Meaning and Measurement of

Economic Development
 The Nature of Development Economics

• Development: The process of improving the quality of all human lives and capabilities by
raising people’s levels of living, self-esteem, and freedom.
• Economic growth is the increase in the inflation-adjusted market value of the goods and
services produced by an economy over time. It is conventionally measured as the percent
rate of increase in real gross domestic product, or real GDP.
• The Nature of Development Economics:
• Traditional economics: An approach to economics that emphasizes utility, profit
maximization, market efficiency, and determination of equilibrium.
• Political economy: The attempt to merge economic analysis with practical politics— to view
economic activity in its political context.
• Development economics: The study of how economies are transformed from stagnation to
growth and from low income to high-income status, and overcome problems of absolute
poverty.
 Why Study Development Economics?

• An introductory course in development economics should help students gain a better

understanding of a number of critical questions about the economies of developing nations.
• The following is a sample list of 30 such questions.
• They illustrate the kinds of issues faced by almost every developing nation and, indeed,
every development economist.
 Why Study Development Economics? (Cont……..)
• 1. What is the real meaning of development? Do the Millennium Development
Goals fit with these meanings?
•
2. What can be learned from the historical record of economic progress in
the now developed world? Are the initial conditions similar or different
for contemporary developing countries from what the developed countries faced on the
eve of their industrialization or in their earlier phases?

3. What are economic institutions, and how do they shape problems of underdevelopment
and prospects for successful development?
•
4. How can the extremes between rich and poor be so very great?
•
5. What are the sources of national and international economic growth? Who
benefits from such growth and why?
 Why Study Development Economics? (Cont……..)
• 6. Why do some countries make rapid progress toward development while
many others remain poor?

• 7. Which are the most influential theories of development, and are they compatible? Is
underdevelopment an internally (domestically) or externally (internationally) induced
phenomenon?

• 8. What constraints most hold back accelerated growth, depending on local

conditions?

• 9. How can improvements in the role and status of women have an especially beneficial
impact on development prospects?
•
10. What are the causes of extreme poverty, and what policies have been most
effective for improving the lives of the poorest of the poor?
 Why Study Development Economics? (Cont……..)
• 11. With world population superseding 7 billion people, on its way to a projected 9 billion
before mid-century, is rapid population growth threatening
the economic progress of developing nations? Does having large families
make economic sense in an environment of widespread poverty and
financial insecurity?
•
12. Why is there so much unemployment and underemployment in the
developing world, especially in the cities, and why do people continue to
migrate to the cities from rural areas even when their chances of finding a
conventional job are slim?

• 13. Under what conditions can cities act as engines of economic transformation?

• 14. Wealthier societies are also healthier ones because they have more resources
for improving nutrition and health care. But does better health also help
spur successful development?
 Why Study Development Economics? (Cont……..)

• 15. What is the impact of poor public health on the prospects for development,
and what is needed to address these problems?

• 16. Do educational systems in developing countries really promote economic

development, or are they simply a mechanism to enable certain select
groups or classes of people to maintain positions of wealth, power, and
influence?
 What Do We Mean by Development?

• Because the term development may mean different things to different people, it is important
that we have some working definition or core perspective on its meaning.
1. Traditional Economic Measures
• In strictly economic terms, development has traditionally meant achieving sustained rates of
growth of income per capita to enable a nation to expand its output at a rate faster than
the growth rate of its population.
• Levels and rates of growth of “real” per capita gross national income (GNI) (monetary
growth of GNI per capita minus the rate of inflation) are then used to measure the overall
economic well-being of a population—how much of real goods and services is available to
the average citizen for consumption and investment.
• Economic development in the past has also been typically seen in terms of the planned
alteration of the structure of production and employment
• so that agriculture’s share of both declines and that of the manufacturing and service
industries increases.
• Development strategies have therefore usually focused on rapid industrialization, often at
the expense of agriculture and rural development.
 What Do We Mean by Development? (Cont……)

• With few exceptions, such as in development policy circles in the 1970s, development was
until recently nearly always seen as an economic phenomenon in which rapid gains in overall
and per capita GNI growth.

