FIN 3255 Economic Development

Chapter 2: Comparative Economic Development

Fatemeh Alimohammadi-Zacarias
PhD. Candidate in Business Administration
The PowerPoint material must be read in
conjunction with the course book. Otherwise,
there will not be a context for the material, and
they may not make much sense.
The chapter aims to explain:

[Link] development levels are measured (income, PPP, and broader indicators).
[Link] among developing countries, using economic and social dimensions.
[Link] development gaps persist and whether convergence between rich and poor nations
is occurring.
[Link] introduces key measures like the Human Development Index (HDI) and discusses ten
economic characteristics that shape development outcomes.
[Link] chapter ends with a case study (Ghana vs. Côte d’Ivoire), showing how colonial
legacies and institutions influence development trajectories.
Key Concepts in Comparative Development

Developing Countries
• Found in Asia, Africa, Latin America, Middle East, Eastern Europe
• Characterized by low living standards and development deficits
• Also called Less Developed or Low- & Middle-Income countries

Human Capital
• Investment in people’s skills, values, and health
• Gained through education, training, and medical care
• Increases productivity and supports economic growth
Classifying Levels of Economic Development

• World Bank ranks economies by Gross National Income (GNI) per capita or
income per person.
• Useful but incomplete measure of development.

Key Points:
•Traditional metric: Per capita income (GNI per person).
•Limitation: Doesn’t capture education or health differences.
•Modern approach: Combine income + education + health.
•Leads to Human Development Index (HDI) by the UN — a composite measure of
well-being.
Classifying Levels of Economic Development
Based on Gross National Income (GNI) per capita:

World Bank (2018-19) Categories:

•Low Income (LIC): ≤ US $996
•Lower-Middle (LMC): $996 – $3,895
•Upper-Middle (UMC): $3,896 – $12,055
•High Income (HIC): > $12,055
•Very High Income: ≈ $40,000 +
On average, high-income countries have:
• 22× higher real income than low-income countries, and
• 4× higher than middle-income countries.
Classifying Levels of Economic Development
Income comparisons depend on which sectors (agriculture, industry, services)
generate a country’s output — showing how economies differ in structure and
development.

Sector
•A part or subset of an economy
•Used in four main ways in development:
• Technology: modern vs. traditional sectors
• Activity: industry or product sectors
• Trade: export sector
• Sphere: private vs. public sectors
Classifying Levels of Economic Development
Based on Gross National Income (GNI) per capita:

• Classifications update yearly as economies grow or decline.

• Most developing countries = Low / Middle Income groups.
• Income distribution is highly unequal — high-income nations get ~ ⅔ of global
income but have ~ ⅙ of population.
• Some “high-income” countries (e.g., oil exporters, tourism economies) still face
development deficits.
• Pure income measures can mislead — require PPP and social indicators for true
comparison.
Adjusting for Purchasing Power Parity (PPP)
Using exchange rates
• Convert each country’s income into U.S. dollars using the market exchange rate.
Problem: this makes poor countries look poorer because local prices are cheaper.

Using PPP (Purchasing Power Parity)

• Adjusts for cost-of-living differences between countries.
This shows what people can actually buy with their income.

Definition:
Purchasing Power Parity (PPP) – Calculation of GNI using a common set of international
prices for all goods and services to make more accurate comparisons of living standards.

Example
In 2017:
•India’s income looked like only 3.1% of U.S. income (by exchange rate).
•But when adjusted for PPP, it became 11.7% — because goods and services cost much less
in India.
To compare how national income looks under
two methods — exchange-rate conversion and
Purchasing Power Parity (PPP)

Exchange rates make poor countries look poorer

than they really are.
PPP shows what people can actually buy with their
income, giving a more accurate picture of real living
standards.
Key Terms in Measuring National Income (GNI)

• Value Added: The increase in value created at each stage of production.

