attainment,and undernourishment. Still, in fields such as primary school completion, low-income countries are also making great progress; for example, enrollments inIndia are up from 68% in the early 1990s to a reported 94% by 2008.

Higher Levels of Inequality and Absolute Poverty

Globally, the poorest 20% of people receive just 1.5% of world income. Thelowest 20% now roughly corresponds to the approximately 1.4 billion peopleliving in extreme poverty on less than $1.25 per day at purchasing power par-ity.19 Bringing the incomes of those living on less than $1.25 per day up to thisminimal poverty line would require less than 2% of the incomes of the world’swealthiest 10%.20 Thus the scale of global inequality is immense.

But the enormous gap in per capita incomes between rich and poor nationsis not the only manifestation of the huge global economic disparities. To ap-preciate the breadth and depth of deprivation in developing countries, it isalso necessary to look at the gap between rich and poor within individual de-veloping countries. Very high levels of inequality—extremes in the relativeincomes of higher- and lower-income citizens—are found in many middle-income countries, partly because Latin American countries historically tend to


200

150

100

50

0

Dea

ths

per

1,0

00liv

e b

irth

s

Tanzania(2004–05)

Bolivia(2003)

Egypt(2005)

Philippines(2003)

Bangladesh(2004)

No education

Mother’s Education

Some primary

Complete primary/some secondary

Complete secondary/some higher

Source: International Bank for Reconstruction and Development/World Bank, World Development Indicators, 2007(Washington, D.C.: World Bank, 2007), p. 119. Reprinted with permission.

FIGURE 2.6 Correlation between Under-5 Mortality and Mother’s Education

be both middle-income and highly unequal. Several African countries, includ-ing Sierra Leone, Lesotho, and South Africa, also have among the highestlevels of inequality in the world.21 Inequality is particularly high in manyresource-rich developing countries, notably in the Middle East and sub-SaharanAfrica. Indeed, in many of these cases, inequality is substantially higher thanin most developed countries (where inequality has in many cases been rising).But inequality varies greatly among developing countries, with generallymuch lower inequality in Asia. Consequently, we cannot confine our attentionto averages; we must look within nations at how income is distributed to askwho benefits from economic development and why.

Corresponding to their low average income levels, a large majority of the ex-treme poor live in the low-income developing countries of sub-Saharan Africaand South Asia. Extreme poverty is due in part to low human capital but also tosocial and political exclusion and other deprivations. Great progress has alreadybeen made in reducing the fraction of the developing world’s population livingon less than $1.25 per day and raising the incomes of those still below that level,but much remains to be done, as we examine in detail in Chapter 5.

Development economists use the concept of absolute poverty to representa specific minimum level of income needed to satisfy the basic physical needsof food, clothing, and shelter in order to ensure continued survival. A prob-lem, however, arises when one recognizes that these minimum subsistencelevels will vary from country to country and region to region, reflecting differ-ent physiological as well as social and economic requirements. Economistshave therefore tended to make conservative estimates of world poverty in or-der to avoid unintended exaggeration of the problem.

The incidence of extreme poverty varies widely around the developingworld. The World Bank estimates that the share of the population living on lessthan $1.25 per day is 9.1% in East Asia and the Pacific, 8.6% in Latin America andthe Caribbean, 1.5% in the Middle East and North Africa, 31.7% in South Asia,and 41.1% in sub-Saharan Africa.22 The share of world population living belowthis level had fallen encouragingly to an estimated 21% by 2006, but indicationsare that the global economic crisis slowed poverty reduction and that in somecountries, poverty has actually increased.23 But as Figure 2.7 shows, the numberliving on less than $1.25 per day has fallen from about 1.9 billion in 1981 to about1.4 billion in 2005; this despite a more than 40% increase in world population.

Extreme poverty represents great human misery, and so redressing it is atop priority of international development. Development economists have alsoincreasingly focused on ways in which poverty and inequality can lead toslower growth. That is, not only do poverty and inequality result from distortedgrowth, but they can also cause it. This relationship, along with measurementsof inequality and poverty and strategies to address these problems, is exam-ined in depth in Chapter 5; because of their central importance in develop-ment, poverty reduction strategies are examined throughout the text.

Higher Population Growth Rates

Global population has skyrocketed since the beginning of the industrial era, fromjust under 1 billion in 1800 to 1.65 billion in 1900 and to over 6 billion by 2000.The United Nations estimates that the “day of 7 billion” will occur in late 2011 or


Absolute poverty The situa-tion of being unable or onlybarely able to meet the subsis-tence essentials of food,clothing, shelter, and basichealth care.

early 2012. Rapid population growth began in Europe and other now developedcountries. But in recent decades, most population growth has been centered inthe developing world. Compared with the developed countries, which oftenhave birth rates near or even below replacement (zero population growth) levels,the low-income developing countries have very high birth rates. More than five-sixths of all the people in the world now live in developing countries.

But population dynamics varies widely among developing countries. Pop-ulations of some developing countries, particularly in Africa, continue to growrapidly. From 1990 to 2008, population in the low-income countries grew at2.2% per year, compared to 1.3% in the middle-income countries (the high-incomecountries grew at 0.7% per year, reflecting both births and immigration).24

Middle-income developing countries show greater variance, with somehaving achieved lower birth rates closer to those prevailing in rich countries.As seen in Table 2.3, the birth rate is about three times as high in the low-income countries as in the high-income countries. In sub-Saharan Africa, theannual birth rate is 39 per 1,000—four times the rate in high-income countries.Intermediate but still relatively high birth rates are found in South Asia (24),the Middle East and North Africa (24), and Latin America and the Caribbean(19). East Asia and the Pacific have a moderate birth rate of 14 per 1,000, partlythe result of birth control policies in China. The very wide range of crudebirth rates around the world is illustrated in Table 2.9. As of 2010, the averagerate of population growth was about 1.4% in the developing countries.

A major implication of high birth rates is that the active labor force has to sup-port proportionally almost twice as many children as it does in richer countries.


0

2,000

1,200

1,400

1,600

1,800

1,000

200

400

600

800

Pop

ula

tio

n li

vin

g u

nd

er $

1.25

per

day

(mill

ion

s)

200520021999199619931990198719841981

Sub-Saharan Africa

South Asia

Rest of the Developing World

East Asia and the Pacific

Source: International Bank for Reconstruction and Development / The World Bank:“The Developing World is Poorer Than We Thought, But No Less Successful in the FightAgainst Poverty” by Shaohua Chen and Martin Ravallion, Aug. 26, 2008. Reprintedwith permission from The World Bank.

FIGURE 2.7 Number of People Living in Poverty by Region, 1981–2005

Crude birth rate The num-ber of children born alive eachyear per 1,000 population.

By contrast, the proportion of people over the age of 65 is much greater in thedeveloped nations. Both older people and children are often referred to as aneconomic dependency burden in the sense that they must be supported finan-cially by the country’s labor force (usually defined as citizens between theages of 15 and 64). In low-income countries, there are 66 children under 15 foreach 100 working-age (15–65) adults, while in middle-income countries, thereare 41 and in high-income countries just 26. In contrast, low-income countrieshave just 6 people over 65 per 100 working-age adults, compared with 10 inmiddle-income countries and 23 in high-income countries. Thus the total de-pendency ratio is 72 per 100 in low-income countries and 49 per 100 in high-income countries.25 But in rich countries, older citizens are supported by theirlifetime savings and by public and private pensions. In contrast, in developingcountries, public support for children is very limited. So dependency has afurther magnified impact in developing countries.

We may conclude, therefore, that not only are developing countries charac-terized by higher rates of population growth, but they must also contend withgreater dependency burdens than rich nations, though with a wide gulf be-tween low- and middle-income developing countries. The circumstances andconditions under which population growth becomes a deterrent to economicdevelopment is a critical issue and is examined in Chapter 6.

Greater Social Fractionalization

Low-income countries often have ethnic, linguistic, and other forms of socialdivisions, sometimes known as fractionalization. This is sometimes associ-ated with civil strife and even violent conflict, which can lead developing soci-eties to divert considerable energies to working for political accommodationsif not national consolidation. It is one of a variety of governance challengesmany developing nations face. There is some evidence that many of the fac-tors associated with poor economic growth performance in sub-SaharanAfrica, such as low schooling, political instability, underdeveloped financialsystems, and insufficient infrastructure, can be statistically explained by highethnic fragmentation.26

The greater the ethnic, linguistic, and religious diversity of a country, themore likely it is that there will be internal strife and political instability. Some of


Fractionalization Significantethnic, linguistic, and othersocial divisions within acountry.

Dependency burden Theproportion of the total popu-lation aged 0 to 15 and 65+,which is considered economi-cally unproductive and there-fore not counted in the laborforce.

TABLE 2.9 Crude Birth Rates Around the World, 2009

Source: Data from World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tab. 2.1.

45+ Afghanistan, Angola, Burkina Faso, Dem. Rep. of Congo, Niger, Somalia, Uganda, Zambia40–44 Benin, Mali, Nigeria, Rwanda, Sierra Leone, Timor-Leste35–39 Côte d’Ivoire, Ethiopia, Kenya, Madagascar, Senegal30–34 Comoros, Ghana, Guatemala, Pakistan, Papua New Guinea, Sudan, Zimbabwe25–29 Bolivia, Cambodia, Egypt, Paraguay, Philippines, Saudi Arabia20–24 Algeria, Dominican Republic, India, Mexico, Peru, South Africa15–19 Argentina, Brazil, Costa Rica, Sri Lanka, Vietnam10–14 China, Cuba, Hungary, United Kingdom, United States<10 Austria, Germany, Japan, South Korea, Serbia, Taiwan

the most successful development experiences—South Korea, Taiwan, Singapore,and Hong Kong—have occurred in culturally homogeneous societies.

But today, more than 40% of the world’s nations have more than five sig-nificant ethnic populations. In most cases, one or more of these groups faceserious problems of discrimination, social exclusion, or other systematic dis-advantages. Over half of the world’s developing countries have experiencedsome form of interethnic conflict. Ethnic and religious conflicts leading towidespread death and destruction have taken place in countries as diverse asAfghanistan, Rwanda, Mozambique, Guatemala, Mexico, Sri Lanka, Iraq, India,Kyrgyzstan, Azerbaijan, Somalia, Ethiopia, Liberia, Sierra Leone, Angola,Myanmar, Sudan, the former Yugoslavia, Indonesia, and the Democratic Re-public of Congo.

Conflict can derail what had otherwise been relatively positive develop-ment progress, as in Côte d’Ivoire since 2002 (see Chapter 14 and the casestudy for Chapter 5). There is, however, a heartening trend since the late1990s toward more successful resolution of conflicts and fewer new con-flicts. If development is about improving human lives and providing awidening range of choice to all peoples, racial, ethnic, caste, or religious dis-crimination is pernicious. For example, throughout Latin America, indige-nous populations have significantly lagged behind other groups on almostevery measure of economic and social progress. Whether in Bolivia, Brazil,Peru, Mexico, Guatemala, or Venezuela, indigenous groups have benefitedlittle from overall economic growth. To give just one illustration, three-quar-ters of Guatemala’s native population is poor, compared to about 50% of therest of the population. Being indigenous makes it much more likely that anindividual will be less educated, in poorer health, and in a lower socioeco-nomic stratum than other citizens.27 This is particularly true for indigenouswomen. Moreover, descendents of African slaves brought forcefully to thewestern hemisphere continue to suffer discrimination in countries such asBrazil.

Ethnic and religious diversity need not necessarily lead to inequality, tur-moil, or instability, and unqualified statements about its impact cannot bemade. There have been numerous instances of successful economic and socialintegration of minority or indigenous ethnic populations in countries as di-verse as Malaysia and Mauritius. And in the United States, diversity is oftencited as a source of creativity and innovation. The broader point is that theethnic and religious composition of a developing nation and whether or notthat diversity leads to conflict or cooperation can be important determinantsof the success or failure of development efforts.28

Larger Rural Populations but Rapid Rural-to-Urban Migration

One of the hallmarks of economic development is a shift from agriculture tomanufacturing and services. In developing countries, a much higher share ofthe population lives in rural areas, as seen in Table 2.10. Although moderniz-ing in many regions, rural areas are poorer and tend to suffer from missingmarkets, limited information, and social stratification. A massive populationshift is also under way as hundreds of millions of people are moving from ruralto urban areas, fueling rapid urbanization, with its own attendant problems.


The world as a whole has just crossed the 50% threshold: For the first time inhistory, more people live in cities than in rural areas. But sub-Saharan Africaand most of Asia remain predominantly rural. Migration and agriculture is-sues are examined in Chapters 7 and 9.

Lower Levels of Industrialization and Manufactured Exports

One of the most widely used terminologies for the original Group of Seven(G7) countries29 and other advanced economies such as smaller Europeancountries and Australia is the “industrial countries.” Industrialization is as-sociated with high productivity and incomes and has been a hallmark ofmodernization and national economic power. It is no accident that mostdeveloping-country governments have made industrialization a high nationalpriority, with a number of prominent success stories in Asia.

Table 2.11 shows the structure of employment of men and women and valueadded in the agricultural, industrial, and service sectors. In developed coun-tries, agriculture represents a very small share of employment and output—about 1% in the United States and United Kingdom—although productivity isnot disproportionately low. And the share of employment in industry in thesetwo countries, for example, is actually smaller now than in some developingcountries, particularly among women, as developed countries switch to theservice sector. An often suggested but controversial “pattern of development” isthat the share of employment in industry begins to slowly decline (and the serv-ice sector continues to expand) after developed-country status is reached (seeChapter 3). There is wide variation in activity by sector around the developingworld. However, in most African and Asian countries, agriculture still providesa substantial share of employment, in some cases even a majority. In LatinAmerica, the share of agricultural employment is smaller but still substantial.

Along with lower industrialization, developing nations have tended to havea higher dependence on primary exports. Most developing countries havediversified away from agricultural and mineral exports to some degree. The


TABLE 2.10 The Urban Population in Developed Countriesand Developing Regions

World 6,810 50More developed countries 1,232 75Less developed countries 5,578 44Sub-Saharan Africa 836 35Northern Africa 205 50Latin America and the Caribbean 580 77Western Asia 231 64South-central Asia 1,726 31Southeast Asia 597 43East Asia 1,564 51Eastern Europe 295 69

Region Population (millions, 2009) Urban Share (%)

Source: Population Reference Bureau, 2009 World Data Sheet.

middle-income countries are rapidly catching up with the developed worldin the share of manufactured goods in their exports, even if these goods are typ-ically less advanced in their skill and technology content. However, the low-income countries, particularly those in Africa, remain highly dependent on arelatively small number of agricultural and mineral exports. Africa will need tocontinue its efforts to diversify its exports. We examine this in Chapter 12.

Adverse Geography

Many analysts argue that geography must play some role in problems of agri-culture, public health, and comparative underdevelopment more generally.Landlocked economies, common in Africa, often have lower incomes thancoastal economies.30 As can be observed on the map on the inside cover, de-veloping countries are primarily tropical or subtropical, and this has meantthat they suffer more from tropical pests and parasites, endemic diseases suchas malaria, water resource constraints, and extremes of heat. A great concerngoing forward is that global warming is projected to have its greatest negativeimpact on Africa and South Asia (see Chapter 10).31


TABLE 2.11 Share of the Population Employed in the Industrial Sector in Selected Countries, 2004–2008 (%)

AfricaEgypt 28 43 13 26 6 38 46 51 49Ethiopia 12 6 44 27 17 13 61 77 42Madagascar 82 83 25 5 2 17 13 16 57Mauritius 10 8 4 36 26 29 54 66 67South Africa 11 7 3 35 14 34 54 80 63AsiaBangladesh 42 68 19 15 13 29 43 19 52Indonesia 41 41 14 21 15 48 38 44 37Malaysia 18 10 10 32 23 48 51 67 42Pakistan 36 72 20 23 13 27 41 15 53Philippines 44 24 15 18 11 32 39 65 53South Korea 7 8 3 33 16 37 60 74 60Thailand 43 40 12 22 19 44 35 41 44Vietnam 56 60 22 21 14 40 23 26 38Latin AmericaColombia 27 6 9 22 16 36 51 78 55Costa Rica 18 5 7 28 13 29 54 82 64Mexico 19 4 4 31 18 37 50 77 59Nicaragua 42 8 19 20 18 30 38 73 51Developed CountriesUnited Kingdom 2 1 1 32 9 24 66 90 76United States 2 1 1 30 9 22 68 90 77

Agriculture Services

Source: World Bank, World Development Indicators, 2010 (Washington, D.C.: World Bank, 2010), tabs. 2.3 and 4.2.Note: Ethiopia agricultural employment reflects limited coverage.

MalesMales Females

Shareof GDP(2008) Females

Shareof GDP(2008) Male Female

Shareof GDP(2008)

Industry

The extreme case of favorable physical resource endowment is the oil-richPersian Gulf states. At the other extreme are countries like Chad, Yemen,Haiti, and Bangladesh, where endowments of raw materials and minerals andeven fertile land are relatively minimal. However, as the case of the Democra-tic Republic of Congo shows vividly, high mineral wealth is no guarantee ofdevelopment success. Conflict over the profits from these industries has oftenled to a focus on the distribution of wealth rather than its creation and to so-cial strife, undemocratic governance, high inequality, and even armed conflict,in what is called the “curse of natural resources.”

