Market-based vs. Interventionist Thoery

In economics, we often see battles between so-called market-based and interventionist camps.  In order to understand how each side views an economic concept (i.e. LRAS, economic growth strategies), we must first understand what drives these beliefs.

Any market-based viewpoint or strategy derives from the power of the free market, or allowing the forces of supply and demand to "solve" equilibria imbalances.  The role of the government in market-based viewpoints/strategies is limited since it basically interferes with the market clearing mechanism.  For example, in real-wage/Classical unemployment, people are out of work because a price floor is set preventing the market from achieving equilibrium.  A market-based solution would be to simply lower or remove the minimum price to allow supply of and demand for labor intersect and rid the economy of real-wage unemployment (see relevant post). 

Conversely, an interventionist viewpoint/strategy focuses on the word seen in the term: intervention.  Here, these economists argue the government must intervene in markets to achieve some goal, usually connected to protecting weaker populations in economies like the elderly or minorities.  Obviously, government intervention implies money being spent from tax revenue to help targeted groups, which causes much debate around the concept of opportunity costs to ignite in political fora.  Returning to the real-wage unemployment discussion above, interventionists believe removing the minimum wage would be is unacceptable.  Certainly, there are firms that would be willing to pay their workers the lower market-clearing wage and workers that would accept this wage (since it's better than no wage).  Yet, imagine living in a country where the wage is so low that you're basically fighting to survive even while employed!  To address this problem, Keynesians advocate for interventionist strategies like minimum wages plus unemployment benefits as a safety net for the most vulnerable (i.e. lowest paid workers) in society.

MANAGING MACROECONOMY
Market-based                         Interventionist
- reduce taxes, income           - use taxpayer money to fund
and corporate                        government spending (if needed)
- deregulate and privatize      - provide vocational training
to create private firm profit    - fund government job database
incentive, make business       - subsidize firms to educate and
easier                                      train workers
- reduce or eliminate              - subsidize workers willing to move
minimum wage, union            to region with jobs
power                                     - encourage R&D to stimulate I
- reduce unemployment          through tax breaks to firms or
benefits to force                      through payments to universities
unemployed to look harder    - construct new/better infrastructure
and to take available jobs       (see relevant post)


ECONOMIC GROWTH AND DEVELOPMENT
Market-based                              Interventionist
- export-led growth                     - import substitution
- floating exchange rate              - managed exchange rate regime 
regime                                        - protectionism
- free trade                                  - regulation and nationalization
- allow FDI to flow in        
 - IMF/WB SAPs
What has economic history shown us?  How is this topic evaluative?

Documentary: Life and Debt

Understanding Jamaica, debt and the IMF/WB (you determine if there is bias!):

http://www.livevideo.com/video/BESToftheBEST/8572389162284FFD9468AD17757C5D95/life-and-debt-1of-4.aspx

IMF and WB (not the tv station, the bank)

The International Monetary Fund (IMF), located in Washington D.C., U.S.A. and now comprised of 186 member-states, oversees the global financial system and promotes (arguable) healthy macroeconomic goals.  Established at the famed Bretton Woods conference in 1944, the IMF's "primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other [which]...is essential for sustainable economic growth, increasing living standards, and alleviating poverty".  According to The Economist web site, the IMF responded to the breakdown of the Bretton Woods exchange rate regime by "bec[oming] more involved with its member countries’ economic policies, doling out advice on fiscal policy and monetary policy as well as microeconomic changes such as privatization of which it became a forceful advocate" and continued "in the 1980s, it played a leading part in sorting out the problems of developing countries’ mounting debt."   "More recently," the web site reads, the IMF "has several times coordinated and helped to finance assistance to countries with a currency crisis". 

Here are some "Fast Facts" about the IMF.

The World Bank, also headquartered in Washington, D.C. and born from Bretton Woods, focuses on giving loans to LEDCs (and others in crisis) as a sort of international lender of last resort.  "Collectively", the Economist web site states, "it aims to promote economic development in the world’s poorer countries through advice and long-term lending, averaging $30 ­billion a year, spread around 100 countries."  The World Bank (the International Bank for Reconstruction and Development International Development Association - IDA) is NOT the World Bank Group (the World Bank two plus the International Finance Corporation - IFC, the Multilateral Investment Guarantee Agency - MIGA, and the International Centre for Settlement of Investment Disputes - IBRD and the -ICSID).