Example: Turning raw cotton into cloth adds value to the final shirt price.
• Depreciation: The wearing out of machines, buildings, or infrastructure over time.
Example: A delivery truck loses value each year due to use and age.
• Capital Stock: The total physical assets used to produce goods and services.
Example: Factories, tools, and equipment used in manufacturing.
• Gross Domestic Product (GDP): The total final value of goods and services produced
within a country.
Example: All goods and services made in the Philippines in one year.
Country Classifications
 Other Common Country Classifications
Classification Description Example
Groups of major economies shaping global policy; G7 = G7: United States, United Kingdom,
advanced nations, G20 = includes large emerging Germany, France, Italy, Japan, and
G7 / G20
economies, that together represent about 85% of global Canada
GDP and two-thirds of the world’s population. G20: China, India, Brazil,...
Least-Developed Countries United Nations category for nations with low income, weak
Haiti, Ethiopia, Mozambique
(LDCs) human capital, and high vulnerability.
Landlocked Developing No sea access → higher trade costs and isolation.
Nepal, Chad, Zambia
Countries (LLDCs) 30 countries, dependence on neighbors for port access.
Small Island Developing States 38 small island nations facing geographic isolation, limited
Fiji, Maldives, Jamaica
(SIDS) resources, and climate change risks.
Heavily Indebted Poor Ghana, Mozambique, Nicaragua,
Eligible for debt relief due to heavy external debt burden.
Countries (HIPCs) Afghanistan
Rapid manufacturing and export-led growth.
Newly Industrializing Countries South Korea, Taiwan, Thailand,
transitioning from agricultural to manufacturing-based
(NICs) Indonesia, Vietnam
economies.
Informal term coined by the International Finance
Corporation (IFC) to describe developing countries with India, Mexico, Indonesia, Brazil,
Emerging Markets
growing financial markets and investment potential. South Africa
Used to replace the outdated term “Third World.”
Human Development Level Classifies countries by human development (health,
Norway – very high; Niger – low
(UNDP) education, income).
Comparing Health and Education Levels

Table 2.3 shows large gaps

between income groups—high-
income countries enjoy much better
health and education outcomes,
while low- and middle-income
groups remain diverse with
significant development challenges.
Introducing the Human Development Index
Human Development Index (HDI)
• A UNDP measure of national development based on health, education, and income.
• Scale: 0 (lowest) → 1 (highest)
1️⃣ Health: Life expectancy at birth
2️⃣ Education: Average & expected years of schooling
3️⃣ Standard of Living: Real GNI per capita (adjusted for PPP)

Purpose: To provide a broader measure of development beyond income, showing quality of

life and human potential.

UNDP: United Nations Development Programme.

Diminishing Marginal Utility

Definition:
The idea that the extra satisfaction (utility) from each additional unit of consumption decreases as
total consumption increases.

Example:
The first slice of pizza gives high satisfaction —
but by the fourth or fifth slice, the added pleasure is much less.
HDI and Diminishing Marginal Utility

Example:
If a person’s income increases by ₱10,000:
• For someone earning ₱8,000 a month, it’s life-changing — they can buy more food, pay
bills, or send kids to school.
• For someone earning ₱80,000 a month, it’s not a big change — their lifestyle stays the
same.
• This shows diminishing marginal utility —
extra income helps low earners much more than high earners.

✓ Each extra peso (or dollar) gives less and less improvement in people’s lives as income
rises.
✓ We use ln (natural log) for income to make HDI sensitive to improvements among poorer
countries and less influenced by very rich ones.
Calculating the New Human Development Index (HDI)
Step 1 – Create Dimension Indices
Each index measures progress between a minimum and maximum (goalposts):

Example (Costa Rica, 2014):

•Health (Life Expectancy): (79.93–20)/(85–20) = 0.922
•Education: [(0.558 + 0.750)/2] = 0.654
•Income: ln(13,011.7) – ln(100) / [ln(75,000) – ln(100)] = 0.735

Step 2 – Combine Using Geometric Mean

Geometric mean ensures poor performance in one area lowers the overall HDI, reflecting balanced
development.
1 1 1
3
HDI = 𝐻 ×𝐸 ×𝐼 =
3 3 3 0.922×0.654×0.735 = 0.763
HDI Groups:
Low (0–0.549) • Medium (0.550–0.699) • High (0.700–0.799) • Very High (0.800–1.0)
Geometric Mean: [Link]
 How a country’s development
compares to its income level?

The column “GNI Per Capita Rank Minus HDI

Rank” shows how a country’s income ranking
compares to its overall human development
ranking (HDI).

It shows whether a country uses its

income effectively to improve people’s
well-being through education and health.

Result Meaning
The country’s HDI rank is higher than its
income rank → it performs better in
Positive (+)
education and health than income alone
predicts.
The country’s HDI rank is lower than its
Negative (–) income rank → it performs worse in health or
education than expected from its income.
≈ 0 (Small The country’s HDI roughly matches its
difference) income level.

Canada uses its income well for education and health.