Clearly, geography is not destiny; high-income Singapore lies almost di-rectly on the equator, and parts of southern India have exhibited enormouseconomic dynamism in recent years. However, the presence of common andoften adverse geographic features in comparison to temperate zone countriesmeans it is beneficial to study tropical and subtropical developing countriestogether for some purposes. Redoubled efforts are now under way to extendthe benefits of the green revolution and tropical disease control to sub-SaharanAfrica. In section 2.7 of this chapter, we add further perspectives on the possi-ble indirect roles of geography in comparative development.

Underdeveloped Markets

Imperfect markets and incomplete information are far more prevalent in de-veloping countries, with the result that domestic markets, notably but notonly financial markets, have worked less efficiently, as examined in Chapters 4,11, and 15. In many developing countries, legal and institutional foundationsfor markets are extremely weak.

Some aspects of market underdevelopment are that they often lack (1) a legalsystem that enforces contracts and validates property rights; (2) a stable andtrustworthy currency; (3) an infrastructure of roads and utilities that results inlow transport and communication costs so as to facilitate interregional trade; (4)a well-developed and efficiently regulated system of banking and insurance,with broad access and with formal credit markets that select projects and allocateloanable funds on the basis of relative economic profitability and enforce rules ofrepayment; (5) substantial market information for consumers and producersabout prices, quantities, and qualities of products and resources as well as thecreditworthiness of potential borrowers; and (6) social norms that facilitate suc-cessful long-term business relationships. These six factors, along with the exis-tence of economies of scale in major sectors of the economy, thin markets formany products due to limited demand and few sellers, widespread externalities(costs or benefits that accrue to companies or individuals not doing the produc-ing or consuming) in production and consumption, and poorly regulated com-mon property resources (e.g., fisheries, grazing lands, water holes) mean thatmarkets are often highly imperfect. Moreover, information is limited and costlyto obtain, thereby often causing goods, finances, and resources to be misallo-cated. And we have come to understand that small externalities can interact inways that add up to very large distortions in an economy and present the realpossibility of an underdevelopment trap (see Chapter 4). The extent to whichthese imperfect markets and incomplete information systems justify a more ac-tive role for government (which is also subject to similar problems of incomplete


Imperfect market A marketin which the theoreticalassumptions of perfect com-petition are violated by theexistence of, for example, asmall number of buyers andsellers, barriers to entry, andincomplete information.

Incomplete informationThe absence of informationthat producers and con-sumers need to make efficientdecisions resulting in under-performing markets.

Resource endowment A na-tion’s supply of usable factorsof production including min-eral deposits, raw materials,and labor.

Infrastructure Facilities thatenable economic activity andmarkets, such as transporta-tion, communication and dis-tribution networks, utilities,water, sewer, and energy sup-ply systems.

and imperfect information) is an issue that we will be dealing with in later chap-ters. But their existence remains a common characteristic of many developing na-tions and an important contributing factor to their state of underdevelopment.32

Lingering Colonial Impacts and Unequal International Relations

Colonial Legacy Most developing countries were once colonies of Europe orotherwise dominated by European or other foreign powers, and institutionscreated during the colonial period often had pernicious effects on developmentthat in many cases have persisted to the present day. Despite important varia-tions that proved consequential, colonial era institutions often favored extrac-tors of wealth rather than creators of wealth, harming development then andnow. Both domestically and internationally, developing countries have moreoften lacked institutions and formal organizations of the type that have bene-fited the developed world: Domestically, on average, property rights have beenless secure, constraints on elites have been weak, and a smaller segment of soci-ety has been able to gain access to and take advantage of economic opportuni-ties.33 Problems with governance and public administration (see Chapter 11),as well as poorly performing markets, often stem from poor institutions.

Decolonization was one of the most important historical and geopoliticalevents of the post–World War II era. More than 80 former European colonieshave joined the United Nations. But several decades after independence, theeffects of the colonial era linger for many developing nations, particularly theleast developed ones.

Colonial history matters not only or even primarily because of stolen re-sources but also because the colonial powers determined whether the legaland other institutions in their colonies would encourage investments by(and in) the broad population or would instead facilitate exploitation of hu-man and other resources for the benefit of the colonizing elite and create orreinforce extreme inequality. Development-facilitating or development-inhibiting institutions tend to have a very long life span. For example, whenthe colonial lands conquered were wealthier, there was more to steal. Inthese cases, colonial powers favored extractive (or “kleptocratic”) institu-tions at the expense of ones that encouraged productive effort. When settlerscame in large numbers to live permanently, incomes ultimately were rela-tively high, but the indigenous populations were largely annihilated by dis-ease or conflict, and descendents of those who survived were exploited andblocked from advancement.

In a related point of great importance, European colonization often createdor reinforced differing degrees of inequality, often correlated with ethnicity,which have also proved remarkably stable over the centuries. In some re-spects, postcolonial elites in many developing countries largely took over theexploitative role formerly played by the colonial powers. High inequalitysometimes emerged as a result of slavery in regions where comparative ad-vantage in crops such as sugarcane could be profitably produced on slaveplantations. It also emerged where a large, settled indigenous populationcould be coerced into labor. This history had long-term consequences, particu-larly in Latin America.34 Where inequality was extreme, the result has been


less movement toward democratic institutions, less investment in publicgoods, and less widespread investment in human capital (education, skills,and health). These are among the ways in which extreme inequality is harmfulto development and so is also an important long-term determinant of compar-ative development. We return to these themes later in this chapter.

The European colonial powers also had a dramatic and long-lasting im-pact on the economies and political and institutional structures of their Africanand Asian colonies by their introduction of three powerful and tradition-shattering ideas: private property, personal taxation, and the requirement thattaxes be paid in money rather than in kind. These innovations were intro-duced in ways that facilitated elite rule rather than broad-based opportunity.The worst impact of colonization was probably felt in Africa, especially if onealso considers the earlier slave trade. Whereas in former colonies such as Indialocal people played a role in colonial governance, in Africa most governancewas administered by expatriates.

In Latin America, a longer history of political independence plus a moreshared colonial heritage (Spanish and Portuguese) has meant that in spiteof geographic and demographic diversity, the countries possess relativelysimilar economic, social, and cultural institutions and face similar problems,albeit with particular hardships for indigenous peoples and descendants ofslaves. Latin American countries have long been middle-income but rarelyadvanced to high-income status—reflecting a situation now known as the“middle-income trap.” In Asia, different colonial heritages and the diversecultural traditions of the people have combined to create different institu-tional and social patterns in countries such as India (British), the Philippines(Spanish and American), Vietnam (French), Indonesia (Dutch), Korea (Japanese),and China (not formally colonized but dominated by a variety of foreignpowers).35 To a widely varying degree newly independent nations continuedto experience foreign domination by former colonial powers and the UnitedStates, and in a number of countries by the Soviet Union, particularly duringthe Cold War period. The diversity of colonial experiences is one of the im-portant factors that help explain the wide spectrum of development out-comes in today’s world.

External Dependence Relatedly, developing countries have also been lesswell organized and influential in international relations, with sometimesadverse consequences for development. For example, agreements withinthe World Trade Organization (WTO) and its predecessors concerning mat-ters such as agricultural subsidies in rich countries that harm developing-country farmers and one-sided regulation of intellectual property rightshave often been relatively unfavorable to the developing world (seeChapter 12). During debt crises in the 1980s and 1990s, the interests of inter-national banks often prevailed over those of desperately indebted nations(discussed in Chapter 13). More generally, developing nations have weakerbargaining positions than developed nations in international economic rela-tions. Developing nations often also voice great concern over various formsof cultural dependence, from news and entertainment to business practices,lifestyles, and social values. The potential importance of these concerns shouldnot be underestimated, either in their direct effects on development in its


broader meanings or indirect impacts on the speed or character of nationaldevelopment.

Developing nations are also dependent on the developed world for envi-ronmental preservation, on which hopes for sustainable development depend.Of greatest concern, global warming is projected to harm developing regionsmore than developed ones; yet both accumulated and current greenhouse gasemissions still originate predominantly in the high-income countries. Thus thedeveloping world endures what may be called environmental dependence, inwhich it must rely on the developed world to cease aggravating the problemand to develop solutions, including mitigation at home and assistance in de-veloping countries.

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

The position of developing countries today is in many important ways signifi-cantly different from that of the currently developed countries when they em-barked on their era of modern economic growth. We can identify eight signifi-cant differences in initial conditions that require a special analysis of thegrowth prospects and requirements of modern economic development:

1. Physical and human resource endowments

2. Per capita incomes and levels of GDP in relation to the rest of the world

3. Climate

4. Population size, distribution, and growth

5. Historical role of international migration

6. International trade benefits

7. Basic scientific and technological research and development capabilities

8. Efficacy of domestic institutions

We will discuss each of these conditions with a view to formulating require-ments and priorities for generating and sustaining economic growth in devel-oping countries.

Physical and Human Resource Endowments

Contemporary developing countries are often less well endowed with naturalresources than the currently developed nations were at the time when the lat-ter nations began their modern growth. Some developing nations are blessedwith abundant supplies of petroleum, minerals, and raw materials for whichworld demand is growing; most less developed countries, however—especiallyin Asia, where more than half of the world’s population resides—are poorlyendowed with natural resources. Moreover, in parts of Africa, where naturalresources are more plentiful, and geologists anticipate that there is far more


yet to be discovered, heavy investments of capital are needed to exploit them,which until very recently has been strongly inhibited by domestic conflict andperhaps Western attitudes. A new wave of investments from China and other“nontraditional investors” has begun to change the picture, though critics areraising concerns about the process.

The difference in skilled human resource endowments is even more pro-nounced. The ability of a country to exploit its natural resources and to initiateand sustain long-term economic growth is dependent on, among other things,the ingenuity and the managerial and technical skills of its people and its accessto critical market and product information at minimal cost.36 The populations oftoday’s low-income developing nations are often less educated, less informed,less experienced, and less skilled than their counterparts were in the early daysof economic growth in the West. Paul Romer argues that today’s developing na-tions “are poor because their citizens do not have access to the ideas that are usedin industrial nations to generate economic value.”37 For Romer, the technologygap between rich and poor nations can be divided into two components, a phys-ical object gap, involving factories, roads, and modern machinery, and anidea gap, including knowledge about marketing, distribution, inventory control,transactions processing, and worker motivation. This idea gap, and whatThomas Homer-Dixon calls the ingenuity gap (the ability to apply innovativeideas to solve practical social and technical problems), between rich and poor na-tions lies at the core of the development divide. No such human resource gapsexisted for the now developed countries on the eve of their industrialization.

Relative Levels of Per Capita Income and GDP

The people living in low-income countries have, on average, a lower level ofreal per capita income than their developed-country counterparts had in thenineteenth century. First of all, nearly 40% of the population of developingcountries is attempting to subsist at bare minimum levels. Obviously, the aver-age standard of living in, say, early-nineteenth-century England was nothingto envy or boast about, but it was not as economically debilitating or precari-ous as it is today for a large fraction of people in the 40 or so least developedcountries, the people now often referred to as the “bottom billion.”

Second, at the beginning of their modern growth era, today’s developednations were economically in advance of the rest of the world. They couldtherefore take advantage of their relatively strong financial position to widenthe income gaps between themselves and less fortunate countries in a long pe-riod of income divergence. By contrast, today’s developing countries begantheir 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 climaticzones. It has been observed that the economically most successful countriesare located in the temperate zone. Although social inequality and institutionalfactors are widely believed to be of greater importance, the dichotomy is morethan coincidence. Colonialists apparently created unhelpful “extractive” insti-tutions where they found it uncomfortable to settle. But also, the extremes of


heat and humidity in most poor countries contribute to deteriorating soilquality and the rapid depreciation of many natural goods. They also con-tribute to the low productivity of certain crops, the weakened regenerativegrowth of forests, and the poor health of animals. Extremes of heat and hu-midity not only cause discomfort to workers but can also weaken their health,reduce their desire to engage in strenuous physical work, and generally lowertheir levels of productivity and efficiency. As you will see in Chapter 8,malaria and other serious parasitic diseases are often concentrated in tropicalareas. There is evidence that tropical geography does pose significant prob-lems for economic development and that special attention in developmentassistance must be given to these problems, such as a concerted internationaleffort to develop a malaria vaccine.38

Population Size, Distribution, and Growth

In Chapter 6, we will examine in detail some of the development problemsand issues associated with rapid population growth. At this point, it is suffi-cient to note that population size, density, and growth constitute another im-portant difference between less developed and developed countries. Beforeand during their early growth years, Western nations experienced a very slowrise in population growth. As industrialization proceeded, population growthrates increased primarily as a result of falling death rates but also because ofslowly rising birth rates. However, at no time did European and North Ameri-can countries have natural population growth rates in excess of 2% per an-num, and they generally averaged much less.

By contrast, the populations of many developing countries have been in-creasing at annual rates in excess of 2.5% in recent decades, and some are stillrising that fast today. Moreover, the concentration of these large and growingpopulations in a few areas means that many developing countries have con-siderably higher person-to-land ratios than the European countries did intheir early growth years. Finally, in terms of comparative absolute size, withthe exception of the former Soviet Union, no country that embarked on a long-term period of economic growth approached the present-day population sizeof India, Egypt, Pakistan, Indonesia, Nigeria, or Brazil. Nor were their rates ofnatural increase anything like that of present-day Kenya, the Philippines,Bangladesh, Malawi, or Guatemala. In fact, many observers doubt whetherthe Industrial Revolution and the high long-term growth rates of contempo-rary developed countries could have been achieved or proceeded so fast andwith so few setbacks and disturbances, especially for the very poor, had theirpopulations been expanding so rapidly.

The Historical Role of International Migration

In the nineteenth and early twentieth centuries, a major outlet for excess ruralpopulations was international migration, which was both widespread andlarge-scale. More than 60 million people migrated to the Americas between 1850and 1914, a time when world population averaged less than a quarter of its cur-rent levels. In countries such as Italy, Germany, and Ireland, periods of famineor pressure on the land often combined with limited economic opportunities in


urban industry to push unskilled rural workers toward the labor-scarce nationsof North America and Australia. In Brinley Thomas’s famous description, the“three outstanding contributions of European labor to the American economy—1,187,000 Irish and 919,000 Germans between 1847 and 1855, 418,000 Scandina-vians and 1,045,000 Germans between 1880 and 1885, and 1,754,000 Italians be-tween 1898 and 1907—had the character of evacuations.”39

Whereas the main thrust of international emigration up to the First WorldWar was both distant and permanent, the period since the Second World Warwitnessed a resurgence of international migration within Europe itself, whichis essentially over short distances and to a large degree temporary. However,the economic forces giving rise to this migration are basically the same; thatis, during the 1950s and especially the 1960s, surplus rural workers fromsouthern Italy, Greece, and Turkey flocked into areas of labor shortages, mostnotably western Germany and Switzerland. Similar trends have been ob-served following the expansion of the European Union. The fact that thislater migration from regions of surplus labor in southern and southeasternEurope was initially of both a permanent and a nonpermanent nature pro-vided a valuable dual benefit to the relatively poor areas from which theseunskilled workers migrated. The home governments were relieved of thecosts of providing for people who in all probability would remain unem-ployed, and because a large percentage of the workers’ earnings were senthome, these governments received a valuable and not insignificant source offoreign exchange.40

In view of the foregoing discussion, you might reasonably ask why thelarge numbers of impoverished peoples in Africa, Asia, and Latin America donot follow the example of workers from southeastern Europe and seek tempo-rary or permanent jobs in areas of labor shortage. Historically, at least in thecase of Africa, migrant labor both within and between countries was rathercommon and did provide some relief for locally depressed areas. Until recently,considerable benefits accrued and numerous potential problems were avoidedby the fact that thousands of unskilled laborers in Burkina Faso were able tofind temporary work in neighboring Côte d’Ivoire. The same is true for Egyp-tians, Pakistanis, and Indians in Kuwait and Saudi Arabia; Tunisians, Moroc-cans, and Algerians in southern Europe; Colombians in Venezuela; andHaitians in the Dominican Republic. The fact remains, however, that there isvery little scope for reducing the pressures of growing populations in devel-oping countries today through massive international emigration. The reasonsfor this relate not so much to a lack of local knowledge about opportunities inother countries as to the combined effects of distance and, more important, thevery restrictive nature of immigration laws in modern developed countries.

