Ch 2 - Comparative Economic Development PDF

CH 2: COMPARATIVE ECONOMIC DEVELOPMENT Outline Globalpatterns of economic development – historical patterns and recent patterns – the “lost decade of development” then and now Classifications of countries depending on their level of economic development The MDGs and the SDGs of the U....

CH 2: COMPARATIVE ECONOMIC DEVELOPMENT Outline Globalpatterns of economic development – historical patterns and recent patterns – the “lost decade of development” then and now Classifications of countries depending on their level of economic development The MDGs and the SDGs of the U.N. The convergence hypothesis and world inequality  HISTORICAL PATTERNS OF ECONOMIC DEVELOPMENT  The growth of real output per person since 1750 U.S. UK Japan Industrial Japan catching Revolution up Historically, very low China income levels Brazil India Nigeria The speed at which a China catching country can “develop” up has accelerated over time: UK 150 years, US 100, Japan 50, China? India? Copyright © 2020, 2015 Michael P. Todaro and Stephen C. Smith BUT few countries catch What happened after decolonization? Economic optimism post-WW2: economic growth & expected to grow even more => countries could borrow funds at lower costs and attempt to accelerate economic development further (how? massive infrastructure investments & industrial subsidies) Public debt increased. Became unsustainable when: (i) world recession in late 1970s (low demand); (ii) recessions in developing countries (mismanagement, corruption, dictatorships, conflict); (iii) oil prices increased (led to inflation); and (iv) changes in US and Euro monetary policies => higher interest rates / cost of debt. 1980s: refinancing loans could not be found. How to pay civil servants, etc.? Structural adjustment programs (implemented by IMF): change economic structure: private sector (not just public), “good” governance. Changes were needed BUT may have deepened the crisis since gvts cut down on social expenditure. What happened after decolonization? Economic optimism post-WW2: economic growth & expected to grow even more => countries could borrow funds at lower costs and attempt to accelerate economic development further (how? massive infrastructure investments & industrial subsidies) Public debt increased. Became unsustainable when: (i) world recession in late 1970s (low demand); (ii) recessions in developing countries (mismanagement, corruption, dictatorships, conflict); (iii) oil prices increased (led to inflation); and (iv) changes in US and Euro monetary policies => higher interest rates / cost of debt. 1980s: refinancing loans could not be found. How to pay civil servants, etc.? Structural adjustment programs (implemented by IMF): change economic structure: private sector (not just public), “good” governance. Changes were needed BUT may have deepened the crisis since gvts cut down on social expenditure. What happened after decolonization? Economic optimism post-WW2: economic growth & expected to grow even more => countries could borrow funds at lower costs and attempt to accelerate economic development further (how? massive infrastructure investments & industrial subsidies) Public debt increased. Became unsustainable when: (i) world recession in late 1970s (low demand); (ii) recessions in developing countries (mismanagement, corruption, dictatorships, conflict); (iii) oil prices increased (led to inflation); and (iv) changes in US and Euro monetary policies => higher interest rates / cost of debt. 1980s: refinancing loans could not be found. How to pay civil servants, etc.? Structural adjustment programs (implemented by IMF): change economic structure: private sector (not just public), “good” governance. Changes were needed BUT may have deepened the crisis since gvts cut down on social expenditure. 1980s period known as the “lost decade of development” Economic convergence within Lost decade Europe Latin America has been growing slower than advanced economies Asia’s boom Asia about to reach the level of development of Latin America. Africa getting Source: https://www.bbvaopenmind.com/en/economy/global-economy/drivers-of- poorer relative to convergence-drivers-of-convergence-between-developed-and-developing-  Since the Structural Adjustment Programs (SAPs) of the 1990s Asia: sustained economic growth MENA (except few gulf states), SSA, LAC: Some economic growth Butto what extent is/was their growth driven by their over-reliance on natural resource exports and high commodity prices in the 2000s/early 2010s/early 2020s? Is their model of economic development sustainable? Or purely price- dependent? 2010s-20s: rising debt levels as economic crisis in many developing economies post-COVID More generally, why did Asia and the rest of the developing world diverge? High commodity prices in the 2000s, early 2010s, early 2020s? Green transition is increasing the demand for precious metals Changes in levels driven by changes in growth rates. Asia = 2-6% since 1980 SSA, LAC and MENA = growth rates close to 0 in 2010s. Growth of 2000s has disappeared Things got worse with COVID and post-COVID Source: https://www.economist.com/finance-and-economics/2019/08/01/emergi RECENT PATTERNS OF ECONOMIC DEVELOPMENT Read these short Economist articles and be prepared to answer these questions: 1. Why is The Economist talking about a potential “lost decade” or "brutal decade" to characterize the 2020s? 2. What do the 2020s have in common with the 1980s? 3. At the same time, what is different between the lost decade of the 1980s and the one of the 2020s? - 3.a. Why could developing economies be possibly better prepared? Emerging markets are converging towards the same patterns as in the 1980s? ? Progress against poverty stalled since mid-2010s Excluding China and India, not great? SRI LANKA DEFAULTED ON ITS DEBT IN 2022 (the 1980s global crisis started when Mexico defaulted on its debt in 1982)  Long-term debt: Short-term = one year or less (needs to be refinanced every year) A different context than the 80s? Public investments in education and health and ODA (official development assistance) have lower returns (low-hanging fruits over? regression? last mile problem now? ) There was the COVID pandemic and inflation from disrupted supply chains Terrorist movements. Conflict more generally (Sahelian conflict belt) Climate change impacts + more climate change finance but at the expense of ODA. Developed economies less willing to help. More focus on migration controls. Lack of