This table shows that countries with
similar income levels (GDP per capita)
→Near $1,000 → very poor countries
can still have very different levels of
human development (HDI).
Income alone doesn’t determine
people’s well-being. →Near $3,500 → low-income

Similar income but higher HDI → the country uses

its income well, investing effectively in health, →Near $7,500 → middle-income
education, and people’s welfare.
Similar income but lower HDI → the country does
not use its income efficiently, meaning wealth
doesn’t translate into better living conditions.
→Near $10,000 → upper-middle

→Near $20,000 → high-income

Improvements in Human Development Since 1990, by Region

• Every region’s HDI rose — meaning longer lives,

better education, and higher incomes.
• Europe & Central Asia and Latin America & the
Caribbean reached the high HDI range (0.700–
0.799).
• East Asia & the Pacific showed the fastest growth,
driven by countries like China.
• South Asia improved steadily but remains in the
medium HDI range.
• Sub-Saharan Africa made progress but still have
the lowest HDI levels (<0.550).
Traditional vs. New HDI (2010)

HDI: Combines social and economic data to give a broader view of development — not just income.

Traditional HDI:
•Used arithmetic mean (simple average)
•Based on GDP per capita, literacy, and school enrollment
New HDI (NHDI):
•Uses geometric mean for better balance
•Replaces GDP with GNI per capita (actual income)
•Education uses mean and expected years of schooling
•Uses natural log (ln) for income and updated goalposts
Result: A more realistic and fair measure of human development.
Alternative HDI Formulations
The UNDP expanded the HDI to capture inequality, gender gaps, and multidimensional poverty
— giving a fuller picture of human development.

Key Variants:
• Inequality-Adjusted HDI (IHDI): Reduces a country’s HDI when inequality across
people is high.
• Gender Inequality Index (GII): Measures gender gaps in health, empowerment, and
labor.
• Multidimensional Poverty Index (MPI): Looks beyond income to include education,
health, and living standards.

Shows who is benefiting from development, not just national averages.

Helps identify if all groups share in progress, not only the wealthy.
Key Similarities and
Differences Among
Developing
Countries
Key Similarities and Differences Among Developing Countries

• Development Economics: Studies the causes of poverty and seeks policies for
prosperity (Acemoglu, 2010).

• Compare Ethiopia, India, and Thailand In 1966, all three were poor countries,
with most people living on less than $1 a day.

• They started at similar levels — but grew very differently:

➢ India: income ×2, poverty ↓ to 53%
➢ Thailand: income ×3, poverty ↓ to 2%
➢ Ethiopia: no income growth
Same starting point, different outcomes — showing the

“staggering consequences for human welfare” of growth and development (World Bank,
1998; Acemoglu, 2010).
Key Similarities and Differences Among Developing Countries
Developing countries share many challenges, but differ in how severe and complex these are.

Ten main features:

1️⃣ Income and productivity
2️⃣ Human capital (education, health)
3️⃣ Inequality and poverty
4️⃣ Population growth and age
5️⃣ Rural vs. urban migration
6️⃣ Social divisions (ethnic, religious)
7️⃣ Industrialization and exports
8️⃣ Geography and resources
9️⃣ Financial and market systems
Institutions and foreign dependence

Development isn’t just about income — it depends on people, structure, and context.
1️⃣ Income and productivity
• At very low income levels, countries can get stuck in a cycle of poverty:
• Low income → low investment in education, health, and infrastructure → low productivity →
continued low income
This creates economic stagnation, making it hard for poor nations to grow — a condition
known as a poverty trap.

Some countries have moved from poverty to prosperity, while others remain stagnant.
• East Asia → rapid growth (e.g., China, South Korea)
• Sub-Saharan Africa → slow or no growth
• Other regions → moderate growth
Development progress depends on regional conditions and effective policies.
1️⃣ Income and productivity
A country's population size doesn’t determine its income or development.
•Large countries like China, India, and the U.S. include both low- and high-income nations.
•Small countries (like Tuvalu or Nauru) can also be poor or rich.
•There’s no clear link between being big or small and being developed — each has its own advantages
and challenges.
Conclusion: Development depends on policies and productivity, not size.
2️⃣ Human capital Attainments
• Human capital—health, education, and skills—is key to economic growth and
human development.
• Most developing countries have made big gains in education and health.
• Still, there are large gaps compared to rich nations, especially in nutrition, life
expectancy, and literacy.

Better human capital = stronger development and productivity.

2️⃣ Human capital Attainments
The chart shows how child survival has improved worldwide.
• In 1990, under-5 deaths were very high in low- and lower-middle-income countries.
• By 2017, deaths dropped sharply across all groups — showing major health progress.
• Still, low-income countries have under-5 mortality rates about 15 times higher than high-
income countries.
Huge progress in child health, but inequality in survival chances remains between rich
and poor nations.