Despite these restrictions, well over 50 million people from the developingworld have managed to migrate to the developed world since 1960. The pace ofmigration from developing to developed countries—particularly to the UnitedStates, Canada, and Australia—has picked up since the mid-1980s to between 2and 3 million people per year. And the numbers of undocumented or illegalmigrants have increased dramatically since 1980. Some people in recipient in-dustrialized nations feel that these migrants are taking jobs away from poor,unskilled citizen workers. Moreover, illegal migrants and their families are of-ten believed to be taking unfair advantage of free local health, educational, and


social services, causing upward pressure on local taxes to support these serv-ices. As a result, major debates are now under way in both the United Statesand Europe regarding the treatment of illegal migrants. Many citizens want se-vere restrictions on the number of immigrants that are permitted to enter or re-side in developed countries. Others call for legislation to bar illegal workersand their families from the generous benefits that states and localities offer totheir citizens. The defeat of limited immigration reform in the United States in2007 reinforced the concern that the safety valve of international migration willnot be as open as it has historically been for the vast numbers of contemporaryunskilled workers from the developing world.41 The anti-immigration lawpassed in Arizona in 2010 reinforced the deterrent effect of the Mexico-U.S.border fence and also led many legal immigrants to feel vulnerable. In Europe,anti-immigrant parties have scored major gains, as in the Netherlands andSweden in 2010.

The irony of international migration today, however, is not merely thatthis traditional outlet for surplus people has effectively been closed off butthat many of the people who migrate from poor to richer lands are the veryones that developing countries can least afford to lose: the highly educatedand skilled. Since the great majority of these migrants move on a permanentbasis, this perverse brain drain not only represents a loss of valuable humanresources but could also prove to be a serious constraint on the future eco-nomic progress of developing nations. For example, between 1960 and 1990,more than a million high-level professional and technical workers from thedeveloping countries migrated to the United States, Canada, and the UnitedKingdom. By the late 1980s, Africa had lost nearly one-third of its skilledworkers, with up to 60,000 middle and high-level managers migrating to Eu-rope and North America between 1985 and 1990. Sudan, for example, lost17% of its doctors and dentists, 20% of its university teachers, 30% of its engi-neers, and 45% of its surveyors. The Philippines lost 12% of its professionalworkers to the United States, and 60% of Ghanaian doctors came to practiceabroad.42 In the early 2000s, India has been concerned that it may be unableto meet its burgeoning requirements for information technology workers inits growing high-tech enclaves if emigration to the United States, Canada,and the United Kingdom continued at its current pace.43 Globally, remit-tances from illegal and legal migrants have been topping $100 million annu-ally in this century and approached $200 billion in 2006.44 Migration, when itis permitted, reduces poverty for migrants and their families, and most of thepoverty-reducing benefits of migration for those remaining in the origincountries come through remittances.45 This is an extremely important re-source (see Chapter 14).

Paradoxically, a potential benefit is that the mere possibility of skilled emi-gration may encourage many more workers to acquire information technol-ogy or other skills than are ultimately able to leave, leading to a net increase inlabor force skills. At least in theory, the result could actually be a “braingain.”46 The fundamental point remains, however, that the possibility of inter-national migration of unskilled workers on a scale proportional to that of thenineteenth and early twentieth centuries no longer exists to provide an equiv-alent safety valve for the contemporary populations of Africa, Asia, and LatinAmerica.


Brain drain The emigrationof highly educated andskilled professionals and technicians from the develop-ing countries to the devel-oped world.

The Growth Stimulus of International Trade

International free trade has been called the “engine of growth” that propelledthe development of today’s economically advanced nations during the nine-teenth and early twentieth centuries. Rapidly expanding export marketsprovided an additional stimulus to growing local demands that led to the es-tablishment of large-scale manufacturing industries. Together with a rela-tively stable political structure and flexible social institutions, these increasedexport earnings enabled the developing countries of the nineteenth century toborrow funds in the international capital market at very low interest rates.This capital accumulation in turn stimulated further production, made in-creased imports possible, and led to a more diversified industrial structure. Inthe nineteenth century, European and North American countries were able toparticipate in this dynamic growth of international exchange largely on thebasis of relatively free trade, free capital movements, and the unfettered inter-national migration of unskilled surplus labor.

In the twentieth century, the situation for many developing countries wasvery different. With the exception of a few very successful Asian countries, thenon-oil-exporting (and even some oil-exporting) developing countries facedformidable difficulties in trying to generate rapid economic growth on thebasis of world trade. For decades after the First World War, many develop-ing countries experienced a deteriorating trade position. Their exports ex-panded, but usually not as fast as the exports of developed nations. Theirterms of trade (the price they receive for their exports relative to the pricethey have to pay for imports) declined over several decades. Export volumetherefore had to grow faster just to earn the same amount of foreign cur-rency as in previous years. Moreover, it is unclear whether the commodityprice boom of the early twenty-first century, fueled by the spectaculargrowth in China, can be maintained.

Where developing countries are successful at becoming lower-cost produc-ers of competitive products with the developed countries (e.g., textiles, cloth-ing, shoes, some light manufactures), the latter have often resorted to variousforms of tariff and nontariff barriers to trade, including “voluntary” importquotas, excessive sanitary requirements, intellectual property claims, an-tidumping “investigations,” and special licensing arrangements. But in recentyears an increasing number of developing countries, particularly China andothers in East and Southeast Asia, have benefitted from expanded manufac-tures exports to developed countries. We will discuss the economics of inter-national trade and finance in the development context in detail in Part Three.

Basic Scientific and Technological Research and Development Capabilities

Basic scientific research and technological development have played a crucialrole in the modern economic growth experience of contemporary developedcountries. Their high rates of growth have been sustained by the interplay be-tween mass applications of many new technological innovations based on arapid advancement in the stock of scientific knowledge and further additionsto that stock of knowledge made possible by growing surplus wealth. And


Free trade Trade in whichgoods can be imported andexported without any barri-ers in the forms of tariffs, quo-tas, or other restrictions.

Terms of trade The ratio of a country’s average exportprice to its average importprice.

even today, the process of scientific and technological advance in all itsstages, from basic research to product development, is heavily concentratedin the rich nations, despite the emergence of China and India as destinationsfor research and development (R&D) activities of multinational corpora-tions. Moreover, research funds are spent on solving the economic and tech-nological problems of concern to rich countries in accordance with their owneconomic priorities and resource endowments. Rich countries are interestedmainly in the development of sophisticated products, large markets, andtechnologically advanced production methods using large inputs of capitaland high levels of skills and management while economizing on their rela-tively scarce supplies of labor and raw materials. The poor countries, by con-trast, are much more interested in simple products, simple designs, saving ofcapital, use of abundant labor, and production for smaller markets. But theyhave neither the financial resources nor the scientific and technologicalknow-how to undertake the kind of R&D that would be in their best long-term economic interests.47

In the important area of scientific and technological research, low-incomedeveloping nations in particular are in an extremely disadvantageous positionvis-à-vis the developed nations. In contrast, when the latter countries wereembarking on their early growth process, they were scientifically and techno-logically greatly in advance of the rest of the world. They could consequentlyfocus on staying ahead by designing and developing new technology at a pacedictated by their long-term economic growth requirements.

Efficacy of Domestic Institutions

Another difference between most developing countries and most developedcountries at the time of their early stages of economic development lies in the ef-ficacy of domestic economic, political, and social institutions. By the time of theirearly industrialization, many developed countries, notably the United Kingdom,the United States, and Canada, had economic rules in place that provided rela-tively broad access to opportunity for individuals with entrepreneurial drive. Ear-lier in the chapter, we noted that high inequality and poor institutions facilitatingextraction rather than providing incentives for productivity were often estab-lished by colonial powers. Today such extraction may be carried out by powerfullocal interests as well as foreign ones. But it is very difficult to change institutionsrapidly. As Douglass North stresses, even if the formal rules “may be changedovernight, the informal rules usually change only ever so gradually.”48 We willreturn to the question of economic institutions later in the chapter.

The developed countries also typically enjoyed relatively stronger politicalstability and more flexible social institutions with broader access to mobility.States typically emerged more organically over a longer period of time in thedeveloped regions, and consolidation as nation-states generally occurred be-fore the industrial era. In contrast, particularly in Africa, national boundarieswere more arbitrarily dictated by colonial powers. The “failed state,” andstates in danger of becoming so, is a phenomenon of the postcolonial period,with roots in imperial and colonial practices. Although many developing na-tions have roots in ancient civilizations, a long hiatus often existed betweenautonomous regimes.


Research and development(R&D) Scientific investiga-tion with a view toward improving the existing qual-ity of human life, products,profits, factors of production,or knowledge.

2.6 Are Living Standards of Developing andDeveloped Nations Converging?

At the dawn of the industrial era, average real living standards in the richestcountries were no more than three times as great as those of the poorest. To-day, the ratio approaches 100 to 1. So as noted by Lant Pritchett, there is nodoubt that today’s developed countries have enjoyed far higher rates of eco-nomic growth averaged over two centuries than today’s developing countries,a process known as divergence. Theories of economic growth are discussed inChapter 3. But in comparing development performance among developingnations and between developed and developing countries, it is appropriate toconsider whether, with strenuous economic development efforts being madethroughout the developing world, living standards of developing and devel-oped nations are exhibiting convergence.

If the growth experience of developing and developed countries were sim-ilar, there are two important reasons to expect that developing countrieswould be “catching up” by growing faster on average than developed coun-tries. The first reason is due to technology transfer. Today’s developing coun-tries do not have to “reinvent the wheel”; for example, they do not have to usevacuum tubes before they can use semiconductors. Even if royalties must bepaid, it is cheaper to replicate technology than to undertake original R&D,partly because one does not have to pay for mistakes and dead ends along theway. This should enable developing countries to “leapfrog” over some of theearlier stages of technological development, moving immediately to high-productivity techniques of production. As a result, they should be able togrow much faster than today’s developed countries are growing now or wereable to grow in the past, when they had to invent the technology as they wentalong and proceed step by step through the historical stages of innovation.(This is known as an “advantage of backwardness,” a term coined by eco-nomic historian Alexander Gerschenkron.). In fact, if we confine our attentionto cases of successful development, the later a country begins its modern eco-nomic growth, the shorter the time needed to double output per worker. Forexample, Britain doubled its output per person in the first 60 years of its in-dustrial development, and the United States did so in 45 years. South Koreaonce doubled per capita output in less than 12 years and China has done so inless than nine.

The second reason to expect convergence if conditions are similar is based onfactor accumulation. Today’s developed countries have high levels of physicaland human capital; in a production function analysis, this would explain theirhigh levels of output per person. But in traditional neoclassical analysis, the mar-ginal product of capital and the profitability of investments would be lower indeveloped countries where capital intensity is higher, provided that the law ofdiminishing returns applies. That is, the impact of additional capital on outputwould be expected to be smaller in a developed country that already has a lot ofcapital in relation to the size of its workforce than in a developing country wherecapital is scarce. As a result, we would expect higher investment rates in devel-oping countries, either through domestic sources or through attracting foreigninvestment (see Chapter 14). With higher investment rates, capital would grow


Divergence A tendency forper capita income (or output)to grow faster in higher-income countries than inlower-income countries sothat the income gap widensacross countries over time(as was seen in the two cen-turies after industrializationbegan).

Convergence The tendencyfor per capita income (or out-put) to grow faster in lower-income countries than inhigher-income countries sothat lower-income countriesare “catching up” over time.When countries are hypothe-sized to converge not in allcases but other things beingequal (particularly savingsrates, labor force growth, andproduction technologies),then the term conditional con-vergence is used.

more quickly in developing countries until approximately equal levels of capitaland (other things being equal) output per worker were achieved.49

Given one or both of these conditions, technology transfer and more rapidcapital accumulation, incomes would tend toward convergence in the longrun as the faster-growing developing countries would be catching up with theslower-growing developed countries. Even if incomes did not eventually turnout to be identical, they would at least tend to be equalized conditional on (i.e.,after also taking account of any systematic differences in) key variables suchas population growth rates and savings rates (this argument is formalized inthe neoclassical growth model examined in Chapter 3). Given the huge differ-ences in capital and technology across countries, if growth conditions are sim-ilar, we should see tendencies for convergence in the data.

Whether there is now convergence in the world economy depends on twolevels of how the question is framed: whether across average country incomesor across individuals (considering the world as if it were one country); andwhether focusing on relative gaps or absolute gaps.

Relative Country Convergence The most widely used approach is simply toexamine whether poorer countries are growing faster than richer countries. Aslong as this is happening, poor countries would be on a path to eventually“catch up” to the income levels of rich countries. In the meantime the relativegap in incomes would be shrinking, as the income of richer countries wouldbecome a smaller multiple of income of poorer countries (or looked at from theother perspective, incomes of poor countries would become an increasinglylarge fraction of income of rich countries). This can be seen on a country-by-country basis. Although China’s average income was just 3% of that of the UnitedStates in 1980, it was estimated to have reached 14% of U.S. income by 2007. Butin the same period, the income of the Dem. Rep. of Congo fell from about 5% ofU.S. levels to just 1%. But globally, evidence for relative convergence is weak atbest, even for the most recent decades.

Figure 2.8a illustrates the typical findings of this literature. On the x-axis,income data are plotted from the initial year, in this case 1980; while on the y-axis,the average growth rate of real per capita income is plotted, in this case, overthe subsequent 27 years to 2007. If there were unconditional convergence,there would be a tendency for the points plotted to show a clear negative rela-tionship, with the initially lower-income countries growing faster. But as seenin Figure 2.8a there is no apparent tendency toward convergence across coun-tries. In fact, even in this recent period about 60% of countries grew moreslowly than the United States. Looking just at the developing countries, as inFigure 2.8b, it is clear that divergence is occurring: middle-income countriesare growing faster than low-income countries, so there is a growing gapamong developing countries. Many nations, especially among the 49 leastdeveloped countries, remain in relative stagnation. Poor developing countrieshave not been catching up as a group.50

In Figure 2.8c, growth of high-income OECD countries is examined sepa-rately for 1950–2007. The picture here is one of convergence, and we need tointerpret it carefully. One explanation is that all of these countries have similarfeatures, including a relatively early start at modern economic growth. Thismakes the countries more able to borrow technology from each other, as well as


trade with and invest in each other’s economies. We might conclude that if de-veloping countries closely followed the institutions and policies of these OECDeconomies, they might converge as well. However, as noted earlier, there aremany institutional and other differences between low- and high-incomeeconomies today, some of which may be very difficult to change; we explorethese further in the next section. Moreover, a poor country cannot force a richcountry to lower its trade barriers. In any case, one must draw conclusions fromthe results with great caution because of selection bias. That is, among today’srich countries, some were relatively rich in the past and some were relativelypoor; in order for them all to be rich countries today, the poor countries had tohave grown faster than the rich ones, simply as a matter of logic. Confining at-tention just to the rich countries thus commits the statistical error of selection


15.00

12.00

9.00

3.00U.S.

= 1.97

Number below U.S. = 93Number above U.S. = 63

5,000 15,000 25,0000 35,000

6.00

0.00

–3.00

–6.00

(a) Per capita growth 1980–2007 for 157 countries (b) Per capita growth 1980–2007 for 86 developing countries

Real income per capita, 1980 Real income per capita, 1980

Real income per capita, 1950

Ave

rage

rea

l per

cap

ita

grow

th (

%)

4.50

4.00

3.50

3.00

2.50

1.50

U.S.= 2.11

2,000 6,000 10,000 14,0000

1.00

0.50

0.00

(c) Per capita growth 1950–2007 for 22 OECD countries

Ave

rage

rea

l per

cap

ita

grow

th (

%)

8.00

6.00

4.00

0.00

U.S.= 1.97

2,000 6,000 10,000 14,0000 18,000

–2.00

–4.00

–6.00

Ave

rage

rea

l per

cap

ita

grow

th (

%) Number below U.S. = 55

Number above U.S. = 31

KHM

BGD

LAO

BTN

ETH

MLINPL

SOM

BDI

TCD

MOZBFA

VNM

IND

MWI

RWA

LKA

GIN

SLE

ZAR

NER

BEN

PAK

TZAAFG

CAF

MDG

HTI

MRT

LSOUGA

AGO

SDN

TGO

KENSEN

IDNEGY

GHA

CMR

LBR

HNDZMB

ZWE

THA

BOL

PHLCOGNGA

PNGSLV

MAR

PER

CIVNIC

COL

PRY

ECU

DOM

GTM

SYR

TUN

JOR

MYS

JAM

LBN

KOR

TUR

DZA MEX

PAN

TWN

CHL

ZAFCRI

BRA

URYARG

PRT

TTO

VEN

HKG

GRC

SGP

ESP

ISR

AUT

BEL

CANDNK

FRA

ISL

IRL

ITA

LUX

NLD

NOR

PRT

SWE

CHE

TUR

GBR

USAAUS

FIN

JPN

NZL

ESP

Source: Data from Center for International Comparisons, University of Pennsylvania, accessed at http://pwt.econ.upenn.edu/php_site/pwt63/pwt63_form.php.

FIGURE 2.8 Relative Country Convergence: World, Developing Countries, and OECD

http://pwt.econ.upenn.edu/php_site/pwt63/pwt63_form.php



25,000

20,000

1990

Income growth,1990–2003

2003

15,000

10,000

56%

24%

196%5,000

0

Per

cap

ita

GD

P, 2

003

(PP

P)

SouthAsia

China High-incomeOECD countries

Source: From Human Development Report, 2005, p. 37. Reprinted with permission from theUnited Nations Development Programme.