reforms. IMF and World Bank weaker at imposing reforms. Not many new Big ideas. Influence from China and Russia (whereas 1980s were a period of decline for USSR). World become more illiberal. More populism and nationalism. Less trade, more tariffs. What is a developing economy? World Bank For the current 2024 fiscal year, low-income economies = those with a GNI per capita, calculated using the World Bank Atlas method, of $1,135 or less in 2022; lower middle-income economies are those with a GNI per capita between $1,136 and $4,465; upper middle-income economies are those with a GNI per capita between $4,466 and $13,845; high-income economies are those with a GNI per capita of $13,846 or more. https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-an d-lending-groups#:~:text=For%20the%20current%202024%20fiscal,those%20with%20a% 20GNI%20per Potential issue: resource rich countries in which significant parts of the population (non-citizens, temporary/semi-permanent migrants) remain poor? Gulf countries. 7 World Bank regions SSA has most “low-income” economies What is a developing economy? U.N. Based on the new Human Development Index Four categories: Very high human development (> 0.800) high human development (0.700-0.799) medium human development (0.550-0.699) low human development (< 0.550). Overall, significant improvements over time. Strong improvements at the bottom as well 2010s: Income patterns and HDI patterns differ for LAC, SSA, etc. LAC Income patterns = stagnation. HDI patterns = SSA improvements. But we saw that per capita GDP increased little since the 1990s What explains the increase in the HDI conditional on income? Select the IMF (International Monetary Fund) region of your choice among the four regions “ASIA AND PACIFIC REGION” (Asia), “MIDDLE EAST AND CENTRAL ASIA” (MENA), “SUB-SAHARAN AFRICA” (Africa) and “WESTERN HEMPISHERE” (focus on LAC) -- and, based on the latest Regional Economic Outlook (REO), discuss with your group the economic challenges that lay ahead for this region. Link for the REOs: https://www.imf.org/en/Publications/REO For 6250 class only Not 6294 Other common classifications Developing world = Africa + Asia + Latin America. Not relevant anymore? Newly industrializing countries (NICs, WB): countries that have achieved relatively advanced manufacturing sectors. Least developed countries (LDCs, UN): low income + low human capital + high economic vulnerability. Emerging markets (IFC) = NICs. Widely used in the financial press to suggest the presence of active stock and bond markets. EMDE = Emerging markets and developing economies HIPC = Heavily indebted poor countries Rather than say “developing countries”, better to say “developing economies”, as what is still “developing” is the economy, not the country or its people.  Millenium Development Goals (2000-2015) https://www.un.org/millenniumgoals/ MDG Retrospective: Was the Glass Half Full or Half Empty? Shorthand: “Halving Poverty” (and Halving Hunger) Income poverty target reached – by official definition of fraction living under $1 a day equivalent (now adjusted to $1.90) Progress on hunger (fraction hungry fell from about 23% to 14%) but not halved – and nearly 900 million still hungry Under-5 Mortality dropped 41%: progress; but not nearly cut by two-thirds Maternal deaths about halved – but not cut by three-quarters Clean drinking water target met, and slum target met; sanitation goal not met Great progress against several diseases including TB (tuberculosis) and malaria Progress on enrollments, but universal goal not met - 57 million children still not in primary school – generally the poorest Development assistance is now probably falling in real terms (despite progress!) Sustainable Development Goals (2016-2030) https://www.un.org/sustainablede velopment/sustainable-developm ent-goals/  Growth rate The Convergence Hypothesis DIVERGENCE Why we care? Riche Initial per capita r income Growth rate CONVERGENCE (“catch-up growth”) Riche Initial per capita r income Convergence only if downward-sloping relationship.  => more capital in poorer economies? => technological leapfrogging?* * Process of adopting new technologies without first using older technologies Period 2004-2017 and giving more weight to large countries Convergence? Yes. BUT driven by China and India (= large countries with very high per capita GDP growth rates) as well as South-East Asia, Eastern With pop. weights Europe when became part of E.U. Without pop. weights BUT possible growth slowdown in developing economies now (including China and India) 1995-2015: Convergence. Post-2015: Lack of BUT growth has slowed in China Growth has remained high in India (but barely higher than China) 1. What are “clubs of convergence”? According to the study mentioned in the article, there are five such clubs. Which types of countries belong to the best two clubs? 2. Does the existence of clubs of convergence imply that there is convergence globally? More generally, why does their existence say about the growth process? 3. Is the currently observed convergence fast enough or too slow? => Driven by China and India, which still have high rates Convergence Hypothesis - Summary Depends on period studied Focusing on most recent period: Yes if unconditional Yes if population-weighted (given China’s and India’s growth) Noif world-as-one-country, due to massive increase in within- country inequality (especially in China and India) We will see that yes when conditional (= clubs of convergence) However, this is for the world on average Possibledivergence between poor and middle-income countries (again, driven by India = lower-middle and China = upper-middle) Policy publications and policy makers focus on percentage growth rates. Is that a mistake? Possibly yes Depends on the question. Very high growth rates are needed for poor countries to catch up with rich countries today. Percentage growth is not as economically meaningful as  Concepts for Review Historical & regional patterns Other common classifications of economic development. MDGs. vs. SDGs and limitations. Role of commodity prices Convergence hypothesis: Lost decade of development Convergence (catch-up growth) vs Structural adjustment divergence programs Unconditional Recent patterns: similarities Conditional (clubs of convergence) and differences wrt to the past Population-weighted Classification of developing Role of China and India economies: World Bank, U.N. World-as-one-country Low-income economies Percentage growth vs absolute