Under-5 Mortality Rate: The

number of children who die before
reaching age 5 per 1,000 live births
in a given year.
2️⃣ Human capital (education, health)
The table shows how many children attend primary school and how many students each teacher
handles in different income groups and regions.
Primary Education Challenges
Enrolment: High in rich countries (95–97%), but low in Sub-Saharan Africa (78%).
Class Size: Too many students per teacher in Africa (38) and South Asia (35).
Main Issue: Access improved, but education quality remains weak.
Focus now: From enrolment to quality learning.
2️⃣ Human capital (education, health)
Health and Education Gaps Across Regions
Many upper- and lower-middle-income countries now have health and education levels close to
high-income nations.

•East Asia: generally good health conditions.

•Sub-Saharan Africa: still faces malnutrition, malaria, TB, AIDS, and other tropical diseases.
•South Asia: continues to struggle with illiteracy, low schooling, and undernourishment.

Progress is uneven — some regions have advanced rapidly, while others still face serious
human development challenges.
3️⃣ Inequality and poverty
Inequality – Unequal distribution of income or wealth among people within a country.
Absolute Poverty – When people cannot meet basic needs like food, shelter, clothing, and
healthcare.

High inequality exists in Latin America, Africa, and resource-rich countries.

Extreme poverty (< $1.90/day) has declined but remains high in Sub-Saharan Africa and
South Asia.
Both poverty and inequality can hold back growth and development.

Details and solutions will be discussed further in Chapter 5.

4️⃣ Population growth and age
The world’s population has grown from under 1 billion (1800) to 7.6 billion (2018).
•Growth now happens mostly in low- and middle-income countries.
•Sub-Saharan Africa has the fastest growth (≈2.7%/year), while high-income countries grow slowly
(≈0.7%/year).
•Rapid growth changes a country’s age structure, creating both challenges and opportunities.

Population and development will be explored further in Chapter 6.

4️⃣ Population growth and age

•Crude birth rate: number of live births per 1,000 people per year (often shortened to birth rate).
4️⃣ Population growth and age
• Dependency Burden: People aged 0–15 and 65+ who depend on the working-age population
(15–64), which is considered economically unproductive and therefore not counted in the
labour force.

• High fertility means more children → heavier burden on workers.

• Fertility rates fell from 5 births/woman (1965) to 2.5 (2015) — a historic drop.
• But as populations age, the elderly share grows and the workforce shrinks (e.g., China).

The challenge: Grow rich before growing old by using the demographic dividend effectively.
4️⃣ Population growth and age

Population Size, Distribution, and Growth

•Developed countries grew when populations were small and increased slowly
(below 2% per year).
•Many developing countries today have very fast population growth (over 2.5%)
and large, dense populations (e.g., India, Nigeria, Philippines).
•Rapid growth strains resources—education, jobs, and land become harder to
provide for everyone.

In short: Fast population growth makes development more difficult.

International Migration
•1800s–1900s: 60M+ Europeans migrated to the Americas—relieving rural pressure and fueling
growth.
•After WWII: Migration shifted within Europe; workers from Italy, Greece, and Turkey filled labor
gaps and sent remittances home.
•Today: Strict immigration laws limit large-scale movement; debates rise over jobs, taxes, and
social services.
•Brain Drain: Skilled workers leaving developing countries cause talent loss but bring remittances.
•Paradox: Migration can both drain talent and motivate skill development (“brain gain”), but it
no longer serves as the major outlet for surplus populations as it once did.

In short: Migration once drove growth and relief; today it’s restricted and uneven, posing new
challenges for developing nations.
5️⃣ Rural vs. urban migration

A key sign of development is the shift from agriculture to industry and services.
•Rural areas in low- and middle-income countries are often poorer, with limited markets
and opportunities.
•Millions are migrating to cities, driving rapid urbanization.
•Around 2012, for the first time, more than half of the world’s population lived in urban
areas.
•Sub-Saharan Africa and South/Southeast Asia are still mostly rural.

Future growth depends on balancing rural development and urban expansion.

6️⃣ Social divisions (ethnic, religious) or Social Fractionalisation
Fractionalisation: Deep ethnic, linguistic, or religious divisions within a country.
•Common in low-income nations, sometimes leading to conflict and instability.
•High diversity can slow growth if it causes inequality or discrimination.
•Over half of developing countries have faced ethnic or religious conflict (e.g., Rwanda,
Myanmar, Sudan).
•Yet, some diverse nations like Malaysia and Mauritius show that cooperation and inclusion can
support development.

• In the Philippines, diversity is seen in its regional, linguistic, and cultural groups; while
mostly peaceful, inequalities across regions (e.g., Mindanao vs. Luzon) show how social divides
can affect development.

