Development Economics Lecture Notes 2

Transcription

1 Development Economics Lecture Notes 2 March 5, 2009

2 .. The glass is half-full Turkey is an upper-middle income country with almost 50 million mobe phone subscibers The Turkish economy ranks as 66th in terms of GDP per capita (PPP) but ranks as 84th in Human Development Index

3 Growth Table: Long term trends Population GDP per capita Total Agr. output Total Ind. output

4 Consider the world as a single country, the income distribution will be only better than Namibia. Cross-country income differentials are as great as within country. Average income per person reaches over 40 thousand dollars in US and barely reaches 700 dollars in Burundi. Why do we have such a disparity? Why are the rich nations rich and the poor nations are poor?

5 World Bank considers all the countries with a GDP per capita less than 10 thousand dollars as non-developed. Then it classifies these countries as LOW-Income (0-875 dollars), LOWER MIDDLE-Income ( dollars) and UPPER MIDDLE-Income ( thousand 725 dollars). Generally there are two measures to indicate the average income of a country. Gross National Income and Gross National Product. The important distinction is to use Purchasing Power Parity (PPP) in each measure since the price of a good or a service may not be same internationally. Say if you a haircut in Turkey, you may certainly pay less than what you would pay in US. PPP is calculated using a common set of international prices for all goods and services produced, valuing goods in all countries at US prices. As the labor costs are much cheaper in developing countries, a dollar can purchase a higher quantity of goods and services that are labor intensive.

6 Human Development Index is a ranking system of all countries on a scale of 0 and 1 based on three targets or results of development. a. Longevity as measured by life expectancy at birth b. Knowledge as measured by a weighted average of adult literacy (the weight is two-thirds) and mean years of schooling (one-third) c.standard of Living as measured by real per capita gross domestic product adjusted.

7 Adjusted income for PPP and diminishing marginal utility is calculated by taking the natural logarithm of the GDP per capita in PPP dollars. The upper limit is 40 thousand dollars. So Income Index is calculates as In order to find longevity index, UNDP takes a country s current life expectancy at birth and subtracts 25 years. The maximum is taken to be 85 for life expectancy.

8 Although the cross-country differences matter a great deal in terms of structural constraints, there are unifyinng features of the developing world. Lower Levels of Income and Productivity: Productivity can be simply measured by the ratio of value added to labor-hours. The increasing trend in productivity for the developing world is not sufficient for this group of countries to catch-up with the developed world. At low levels of income and productivity a vicious circle of poverty traps is likely to occur. This is what Nobel laureate Gunnar Myrdal phrased as circular and cumulative causation. Low income leads to to low levels of investment in education and health as well as plant, equipment and infrastructure, which in turn leads to low productivity and economic stagnation.the regional backwardness of East and Southeast Turkey related to this vicious circle.

9 Lower Levels of Human Capital: Higher Levels of Inequality and Absolute Poverty Higher Population Growth Rates Greater Social Fractionalization Larger Rural Populations but Rapid Rural-to-Urban Migration Lower Levels of Industrialization and Manufactured Exports Adverse Geography Underdeveloped Financial and Other Markets Colonial Legacies, External Dependence, Lack of Civil Society

10 IS THERE A CHANCE OF CONVERGENCE? There exists rather a DIVERGENCE for the world sample for the period of There is a CONVERGENCE CLUB of some OECD countries; excluding Turkey and Mexico There is not really a pattern among the 125 developing countries in terms of convergence for the period of

11 SIMPLE GROWTH DYNAMICS Harrod-Domar Growth Model All economic units and branches are homogenous. There exist a direct relationship between the capital stock (K) a country holds and its current output. This is called capital-output ratio. Denote this ratio as k. The agents have to save to incur the costs of depreciation as well as to finance the incremental increase in capital stock.the net savings ratio is s.

12 Then S = sy Net investment, I is defined as the incremental change in the capital stock, K and is represented as K such that I = K Since k = K Y k = K Y and K = k Y Finally in the long-run equilibrium, net savings should be equal net investment, I we have S = I

13 Therefore sy = k Y Dividing both terms by Y and k, we get Y Y = s k in which the first term represents the growth rate of GDP. In order to make the model a bit more realistic, we can take the rate of capital depreciation, δ into account. Y Y = s k δ

14 The savings in Turkey averaged around 20 percent of GDP. Capital to Output ratio is around 3. According to the simple Harrod-Domar model Turkey can grow at a rate of 7.3 percent per year because Y Y = s k = 20 3 = 7.3 However, the average rate of growth throughout this period has been 4 percent. Rate of population growth has been little less than 2 percent, implying a rate of growth in average income merely 2 percent per year. Rate of depreciation of capital stock can be assumed as 10