FIGURE 2.9 Growth Convergence versus Absolute Income Convergence

bias.51 Nevertheless, the strong evidence for convergence among the OECDcountries, together with the failure to find compelling evidence for longer-termconvergence for the world as a whole, particularly divergence for the least de-veloped countries, is likely one reflection of the difference in growth conditionsbetween now developed and developing countries.

Absolute Country Convergence With the recent rapid growth in China,and the acceleration of growth in South Asia as well, these regions are currentlyon a path of relative country convergence. For example, in the 1990–2003 pe-riod, while income grew 24% in high-income OECD countries, it grew 56% inSouth Asia and 196% in China. But due to their relatively low starting incomelevels, despite higher growth, income gains were still smaller in absoluteamount than in the OECD, as illustrated in Figure 2.9. That is, even when theaverage income of a developing country is becoming a larger fraction of de-veloped country average incomes, the difference in incomes can still continueto widen for some time before they finally begin to shrink. A process of ab-solute country convergence is a stronger standard than (and appears onlywith a lag after) a process of relative country convergence.52

Population-Weighted Relative Country Convergence The high growthrate in China and India is particularly important because more than one-third

of the world’s people live in these two countries. This approach frames thequestion so as to weight the importance of a country’s per capita incomegrowth rate proportionately to the size of its population. A typical study ofthis type is depicted in Figure 2.10a–d. Instead of points representing the datafor each country, bubble sizes are used to depict the relative size of countries’populations. To get a sense of how the acceleration of growth in China and In-dia, along with a few other countries, have changed the picture, the data arebroken up into four time periods. Figures 2.10a and 2.10b reflect that therewas relative per capita divergence from 1950 through 1976, but Figure 2.10d re-flects relative per capita convergence since 1989 (and less unambiguously butplausibly from 1977 to 1989 as well—see Figure 2.10c). Although it is true thatconditions have remained stagnant or even deteriorated in many of the least


0.1

6 7 8 9 105 11–0.1

0.0

Per

Cap

ita

Gro

wth

Rat

e, 1

950–

1963 0.1

6 7 8 9 105 11–0.1

0.0

Per

Cap

ita

Gro

wth

Rat

e, 1

976–

1989

0.1

6 7 8 9 105 11–0.1

0.0

Per

Cap

ita

Gro

wth

Rat

e, 1

963–

1976 0.1

6 7 8 9 105 11–0.1

0.0

Per

Cap

ita

Gro

wth

Rat

e, 1

989–

2003

(c) Country size, initial income, and economic growth, 1976–1989, bubble size proportional to population in 1976

ln (income per capita, 1976)

(a) Country size, initial income, and economic growth, 1950-1963, bubble size proportional to population in 1950


(b) Country size, initial income, and economic growth, 1963–1976, bubble size proportional to population in 1963


(d) Country size, initial income, and economic growth, 1989–2003, bubble size proportional to population in 1989


China

India

Japan

USA

Fed. USSR

China

India

Japan

USA

Fed. USSR

China

India

Japan

USA

Fed. USSR

China

India

Japan

USA

Fed. USSR

Source: Steven Brakmana and Charles van Marrewijk, “It’s a big world after all: On the economic impact of location and dis-tance,” Cambridge Journal of Regions, Economy and Society 1 (2008): 411–437. Reprinted by permission of Oxford University Press.

FIGURE 2.10 Country Size, Initial Income Level, and Economic Growth

developed countries, because of their smaller population sizes with the popu-lation-weighted approach this divergence effect is more than compensated forby growth in countries with large populations. Note that all such trends maybe subject to change. For example the population growth rates of the 49 leastdeveloped countries and other low-income countries is much higher thanthose of the middle- and upper-income countries; so their population-weightsare increasing over time. African countries may see a furtherance of their re-cent trend to faster growth magnifying the new trend to global convergence;or they and other developing regions could see a growth slowdown, and theglobal economy could return to a period of divergence. These trends will bewatched closely.

World-as-One-Country Convergence A final—and very different—approachto the study of convergence is to think of the world as if it were one country. Inthe first such study, Branko Milonovic stitched together household data setsfrom around the world and concluded that global inequality rose significantlyin the period 1988 to 1993.53 Studies of this kind are difficult to carry out. Themost important difference from population-weighted country convergence isthat a world-as-one-country convergence study can take into account changesin inequality within countries as well as between them. In particular, thewidening gulf between incomes in rural and urban China had a major effecton the finding of global divergence using this method. But most scholars andpolicymakers frame development as a process that occurs on the nationallevel, and country convergence studies remain the standard.

2.7 Long-Run Causes of Comparative Development

What explains the extreme variations in development achievement to date amongdeveloping and developed countries? The next two chapters examine theoriesof economic growth and development processes and policy challenges; herewe present a schematic framework for appreciating the major long-run causes ofcomparative development54 that have been argued in some of the most influen-tial recent research literature.55 (Bear in mind that research on this importantsubject is still at a relatively early stage; scholars have legitimate disagreementsabout emphasis and substance, and new findings are being reported regularly.)

First, in the very long run, few economists doubt that physical geography,including climate, has had an important impact on economic history. Geographywas once truly exogenous, even if human activity can now alter it, for better orworse. But the economic role played by geography, such as tropical climate,today is less clear. Some research suggests that when other factors, notablyinequality and institutions, are taken into account, physical geography addslittle to our understanding of current development levels. However, some evi-dence is mixed. For example, there is some evidence of an independent impactof malaria and indications that in some circumstances, landlocked status maybe an impediment to economic growth; indeed, a direct link is argued by someeconomists,56 so this possible effect is reflected in Arrow 1 connecting geogra-phy to income and human development on the left side of Figure 2.11.


Economic institutions, which play an important role in comparative devel-opment, are defined by Nobel laureate Douglass North as the “rules of thegame” of economic life. As such, institutions provide the underpinning of amarket economy by establishing the rules of property rights and contractenforcement; improving coordination;57 restricting coercive, fraudulent, and anti-competitive behavior—providing access to opportunities for the broad popula-tion; constraining the power of elites; and managing conflict more generally.Moreover, institutions include social insurance (which also serves to legitimizemarket competition) and the provision of predictable macroeconomic stability.58


Economic Institutions“Humanly devised” con-straints that shape interac-tions (or “rules of the game”)in an economy, including for-mal rules embodied in consti-tutions, laws, contracts, andmarket regulations, plus in-formal rules reflected innorms of behavior and con-duct, values, customs, andgenerally accepted ways ofdoing things.

Physical geography(including climate)

Precolonial institutions

Type of colonial regime

Inequality

Well-functioning markets

Income and humandevelopment

Human capital

Public goods quality

Effective civilsociety

Postcolonialinstitutional

quality

Precolonial labor abundances, productionstructure, and potentialcomparative advantage

Evolution and timing of European

development

Local features affectingtypes of colonies

established (e.g., potentialsettler costs such as mortality)

21 2220

11

1914

13

1

2

3

46

8

9

5 7

12

1615 17 18

10

FIGURE 2.11 Schematic Representation of Leading Theories of Comparative Development

Countries with higher incomes can afford better institutions, so it is challengingto identify the impact of institutions on income. But recently, development econ-omists have made influential contributions toward achieving this research goal.

As noted earlier, most developing countries were once colonies. Geogra-phy affected the types of colonies established (Arrow 2), with one of the nowbest known geographic features being settler mortality rates, whose impact 59

was examined in work by Daron Acemoglu, Simon Johnson, and James Robin-son. In this argument, when potential settlers faced higher mortality rates (orperhaps other high costs), they more often ruled at arm’s length and avoidedlarge, long-term settlement. Their interest could be summarized as “steal fastand get out” or “get locals to steal for you.” Unfavorable institutions weretherefore established, favoring extraction over production incentives. Butwhere mortality was low, populations were not dense, and exploitation ofresources required substantial efforts by colonists, institutions broadly en-couraging investments, notably constraints on executives and protection fromexpropriation, were established (sometimes as a result of agitation from set-tlers who had the bargaining power to demand better treatment). These effectsare reflected by Arrow 3. Acemoglu and colleagues present evidence that afteraccounting for institutional differences, geographic variables (e.g., closenessto the equator) have little influence on incomes today.60 Their statistical esti-mates imply large effects of institutions on per capita income.

The influence of geography on precolonial institutions is captured by Arrow 4.Precolonial institutions also mattered to the extent that they had influence onthe type of colonial regime established. This possible effect is reflected by Arrow 5.

Precolonial comparative advantage and evolving labor abundances in the Amer-icas and its relation to the institutions established have been examined in thepioneering work of Stanley Engerman and Kenneth Sokoloff.61 When climatewas suitable for a production structure featuring plantation agriculture (partic-ularly sugarcane in the early history), slavery and other types of mass exploita-tion of indigenous labor were introduced. In other areas, when indigenouspeoples survived contact in sufficient numbers and mineral wealth wasavailable, vast land grants that included claims to labor were established (bySpain). Although resulting from different comparative advantage (sugarcaneand minerals), economic and political inequality was and remained high in allof these economies (even among freemen), which had long-lasting negative ef-fects on development. These links are reflected by Arrow 6 and Arrow 7. Earlyinequities were perpetuated with limits on the nonelite population’s access toland, education, finance, property protection, and voting rights, as well aslabor markets. This inhibited opportunities to take advantage of industrializa-tion when they emerged in the nineteenth century, a period when broad par-ticipation in commercial activity had high social returns.

The contrast with North American potential production structure is striking.Its comparative (emerging) advantage in grain lacked at the time the scaleeconomies of tropical agriculture and of mineral extraction seen elsewhere inthe Americas. Scarce labor with abundant land inhibited the concentration ofpower (despite efforts of colonizers to do so). The need to attract more settlersand encourage them to engage the colonial economy led to the evolution of moreegalitarian institutions in the North American colonies. North Americans en-joyed greater egalitarianism in access to all of the factors so restricted elsewhere.


This environment facilitated broad-based innovation, entrepreneurship, andinvestment and gave the United States and Canada a decisive advantage de-spite their starting out as much poorer societies, which they used to economi-cally surpass societies whose populations were mostly illiterate, disenfran-chised, and lacking collateral.62 (We will examine further aspects of Engermanand Sokoloff’s analysis shortly.)

When local populations were larger and denser and social organization wasmore advanced, it was easier for colonists to take over existing social structuresto gain tribute. In such cases, resulting institutional arrangements would tendto favor mechanisms of extraction of existing wealth over the creation of newwealth, often leading to declines in the relative fortunes of these regions. This ispointed up by Acemoglu, Johnson, and Robinson, whose influential researchon this historical “reversal of fortune”63 is also reflected by Arrow 5. These au-thors stress that if geography were fundamental to development prospects, themost prosperous areas prior to colonization should continue to be relativelyprosperous today. But the most prosperous formerly colonized areas todaytend to have been least prosperous in the past. Past population density andpast urbanization, which are positively correlated with past income, arenegatively correlated with current income, these authors show.64 There is evi-dence that Europeans set up more extractive institutions (ones designed to ex-tract more surplus from colonized populations) in prosperous areas and thatthese institutions have often persisted to the contemporary period.65

Geography undoubtedly influenced early economic history in Europe.66 Thisis reflected by Arrow 8 leading to Evolution and timing of European development.Early development in Europe gave it advantages over most other regions, ad-vantages that were used to colonize much of the world. But the types of colonialregimes implemented varied considerably, depending on conditions prevailingat the time of colonization both in the different parts of the world colonized andwithin the colonizer’s home country. The timing of European development influ-enced the type of colonial regime established, reflected by Arrow 9. For example,it has been argued that for various reasons, earlier colonization generally in-volved more plunder and less active production than later colonization, al-though both occurred at the expense of the indigenous populations.67

Precolonial comparative advantage may also have interacted with the timingof European development in influencing institutions in that settlers in later-colonized temperate zones arrived with more knowledge and more advancedtechnology. In particular, Europeans brought better agricultural techniques tothe later-settled areas such as North America. As noted by David Fieldingand Sebastian Torres, by the eighteenth century, population growth in Europeand technical change had produced a large supply of people with temperate-zone agricultural skills in products such as wheat and dairy. They were ableto gain higher incomes using these skills in temperate colonies and formercolonies (the so-called neo-Europes).68 Thus precolonial (potential) compara-tive advantage again mattered. This link is reflected in the flow throughArrow 6 and Arrow 7. The possible role played by specific skills also pointsup the importance of human capital investments for development, reflectedby Arrow 14.

Thus the types of colonial regimes established, while always designed forthe benefit of the colonizers, were influenced by local and European supply



and demand factors. The type of regime had enormous influence on postcolo-nial institutional quality, reflected by Arrow 10. For example, the depravedrule of Belgium’s King Leopold II over the Congo (today’s Democratic Re-public of Congo) was arguably an ultimate cause of the oppressive Mobutureign after independence. Of course, not all influences of colonialism werenecessarily bad. Along with enslavement, subjugation, exploitation, loss ofcultural heritage, and repression, colonists also brought modern scientificmethods in fields such as medicine and agriculture. Note that this can be noapologia for colonialism, because these advances could have been gainedwithout the societies’ becoming colonized, as in Japan. Still, there is some ev-idence that countries and territories that spent a longer time as colonies (atleast in the case of islands) have higher incomes than those that experiencedshorter colonial periods, with this effect greater for entities colonized later(perhaps because earlier colonial activity had more pernicious effects thanlater ones). Even so, there are strong caveats to this finding.69

Besides creating specific institutions, European colonization created or re-inforced differing degrees of inequality (often correlated with ethnicity), ulti-mately leading to diminished prospects for growth and development, notablyin Latin America and the Caribbean. This is reflected by Arrow 11. High in-equality often emerged as a result of slavery in regions where crops could be“efficiently” produced on slave plantations. They also emerged where a large,settled indigenous population could be coerced into labor. Such histories hadlong-term consequences, particularly in Latin America. As Engerman andSokoloff have argued, the degree of inequality itself can shape the evolution ofinstitutions as well as specific policies. Where inequality was extreme, therewas less investment in human capital (Arrow 13) and other public goods(Arrow 16) and, as reflected by the bidirectional Arrow 12, a tendency of lessmovement toward democratic institutions (which could also have facilitatedmovement to other constructive institutions).70

Thus extreme inequality is likely to be a long-term factor in explainingcomparative development. This is raised in the striking historical contrast be-tween the states of North America and the states of Central and South America.There was greater egalitarianism in North America, though the inhuman treat-ment of Native Americans and of slaves in the southern colonies reflects thefact that this is not because the English settlers were inherently “nicer masters”than the Spanish. Still, the North American experience contrasts strongly withthe extreme inequality of Central and South America and the Caribbean.71

Engerman and Sokoloff argued that high inequality in Latin America led tolow human capital investments, again in contrast to North America;72 thismechanism is again reflected by Arrow 13. Elites in Latin America then loos-ened their control only when their returns to increased immigration, and thusto creating more attractive conditions for immigrants, were high. Besides cre-ating specific institutions, then, European colonization created or reinforceddifferent degrees of inequality, often correlated with ethnicity. This history hadlong-term consequences, particularly in Latin America. In the direction frominequality to postcolonial institutional quality, Arrow 12 reflects what hasbeen termed the social conflict theory of institutions.

Cultural factors may also matter in influencing the degree of emphasis oneducation, postcolonial institutional quality, and the effectiveness of civil


society, though the precise roles of culture are not clearly established in rela-tion to the economic factors surveyed in this section and so are not includedin the diagram. In addition, institutional quality affects the amount and qualityof investments in education and health, via the mediating impact of inequal-ity. In countries with higher levels of education, institutions tend to be moredemocratic, with more constraints on elites. The causality between educationand institutions could run in either direction, or both could be caused jointly bystill other factors. Some scholars argue that some countries with bad institutions

BOX 2.2 FINDINGS Instruments to Test Theories of Comparative Development: Inequality

In a 2007 study, William Easterly used cross-countrydata to examine the Engerman and Sokoloff hy-

pothesis. His research confirmed that “agricultural en-dowments predict inequality and inequality predictsdevelopment.” Specifically, Easterly finds that in-equality negatively affects per capita income; it alsonegatively affects institutional quality and schooling,which are “mechanisms by which higher inequalitylowers per capita income.” That the negative relation-ship between income and inequality is present in thedata is clear—but how do development economiststake the step to prediction and assignment of causalitywhen measurement error and many confounding fac-tors are present, such as the possible link that under-development itself is a cause of inequality?

Sometimes development economists run fieldexperiments—but obviously, we cannot randomlyassign countries various levels of inequality to seewhat happens! In the many cases when field experi-ments are impossible, development economists fre-quently try to understand causality by searching foran instrumental variable (or “instrument”); in fact,many researchers in development economics invest alot of their time in this search. This is a topic coveredin classes in econometrics. But the basic idea is that toidentify the effect of a potential causal variable c(such as inequality) on a development outcome vari-able d (such as income or educational attainment),the hunt is on for an elusive instrumental variable ethat affects d only through e’s effect on c. So an instru-ment has no independent effect on the outcome

variable of interest. You saw earlier that Acemoglu,Johnson, and Robinson used settler mortality as an in-strument for early institutions. Easterly uses “theabundance of land suitable for growing wheat relativeto that suitable for growing sugarcane” as an instru-ment for inequality. Using this strategy, Easterly con-cludes that high inequality of the Engerman andSokoloff variety is independently “a large and statisti-cally significant barrier to prosperity, good quality in-stitutions, and high schooling.” Schooling and insti-tutional quality are precisely the mechanisms proposedby Engerman and Sokoloff by which higher inequalityleads to lower incomes. Like a leprechaun, a good in-strumental variable is hard to get hold of but whencaught can give the researcher’s equivalent of a pot ofgold. Though active debate on inequality and devel-opment continues, the interplay between the carefulinstitutional analysis and economic history scholar-ship of Engerman and Sokoloff and the study ofcausality with larger data sets as used by Easterly givesa window into how the field of development econom-ics continues to make progress.