Again, intuitively, this sounds great!  What could go wrong?

From The Economist web site:

"Critics of the World Bank say that it often worsens the problems facing developing countries. Its advice has often been guided by economic fashion, which led it to support a centrally planned brand of development economics in the 1960s and 1970s, before switching to privatization and structural adjustment in the 1980s and then to promoting democracy and economic transparency, and attacking crony capitalism, in the late 1990s. Until recently, it has generally supported big, ­high-profile projects rather than more economically useful smaller schemes. It has often failed to ensure that its loans have been spent on the intended project. Its willingness to pump money into struggling countries creates a potential moral hazard, in which politicians may have little incentive to govern well because they believe that, if they do a bad job, the World Bank will come to the rescue. The increase in private-sector lending to and investment in emerging markets has led to growing discussion of whether the World Bank is any longer needed."

So what is this structural adjustment (SAPs) with "conditionalities" used by both the IMF and WB?  Basically, the former aims to change the structure of the economy via policy changes and the latter are the strings attached to (sometimes enormous) loans.  Obviously, if countries must do x, y and z to get the loans, there are going to be debates as to whether or not these required structural adjustments are best for the countries (and to what extent they help economic agents in MEDCs). 

This link provides a fairly comprehensive overview of SAPs and "conditionalities" in words other than my own or through a source I usually cite.

Aid

Aid, from the French verb to help, is assistance usually from MEDCs (who can afford it) to LEDCs (who need it), or, as the Economist web site says, "a helping hand for poor countries from rich countries".  Aid is needed for the following reasons : emergency relief for disasters (i.e. 2010 Haitian earthquake), war relief for non-combatants (i.e. DR Congo), assist in development, provide more technology and R&D, fund specific projects (i.e. infrastructure), feed savings which leads to investment, etc.  Aid is given by nation-states (i.e. the United States, the biggest gross donor of international aid), intergovernmental organizations (i.e. United Nations), and non-governmental organizations (i.e. Oxfam).  If between two entities, the aid is bilateral.  If between more than two entities, the aid is multilateral.

There are two subcategories of aid, humanitarian and development.  Humanitarian aid is designed to help people in the short-run survive disasters (i.e. drought, floods) or war.  We see this through food aid, medical aid, and emergency (i.e. disaster ) aid.  The first two are self-explanatory.  Emergency aid includes emergency supplies like medication, clothing, gasoline, etc. to help people survive any sort of calamity.  In Haiti, we saw all three types of aid being donated and used (albeit not as efficiently as it should have : food, medical and emergency.
Important video of the disaster from Frontline (must watch, but very graphic).

Development aid, with longer assistance goals, is designed to lift people out of poverty through bigger and deeper changes within the country.  The technical term for development aid is Official Development Aid (ODA - from the OECD).  Click here for further information including the full definition for ODAs.

The following are different types of development aid (Blink & Dorton, 2007) : long-term loans (low interest for many years to provide a source of savings for LEDCs), tied (aid connected to macroeconomic goals to help the economy grow and develop), project (for specific projects like a new dam or railway system), technical assistance (via better, new technology and better human capital), and commodity (raw materials to help production of g/s).

Aid makes intuitive sense.  The more money given to LEDCs, the better able they are to overcome disaster and achieve economic growth and development.  Unfortunately, the results and evaluation of aid are not so clear.

The Economist web site reads :
"In practice, in many cases aid has done little good for its intended recipients (improved health care is a notable exception) and has sometimes made matters worse. Poor countries that receive lots of aid grow no faster, on average, than those that receive very little...
Why has aid achieved so little? Donations have often ended up in the offshore bank accounts of corrupt politicians and officials in poor countries. Money has often been given with strings attached, so that much of this “tied” aid is spent on com­panies and corrupt politicians and officials in the donor country. War has ravaged many potentially beneficial aid projects. Moreover, some aid has been motivated by political goals – for example, shoring up anti-communist governments – rather than economic ones.
The lesson of history is that aid will often be wasted unless it is carefully aimed at countries with a genuine commitment to sound economic management. Analysis by the World Bank sorted 56 aid-receiving countries by the quality of their economic management. Those with good policies (low inflation, a budget surplus and openness to trade) and good institutions (little corruption, strong rule of law, effective bureaucracy) benefited from the aid they received. Those with poor policies and institutions did not. This accounts for the growing popularity of conditionality in aid."  Authors like William Easterly in his great Elusive Quest for Growth make the same argument.