• Problems of poverty, discrimination, unemployment, and income distribution were of

secondary importance to “getting the growth job done.”

• Indeed, the emphasis is often on increased output, measured by gross domestic product
(GDP).
 What Do We Mean by Development? (Cont……)

The New Economic View of Development:

• The experience of the first decades of post–World War II and postcolonial development in
the 1950s, 1960s, and early 1970s,
• when many developing nations did reach their economic growth targets but the levels of
living of the masses of people remained for the most part unchanged,
• signaled that something was very wrong with this narrow definition of development.
• An increasing number of economists and policymakers clamored for more direct attacks on
widespread absolute poverty, increasingly inequitable income distributions, and rising
unemployment.
• In short, during the 1970s, economic development came to be redefined in terms of the
reduction or elimination of poverty, inequality,
• and unemployment within the context of a growing economy.
• “Redistribution from growth” became a common slogan.
 What Do We Mean by Development? (Cont……)

• A number of developing countries experienced relatively high rates of growth of per capita
income during the 1960s and 1970s but

• showed little or no improvement or even an actual decline in employment, equality, and the
real incomes of the bottom 40% of their populations.

• By the earlier growth definition, these countries were developing; by the newer poverty,
equality, and employment criteria, they were not.

• The situation in the 1980s and 1990s worsened further as GNI growth rates turned negative
for many developing countries, and

• governments, facing mounting foreign-debt problems, were forced to cut back on their
already limited social and economic programs.
 What Do We Mean by Development? (Cont……)

• But the phenomenon of development or the existence of a chronic state of

underdevelopment is not merely a question of economics or

• even one of quantitative measurement of incomes, employment, and inequality.

• Development must therefore be conceived of as a multidimensional process involving major

changes in social structures, popular attitudes, and

• national institutions, as well as the acceleration of economic growth, the reduction of

inequality, and the eradication of poverty.

• No one has identified the human goals of economic development as well as Amartya Sen,
perhaps the leading thinker on the meaning of development.
 What Do We Mean by Development? (Cont……)

• Amartya Sen’s “Capability” Approach:

• – Functionings as an achievement
• – Capabilities as freedoms enjoyed in terms of functionings
• – Development and happiness
• – Well being in terms of being well and having freedoms of choice
• – “Beings and Doings”:
 What Do We Mean by Development? (Cont……)

• Some Important “Beings” and “Doings” in Capability to Function:

• – Being able to live long
• – Being well-nourished
• – Being healthy
• – Being literate
• – Being well-clothed
• – Being mobile
• – Being physically secure
• – Being able to take part in the life of the community
• – Being happy – as a state of being - may be valued as a functioning
 What Do We Mean by Development? (Cont……)

Details on Amartya Sen’s Capability Approach

• Sen: “Economic growth cannot be sensibly treated as an end in itself. Development has to
be more concerned with enhancing the lives we lead and the freedoms we enjoy.”
• So what matters fundamentally is not things a person has—or feelings these provide—but
what a person is, or can be, and does, or can do.
• That is, not just characteristics of commodities consumed as in the utility approach (recall
Sen’s bread example in the text), but
• the uses a consumer can and does make of commodities
• Think beyond availability of commodities and consider uses to address “functionings” - what
a person does (or can do) with commodities of given characteristics they come to possess or
control
• Valued functionings range from very basic - being adequately nourished to very complex -
e.g. being able to take part in community life
 What Do We Mean by Development? (Cont……)

• Disparities between income and advantages are due to:

• personal heterogeneities;
• environmental diversities;
• variations in social climate;
• intra-household distribution; and
• differences in relational perspectives such as minimal social expectations
 What Do We Mean by Development? (Cont……)

• In the case of nutrition, the end is health and what one can do with good health, as well as
personal enjoyment and social functioning.

• Measuring well-being with utility is not sufficient improvement over measuring consumption
to capture the meaning of development.