Key idea: Diversity isn’t the problem — inequality and exclusion are.
7️⃣ Industrialization and exports
Industrialisation drives higher productivity, income, and modernization.
•Developing countries are shifting from agriculture to manufacturing, though many still rely on
low-skill, low-wage industries.
•Agriculture employs many but produces less output — e.g., Madagascar: 82% work in farming →
only 25% of output.
•Middle-income countries (e.g., Vietnam, Indonesia) grew through export-led manufacturing.
•Low-income countries, especially in Africa, remain tied to agricultural and mineral exports.

• In the Philippines, industry and services now lead GDP, but manufacturing growth is modest,
and the country still depends heavily on agriculture and imports of high-tech goods.

Goal: Strengthen the industrial base and promote value-added manufacturing for
sustainable growth.
8️⃣ Geography and Natural Resource Endowments
Resource Endowment: A nation’s supply of usable factors of production — minerals, raw
materials, and labor.

•Most developing countries are in tropical regions, facing diseases, heat, and water shortages.
•Climate change hits Africa and South Asia the hardest.
•Resource-rich nations (e.g., oil states, DRC) often face the “resource curse” — conflict and
inequality instead of growth.
•Resource-poor countries (e.g., Singapore) show that strong institutions and innovation can
overcome geography.

• Philippines: rich in natural resources, but highly vulnerable to typhoons and climate risks,
requiring sustainable management and resilience planning.

Key idea: Geography influences opportunity, but good governance and smart policy drive
success.

DRC: Democratic Republic of Congo

9️⃣ Financial and market systems
Many developing countries have weak financial systems and inefficient markets.
•Caused by poor institutions, limited information, and weak rule enforcement.

•Economic institutions: “Rules of the game” — laws, norms, and behaviors shaping markets.
•Infrastructure: Facilities that enable economic activity and markets, such as transport,
communication, and utilities.

• Philippines: improving through digital banking and microfinance, but financial inclusion gaps
remain.

Strong institutions + infrastructure = efficient, inclusive markets.

9️⃣ Financial and market systems
In many developing countries, markets remain weak and inefficient.

They often lack:

1️⃣ Legal systems that enforce contracts and property rights
2️⃣ Stable currencies people can trust
3️⃣ Infrastructure (roads, utilities) for low-cost trade
4️⃣ Efficient financial systems for fair lending and repayment
5️⃣ Market information on prices, products, and creditworthiness
6️⃣ Social norms that build trust in business

Imperfect Market: A market where perfect competition doesn’t exist — few buyers or sellers,
barriers to entry, or limited competition.

Incomplete Information: When consumers or producers lack key information, leading to poor
decisions and inefficient markets.

Together, these problems cause market underperformance and slow economic development.
 Quality of Institutions and External Dependence

Colonial Legacy and Institutional Impact

Colonial Legacy: The lasting effects of colonial rule on a country’s institutions, economy, and
society.
• Colonial systems were built to extract wealth, not create it.
Result: weak institutions, insecure property rights, and elite dominance.
Strong, inclusive institutions are key to fair growth and governance.

•Property Rights: The acknowledged right to use, benefit from, and control an asset — whether
tangible (like land) or intangible (like ideas).
 Institutions and foreign dependence

Colonial Legacy and Institutional Impact

Latin America: Spanish & Portuguese rule left deep inequality and a persistent middle-income
trap.
Africa: Colonial borders and extractive governance caused conflict, weak states, and low
trust.
India: British legal and education systems remained but often favored elites.

Philippines
Spanish and American rule reinforced land concentration and elite political control.
Wealth and power remain in the hands of a few families, limiting inclusive growth.

Lesson: Countries that reform colonial-era institutions toward inclusion, transparency,

and equity achieve stronger, more sustainable development.
 Institutions and foreign dependence

External Dependence and Global Inequality

• Developing countries are often less powerful in international relations, leading to unequal
outcomes.
• Trade rules (e.g., WTO) often favor rich nations — subsidies in advanced economies hurt poor-
country farmers.
• During debt and financial crises, banks and rich nations’ interests prevailed over developing
countries.
• Most developing nations still have weak bargaining positions globally.
Result: Persistent economic dependence on richer countries.
Key idea: Global systems often reinforce economic inequality between rich and poor nations.

World Trade Organization (WTO)

 Institutions and foreign dependence

Cultural and Environmental Dependence

• Dependence also extends beyond economics.

Cultural dependence: Western media and lifestyles shape local values and business norms.
Environmental dependence: Developing nations suffer most from climate change caused mainly
by rich countries.

• Poor nations rely on global powers for environmental solutions and aid.
• Philippines: One of the most climate-vulnerable countries, relying on international climate
funds and foreign investment for resilience.