GREAT Games! Third World Farmer and Free Rice

From the web site (http://www.3rdworldfarmer.com/) PLAY NOW! -
"In the game, the player gets to manage an African farm and is soon confronted with the difficult choices that poverty and conflict can cause.
As a farm and family management game it has an emotional impact on many players because usually these types of games play out in much easier settings, where it's always possible to prosper by playing cleverly and making the right game choices. It's not always like that in 3rd World Farmer. Just like real people are dying from starvation in desperate situations that they never asked to be put in, all it takes for things to go wrong in this game is one bad harvest, an unfortunate encounter with corrupt officials, a raid by guerillas, a civil war, a sudden fluctuation in market prices, or any of the many other game events, that might never happen to families in industrialized countries.
By letting players experience this - albeit in a harmless, fictional setting - we hope to open their eyes to the problems and to motivate them to make positive social change. Our aim is to have everybody play the game, reflect, discuss and act on it."

Free Rice : 
"FreeRice is a non-profit website run by the United Nations World Food Program. Our partner is the Berkman Center for Internet & Society at Harvard University.
FreeRice has two goals:

1. Provide education to everyone for free.
2. Help end world hunger by providing rice to hungry people for free.

This is made possible by the generosity of the sponsors who advertise on this site.
Whether you are CEO of a large corporation or a street child in a poor country, improving your education can improve your life. It is a great investment in yourself.
Perhaps even greater is the investment your donated rice makes in hungry human beings, enabling them to function and be productive. Somewhere in the world, a person is eating rice that you helped provide. Thank you."

Growth Models and Development Strategies

In development economics, there are growth models, growth strategies and development strategies.  Be careful not to confuse them!

First, the IB requires the Harrod-Domar growth model and the Lewis / structural change / dual sector model be taught.  Unfortunately, at the higher tertiary level, these models are not really used anymore, so we will understand the basics.

GROWTH MODELS

The Harrod-Domar model (named for guess who) states that the rate of GDP growth equals the savings ratio divided by the capital to output ratio.  Therefore, to increase GDP growth, the model suggests consumers should save more (increase mps) or that capital should become more productive/efficient.  The rationale is that more savings leads to more investment which leads to more capital and output and thus higher GDP per capita.  However, in poor countries, many citizens make only enough to survive, so it is very difficult to increase savings (confounded by the fact that many banks in these countries are MNCs catering to the upper echelon of the socioeconomic spectrum).  Moreover, with capital flight (see relevant post) and little to no R&D, it is nearly impossible to make the capital more efficient.  These are two major reasons why this growth model (which was originally meant to be a business cycle model) doesn't really help.

Another rather outdated model is Lewis's dual sector model.  First, we assume there are two sectors: a large agricultural sector and a small industrial sector in the city.  There are far more workers in the countryside working in the fields and getting paid low wages.  The few workers in the city that manufacture products make more.  The idea is that the private firms in the industrial sector will take their profits and reinvest them which enlarges the industrial sector that can then hire people from the agricultural sector and pay them more.  This pattern repeats itself until equilibrium is achieved.  Although this model is helpful in understanding industrialization, it has fallen out of favor because of today's considerable urban poor, (possibly incorrect) assumption of extra rural labor, (possibly incorrect) assumption of reinvestment of profits and lack of known capital flight in LEDCs.

GROWTH STRATEGIES

Export-led growth is an impetus for a country's industrialization which focuses on creating, developing and selling g/s for which it has a comparative advantage (see relevant post).  For this to occur, the country needs to open its border to trade, which means we see a reduction in protectionist measures.  This is supposed to lead to economic growth through the increase in the net exports part of the GDP equation.  We have seen success with export-led growth in the Four Asian Tigers, but their difficulties during the Asian crisis of the 1990s questions the strategy's sustainability.  Furthermore, where do poor countries start?  How can they compete with MNCs and MEDCs?

A second strategy is import-substitution (inward).  The idea behind import substitution is that countries reduce trade and produce g/s that they would have imported domestically as replacements.  This would obviously lead to an increase in national output which is national income (or GDP growth).  Jobs would be created as well.  Although this technique is logical, it has several disadvantages.  These include a lack of efficiency, reduced consumer and firm choice for g/s, increased prices, and the possibility that the growth is only short-term (not sustainable?). 