Sources: William Easterly, “Inequality does cause underde-velopment,” Journal of Development Economics 84 (2007):755–776; Joshua D. Angrist and Jorn-Steffen Pischke,Mostly Harmless Econometrics: An Empiricist’s Compan-ion (Princeton, N.J.: Princeton University Press, 2008). For an important critique of the use and interpretation ofinstrumental variables (and also of randomization) in development economics research see Angus Deaton, “In-struments, randomization, and learning about develop-ment,” Journal of Economic Literature, 48, No. 2 (2010):424–455.


run by dictators have implemented good policies, including educational in-vestments, and subsequently, after reaping the benefits in terms of growth,those countries have changed their institutions.73 They argue that humancapital is at least as fundamental a source of long-run development as institu-tions. In the diagram, this would suggest adding an arrow from human capitalback to postcolonial institutional quality; this is intuitively plausible, al-though additional evidence for this link will be needed for it to become morefully established.74

For the relatively small number of developing countries never colonized,such as Thailand, type of colonial regime can be reinterpreted in the diagram asinstitutional quality at an early stage of development (or as cultural influ-ences not shown)—but note that the evidence for causality patterns is not asconvincing in these cases. However, the diversity of development experiencesof never-colonized countries caution us not to place complete emphasis on thechoices of colonizers; preexisting social capital may matter at least as much.75

Never-colonized countries also show a dramatic range in performance;Ethiopia and Afghanistan remain very poor, Thailand is in the lower-middlerange, Turkey is in the upper-middle range, and Japan is among the verywealthiest countries; China, starting among the poorest countries 30 yearsago, is now rapidly ascending the income tables. The quality of institutions(and inequality) undoubtedly mattered in noncolonized societies; it is justharder to conclude that institutions led to income rather than vice versa.

Clearly, human capital has a direct impact on income and on human devel-opment more broadly, as reflected by Arrow 14. The depth and breadth of ed-ucation in the population will help determine the effectiveness of governmentas a force for development, reflected by Arrow 15. This is due not only to a

BOX 2.3 FINDINGS Legacy of Colonial Land Tenure Systems

Substantial evidence on the importance of institu-tions is provided in a study of the impact of land

revenue institutions established by the British Raj inIndia conducted by Abhijit Banerjee and LakshmiIyer. Because areas where land revenue collection wastaken over by the British between 1820 and 1856 (butnot before or after) were much more likely to have anon-landlord system, the authors used being con-quered in this period as an instrument for having anon-landlord system. They also used other statisticaltests that showed the results were robust. They showthat historical differences in property rights institu-tions led to sustained differences in economic out-comes. The regions in which property rights to land

were given to landlords have had significantly loweragricultural investments and productivity in thepostindependence period than regions in whichproperty rights were given to cultivators. The authorsconclude that the divergence occurred because histor-ical differences in institutions led to different policychoices. Tellingly, the regions in which landlords re-ceived the proprietary rights also had significantlylower investments in health and education in thepostcolonial period.

Source: Abhijit Banerjee and Lakshmi Iyer, “History, insti-tutions, and economic performance: The legacy of colo-nial land tenure systems in India,” American Economic Re-view 95 (2005): 1190–1213.


better-qualified civil service but also to the understanding of citizens of poorgovernment performance and the knowledge of how to work for a betteroutcome and capacity to organize.76 Of course, education could also inde-pendently affect the organization and functioning of markets per se (arrowomitted), but the literature to date has primarily viewed the productive impactof human capital on market outcomes as a direct one, reflected by Arrow 14.These impacts are explored further in Chapter 8.

The type and quality of global integration (particularly trade) have beenstressed as a boon to long-run growth and development in many World Bankreports. Trade may be beneficial in that it provides various kinds of access totechnology.77 And some economists argue that greater openness to trade bene-ficially affects the subsequent evolution of institutions. On the other hand,critics argue that the wrong kind of integration or the failure to complementintegration with appropriate policies could be harmful to development. Infact, evidence suggests that once institutions are accounted for, trade itself ex-plains very little, so for simplicity, integration is left out of the diagram78.

Postcolonial institutional quality has a strong impact on the effectivenessof the private, public, and citizen (or civil society) sectors. Democratic gover-nance, rule of law, and constraints on elites will encourage more and betterquality public goods, reflected by Arrow 17. Better property rights protec-tions and contract enforcement for ordinary citizens and broad access to eco-nomic opportunities will spur private investments, reflected by Arrow 18.And institutions will affect the ability of civil society to organize and act ef-fectively as a force independent of state and market, reflected by Arrow 19.Clearly, the activities of the three sectors will each have an influence on pro-ductivity and incomes, and on human development more generally, as reflectedby Arrows 20, 21, and 22, respectively.79 These factors are explored further inChapter 11.

It is not yet entirely clear which economic institutions are most importantin facilitating development or the degree to which strength in one institutioncan compensate for weakness in another.80 Clearly, there are multiple pathsto economic development (see, for example, the case study of China at theend of Chapter 4). But a key finding of recent research is that forces that protectnarrow elites in ways that limit access of the broader population to opportunities foradvancement are major obstacles to successful economic development. If institutionsare highly resistant to attempts at reform, this helps clarify why development is sochallenging.

Nevertheless, in most countries with poor institutions, there is still muchthat can be done to improve human welfare and to encourage the develop-ment of better institutions. Indeed, economic institutions do change over time,even though political institutions such as voting rules sometimes change with-out altering the real distribution of power or without leading to genuine re-form of economic institutions. Although the evidence of the impact of democ-racy on growth in the short to medium term is not strong (see Chapter 11), inthe long run democratic governance and genuine development do go hand inhand, and the steady spread of more genuinely democratic institutions in thedeveloping world is a very encouraging sign.81 As Dani Rodrik has noted,“Participatory and decentralized political systems are the most effective oneswe have for processing and aggregating local knowledge. We can think of


democracy as a meta-institution for building other good institutions.”82 Inaddition, development strategies that lead to greater human capital, improveaccess to new technologies, produce better-quality public goods, improvemarket functioning, address deep-rooted problems of poverty, improve accessto finance, prevent environmental degradation, and foster a vibrant civil soci-ety all promote development.

2.8 Concluding Observations

History matters. We have learned that conditions prevailing in a developingnation when European colonialism began had a large impact on the subse-quent history of inequality and institutional development in the nation inways that either facilitated or thwarted participation in modern economicgrowth after the Industrial Revolution arrived in the late eighteenth century.And poor institutions have generally proved very resistant to efforts at re-form. But the new perspectives do not imply that development is impossible!Instead, they serve to clarify the nature of the great challenges facing manydeveloping nations. The phenomenon of underdevelopment is best viewed inboth a national and an international context. Problems of poverty, inequality,low productivity, population growth, unemployment, primary-product exportdependence, and international vulnerability have both domestic and globalorigins and potential solutions.

Although the picture of life in much of the developing world paintedthroughout our review may seem bleak, it should be remembered that mostdeveloping nations have succeeded in raising incomes significantly. Andmost developing countries have had notable successes in lowering infantmortality, improving educational access, and narrowing gender disparities.83

By pursuing appropriate economic and social policies both at home andabroad and with effective assistance from developed nations, poor countriesdo indeed have the means to realize their development aspirations. Parts Twoand Three will discuss the ways in which these hopes and objectives can beattained.

But concomitant and complementary human capital, technological, social,and institutional changes must take place if long-term economic growth is tobe realized. Such transformations must occur not only within individual de-veloping countries but in the international economy as well. In other words,unless there is some major structural, attitudinal, and institutional reform inthe world economy, one that accommodates the rising aspirations andrewards the outstanding performances of individual developing nations, par-ticularly the least developed countries, internal economic and social transfor-mation within the developing world may be insufficient.84

There may be some “advantages of backwardness” in development, suchas the ability to use existing, proven technologies rather than having to rein-vent the wheel and even leapfrogging over older technology standards thatdeveloped countries have become locked into. One can also learn valuable les-sons from economic policies that have been tried in various countries aroundthe world. These advantages are especially helpful if an economy can success-fully manage to get sustained modern economic growth under way, as, for


example, in Taiwan, South Korea, China, and a few other cases. However, formost 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 domore than simply emulate policies followed by today’s developed countrieswhile they were in their early stages of development.

Despite the obvious diversity of these countries, most developing nationsshare a set of common and well-defined goals. These include a reduction inpoverty, inequality, and unemployment; the provision of basic education, health,housing, and food to every citizen; the broadening of economic and social op-portunities; and the forging of a cohesive nation-state. Related to these eco-nomic, social, and political goals are the common problems shared in varyingdegrees by most developing countries: chronic absolute poverty, high levels ofunemployment and underemployment, wide disparities in the distribution ofincome, low levels of agricultural productivity, sizable imbalances betweenurban and rural levels of living and economic opportunities, discontent on thepart of the segments of the population not benefiting from economic growth,serious and worsening environmental decay, antiquated and inappropriateeducational and health systems, and substantial dependence on foreign tech-nologies, institutions, and value systems. It is therefore also possible and usefulto talk about the similarities of critical development problems and to analyzethese problems in a broad developing world perspective.

Economic and social development will often be impossible without cor-responding changes in the social, political, legal, and economic institutionsof a nation, such as land tenure systems, forms of governance, educationalstructures, labor market relationships, property rights, contract law, civicfreedoms, the distribution and control of physical and financial assets, lawsof taxation and inheritance, and provision of credit. But fundamentally,every developing country confronts its own constraints on feasible policyoptions and other special circumstances, and each will have to find its ownpath to effective economic and social institutions. Examples offered by de-veloped countries’ earlier experiences and current institutions, as well asthose of other countries in the developing world, provide important insightsfor policy formulation. Economic institutions of Europe and North Americaare in most cases closer to optimal than those of many developing countries,although all countries have room for further institutional innovations. Butdeveloping countries cannot assume without additional investigation thatpatterning their policies and institutions on those of developed countrieswill always provide the fastest route to successful economic development.

In sum, this chapter has pointed up some important similarities acrossmost developing countries, in contrast to contemporary and historical charac-teristics of developed countries. It has also shown that developing nations arevery heterogeneous, differing in many critical respects. Looming large in ex-plaining the root causes in the levels of incomes and human development arethe higher inequality, weaker institutions, and lower levels of education andhealth. But even starting with these weaknesses, there is much that develop-ing countries can undertake through appropriate policy strategies to speedeconomic and social progress.

Indeed, the experience of the past 50 years shows that while developmentis not inevitable and poverty traps are quite real, it is possible to escape frompoverty and initiate sustainable development. Before examining specific poli-cies for doing so, in the next chapters we will set the context further by exam-ining important theories and models of development and underdevelopment.In Chapter 3, we examine classic theories that remain influential and useful inmany respects, and in Chapter 4, we consider models of coordination failuresand other constraints and conceptual strategies for escaping from them.


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Case Study 2

Comparative Economic Development:Pakistan and Bangladesh

In 1971, Bangladesh declared independence fromPakistan. Previously, Bangladesh had been

known as East Pakistan, and what is now Pakistanwas called West Pakistan. Though more than 1,000miles apart, both were part of a single country, witheconomic and political power concentrated in WestPakistan. Because they were once the same country,Pakistan and Bangladesh make for an interestingexercise in comparative development, in that thetwo shared a common national policy in the earlyyears, even if they did not benefit from it equally.Pakistan and Bangladesh had about the same popu-lation in 2009 (181 million in Pakistan, 162 millionin Bangladesh). They are located in the South Asianregion, are both overwhelmingly Islamic, and wereboth once part of the colonial British Raj of India.Bangladesh was for a long time the global symbolof suffering, from the Bengal famine of 1943 to the1971 Concert for Bangladesh featuring George Har-rison, Eric Clapton, and Bob Dylan to the horrors ofthe 1974 postindependence famine.

But analysts such as William Easterly have de-clared Pakistan a leading example of “growth with-out development,” with low social indicators for itsincome and growth. Meanwhile, Bangladesh, thoughstill very poor and afflicted with many of the socialproblems found in Pakistan, has been transformingitself from a symbol of famine to a symbol of hope.

When Bangladesh gained its independence, itwas viewed as lagging insurmountably behindPakistan. Indeed, its poor social and economic de-velopment in comparison with West Pakistan was amajor impetus behind the independence movement,which complained that Bangladesh was beingdrained of tax revenues to benefit West Pakistan.The war for independence itself and the economic

destruction deliberately visited on Bangladesh’sindustry left an even wider gap, while abuses leftserious psychological scars, and a terrible faminefollowed. One U.S. statesman undiplomaticallydubbed Bangladesh the “international basket case.”Others somewhat more tactfully called it the “testcase for development”—meaning that if develop-ment could happen in Bangladesh, it could happenanywhere. Four decades later, Bangladesh is con-founding the skeptics; it actually looks like it maypass this test.

Not that Bangladesh has dramatically outper-formed Pakistan. Bangladesh continues to have se-rious development problems, even compared withcountries such as neighboring India. It is rather thatBangladesh has made relatively better progress thanPakistan, particularly on social development indi-cators, despite its handicaps at independence andexpectations that it would continue to fare badly.Bangladesh started at a much lower level of socialdevelopment and still has lower income. But inachieving more progress on social development,Bangladesh now also has the conditions for acceler-ating economic progress in the coming years, par-ticularly if continuing problems of governance canbe overcome.

GrowthPPP-adjusted incomes remain higher in Pakistan($2,590 in 2008) than in Bangladesh ($1,450), butPPP estimation is difficult and other recent esti-mates show a more narrowed gap. In Pakistan, percapita income grew at about 2.2% per year in thehalf-century from 1950 to 2000. As a result, percapita income tripled. But the growth rate declineddecade by decade, even as it rose in other countries,

95

including India. The decline in the growth rate maybe a result of the poor performance on social indica-tors. From 2003 to 2007, growth in Pakistan acceler-ated, and the gap between these countries widenedsomewhat; it remains to be seen whether Pakistan’shigher growth performance will be sustainable (infact, growth fell back to about 3% in 2008 and 2009after the global economic crisis). Indications arethat Pakistan has experienced much less pro-poor growth in comparison with Bangladesh. InBangladesh, farm yields are up dramatically, andthe economic growth rate now tops 4%. When theinternational textiles quota system of the MultifiberArrangement ended in 2005, Bangladesh garmentfactory jobs—a major source of job creation—wereat ongoing risk. The speed and astuteness of the re-sponse has been a major test of the resiliency of theBangladeshi economy. So far, the outcome is betterthan many predicted; and the impact of the globalcrisis was comparatively modest.

PovertyThe World Bank currently estimates that 23% of thepopulation lives below the $1.25 per-day povertyline in Pakistan, compared with 49% in Bangladesh.But poverty progress has been impressive in theonetime “basket case” of Bangladesh, and incomesof the poorest people are rising. Many factors havecontributed to the relatively rapid decrease in ex-treme poverty in the country, including the earlyand quickly disseminating green revolution, theimpressive role of indigenous nongovernmental or-ganizations (NGOs) fighting poverty in rural areas,opportunities for women’s employment in exportindustries, and remittances from relatives workingabroad. Bangladesh remains a significantly poorercountry, with 80% of Bangladeshis living on lessthan $2 per day, while the figure is a still very high59% for Pakistan. But the two countries receivedmuch more similar scores on the UNDP’s new mul-tidimensional poverty index (discussed in Chapter5). Pakistan was only slightly less poor, ranking No.70 with a score of 0.275, while Bangladesh rankedNo. 73 with a score of 0.291, when aspects of povertybroader than income are considered.

Education and LiteracyIn both countries, the adult literacy rate is still a low54%, but literacy has been growing more quickly in

Bangladesh and with greater gender equity. In Pak-istan, female literacy is just 40%, and in someregions of the country, particularly Baluchistan andthe Northwest Frontier, it is far lower. Female liter-acy is not high in Bangladesh either. One recent es-timate puts it at just 50%. Thirty times as manypublic education dollars are spent per pupil for uni-versity education as for primary school education.Primary school expenditures are extremely unequal,with the lion’s share of funds going to schools thatmore often train the few students who will eventu-ally go on to universities. Many teachers are hiredfor political reasons rather than professional com-petence, and “teacher truancy” is a serious prob-lem. Easterly and other analysts such as IshratHusain believe that Pakistan’s poor performanceon education and literacy may result from the incentives of the elite to keep the poor from gain-ing too much education. Looking to the future,Bangladesh has the clear edge in combined schoolenrollments, 52% to 39%; this will translate to higherliteracy rates in a few years. In Bangladesh just 30years ago, attending school was an unimaginableluxury for most of the poor. Whereas only half ofstudents completed primary school in 1990, morethan two-thirds do today. And Bangladesh todayactually has a female-to-male primary and second-ary enrollment ratio 1.07 to 1, while in Pakistan it isjust 0.83. As we look ahead, then, we can also ex-pect much greater parity in male and female liter-acy levels in Bangladesh. The nonformal educationprograms of NGOs such as BRAC provide a majorcontribution to this progress (see the case study inChapter 11). But both countries are now makingreal progress.