Lesson: True development requires reducing external dependence and building self-reliant,
resilient institutions.
• Developing
countries often
inherited extractive
institutions from
colonial rule—
benefiting elites and
limiting productivity.
• Institutional change
is slow; formal laws
can change quickly,
but informal norms
evolve gradually
(Douglass North).
Convergence or Divergence of Living Standards
Convergence or Divergence of Living Standards
2. 5 Convergence or Divergence of Living Standards

In the 18th century, the richest nations were only 3× wealthier than the poorest.
Today, they are about 100× wealthier — a huge divergence in living standards.

•Divergence: Developed nations have grown much faster over the past two centuries.
•The question now: Are developing countries catching up (converging) or still falling behind
(diverging)?

•This depends on growth rates, technology adoption, and institutional strength

(discussed in later chapters).
 2. 5 Convergence or Divergence of Living Standards

•The graph shows how living standards diverged

after the Industrial Revolution.
•Countries like the U.S., U.K., and Japan
experienced rapid income growth.
•Meanwhile, India, China, Brazil, and Nigeria saw
little or slow progress for a long time.
•By the late 20th century, China and India began
catching up, showing signs of convergence.

The world experienced a Great Divergence in

incomes for 200 years — and only recently have
some developing nations started to narrow the
gap.
Two Major Reasons to Expect Convergence
Developing countries can “catch up” with developed nations through:

1️⃣ Technology Transfer

•Developing nations can adopt existing technologies instead of inventing them.
•This allows faster growth — they can “leapfrog” stages of development.
•Example: China and South Korea doubled their incomes in just 8–12 years, compared to
Britain’s 60 years.
2️⃣ Diminishing Returns to Capital
•Rich countries already have high capital, so new investments yield smaller gains.
•Poor countries, with less capital, can earn higher returns on investment.
•This encourages faster capital growth and income catch-up.

With technology transfer and high returns on capital, developing countries should grow faster — if
institutions and conditions allow it.
Perspectives on Income Convergence
•Each dot represents a country’s GDP growth rate compared to its initial income.
•Left graph (1970–1994): The trend is almost flat → no strong convergence; rich and poor countries grew at similar
or uneven rates.
•Right graph (1994–2017): The line slopes downward, showing that poorer countries grew faster than richer ones
— evidence of convergence.
•From 1994–2017, 116 of 152 countries grew faster than the U.S., compared to only 63 in the earlier period.
The world has shifted from divergence (rich getting richer) to a new era of partial convergence, where many
developing nations are catching up in income growth.
Conditional Convergence
Poorer countries can catch up — but only under similar conditions.
•Economies converge “conditionally” when they share:
• Similar savings rates
• Similar labor force growth
• Comparable technology and productivity

•This idea comes from the Solow Growth Model (Chapter 3).
•Countries with better institutions and policies grow faster toward higher income levels.
Key idea: Convergence happens only if the right economic and institutional conditions exist.
2.6 Long-Run Causes of Comparative Development
Why do some countries develop faster than others?
Economists identify long-term factors shaping
national progress.
2.6 Long-Run Causes of Comparative Development

Arrow 1: Physical Geography → Income & Human

Development
•Geography shapes early development — climate,
location, and disease patterns (e.g., malaria, being
landlocked) influence productivity and trade.
•Tropical and landlocked countries often face
structural barriers (poor soil, high transport costs,
disease burden).
•Direct impact weakens today — once institutions
and inequality are considered, geography alone
explains less of income differences.

✓ Geography matters most indirectly—it affects

health, transport, and agricultural potential, which in
turn shape economic growth.
Summary: Geography sets initial conditions, but
institutions determine how nations overcome or
amplify these geographic limits.
2.6 Long-Run Causes of Comparative Development
Arrow 2: Geography → Local Features of Colonies
Geography affected how colonies were formed.
Areas with harsh climates, diseases, or high death rates
were harder to settle.
Colonizers ruled from afar and focused mainly on taking
resources.
In short: The environment influenced whether a
colony became extractive or settler-based.