Thirdly, foreign direct investment (FDI), or direct investment in a country through building a company or taking over part/all of an existing company, can assist in the growth of LEDCs.  These countries must open themselves to foreign MNCs to do this.  There are several advantages and disadvantages to FDI (analysis and evaluation!).  

Advantages - funds domestic savings, builds infrastructure, gives access to R&D and new technology, employs domestic citizens (amplified by mulitplier), can increase aggregate demand (amplified by accelerator), and gives tax revenue to the domestic government.

Disadvantages - who holds management / upper-level jobs?, negative externalities of production, possible transfer pricing, excessive power in domestic economy/politics?, possible repatriation of profits, low level of capital.


DEVELOPMENT STRATEGIES
Fairtrade
Besides growth strategy, there are also development strategies that focus on improving standard of living in LEDCs.  For example, there is the Fairtrade Organization.

According to their web site, the Fairtrade Labeling Organization (FLO) is "a non-profit, multi stakeholder body that is responsible for the strategic direction of Fairtrade, sets Fairtrade standards and supports producers".  From the web site as to what Fairtrade is, the web site says :

"Fairtrade is an alternative approach to conventional trade and is based on a partnership between producers and consumers.  Fairtrade offers producers a better deal and improved terms of trade.  This allows them the opportunity to improve their lives and plan for their future.  Fairtrade offers consumers a powerful way to reduce poverty through their every day shopping. 

When a product carries the FAIRTRADE Mark (seen above) it means the producers and traders have met Fairtrade standards.  The standards are designed to address the imbalance of power in trading relationships, unstable markets and the injustices of conventional trade.

For producers Fairtrade means prices that aim to cover the costs of sustainable production, an additional Fairtrade Premium, advance credit, longer term trade relationships, and decent working conditions for hired labor." 

Basically, Fairtrade ensures producers in "disadvantaged" countries get a price for their goods that allows them to take care of themselves economically.  This, of course, leads to higher prices due to the fact they do not have world efficiency levels of production, but some consumers are willing to pay more to help these people.

What types of products have the Fairtrade symbols?

Video examples from Uganda,  Nicaragua, and Dominican Republic.

Micro-finance 

In LECDs, oftentimes the vast majority of the population does not have access to banking services because of their lack of savings and collateral (Merriam-Webster - of, relating to, or being collateral used as security, as for payment of a debt or performance of a contract).  To address this deficiency, certain financial institutions have developed micro-finance offices (or entire banks) designed to provide standard banking services taken for granted in MEDCs (i.e. savings account, small business loans, insurance).

One example of a bank that focuses on micro-finance projects in the Grameen Foundation.  Click here for further information about this remarkable organization. 

Micro-credit is a part of micro-finance that extends small loans to entrepreneurs to start businesses.  These are designed to lift people and families, unit by unit, out of poverty.  Women have especially benefited from micro-credit because of their tendency (which is arguable and to be checked empirically) to be less risky and their certain gender disadvantage in many LEDCs.

The following are examples of micro-finance and micro-credit that have worked in Bangladesh, the "Arab World", and Botswana.

What is poverty?

poverty (n) (Yahoo Education): 

1. The state of being poor; lack of the means of providing material needs or comforts.
2. Deficiency in amount; scantiness: "the poverty of feeling that reduced her soul" (Scott Turow).
3. Unproductiveness; infertility: the poverty of the soil.
4. Renunciation made by a member of a religious order of the right to own proper

relative poverty (from Biz/ed) : "the level of poverty in a country expressed in term of certain level of income such as half of the average wage" versus absolute poverty : " level of poverty when only the minimum levels of food, clothing and shelter can be met", for example, percentage of people living on less than $1 a day.

In Luxembourg, one is relative poor if they make less than half of the GDP per capita ($78,395 / 2 = <$39,197.50) ($PPP, from IMF 2009).  Clearly, this is a much higher number than a country like Tunisia ($8,254 / 2 = <$4,128) ($PPP, from IMF 2009).  However, we can compare across countries absolute poverty because we can simply calculate the percentage of the population living below $1 PPP per day.  The following map from Wikipedia shows us these figures graphically.  Unsurprisingly, the map shows a similar pattern to countries with the most un/underdevelopment and corruption.

Videos one, two and three all provide visualizations and stories of poverty.  Watch them.  The entire blog is also informative. 