HealthLife expectancy in both countries is 66; but in 1970life expectancy was 54 in Pakistan and only 44 inBangladesh. Today life expectancies are almostidentical. Since 1990, the prevalence of child malnu-trition in Bangladesh has fallen from two-thirds toless than half. Nutrition in Bangladesh benefitedfrom a successful green revolution. But child mal-nutrition remains lower in Pakistan, at about 38%.Under-five mortality in Bangladesh has fallen, dra-matically. On the eve of independence in 1970, theunder-five mortality rate in Bangladesh was 239 per1,000 live births; the rate in Pakistan was 180 per

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1,000. By 2008, both countries had made strongprogress, but their positions were reversed, withthe Bangladesh under-five mortality rate at 54 per1,000, but that in Pakistan at 89 per 1,000; that is,under-5 mortality is 65% higher in Pakistan.

Human Development IndexIn the early years of the century, Bangladesh haddramatically passed Pakistan on the Human Devel-opment Index, achieving middle human develop-ment status before Pakistan did. On the 2009 index,Pakistan had retaken the lead, and it has experi-enced a recent surge in growth partly due to aid as-sociated with the war on terror. It is not clear if thisincreased growth is sustainable. Pakistan rankednumber 141 with Bangladesh ranked just behind itat 146. But Bangladesh was 9 places higher thanpredicted by its lower income, and Pakistan 9places lower than predicted by its income. This re-flects the better health and education performancefor Bangladesh for its income level. But Pakistan’ssocial backwardness for its income level is not fullycaptured by these statistics, because the HDI reliesonly on simple measures of education and health. Itdoes not consider other elements of social progressor key indicators such as fertility, reduced genderdisparities, lessened social exclusion, or reductionof extreme poverty.

PopulationBangladesh has made much greater progress thanPakistan in reducing fertility. Shortly after independ-ence in 1971, both countries had an extremely highlevel of over 6 births per woman. In Bangladesh, fer-tility fell to 2.3 by 2008. But for Pakistan, fertility hasfallen only to 4.0 (WDI data). These changes reflectboth cause and effect. Fertility tends to fall as socialand economic progress increases. Women perceivebetter economic opportunities and less need to relyon having several children for security. But withlower fertility, more can be invested in each child inhealth and education, both by families and by gov-ernments and NGOs. Thus the productivity of thenext generation is higher. A virtuous cycle can takehold as the country passes through its demographictransition (see Chapter 6). Looked at differently,given the negative relationship between populationgrowth and income per capita growth (see Chapter6), continuing high fertility augurs relatively poorly

for Pakistan as we look ahead (though fertility isfalling in Pakistan as well). Rather than simplyconverging, Bangladesh is actually on a trend to pullahead of Pakistan as they follow divergent paths,with greater human capital investment in Bangladesh.The early and strong emphasis on an effective familyplanning strategy was an important factor in theprogress of Bangladesh.

Understanding the DivergenceWhat explains the unexpectedly poor performanceof Pakistan in social development and recent growtheven in relation to Bangladesh, and what might bedone to improve it? The most commonly cited exam-ples of countries exhibiting “growth without devel-opment” are Middle Eastern oil-exporting economiesof the Persian Gulf states. Elites contest control ofnatural resources, an enclave economy developswith relatively few strong links to other sectors of theeconomy, and social spending is crowded out by na-tional defense expenditures—both to ward off exter-nal attack, as exemplified by Iraq’s brief conquest ofKuwait in 1990, and at least implicitly also to controlthe domestic population. In contrast, Pakistan hasminimal oil reserves, has to import about four-fifthsof its crude oil requirements, and may have to beginimporting natural gas.

It is important to note that it is not true that therehas been no social progress at all in Pakistan. Rather,the concern is that less progress has been made thanin many other countries, even in many that grewmuch more slowly or experienced negative growth.Why has there been such slow progress?

GeographyTo the degree that geography constrains develop-ment success, Bangladesh would seem to be at aconsiderable disadvantage. Tropical countries suchas Bangladesh have done more poorly around theworld, other things being equal. Pakistan, thoughfacing some geographic disadvantages, wouldseem to hold the edge here. Moreover, except forthe city-state of Singapore, Bangladesh is the mostdensely populated country in the world. For per-spective, the Netherlands is famous for its crowd-ing and has 398 people per square kilometer. ButBangladesh is nearly three times as densely popu-lated, with 1,127 people per square kilometer.Bangladesh has more than half the population of

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the United States, squeezed into an area less thanthe size of Wisconsin. (A partial countervailing fac-tor is the greater ease of connecting people and eco-nomic activity, facilitating the benefits of the divi-sion of labor, for example.)

William Easterly and Ross Levine propose thatcountries with a multitude of social divisions, ethnicgroups, and languages tend to have lower social de-velopment and growth rates, although the result islargely muted if the regime is democratic. There isno iron rule here; Mauritius is very diverse but hasexperienced successful development; India is di-verse but has done better than either Pakistan orBangladesh. Bangladesh is quite homogeneous; asmuch as 98% of the population is considered ethnicBangla (Bengali) and speaks the Bangla language.Pakistan has a very high level of ethnic and languagediversity. Even its name derives from a compound ofPunjab, Afghanistan, Kashmir, and Baluchistan. Theofficial language is Urdu, but it is spoken as a firstlanguage by only 7% of the population (the largestlanguage group is Punjabi, at 48%). The failure toprovide a fair allocation of revenues and servicesand resolve other issues for one of the largest ethnicgroups, the Bangla, led to the division of Bangladeshfrom Pakistan in the first place. Easterly concludesthat part of the cause of Pakistan’s “fractionalism liesin ethnolinguistic fractionalization” and argues that“Pakistan is the poster child for the hypothesis that asociety polarized by class, gender, and ethnic groupdoes poorly at providing public services.”

Gender EquityAccording to the Social Watch Report, 2004,Bangladesh scores in the “above average” (second-highest) group in overall gender equity, whilePakistan in the fourth and lowest category (“coun-tries in worst situation”). In Pakistan, as of 2008,only 60% as many women as men were literate—afigure that is little higher in the 15–24 age group.This is a key age group to consider because it rep-resents those old enough to have had a full chanceto gain literacy in school yet not be weighted downby past practices, which tend to perpetuate illiter-acy in older groups. In Bangladesh, a significantlyhigher ratio of female to male literacy of 83% wasfound in 2008. As already seen, today in Bangladesh,more girls than boys are enrolled in primary edu-cation, while in Pakistan, the enrollment level of girls

is less than three-quarters that of boys. But bothcountries have a male-to-female ratio of 1.05, an in-dicator of gender inequality (higher mortality ofgirls). The availability of opportunities for workoutside the home, notably in garment factories, hasprobably increased the autonomy of women. Im-proved safety is the most urgent priority: Condi-tions are harsh by Western standards, and manyworkers are paid below the official minimum wage.At the same time, incomes are still several timeshigher than alternatives such as domestic work,and these factory jobs have offered a way out forhundreds of thousands of formerly impoverishedBangladeshi women.

AidPakistan has received a great deal of aid. Since in-dependence in 1947, it has been one of the top threeaid-earning countries, behind India and Egypt. Inthe aftermath of the terrorist attacks on the UnitedStates of September 11, 2001, Pakistan assumedgreat importance as a strategic ally of the UnitedStates in the struggle against terrorism. Sanctionswere lifted, and various forms of aid were greatlyincreased. Although this should be an opportunityfor Pakistan to spur development, and growth hasaccelerated since 2003 apparently in part as a result,history suggests caution. The country was a majorCold War ally of the United States, but the poorseemed to derive little benefit from that association.Bangladesh has also benefited considerably fromaid. Effectiveness in the use of aid may be impor-tant, particularly the active involvement of effectiveNGOs in Bangladesh. The major indigenous NGOsand similar groups in Bangladesh, including largegroups such as BRAC (see the case study inChapter 11) and Grameen (discussed in the casestudy in Chapter 15), placed a central emphasis onempowerment of women, and the impacts are gen-erally viewed as having been very strong.

Governance and the Role of the MilitaryThe military has always played a prominent role inPakistan, and from 1999 to 2008, the nation was gov-erned by a military ruler, General Pervez Musharraf.Pakistan’s long-standing rivalry with India andterritorial dispute with it over Kashmir since 1947have diverted resources as well as government at-tention from social priorities while reinforcing the

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influence of the military. The conflicts in northwestPakistan and neighboring Afghanistan also em-phasize a military role. In contrast, although themilitary was very active in Bangladeshi politics fornearly two decades after independence in 1971, themilitary’s withdrawal from politics and govern-ment after 1990 is probably a factor in the country’ssubsequent progress. Military involvement as thebacker of a caretaker government in 2007 and 2008Bangladesh in 2007 and 2008 was widely viewed asrelatively benign, and the country returned toelected civilian rule in 2009. Neither country hasbeen particularly democratic, transparent, or freefrom corruption. In fact, in its 2009 Corruption Per-ceptions Index, Transparency International hasgiven an equally poor ranking—a tie at number139 out of 180 countries ranked—to Pakistan andBangladesh.

Civil SocietyGiven the weak government and the private sector,one must look to the third sector, variously referredto as the nongovernmental, nonprofit, or citizensector. Here the difference is dramatic. Bangladeshhas one of the most vibrant NGO sectors in theworld, the most highly developed in Asia. This willbe explored in more detail in the case study inChapter 5, when different approaches of NGOs toan important area of poverty action, microfinanceprograms, will be explored, as well as in the casestudy of BRAC at the end of Chapter 11. If a largerNGO sector could be developed in Pakistan, per-haps led by the many educated Pakistanis living inthe United Kingdom, the United States, and Canada,it might play a similar catalyzing role.

Ishrat Husain proposes that Pakistan has experi-enced an “elitist growth model,” which he identi-fies as combining a powerful leader or successionof leaders operating without checks and balances,a bureaucratic class that unquestioningly imple-ments the wishes of the leader, and a passive andsubservient population. He argues that “failure ofgovernance and the consistent domination of polit-ical power and state apparatus by a narrowlybased elite seeking to advance private and familyinterests to the exclusion of the majority of the pop-ulation lies at the root of the problem.” Husainshows that Pakistan has exhibited these character-istics since independence and points out that “this

combination of strong autocratic leaders, a pliantbureaucracy, and a subservient population made itpossible for the benefits of growth to be unequallydistributed and concentrated.” He concludes that“the ruling elites found it convenient to perpetuatelow literacy rates. The lower the proportion of lit-erate people, the lower the probability that the rul-ing elite could be replaced.” One reason is thatwhile girls’ education is a boon for development asa whole, it is not necessarily in the economic andpolitical interests of some of the elites now in pow-erful positions, especially at the local or regionallevel. The dominance of large landowners overtenants in the social, political, and economicspheres is all too apparent in rural Pakistan. Witheducation, as some landlords and business opera-tors well know, workers, especially women, may fi-nally demand that laws in place to protect them beenforced. It is sometimes in the owners’ interest tosee that this does not happen.

The differences in social development inBangladesh and Pakistan are not as overwhelmingas would be found in a comparison with Sri Lanka,which has had favorable human development sta-tistics for its low income level despite enduring civilconflict, or even as dramatic as found between low-income states in India, such as the relatively highhuman development state of Kerala and the low-development state of Bihar. But Pakistan’s growthhas been higher than many countries that have mademuch greater social improvements and done muchbetter with available aid. The alternative interpreta-tion of Pakistan’s experience is that economicgrowth is after all possible even without high in-vestment in health and education. But the long-term trends are for slower growth in Pakistan andhigher growth in Bangladesh, making this interpre-tation simply untenable. As Easterly conjectured:

It may be that a certain degree of developmentand growth was attainable with a skilled manage-rial elite and unskilled workers, but over time thisstrategy ran into diminishing returns, as humancapital did not grow at the same rate as the otherfactors. This is consistent with the slowdown ingrowth from the mid-1980s to the present. . . .Agricultural growth may have also been possiblewith the landlord elite taking advantage of the im-mense potential of the irrigation network and thegreen revolution, using only unskilled agricultural

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laborers. But agricultural growth may also haverun into diminishing returns, as irrigated land andhuman capital did not grow at the same rate asother factors of production.

The development levels of these two countriesare not dramatically different. But this itself is thedramatic finding, given the wide disparity whenthe countries separated in 1971. ■

SourcesAlderman, Harold, and Marito Garcia. “Food security

and health security: Explaining the levels of nutritionin Pakistan.” World Bank Working Paper PRE 865.Washington, D.C.: World Bank, 1992.

Easterly, William. “The political economy of growth with-out development: A case study of Pakistan.” In InSearch of Prosperity: Analytic Narratives on EconomicGrowth, ed. Dani Rodrik. Princeton, N.J.: PrincetonUniversity Press, 2003.

Easterly, William, and Ross Levine. “Africa’s growthtragedy: Policies and ethnic divisions.” Quarterly Jour-nal of Economics 112 (1997): 1203–1250.

Heston, Alan, Robert Summers, and Bettina Aten. PennWorld Table, version 6.3, August 2009. http://pwt.econ.upenn.edu/php_site/pwt63/pwt63_form.php.

Husain, Ishrat. Pakistan: The Economy of an Elitist State.New York: Oxford University Press, 1999.

Hussain, Neelam. “Women and literacy development inPakistan.” Working paper.

Instituto del Tercer Mundo. Social Watch Report, 2004. Mon-tevideo, Uruguay: Instituto del Tercer Mundo, 2004.

Sen, Amartya. Development as Freedom. New York: Knopf,1999.

Smith, Stephen C. “The miracle of Bangladesh: From bas-ket case to case in point.” World Ark, May/June 2009,pp. 13–21.

Summers, Lawrence H. “Investing in all the people.”World Bank Working Paper PRE 905. WashingtonD.C.: World Bank, 1992.

UNICEF. State of the World’s Children, 2010 (New York:UNICEF, 2010).

United Nations, Human Development Report, various years.New York: Oxford University Press.

World Bank, World Development Indicators, various years.Washington, D.C.: World Bank.

World Bank. World Development Report, various years.New York: Oxford University Press.

Concepts for Review

Absolute povertyBrain drainCapital stockConvergenceCrude birth rateDependency burdenDepreciation (of the capital

stock)Diminishing marginal utilityDivergenceEconomic institutions

FractionalizationFree tradeGross domestic product (GDP)Gross national income (GNI)Human capitalHuman Development Index

(HDI)Imperfect marketIncomplete informationInfrastructureLeast developed countries

Low-income countries (LICs)Middle-income countriesNewly industrializing countries

(NICs)Purchasing power parity (PPP)Research and development

(R&D)Resource endowmentTerms of tradeValue addedWorld Bank




Questions for Discussion

1. For all of their diversity, many less developedcountries are linked by a range of common prob-lems. What are these problems? Which do youthink are the most important? Why?

2. Explain the distinction between low levels of liv-ing and low per capita incomes. Can low levels ofliving exist simultaneously with high levels of percapita income? Explain and give some examples.

3. Can you think of other common (not necessarilyuniversal but widespread) characteristics of lessdeveloped countries not mentioned in the text? Seeif you can list four or five and briefly justify them.

4. Do you think that there is a strong relationshipamong health, labor productivity, and income lev-els? Explain your answer.

5. What is meant by the statement that many devel-oping nations are subject to “dominance, depend-ence, and vulnerability” in their relations withrich nations? Can you give some examples?

6. Explain the many ways in which developingcountries may differ in their economic, social, andpolitical structures.

7. What are some additional strengths and weak-nesses of the Human Development Index as acomparative measure of human welfare? If youwere designing the HDI, what might you do dif-ferently, and why?

8. ”Social and institutional innovations are as impor-tant for economic growth as technological and

scientific inventions and innovations.” What ismeant by this statement? Explain your answer.

9. Why do many economists expect income conver-gence between developed and developing coun-tries, and what factors would you look to for anexplanation of why this has occurred for only alimited number of countries and in such a limiteddegree so far?

10. What are good economic institutions, why do somany developing countries lack them, and whatcan developing countries do to get them. Justifyyour answer.

11. Which measure shows more equality amongcountries around the world—GNI calculated atexchange rates or GNI calculated at purchasingpower parity? Explain.

12. ”South Asia has a lower income per capita thansub-Saharan Africa.” Comment on the validity ofthis statement.

13. What is the meaning of a “colonial legacy”? Dis-cuss any disadvantages and possible advantages.

14. State five characteristics of the developing world.Discuss diversity within the developing world onthese characteristics in relation to the developedworld.