• Extractive Colonies: Colonies where Europeans focused on taking

resources like gold, silver, or crops, using forced or cheap local labor.
They invested little in schools, infrastructure, or local governance.
Example: Congo (under Belgian rule) — The Belgians
extracted rubber and minerals through forced labor, causing
severe exploitation and leaving weak institutions behind.
• Settler-Based Colonies: Colonies where Europeans settled
permanently, building towns, schools, and laws similar to those in their
home countries. Institutions were more inclusive and stable.
Example: United States (under British rule) — British
settlers established local governments and property rights,
which later supported democracy and economic growth.
2.6 Long-Run Causes of Comparative Development

Arrow 3: Local Features → Type of Colonial Regime

Settler survival shaped the kind of rule.
High death rates: Colonizers only wanted to get rich
quickly — they built extractive systems.
Low death rates: Settlers stayed longer and built better
laws and institutions that protected property and
trade.
In short: The kind of colonial rule left long-lasting
effects on a country’s development.
2.6 Long-Run Causes of Comparative Development

Arrow 4: Geography → Precolonial Institutions

Geography shaped early societies before

colonization.
Climate and natural resources affected how people
farmed, traded, and organized their communities.
These early systems influenced how colonizers later
ruled.
In short: Geography helped form early local
institutions, which later affected how countries
developed.
2.6 Long-Run Causes of Comparative Development

Arrow 5: Precolonial Institutions → Type of Colonial

Regime

Precolonial systems influenced how colonizers

ruled.
• Areas with organized societies and strong local
leaders were easier for colonizers to control and tax.
• These places often became extractive colonies,
focused on taking wealth rather than building new
economies.

In short: Strong local systems made it easier for

colonizers to exploit rather than develop.
2.6 Long-Run Causes of Comparative Development

Arrow 6: Precolonial Labor & Comparative Advantage

→ Type of Colonial Regime

Climate and natural resources shaped labor

systems.
• Places good for plantations (like sugar or tobacco)
used slavery and forced labor.
• Mineral-rich areas had large land grants and elite
control.

In short: The kind of work possible in a region

affected whether its institutions became equal or
unequal.
2.6 Long-Run Causes of Comparative Development

Arrow 7: Type of Colonial Regime → Inequality

Colonial rule left long-lasting inequality.

• Elites controlled land, education, and money, while
most people had few rights or opportunities.
• In contrast, places like North America had more
equal access to land and business, helping growth.

In short: Extractive systems created deep

inequality that slowed development even after
independence.
2.6 Long-Run Causes of Comparative Development

Arrow 8: Geography → European Development

Geography helped Europe develop early.

• Europe had a temperate climate, fertile soil, and
navigable rivers and coastlines, which supported
agriculture, trade, and urban growth. Its access to
the Atlantic and Mediterranean allowed easy
exchange of goods, ideas, and technologies.
Result:
Because Europe advanced early in farming, shipping,
and technology, it gained economic and military power
— which later enabled it to colonize large parts of the
world.
In short:
Good geography → early development → global
influence.
2.6 Long-Run Causes of Comparative Development

Arrow 9: European Development → Type of Colonial

Regime
Timing of colonization mattered.

• Early European colonies (like those in the 1500s–1600s)

were mainly about plunder and resource extraction — they
focused on taking gold, silver, or slaves quickly, often
exploiting local labor.
• Later colonies (1700s–1800s) were more about settlement
and production, where Europeans stayed longer, built farms,
towns, and trade systems.
Example:
Early plunder-based colony: Spanish colonies in Latin America
(e.g., Peru or Mexico) focused on mining gold and silver.
Later settler-based colony: North America (e.g., the United
States, Canada) emphasized permanent settlement, farming,
and trade.
In short:
When colonization happened determined how colonies were
ruled — either for quick extraction or for long-term
development.
2.6 Long-Run Causes of Comparative Development

Arrow 10: Type of Colonial Regime → Postcolonial

Institutional Quality

Colonial rule shaped institutions after

independence.
• . Extractive regimes (like Congo under Belgium) left
behind weak and corrupt institutions.
• Some later colonies gained better systems (like
schools or legal frameworks), but inequality
remained

Legacy: Colonial systems still affect how

governments work today.
2.6 Long-Run Causes of Comparative Development

Arrow 11: Type of Colonial Regime → Inequality

Different colonies, different inequalities.

Plantation and mining colonies created elite classes
controlling land and labor.

In contrast, settler colonies (like the U.S.) had more

equal access to land and business.

Result: High inequality slowed development for

centuries.
2.6 Long-Run Causes of Comparative Development

Arrow 12: Inequality Postcolonial Institutions

Inequality and weak institutions reinforce each other.

When elites hold power, they block reforms and limit
education and rights.
This keeps institutions weak and undemocratic.

In short: Unequal societies struggle to build fair,

effective governments.
2.6 Long-Run Causes of Comparative Development

Arrow 13: Inequality → Human Capital

• Inequality limits education and opportunity.

• Elites invest little in schools or training for ordinary
citizens.
• Without education, people can’t innovate or earn
higher incomes.