A poverty trap occurs when countries cannot lift themselves out of poverty because of the twisted nature of barriers to growth and development.  We can illustrate this using a poverty cycle like the one shown in Blink & Dorton (2007):

Stopping economic g/d...what are the major obstacles to these essential goals?

Before analyzing those barriers that are keeping poor countries poor and limiting even the richest of economies, I want to recognize the United Nations Millennium Development Goals.  The UN web site states that "the eight Millennium Development Goals (MDGs) – which range from halving extreme poverty to halting the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015 – form a blueprint agreed to by all the world’s countries and all the world’s leading development institutions."  This video, "Make it Happen",  provides us with an excellent multimedia introduction to to the MDGs and the eight MDGs are here.  Please read them.


What are the barriers to economic growth and economic development?  
First, there is often a lack of a proper, well-functioning education system as developing countries lack educational infrastructure and capital and parents lack the incentives to send their children to school (see relevant chapter in William Easterly's The Elusive Quest for Growth).  Moreover, the health care system is also missing trained staff, medications, and physical infrastructure leading to increased mortality from diseases and childbirth.  Speaking of infrastructure, this term includes all the roads, railways, airports, public services (police, fire, emergency, sewage), communication services (telephones, post) and public utilities (water, electricity, gas) in a country.  Imagine how difficult business (or, more generally, day-to-day life!) is in a country where these forms of infrastructure are weak or non-existent!   


Institutionally, developing countries often lack clear and well-protected (legally) property rights and general rule of law which makes incentive perverse.  Why would an entrepreneur create if his/her creation could be stolen?  Furthermore, the financial system of less economically developed countries (LEDCs) tend to also be weak and insufficient which compromising the way savings should occur in a properly functioning economy.  In fact, banks here tend to be foreign multi-national corporations (MNCs) which only make funds available for the wealthy, which is a very small percentage of the overall population.  Once again, we have perverse incentives with people simply saving their money in cans or places other than banks.  There exist in LEDCs more informal / black markets because of these institutional weaknesses.  These transactions cannot be monitored (for safety) or taxed (for government revenue) because they are invisible.  Moreover, the tax system's tend already to be disordered and failing and do not collect the money needed for proper government provision of goods, services and welfare.  This is worsened by the fact that income inequality tends to be very high in developing countries and, thus, redistribution due to a poor tax scheme and personal tax avoidance is very hard to accomplish.


What is corruption?  Corruption is NOT having integrity, a term which means doing the right thing when no one is looking.  Technically, it is the pursuit of personal gain by those in positions of power through simple thief, money laundering, bribery, extortion, etc.  Corruption is wholly toxic to economies.  They create perverse incentives, they funnel money away from the mouths and hands of those who need it, they stop the provision of health care and infrastructure.  Where is in the worst?  Look at this map from Wikipedia from www.transparency.org which measures perceived corruption:

As you can see, the more green, the less corruption is perceived, and the more red, the reverse.  Clearly, there appears to be a correlation between how developed a country is and how corrupt it is perceived to be.  Check out the web site above for more (compelling) information.


There are a few more barriers to economic growth and economic development.  The first is the exploitation by more economically developed countries (MEDCs) of LEDCs in different international organizations (i.e. World Trade Organization) in what's argued to be a "neo-colonization".  We do observe MEDCs putting protectionist measures on developing countries' products for reasons mentioned in my previous post on protectionism.  LEDCs also tend to focus to heavily on the primary sector and raw materials which are volatile with respect to price.  This, in turn, makes their overall economies volatile.  These problems all can compel the best and brightest to leave their native countries and seek higher paying, better protected jobs in MEDCs.  We call this capital flight.  After all, why would you stay in your homeland and make 1/50th of what you could make in Canada or New Zealand or Switzerland?  This is especially true in countries whose currency (non-convertible) can't be traded for "hard" currency (convertible), because of the reduced incentive for foreigners to do business.  These are just several of many impediments to growth and development that need to be studied to answer one of economics most important questions : How do we lift the poor out of poverty?

Where does economic development come from? What are its consequences?

Economic growth does not necessarily breed economic development.  Unless the increase in national income reaches all levels of society, development remains elusive.  It is this, the pursuit of equal income distribution after growth, that is a widely accepted economic goal.