15. Discuss the differences between the traditionalHDI in comparison to the “new” (NHDI) formula-tion. In what ways do you think either one is abetter measure of human development?

Notes and Further Reading

1. Alan Heston, Robert Summers, and Bettina Aten,Penn World Table, version 6.3, Center for Interna-tional Comparisons of Production, Income andPrices, University of Pennsylvania, August 2009,http://pwt.econ.upenn.edu/php_site/pwt63/pwt63_form.php. Data for 2007.

2. World Bank, World Development Indicators, 2010.(Washington, D.C.: World Bank, 2010), tab. 1.1. Datafor 2008. These real measures reflect purchasingpower parity (explained later in the chapter).

3. United Nations Development Program (UNDP),Human Development Report, 2005 (New York: Ox-ford University Press, 2005), p. 38. The global Ginicoefficient is reported at 0.67 (for details on thismeasure of inequality, see Chapter 5).

4. World Bank, World Development Indicators, 2010,various tables. Some of these contrasts are sum-marized in Table 2.3 of this text.

5. For more information on country classificationsystems and other key comparative data, go to the




World Bank Web site at http://www.worldbank.org/data, the OECD Web site at http://www.oecd.org/oecd, and the United Nations Develop-ment Program Web site at http://www.undp.org. See http://www.unohrlls.org/en/home/ andhttp://www.unohrlls.org/en/ldc/related/59/.Some least developed countries such as Equator-ial Guinea are on an “identified for graduation”list; but Equatorial Guinea does not meet “gradu-ation criteria” on human assets or economic vul-nerability.

6. Adjustments are made because otherwise the re-sulting PPP measure would essentially assumethat the relative prices prevailing in the UnitedStates (i.e., the numeraire currency) also prevailelsewhere (which means that the resulting totalincomes would not be “base-country invariant”;that is, they would differ if, for example, the con-versions were made to the U.K. pound sterling).Accounting for relative price differences recog-nizes the substitutions people make toward lower-priced goods in their market basket and thusgives a more accurate comparison of living stan-dards. For details on calculations of PPP incomes,see the 2011 International Comparison Program siteat http://siteresources.worldbank.org/ICPEXT/Resources/ICP_2011.html, the UN Statistics Divi-sion at http://unstats.un.org/unsd/methods/icp/ipc7_htm.htm, and the Penn World Table site athttp://pwt.econ.upenn.edu/aboutpwt2.html.These figures do provide a useful indicator of theability of a nation to buy goods and services indollars abroad, but they are misleading regardingthe ability to buy domestically.

There are also other limitations of GNI (andPPP) calculations as measures of economic per-formance and welfare. For example, GNI does nottake account of the depletion or degradation ofnatural resources; it assigns positive values to ex-penditures resulting from natural disasters (e.g.,earthquakes, hurricanes, floods), to polluting ac-tivities, and to the costs of environmental cleanups(see Chapter 10). It frequently ignores nonmone-tary transactions, household unpaid labor, andsubsistence consumption (see Chapter 9). Productsconsumed by people living in poverty and pricesthey pay for them differ from the nonpoor. Finally,GNI figures take no account of income distribu-tion (Chapter 5) or capabilities other than income.

7. In fact, Lant Pritchett argues persuasively, consid-ering available country data and the cost ofminimum nutrients, that $250 is a more realisticlower bound for per capita income. See LantPritchett, “Divergence, big time,” Journal of EconomicPerspectives 11, no. 3 (Summer) (1997): 3–17. Thelogarithms used in the traditional HDI income in-dex formula are common (base 10) logs ratherthan natural logs.

8. UNDP, Human Development Report, 1994 (New York:Oxford University Press, 1994).

9. All but the South Africa example are drawn fromHuman Development Report, 2006 (New York: OxfordUniversity Press, 2006. An earlier Human Develop-ment Report gave South Africa an overall ranking of0.666, with whites at 0.876 and blacks at 0.462.

10. The new UNDP measures can be found at http://hdr.undp.org.

11. It is possible that low income is supplemented bytapping into savings (broadly defined), whichwould reflect the unsustainable nature of such alow income.

12. There is still substitutability across the three com-ponents in the NHDI, but not perfect substitutabil-ity as in the HDI. Regarding the calculation in thelast equation of Box 2.1 recall that a geometricmean for the case of three variables is equivalentto the cube root of the product (by the propertiesof exponents). You can see how a geometric meanis used to build up the overall education indexfrom its two components in the fourth equationin Box 2.1. For an interesting critique of the use ofa geometric mean rather than a different func-tional form that also allows for imperfect substi-tutability see Martin Ravallion, “Troubling Trade-offs in the Human Development Index,” WorldBank Policy Research Working Paper No. 5484,2010.

13. See, for example, Jeffrey D. Sachs, The End ofPoverty: Economic Possibilities for Our Time (NewYork: Penguin, 2005).

14. Gunnar Myrdal, Asian Drama (New York: Pan-theon, 1968), app. 2.

15. Recent debates on the incidence of nationalpoverty traps and their causes is examined inChapter 4. Economic growth is of course anotherarea of wide variations in the developing world,

http://www.worldbank.org/data

http://www.worldbank.org/data

http://www.oecd.org/oecd

http://www.oecd.org/oecd

http://www.undp.org

http://www.undp.org

http://www.unohrlls.org/en/home/

http://www.unohrlls.org/en/ldc/related/59/

http://hdr.undp.org

http://hdr.undp.org

http://siteresources.worldbank.org/ICPEXT/Resources/ICP_2011.html

http://siteresources.worldbank.org/ICPEXT/Resources/ICP_2011.html

http://unstats.un.org/unsd/methods/icp/ipc7_htm

http://unstats.un.org/unsd/methods/icp/ipc7_htm

http://pwt.econ.upenn.edu/aboutpwt2.html

with historically unprecedented growth in EastAsia alongside chronic stagnation at least until re-cently in most of sub-Saharan Africa. Economicgrowth is a major subject of the next chapter.

16. For a discussion of the relative benefits and costsof country size, see Alberto Alesina and Enrico Spo-laore, “On the number and size of nations,” Quar-terly Journal of Economics 112 (1997): 1027–1056.

17. For an interesting look at this problem in the con-text of India, see Kaushik Basu, “Teacher truancyin India: The role of culture, norms and economicincentives,” January 2006, http://ssrn.com/abstract=956057. We return to this topic in Chapters 8and 11.

18. See Table 2.3, columns 3, 4, and 5. See also WorldBank, World Development Indicators, 2007, tabs. 2.14through 2.20, and World Health Organization,World Health Report, 2006, http://www.who.int/whr/2006/en/index.html.

19. This widely used benchmark is an updated valuefor the dollar-a-day level. The standard of $1.25 isincreasingly used for reasons described inChapter 5.

20. UNDP, Human Development Report, 2006, p. 269.

21. World Bank, World Development Indicators, 2007,tab. 2.7.

22. World Bank, Global Monitoring Report, 2007 (Wash-ington, D.C.: World Bank, 2007), tab. A.1. For recentevidence, please see Shaohua Chen and MartinRavallion, “The Developing World Is Poorer thanWe Thought, but No Less Successful AgainstPoverty,” (Policy Research Working Paper 4703,World Bank, August 2008).

23. Ibid. and pp. 40–41; World Bank, World Develop-ment Report, 2000/2001 (New York: Oxford Uni-versity Press, 2000); World Development Indicators,2007, tab. 2.1; Population Reference Bureau, 2006World Data Sheet, http://www.prb.org/pdf06/06WorldDataSheet.pdf. Some economists arguethat these figures understate poverty incidence,but the trend has been clearly favorable, at leastuntil 2006. Since then, the World Bank reports, sig-nificantly higher food prices and other conse-quences of the global economic crisis have slowedthe pace of poverty reduction substantially.

24. World Bank, World Development Indicators, 2010,tab. 2.1; Population Reference Bureau, 2009 World

Data Sheet, http://www.prb.org/pdf10/10WorldDataSheet.pdf. For the population projections, seeUnited Nations, Population Division, “WorldPopulation Prospects: The 2008 Revision,” June2009, http://www.un.org/esa/population/pub-lications/popnews/Newsltr_87.pdf.

25. Population Reference Bureau, 2010 World DataSheet.

26. See William Easterly and Ross Levine, “Africa’sgrowth tragedy: Policies and ethnic divisions,”Quarterly Journal of Economics 112 (1997): 1203–1250,and Alberto Alesina et al., “Fractionalization,”Journal of Economic Growth 8 (2003): 155–194.

27. For a discussion of these issues and the most care-ful attempt at generating the needed data, seeGillette Hall and Harry Anthony Patrinos, eds.,Indigenous Peoples, Poverty and Human Developmentin Latin America: 1994–2004 (New York: PalgraveMacmillan, 2006); Haeduck Lee, The Ethnic Dimen-sion of Poverty and Income Distribution in LatinAmerica (Washington, D.C.: World Bank, 1993);and Paul Collier, “The political economy of eth-nicity,” Annual World Bank Conference on Develop-ment Economics, 1998 (Washington, D.C.: WorldBank, 1999).

28. For a review of the complex statistical issues insorting out the possible impact of ethnic, reli-gious, and linguistic fractionalization, see Alesinaet al., “Fractionalization.” An earlier paper drawingsomewhat different conclusions using less com-prehensive measures is Easterly and Levine,“Africa’s growth tragedy.”

29. The United States, United Kingdom, Japan,Germany, France, Italy, and Canada formed theoriginal Group of Seven (G7) industrial coun-tries, considered the world’s leading economies,to meet annually to deliberate global economicpolicy; the group was later expanded to includeRussia as the Group of Eight (G8).

30. See David Landes, The Wealth and Poverty of Na-tions: Why Some Are So Rich and Some So Poor (NewYork: Norton, 1998); Jared Diamond, Guns, Germs,and Steel: The Fates of Human Societies (New York:Norton, 1997); John Luke Gallup, Jeffrey D. Sachs,and Andrew D. Mellinger, “Geography and eco-nomic development,” Annual World Bank Confer-ence on Development Economics, 1998 (Washington,


http://www.prb.org/pdf10/10WorldDataSheet.pdf


http://www.un.org/esa/population/publications/popnews/Newsltr_87.pdf

http://www.un.org/esa/population/publications/popnews/Newsltr_87.pdf

http://ssrn.com/abstract=956057

http://ssrn.com/abstract=956057

http://www.who.int/whr/2006/en/index.html

http://www.who.int/whr/2006/en/index.html




D.C.: World Bank, 1999), pp. 127–178; and PaulCollier, The Bottom Billion, Oxford: Oxford Univer-sity Press, 2007, who emphasizes the combinationof being landlocked with “bad neighbors.”

31. See, for example, Intergovernmental Panel on Cli-mate Change, “Fourth assessment report: Climatechange 2007,” http://www.mnp.nl/ipcc/pages_media/AR4-chapters.html. The IPCC was estab-lished by the World Meteorological Organization(WMO) and the United Nations Environment Pro-gram (UNEP) to “assess available scientific, tech-nical, and socioeconomic information relevant forthe understanding of climate change, its potentialimpacts, and options for adaptation and mitiga-tion.” The group won the Nobel Peace Prize in2007. For more details, see Chapter 10.

32. For a detailed analysis of the importance of infor-mation acquisition, its absence in many develop-ing countries, and the consequent role of govern-ments in promoting knowledge and informationin the context of limited markets, see World Bank,World Development Report, 1998/99: Knowledge forDevelopment (New York: Oxford University Press,1998), pp. 1–15.

33. These three factors are identified as critically im-portant in the research by Daron Acemoglu andJames A. Robinson; see their Economic Origins ofDictatorship and Democracy (New York: CambridgeUniversity Press, 2005). See also note 55.

34. See Kenneth L. Sokoloff and Stanley L. Engerman,“Factor endowments, institutions, and differentialpaths of growth among New World economies: Aview from economic historians of the UnitedStates,” in Stephen Haber, ed., How Latin AmericaFell Behind: Essays on the Economic Histories of Braziland Mexico (Stanford, Calif.: Stanford UniversityPress, 1997); see also additional works by theseauthors cited in note 55.

35. Having avoided formal colonization is no guar-antee of development success; Afghanistan andEthiopia are frequently cited examples. However,it should also be noted that although it was notsuccessfully colonized, Afghanistan was sub-jected to extensive indirect control with Britishand Russian invasions from the early nineteenthto the early twentieth century (and later by Sovietarmies with ongoing consequences), and Ethiopiawas subject to invasions and intrigue by Italy and

Britain. (Liberia, the other frequently cited exam-ple, was also subject to major influence from thedeveloped world.)

36. For an interesting and provocative analysis of thecritical role of “ideas” and “ingenuity” in long-term economic growth, see Paul M. Romer, “Ideagaps and object gaps in economic development,”Journal of Monetary Economics 32 (1993): 543–573,and Thomas Homer-Dixon, “The ingenuity gap:Can poor countries adapt to resource scarcity?”Population and Development Review 21 (1995):587–612.

37. Romer, “Idea gaps,” 543.

38. See, for example Gallup, Sachs, and Mellinger,“Geography and economic development,” pp.127–178; Desmond McCarthy, Holger Wolf, and YiWu, “The growth costs of malaria,” NBER Work-ing Paper No. W7541, February 2000; and JohnLuke Gallup and Jeffrey D. Sachs, “The economicburden of malaria,” Harvard University CIDWorking Paper No. 52, July 2000. See also p. 85.

39. Brinley Thomas, Migration and Economic Growth(London: Cambridge University Press, 1954), p. viii.

40. For an interesting contemporaneous descriptionof the process and implications of internationalmigration from the Mediterranean area to westernEurope, see W. R. Böhnung, “Some thoughts onemigration from the Mediterranean basin,“International Labour Review 14 (1975): 251–277.

41. For an analysis of this issue, see Douglas Massey,“The new immigration and ethnicity in the UnitedStates,” Population and Development Review 21(1995): 631–652.

42. UNDP, Human Development Report, 1992 (New York:Oxford University Press, 1992), p. 57.

43. On the emigration of Indian information technol-ogy workers, see “India’s plan to plug the braindrain,” Financial Times, April 24, 2000, p.17.

44. World Bank, “Migration and development briefs,”http://go.worldbank.org/R88ONI2MQ0.

45. For an excellent overview of these issues, seeUNDP, Human Development Report, 2009, http://hdr.undp.org/en.

46. For a discussion, see Simon Commander, MariKangasniemi, and L. Alan Winters, “The brain

http://www.mnp.nl/ipcc/pages_media/AR4-chapters.html

http://www.mnp.nl/ipcc/pages_media/AR4-chapters.html

http://go.worldbank.org/R88ONI2MQ0

http://hdr.undp.org/en

http://hdr.undp.org/en

drain: Curse or boon? A survey of the literature,”in Challenges to Globalization: Analyzing the Eco-nomics (Chicago: University of Chicago Press,2004), pp. 235–272. See also C. Simon Fan andOded Stark, “International migration and ‘edu-cated unemployment,’ “ Journal of DevelopmentEconomics 83 (2007): 76–87.

47. A theoretical contribution to the literature on his-torical growth and its relevance to contemporarydeveloping countries can be found in MarvinGoodfriend and John McDermott, “Early devel-opment,” American Economic Review 85 (1995):116–133. Goodfriend and McDermott argue thatlong-term economic development involves fourfundamental processes: the exploitation of in-creasing returns to specialization, the transitionfrom household to market production, knowledgeand human capital accumulation, and industrial-ization. With regard to developing countries, theyargue that “the continuing widespread use ofprimitive production processes alongside relativelymodern techniques is the most striking feature ofless-developed countries” (p. 129).

48. Douglass C. North, “Economic performancethrough time,” American Economic Review 84 (1994):359–368, and Douglass C. North, Institutions, Insti-tutional Change and Economic Performance (NewYork: Cambridge University Press, 1990). For aprovocative analysis of the historical links betweeneconomic development and political development,including democratization and the extension ofhuman and legal rights, drawing on economictheory and 500 years of the global historicalrecord, see Acemoglu and Robinson, EconomicOrigins of Dictatorship and Democracy.

49. In Chapters 3 and 4, we examine economic growthmore closely, including the contending viewsabout whether such diminishing returns apply toaggregate growth experience. For an appealinglyintuitive discussion of these two effects, see EliBerman, “Does factor-biased technologicalchange stifle international convergence? Evidencefrom manufacturing,” NBER Working Paper, rev.September 2000. Note, however, that other factorssuch as institutional quality may be at least as im-portant as capital per worker in explaining in-come per capita, as you will see later in this chap-ter and in Chapters 3 and 4. On the long-term

divergence between developed and developingnations, see Pritchett, “Divergence, big time.”