Result: Inequality reduces human capital, slowing

national progress.
2.6 Long-Run Causes of Comparative Development

Arrow 14: Human Capital → Income and Human

Development

Education and skills build a stronger economy.

The more educated the people, the higher the
productivity and income.

Human capital drives long-term growth and well-

being.
2.6 Long-Run Causes of Comparative Development

Arrow 15: Human Capital → Government

Effectiveness

• Educated citizens strengthen governance.

• Education builds competent leaders and aware
citizens.
• People can hold the government accountable and
push for better services.

Education improves how government works.

2.6 Long-Run Causes of Comparative Development

Arrow 17: Institutions → Public Sector

• Good institutions mean better public services.

• Rule of law and democracy encourage transparency
and quality governance.

Stronger institutions = more effective public

programs.
2.6 Long-Run Causes of Comparative Development

Arrow 18: Institutions → Private Sector

Institutions support business and investment.

Secure property rights and fair contracts encourage
entrepreneurship.

Good institutions boost private sector growth.

2.6 Long-Run Causes of Comparative Development

Arrow 19: Institutions → Civil Society

Institutions empower citizens and communities.

Freedom and accountability let people organize and
advocate for change.

Active civil society keeps balance between

government and business.
2.6 Long-Run Causes of Comparative Development

Arrows 20–22: Three Sectors → Development

Public, private, and civil society all contribute to

progress.
Public sector provides services.
Private sector creates jobs and innovation.
Civil society ensures fairness and inclusion.

Good governance + fair markets + active citizens =

sustainable and inclusive development.

• Public Sector → Quality Public Goods

A strong government provides good education, healthcare, and
infrastructure, ensuring equal access and opportunity.
• Private Sector → Well-Functioning Markets
Efficient markets with fair competition and clear rules drive innovation,
investment, and job creation.
• Civil Society → Accountability and Inclusion
An active civil society promotes transparency, justice, and citizen
participation, keeping both government and business in check.
Key Lessons from History
History matters for development.

•Colonial legacies shaped inequality and weak institutions that still affect many developing
countries.
•Poor institutions are hard to reform, but progress is still possible with effective policies.
•Development challenges (poverty, inequality, weak governance) have both domestic and global
roots.
•Most developing countries have improved income, education, and health despite difficulties.
•
Success needs combined progress in human capital, technology, and institutions.
Paths to Inclusive Development
• Developing nations can leapfrog by adopting proven technologies (“advantage of
backwardness”).
• But each country must find its own path — copying developed nations is not always effective.
• Lasting growth requires reforms in governance, property rights, education, labor, and credit
systems.
• Strong institutions + equity + education = foundation for inclusive growth.

With the right mix of policies and institutional change, sustainable development is
achievable.

Leapfrogging means skipping

older stages of technology or
development and jumping straight
to newer, more advanced ones.
Questions for Discussion

1. Why can the term “developing countries” sometimes be an overgeneralization?

2. Despite their diversity, many developing countries share common problems.
What are these problems, how do they differ across countries, and which do you
think are most important?
3. What other common characteristics of developing countries can you think of that
were not mentioned in the text? Briefly explain.
Questions for Discussion

4. In what key ways do developing countries differ in their economic, social, and
political structures? How does their diversity compare with that of developed
countries?
5. What are the possible relationships among health, labor productivity, and income
levels? Explain.
6. What are the strengths and weaknesses of the Human Development Index (HDI)
as a measure of human welfare? What changes would you make if you were to
redesign it?
Questions for Discussion

7. Explain the statement: “Social and institutional innovations are as important as

technological and scientific innovations for economic growth.”
8. Why do economists expect income convergence between developed and
developing countries, and why has this process been slow or limited?
9. What are economic institutions? Explain their roles using examples of both formal
and informal rules.
10. What makes for good economic institutions? What happens when countries lack
them, and what steps could be taken to build stronger institutions?
Questions for Discussion

11. Which measure shows greater equality among countries—GNI at exchange rates
or GNI at Purchasing Power Parity (PPP)? Explain why.
12. Comment on the statement: “South Asia has a lower income per capita than
Sub-Saharan Africa.”
13. What is meant by a colonial legacy? Discuss its disadvantages and any possible
advantages.
14. What does the evidence show about income convergence (or lack thereof)
among countries?
Questions for Discussion
15. How have institutions, structural inequality, and geography contributed to the
historical gaps between developed and developing nations?
16. How do development economists identify causal relationships in research? Why
is this important?
17. Compare the new HDI with the traditional HDI. Which is a better measure of
human development, and why?
18. What were the key findings of Melissa Dell’s research on the mita system, and
why are they significant for understanding economic development?