The big four sources of economic development are education, health care, infrastructure and political stability.  Education improves opportunities for all lucky enough to receive it, especially disadvantaged groups like women and minorities.  It allows people to become ever increasingly more productive and engaged as labor/human capital.  In societies where women sit idle, roughly 50% of the potential workforce is simply out of commission.  Educating and employing women can be immensely helpful in achieving growth and development as there are more and better FoPs.  A very interesting argument here involves cultural relativism with respect to whether or not treatment of women is a cultural issue or a human rights / right to work issue.

Moreover, as people learn how to take care of themselves and others, mortality rates fall.  For example, if mothers learn to wash their hands with soap before touching their child's wound or men learn to use condoms to prevent the spread of HIV, rates of infection in both cases will logically fall.

Closely connected to this issue is that of improving health care.  Imagine how difficult it would be to work when suffering from malaria!  As people become healthier, they are better equipped to achieve their maximum productivity.  Therefore, many economists argue governments should spend money to build hospitals, to acquire doctors, nurses and medications and to make health care a vital part of government spending and investment for the future.

The Economist web site defines infrastructure as "the economic arteries and veins...roads, ports, railways, airports, power lines, pipes and wires that enable people, goods, commodities, water, energy and information to move about efficiently".  As infrastructure improves, g/s can be moved around more easily and people can get to work or to school.  Simply stated, development occurs.

Lastly, stories like this can be devastating for economies since people within the country become nervous and foreigners choose to stay away.  With more institutionalized political instability, firms do not invest or conduct business at all.  Therefore, political stability is a clear step to development as economic incentives and ownership become protected and business (via foreign direct investment, FDI) flows into the country.

Where does economic growth come from? What are its consequences?

Sources of Economic Growth

As previously written, economic growth is achieved through the increase in the quality and/or quantity of FoPs.  But how is this possible?  Regarding land, an increase in "quantity" can occur when new sources of raw materials are discovered (i.e. the oil well off Brazil in 2007 and now the Gulf of Mexico) or when farming/drilling techniques become more efficient ("quality" of the FoP), i.e http://mndcnews.com/archives/222317.   

Regarding labor and human capital, a country can either let more people in through loosening immigration policies (http://thecitizen.co.tz/editorial-analysis/47-columnists/1700-in-praise-of-latin-american-immigrants.html) or improving the quality of labor through education and training (http://tvnz.co.nz/business-news/fta-brings-chinese-teachers-nz-3517955).  

Economic growth can also be achieved through improving the quality and/or quantity of the capital stock of an economy.  When savings increases, more investment can occur (more machines, factories).  When more people become educated, more advancements in technology via R&D will be made.  In this section, we use two terms; capital widening and capital deepening.  Capital widening occurs when more forms of technology are placed into more hands (not individually more productive people, but more in terms of numbers of people with technology).  Capital deepening occurs when each individual worker becomes more productive through more productive techniques / tools.  

Lastly, the improvement of political and economic institutions as described in my thesis (see post 1/1/10) leads to economic growth as innovation becomes better protected, banking becomes more monitored and infrastructure becomes stronger among other similar developments.

Consequences of Economic Growth 

- increase in incomes : GDP goes up, GDP per capita logically follows assuming equal income distribution

- better indicators of standard of living : when GDP goes up, enrollment ratios, life expectancy, GDP per capita, and literacy tend to follow

- more money for the government : as people make more and tax institutions improve, governments get more money to use for development of infrastructure, education, health care, etc.

- negative externalities and future threat : countries that are developing thanks to growth see firms that pollute more due to increased production and that may engage in practices that threaten future growth (i.e. sustainable development, or development that doesn't impact future development, for example planting trees if cutting them down).

- inequality creation : with economic growth comes winners and losers; often, the upper percentage of households get a higher percentage of income and the lower less.  This can increase the Gini coefficient which has happened following growth in South America, one of the most unequal continents on Earth in the last three decades of the 20th century (and still today).

What characteristics do developing countries share? How do they differ?

