Measuring Development 9/04/2015 8:20 AM Which country is more developed? Cuba or Colombia Cuba may be more equal in distribution Throw the US into it Measuring Development Now that we have some concepts of what might comprise development, we need to operationalize those ideas o We want to be able to measure them Why do we want to be able to measure them? o Be able to describe current conditions within a country o Want to describe changes within a country over time o Want to be able to compare across countries! Want to be able to compare 2 countries.! Ex: infant mortality in US vs infant mortality in India These goals place certain requirements on measurement: o Current conditions: representative, accurate measure! Inflation/deflation over years o Intertemporal comparison o Cross-country comparison! Even for simple measures, difficult. Ex: under 5 mortality between countries. Measuring Total Value Added Most common starting point for fiscal health Total income: GNI vs GDP o Why g and not n? Take out depreciation to get to GDP o Why n and not d? N is nationality of the country, d is within the countries o Why i and not p? there isn t one Challenges by use: o Current conditions! Household production (no sale of services) " Cambodia: this includes 50 percent of labor force! Black markets! What about produced bads o Intertemporal changes! Inflation?
o Cross-country comparison! How do we compare total production in the US to India? " Exchange rates " Purchasing power- measure of the real goods you can by for a given currency Take a basket of goods, calculate price in different countries. Ratios of prices is purchasing power. Big Mac index o What are the issues of comparison?! Quality of the food! Cultural factors! Ingredients are different! Nature of the good/differences in production Measuring Human Capital We might want to measure development in terms of improvement in outcomes like health or education o More precise than measuring income b/c units don t vary by country o However still significant challenges How might we compare the health of the population in different countries? o Ex: Child mortality by country! Under 5 mortality rate. How do we calculate? " # of children born birth certificates " # of children born alive that die before 5 death certificates! How do we calculate in a developing country? Aka Zimbabwe " Good sampling techniques " Rural surveying go to village and ask the two questions UN interagency group for child mortality estimation Group created with the sole purpose of creating consistent comparable estimates on child mortality
Estimates are based on national surveys o US AID funded demographic and health surveys o UNICEF multiple indicator cluster surveys o Original data Problems identified in generating under 5 child-mortality estimates (UN IGCME 2012) o No consistent source of data covering the last several decades o Survey within and between countries are often inconsistent in sampling methodology, survey content (e.g. specific questions used to identify children who died under 5), and coverage. o Data quality issues! Missing responses! Non-compliance with sample methodology o Latest data is almost never current Estimating infant and pre-natal morality o Much more difficult to asses o Much more limited data o Usually calculate through statistical models Multi-Dimensional measures Have the additional problem of aggregating multiple outcomes o How does one trade off between literacy rate and infant mortality? Examples: o Happiness index? o Human development index HDI! Scale from 0 to 1! Aggregate of 3 dimensions " Longevity- life expectancy at birth " Knowledge- adult literacy and enrollment ratio " Standard of living- measure of gdp! Does this make sense/! Which us state would hdi help or hurt? o Strong positive correlation between high gdp and hdi! Correlated almost 1 to 1! What do we learn?
" Fostering gdp fosters development " GDP is so correlated with other factors that the formula doesn t tell you much more than per capita gdp Comparing countries o NEW human development index! Replace gdp with gni! Include actual educational attainment! Predicted attainment by todays children! Literary and enrollment dropped! Upper goal posts empirically based! Lower income minimum! Switch from log to ln! Calculate geometric average o New HDI! Five components " Life expectancy, mean years of schooling, expected years of schooling, combined education index, GNI per capita! 3 dimension indexes: life, education, income " index= actual value minimum value maximum value minimum value " max values are highest values observed in data, including past years " index for each 3 thing, then calculate geometric mean. Multiply and get cubic root. " min values are subsistence levels! Blue dots more spread spreading the gap o What do we do?! Focus on one measure is too narrow, need to focus on multiple measures! BUT aggregating can be useful and challenging " Many measures highly correlated " Not clear what to include/exclude " Also difficult on how to weight them! Thoughts:
9/04/2015 8:20 AM What should you take from these models? Why we cover them? History of thought how our thought has changed over time Overview of methodology theoretical models Diversity of perspectives Limitations: provide an understanding of the limits of these techniques Classic growth models Two types of models o Linear-in-stages of growth! Rostow s stages of growth! Harrod-Domar growth model o Structural change models! Lewis model Common characteristics o Focus on output as a proxy for development o Development is a uniform process path from getting from developing to developed.! Differences reflect that they are at different points on path. o Savings/capital deepening is the main mechanism for generating greater output! Build capital accumulation through savings Linear in-stages models o Two examples:! Rostow s stages of growth! Harrod-domar growth model o Common characteristics:! Development t is a progress though a series of universal, necessary stages of progress! Universal: all countries follow the same path! Necessary: only one path o History:! Popular in the 50s and 60s! Strongly influenced by the Marshall plan! Emphasize capital accumulation
o Rostows s Stages of Growth! Walter Whitman Rostow " UT professor until retirement " LBJ NSA special assistant! Stages of development: " Traditional society " Pre-conditions stage- excess output invest in capital # " Take-off " Drive to maturity diminishing marginal returns, level off into steady situation, enter into # " Age of high mass consumption! Mechanism behind this is mustering savings for capital accumulation o Harrod-Domar model! Terms: " t=time period " K=capital stock, c is the capital to output ratio " S=net savings, s is the net savings ratio " Y=national income, I=net investment! Create 4 identities from theses: " I t =S t Net investment = net saving. When you invest, there is nothing else you could do with it but save " I t+1 =K t+1 K t " S t+1 = sy t Net savings ratio. How much we decide to save this year. " K t / y t = c! Conclusion: Rate of growth of gdp=s/c " Model says that if you make these assumptions, growth rate is determined by net savings rate and savings/capital ratio " Increase rate of savings # increase rate of growth Structural Change Model