50. Note that earlier and longer periods tend to showmore divergence due to “divergence big time” ef-fect of inequalities growing since the start of theindustrial era. Note also that there is evidence ofconvergence taking place for the years 2001 to 2007(a shorter period than entertained in this literature,but an encouraging and intriguing short-termtrend that will bear watching closely); data areawaited to determine if this continued or even am-plified after the financial crisis. The sample criteriafor the diagrams in Figure 2.8 were as follows. Alldata are constructed from the Penn World Tableusing PPP values (which extended through 2007when the graphs were constructed in 2010). To beincluded a country had to have data available inthe PWT database for the sample period; by start-ing in 1980 a relatively small number of countrieshad to be omitted. For the world diagram sixcountries were excluded as 1980 base-period out-liers that had very high income in that year due toa temporary oil price increase (Brunei, Qatar, UAE,Libya, Saudi Arabia, and Kuwait). The criterion forinclusion as a developing country in the 1980 baseyear was classification as a low- or middle-incomecountry in the 1980 World Bank World DevelopmentReport; use of this early classification (in the baseyear of the study) avoided the bias of excludingcountries that had grown fast enough to becomehigh-income countries during this period. An im-plication of this criteria however is the exclusion ofcentrally planned and oil-exporting countries;these two groupings had separate classificationcategories in the 1980 WDR not based on incomelevel, and for consistency China is excluded fromthis group as a centrally planned economy. As it isonly one data point, this exclusion does not affectthe failure to find country convergence in this pe-riod. (But the finding of population weighted con-vergence since 1989 is substantially driven by therapid per capita income growth of China, whereChina is included; note that China is also includedin the world sample in Figure 2.8a). For the pur-pose of the OECD convergence diagram, the inclu-sion criteria was all original members plus Japan,Finland, Australia, and New Zealand, the fourcountries that joined after its founding but before



1973 (after which no new countries were admitteduntil Mexico in 1994), but with the exclusion ofWest Germany due to the statistical problem pre-sented by its 1990 unification with East Germany.

51. For a detailed discussion, see J. Bradford De Long,“Productivity growth, convergence, and welfare:Comment,” American Economic Review 78 (1988):1138–1154.

52. Figure from Human Development Report, 2005, ch. 1.For graphs showing relative versus absoluteincome convergence for China in relation to theUnited States, see Stephen C. Smith, www.gwu.edu/~iiep/G2/. (Such absolute inequality meas-ures can be used to address other kinds of ques-tions about convergence or divergence but this israrely done. For example it could be used in thesize distribution of income at national or even in-ternational scale; but the usual preferred propertyfor inequality measures is to make relative incomecomparisons. Details are discussed in Chapter 5.)

53. Branko Milanovic, “True world income distribu-tion, 1988 and 1993: First calculation based onhousehold surveys alone,” Economic Journal 112,(2002) 51–92.

54. We thank Daron Acemoglu, Shahe Emran, StanleyEngerman, and Karla Hoff for their helpful com-ments on this section. Not all of the causal linksdescribed here are supported by the same type ofevidence. Some are underpinned by widely (if notuniversally) accepted statistical (econometric) evi-dence. Other causal links emerge from historicalstudies. All links discussed are argued in the de-velopment economics literature to be underlyingfactors leading to divergent development out-comes. The discussion follows the numbering ofthe arrows in Figure 2.11, which is arranged forconcise display.

55. For very readable introductions to this research,see Daron Acemoglu, Simon Johnson, and JamesA. Robinson, “Understanding prosperity andpoverty: Geography, institutions, and the reversalof fortune,” in Understanding Poverty, ed. AbhijitBanerjee, Roland Benabou, and Dilip Mookherjee(New York: Oxford University Press, 2006), pp.19–36, and Stanley L. Engerman and Kenneth L.Sokoloff, “Colonialism, inequality, and long-runpaths of development,” in Understanding Poverty,

pp. 37–62. See also Daron Acemoglu, Simon John-son, and James A. Robinson, “The colonial originsof comparative development: An empirical inves-tigation,” American Economic Review 91 (2001):1369–1401, and Kenneth L. Sokoloff and Stanley L.Engerman, “History lessons: Institutions, factorendowments, and paths of development in theNew World,” Journal of Economic Perspectives 14(2000): 217–232. For an excellent review of thework of these authors, see Karla Hoff, “Paths ofinstitutional development: A view from economichistory,” World Bank Research Observer 18 (2003):205–226. See also Dani Rodrik, Arvind Subraman-ian, and Francesco Trebbi, “Institutions rule: Theprimacy of institutions over geography and inte-gration in economic development,” Journal ofEconomic Growth 9 (2004): 135–165, and DaniRodrik and Arvind Subramanian, “The primacyof institutions, and what this does and does notmean,” Finance and Development (June 2003),http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/rodrik.pdf.

56. On the role of geography, see Diamond, Guns,Germs, and Steel; Gallup, Sachs, and Mellinger,“Geography and economic development”; JeffreyD. Sachs, “Institutions don’t rule: Direct effects ofgeography on per capita income,” NBER WorkingPaper No. 9490, 2003; and Jeffrey D. Sachs, “Insti-tutions matter, but not for everything,” Financeand Development (June 2003), http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/sachs.pdf. See also Douglas A. Hibbs and OlaOlsson, “Geography, biogeography and why somecountries are rich and others poor,” Proceedings ofthe National Academy of Sciences (2004): 3715–3740;for a discussion on landlocked status as it affectspoor African economies, see Paul Collier, The Bot-tom Billion: Why the Poorest Countries Are Failingand What Can Be Done about It (Oxford: OxfordUniversity Press, 2007), pp. 53–63, 165–166, and179–180.

57. See Chapter 4 for an analysis of problems of coor-dination failure and the importance of mecha-nisms to correct it.

58. For accessible discussions, see North, Institutions,Institutional Change and Economic Performance;Justin Lin and Jeffrey Nugent, “Institutions andeconomic development,” Handbook of Economic

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www.gwu.edu/~iiep/G2/

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http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/rodrik.pdf

http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/sachs.pdf



Development, vol. 3A (Amsterdam: North Holland,1995); Dani Rodrik, “Institutions for high-qualitygrowth: What they are and how to acquire them,”Studies in Comparative International Development 35,No. 3 (September 2000): 3–31; and Acemoglu,Johnson, and Robinson, “Understanding prosper-ity and poverty.” Note that the quality of many ofthe institutions described in this paragraph of thetext is correlated, and it is disputed which onesmatter most and the degree to which they are sub-stitutes for each other in spurring growth.

59. As an instrument for the types of institutions es-tablished (note that scholars have widely debatedthis instrument). For a discussion, with some im-portant caveats, see Rodrik, Subramanian, andTrebbi, “Institutions rule.”

60. This is after the problem of simultaneity betweenincome and institutions is controlled for by takingadvantage of the exogeneity of initial settler mor-tality risk (other approaches using different datastill find some role for geography; see the papersby Sachs in note 56). See Acemoglu, Johnson, andRobinson, “Colonial origins of comparative devel-opment.” The schema on page 1370 in their papercorresponds to links 3-10-18-21 or 3-10-19-22 inFigure 2.11 in this text. See also Daron Acemoglu,Simon Johnson, James A. Robinson, and YunyongThaicharoen, “Institutional causes, macroeco-nomic symptoms: Volatility, crises and growth,”Journal of Monetary Economics 50 (2003): 49–123.For a summary, see Daron Acemoglu, “Rootcauses: A historical approach to assessing the roleof institutions in economic development,” Financeand Development (June 2003), http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/Acemoglu.pdf. It is also worth noting, however,that in the early colonial period, potential settlerswho did wish to emigrate to Latin America and theCaribbean (and perhaps to some other colonies inlater times) were sometimes restricted by immi-gration rules. See Stanley L. Engerman and KennethL. Sokoloff, “Factor endowments, inequality, andpaths of development among New Worldeconomies,” Economia 3, No. 1 (Fall) (2002): 41–109.There is also some question about the use of largelyeighteenth century mortality data, which may pos-sibly differ from earlier (but unavailable) mortalityrates. These points may suggest some possible lim-

itations to the mortality data-based research. Seealso Rodrik et al., “Institutions rule,” and PranabBardhan, “Institutions matter, but which ones?”Economics of Transition 13 (2005): 499–532.

61. Sokoloff and Engerman, “History lessons”; Enger-man and Sokoloff, “Colonialism, inequality, andlong-run paths of development.”

62. Engerman and Sokoloff, “Colonialism, inequality,and long-run paths of development.” On the roleof labor scarcity in the development of institutionsin North America, see David Galenson, “The set-tlement and growth of the colonies: Population,labor and economic development,” in The Cam-bridge Economic History of the United States, vol. 1,ed. Stanley L. Engerman and Robert Gallman(New York: Cambridge University Press, 1996).

63. See Daron Acemoglu, Simon Johnson, and JamesA. Robinson, “Reversal of fortune: Geography andinstitutions in the making of the modern world in-come distribution,” Quarterly Journal of Economics118 (2002): 1231–1294. Although the reversal isnow associated with this article, similar historicalobservations were a theme of the “dependencytheory” literature, described in Chapter 3.

64. In fact, the Acemoglu-Johnson-Robinson theorycould be said to turn dependency theory on itshead. The neo-Marxist dependency theory (seeChapter 3) views development constraints as com-ing from foreign nationals, but in the Acemogluet al. theory, the underlying development problemis the presence of extractive institutions, whetherthe extractors are nationals or foreigners, and thecorrective is investment-encouraging institutions,whoever implements them. The preferred institu-tions include some that are clearly non-Marxist,such as broader respect for private property rights.The implication of their argument is that it is atbest no more important to get today’s rich coun-tries to change their current behavior toward de-veloping countries than it is to achieve reforms inlocal institutions—although former colonial pow-ers might reasonably be asked to pay for costs ofchanging over to better domestic institutions, as-suming that such change is possible. Inequalitymakes reform difficult to achieve.

65. This evidence is presented in Acemoglu, Johnson,and Robinson, “Reversal of fortune.” The evi-dence has been criticized by some economists on


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the grounds that measures of modern institutionsactually show great variability rather than persist-ence and may follow rather than lead growth; see,for example, Edward L. Glaeser, Rafael La Porta,Florencio Lopez de Silanes, and Andrei Shleifer,“Do institutions cause growth?” Journal of Eco-nomic Growth 91 (2004): 271–303, who argue thathuman capital is a more fundamental factor. Butfor a theoretical analysis of how change in specificpolitical institutions is consistent with stability ineconomic institutions, see Daron Acemoglu andJames A. Robinson, “De facto political power andinstitutional persistence, American Economic Re-view 96 (2006): 326–330. For an empirical analysisproviding evidence that education does not in factlead to democracy within countries over time, seeDaron Acemoglu, Simon Johnson, James A.Robinson, and Pierre Yared, “From education todemocracy?” American Economic Review 95 (2005):44–49. Other critical commentary is found inPranab K. Bardhan, “Institutions matter, butwhich ones?” Economics of Transition 13 (2005):499–532.

66. The primary evidence for this is historical. SeeLandes, Wealth and Poverty of Nations. For exam-ple, the fragmentation of a continent divided bymountains, sea lanes, and rivers facilitated politi-cal competition that fueled institutional develop-ment. See also Diamond, Guns, Germs, and Steel.

67. See David Fielding and Sebastian Torres, “Cowsand conquistadors: A contribution on the colonialorigins of comparative development,” Journal ofDevelopment Studies 44 (2008): 1081–1099, andJames Feyrer and Bruce Sacerdote, “Colonialismand modern income: Islands as natural experi-ments,” Review of Economics and Statistics 91 (2009):245–262. Both build on the pioneering research ofAcemoglu, Johnson, and Robinson.

68. Fielding and Torres, “Cows and conquistadors.”The neo-Europes are primarily the United States,Canada, Australia, and New Zealand.

69. See Feyrer and Sacerdote, “Colonialism and mod-ern income.” The authors use wind direction andwind speed as instruments for length and type ofcolonial experience of islands. They identify apositive relationship between colonization lengthand both income and child survival rates. Theyalso use their evidence to argue that “time spent

as a colony after 1700 is more beneficial to mod-ern income than years before 1700, consistentwith a change in the nature of colonial relation-ships over time.” Note, however, that some is-lands included in this research are still colonies,such as overseas French departments with largeEuropean populations, and that in other inde-pendent former colonies with high incomes, theoriginal inhabitants were largely wiped out—facts that weaken the case for benefits of longercolonization from the viewpoint of those whowere colonized. But on a positive historical note,Stanley Engerman pointed out that in the latercolonial period, Europeans were often responsi-ble for ending slavery in Africa (personal com-munication with the authors).

70. Engerman and Sokoloff, “Colonialism, inequality,and long-run paths of development.” For supportingeconometric evidence on the negative effects of in-equality using an identification strategy inspiredby the Engerman and Sokoloff hypothesis, seeBox 2.2. See also William Easterly and Ross Levine,“Tropics, germs, and crops: The role of endow-ments in economic development,” Journal of Mon-etary Economics 50 (2003): 3–39. For a different ar-gument, see Edward L. Glaeser, Giacomo Ponzetto,and Andrei Shleifer, “Why does democracy neededucation?” NBER Working Paper No. 12128,March 2006; however, see also Acemoglu et al.,“From education to democracy?” For alternativeperspectives, see Acemoglu and Robinson, EconomicOrigins of Dictatorship and Democracy. It remainsunclear whether economic or political inequalityis more fundamental, as politicians often amasswealth when their power is secure. For an inter-esting study suggesting that the latter is impor-tant, see Daron Acemoglu, Maria AngelicaBautista, Pablo Querubin, and James A. Robinson,“Economic and political inequality in develop-ment: The case of Cundinamarca, Colombia,”June 2007, http://econ-www.mit.edu/faculty/download_pdf.php?id=1510.

71. Although in this century so far inequality hasbeen rising in North America and falling some-what in some Latin American countries, the con-trast remains extreme. For a set of excellent analy-ses on recent trends, see Luis F. López-Calva andNora Lustig, eds., Declining Inequality in Latin

http://econ-www.mit.edu/faculty/download_pdf.php?id=1510

http://econ-www.mit.edu/faculty/download_pdf.php?id=1510

America: A Decade of Progress? (Washington, D.C.:Brookings Institution, 2010).

72. Engerman and Sokoloff, “Colonialism, inequality,and long-run paths of development.” See alsoEdward L. Glaeser, “Inequality,” in The OxfordHandbook of Political Economy, ed. Barry R. Weingastand Donald Wittman (New York: Oxford Univer-sity Press, 2006), pp. 624–641.

73. See Glaeser et al., “Do institutions cause growth?”

74. Acemoglu et al., “From education to democracy?”esp. pp. 47–48. Evidence for the intuitive idea thatmigrants to the “neo-Europes” settled by Britainembodied not just better institutions but alsohigher human capital levels is not well established;see Acemoglu, Johnson, and Robinson, “Colonialorigins of comparative development.” The effectsof institutions held even when excluding thesecountries. Another possible channel, recently in-troduced by Gregory Clark, is that institutions af-fect preferences, which in turn directly or indirectlyaffect the quality of the workforce. For his provoca-tive and controversial assessment, see A Farewell toAlms: A Brief Economic History of the World (Prince-ton, N.J.: Princeton University Press, 2007).

75. See, for example, Bardhan, “Institutions matter.”This article also argues some limitations of theempirical methods of Acemoglu and colleagues.

76. Glaeser et al., “Do institutions cause growth?”

77. See Jeffrey Frankel and David Romer, “Does tradecause growth?” American Economic Review 89(1999): 379–399.

78. Not surprisingly, trade effects are complex. Geogra-phy can influence the pattern and amount of trade.And as countries develop and incomes rise, coun-tries trade in greater amounts and in a wider rangeof goods. See Rodrik, Subramanian, and Trebbi,“Institutions rule.” They provide a diagram of theeffects outlined in this paragraph in their Figure 1.

79. Of course, the effectiveness of each sector mayalso affect the effectiveness of the other sectors.This is not shown in the diagram.

80. Bardhan, “Institutions matter”; Rodrik, “Gettinginstitutions right.” For a provocative analysis ofthe historical links between economic develop-ment and political development, including de-mocratization and the extension of human andlegal rights, drawing on economic theory and500 years of the global historical record, seeDaron Acemoglu and James A. Robinson,Economic Origins of Dictatorship and Democracy(New York: Cambridge University Press, 2005).For an insightful analysis of diverging develop-ment paths, see Kenneth L. Sokoloff and StanleyL. Engerman, “History lessons: Institutions, fac-tor endowments, and paths of development inthe New World,” Journal of Economic Perspectives14 (2000): 217–232.

81. See, for example, UNDP, Human Development Re-port, 2005.

82. Dani Rodrik, “Institutions for high-quality growth:What they are and how to acquire them,” Studiesin Comparative International Development 35, No. 3(2000), 3–31, DOI: 10.1007/BF02699764, p. 5

83. For an elaboration of this point, see Chapter 8 andalso Lawrence H. Summers and Vinod Thomas,“Recent lessons of development,” World Bank Re-search Observer 8 (1993): 241–254; Pam Woodall,“The global economy,” Economist, October 1, 1994,pp. 3–38; World Bank, World Development Indica-tors, 1998 (Washington, D.C.: World Bank, 1998),pp. 3–11; and UNDP, Human Development Report,2003.

84. Similar conclusions can be found in Irma Adelmanand Cynthia Taft Morris, “Development historyand its implications for development theory,”World Development 25 (1997): 831–840.


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