Common characteristics of developing countries:
- low standard of living (i.e. too many without access to clean water, fighting diarrheal disease, losing children to "preventable" diseases like smallbox or cholera)
- high growth rate of population and, thus, high dependency ratios (% non-working due to age/%working)
- low productivity per worker
- high unemployment
- domination by "rich" countries like the US, EU, Japan
- too much focus on raw materials / agricultural sector
- presence of black markets

Differences between developing countries:
- physical geography
          - size : Sudan vs. Lesotho
          - endowment of natural resources : Nigeria (rich) vs. Bangladesh (poor)
          - history : type of colonization : Canada (neo-Europes) vs. Vietnam (extractive) *See Schmidt's MSc thesis in economics and history: see post from 1/1/10 (first post on blog)
          - demographic factors: religion (Islamic Oman, Christian Bolivia) and racial/ethnic (Cambodia vs. Nicaragua)
          - GDP per capita (Mexico - higher vs. Sierra Leone - lower)
          - type of industry (Bangladesh - agriculture, Maldives - tourism)
          - political structure (Iran - theocracy, India - democracy, Myanmar - military junta, Tonga - monarchy, single party - Cuba)

LINK: UNDP for Beginners - UNDP for Beginners

Economic Growth and Development

Economic growth is simply the increase in the GDP (real output) of an economy over a period of time, usually a year.  This is a quantitative measure, GDPnew - GDPold/GDPold.  For example, if Angola saw 9% growth in 2009, that means the value of final g/s produced in Angola in 2009 was 9% higher than it was in 2008.

How is economic growth achieved?  Simple answer: through the increase in the quality and/or quantity of FoPs.  This increases the potential output of the country (Keynesian v. neo-Classical views) and can be shown by a rightward shift in the country's PPC or LRAS (see relevant posts from January and March).

Economic development, a qualitative measure, describes of an economy's standard of living, including information like access to safe drinking water, mother mortality and GDP per capita.  Although economic growth can lead to economic development, this isn't always the case if the rich reap the benefits of the increase in national income.

Although economic growth is very simply measured using the equation above, economic development requires numerous indices to provide a more complete picture of the development of a country.  These include the UN Development Program's (UNDP) Human Development Index (HDI), Gender-related Development Index (GDI), Gender Empowerment Measure (GEM), Human Poverty Index (HPI), and Lorenz curve / Gini coefficient.  These all deserve further description.

The HDI has three components : life expectancy at birth, education/knowledge measured via literacy rate (two-thirds weighting) and gross enrollment ratio (primary, secondary, tertiary) and standard of living measured by GDP per capita (PPP).  The following graph from Wikipedia shows current HDI levels, with zero meaning very low development and one being almost total development, followed by the link for the most current Human Development Report:

Link (look for "Annual Report"): http://hdr.undp.org/en/

The GDI adjusts the HDI for gender to show the inequalities for men and women for life expectancy, education/knowledge and standard of living.  The GEM targets differences in opportunities for women and men in different countries through a statistical calculation of political participation (parliamentary seats filled by women), economic participation (legislators, senior officials, managers; professional and technical positions) and female GDP per capita compared to male.  Please see the following image (zoom in if necessary) for countries and their GEM values.

The HPI takes the HDI and reverses it to look at the other side of the equation.  Instead of life expectancy at birth, the HDI calculates the chance that people won't live past a certain age (from 40 to 60).  Moreover, the HDI uses the adult illiteracy rate instead of the literacy rate / enrollment rate and sort of an "anti" standard of living as measured by statistics of those without access to clean water or health services and child malnourishment rates.  Click on this link for further information: A map of world poverty that includes human poverty index Development Economics.

Lastly, the Lorenz curve and the Gini coefficent it derives determine the income inequality of an economy.  The Lorenz curve shows which percentage of households earn which percentage of the country's income.  If the country was perfectly equal, the bottom 30% would earn 30% of national income and the bottom 60% would earn 60% of the income, etc.  This is shown by the line of perfect equality, the 45 degree angle from the point of origin.  The curve that exists beneath this line shows how unequal countries are, and the more bowed the curve, the more unequal is the income distribution in the economy.  This is the Lorenz curve.  Please see the following graph:

In this hypothetical (extreme) scenario, the bottom ten percent of the economy earns less than 1% of the income and the bottom 50% of the household earns just 10% of the income (compared to 50% at perfect equality).  In fact, in this example, the upper 50% of society earns 90% of the income and the top 10% earns about 50% of the income!  This would be an EXTREMELY unequal society.  The distance between the Lorenz curve and the line of perfect equality derives the Gini coefficient which quantifies the actual income inequality of a country.  Zero corresponds to perfect equality (everyone earns the same) and one perfect inequality (one person earns everything..."statistical dispersion").  Here is a graph that shows worldwide Gini coefficients (thanks to Wikipedia):

Where is your country?  How does this make you feel?