• A person’s own valuation of what kind of life would be worthwhile is not necessarily the
same as what gives pleasure to that person.
 What Do We Mean by Development? (Cont……)

• Consider functionings as resulting from choices, given capabilities

• “The functioning of a person is an achievement; it is what the person succeeds in doing with
the commodities and characteristics at his or her command… bicycling has to be
distinguished from possessing a bike… [and] from the happiness generated by [bicycling]…
• Or, you can think of goods leading in part to functioning, and from there to “utility” (as
happiness resulting from that functioning)
• To clarify, Sen suggests that subjective well-being as a psychological state of being is a
functioning—that could be pursued alongside other functionings such as health and dignity.
 What Do We Mean by Development? (Cont……)

• Three Core Values of Development:

• at least three basic components or core values serve as a conceptual basis and practical
guideline for understanding the inner meaning of development.

• These core values—sustenance, self-esteem, and freedom—represent common goals

sought by all individuals and societies.

1. Sustenance: The Ability to Meet Basic Needs:

• Sustenance: The basic goods and services, such as food, clothing, and shelter, that are
necessary to sustain an average human being at the bare minimum level of living.

• All people have certain basic needs without which life would be impossible. These life-
sustaining basic human needs include food, shelter, health, and protection.
 What Do We Mean by Development? (Cont……)

• When any of these is absent or in critically short supply, a condition of “absolute

underdevelopment” exists.

• A basic function of all economic activity, therefore, is to provide as many people as possible
with the means of overcoming the helplessness and misery arising from a lack of food,
shelter, health, and protection.

• To this extent, we may claim that economic development is a necessary condition for the
improvement in the quality of life that is development.

• Without sustained and continuous economic progress at the individual as well as the
societal level, the realization of the human potential would not be possible.

• Rising per capita incomes, the elimination of absolute poverty, greater employment
opportunities, and lessening income inequalities therefore constitute the necessary but not
the sufficient conditions for development
 What Do We Mean by Development? (Cont……)

2. Self-Esteem: To Be a Person
• A second universal component of the good life is self-esteem—a sense of worth and self-
respect, of not being used as a tool by others for their own ends.

• All peoples and societies seek some basic form of self-esteem, although they may call it
authenticity, identity, dignity, respect, honor, or recognition.

• The nature and form of this self-esteem may vary from society to society and from culture to
culture.

• This is because national prosperity has become an almost universal measure of worth.
• Due to the significance attached to material values in developed nations, worthiness and
esteem are nowadays

• increasingly conferred only on countries that possess economic wealth and technological
power—those that have “developed.”
 What Do We Mean by Development? (Cont……)

• Freedom from Servitude: To Be Able to Choose

• A third and final universal value that we suggest should constitute the meaning of
development is the concept of human freedom.

• Freedom involves an expanded range of choices for societies and their members together
with a minimization of external constraints in the pursuit of some social goal we call
development.

• Amartya Sen writes of “development as freedom.”

• Wealth can enable people to gain greater control over nature and the physical environment
(e.g., through the production of food, clothing, and shelter) than they would have if they
remained poor.
• It also gives them the freedom to choose greater leisure, to have more goods and services,
or to deny the importance of these material wants and choose to live a life of spiritual
contemplation.
• The concept of human freedom also encompasses various components of political freedom,
including personal security, the rule of law, freedom of expression, political participation,
and equality of opportunity.
 What Do We Mean by Development? (Cont……)

• The Central Role of Women:

• women as playing the central role in the development drama.
• Globally, women tend to be poorer than men.
• They are also more deprived in health and education and in freedoms in all its forms.
• Moreover, women have primary responsibility for child rearing, and the resources that
• they are able to bring to this task will determine whether the cycle of transmission of
poverty from generation to generation will be broken.
• Children need better health and education, and studies from around the developing world
confirm that
• mothers tend to spend a significantly higher fraction of income under their control for the
benefit of their children than fathers do.
• Women also transmit values to the next generation.
• To make the biggest impact on development, then, a society must empower and invest in its
women.
 What Do We Mean by Development? (Cont……)

• The Three Objectives of Development:

• We may conclude that development is both a physical reality and a state of mind in which
society has, through some combination of social, economic, and institutional processes,
secured the means for obtaining a better life. Whatever the specific components of this
better life, development in all societies must have at least the following three objectives:
1. To increase the availability and widen the distribution of basic life-sustaining goods such
as food, shelter, health, and protection
2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs,
better education, and greater attention to cultural and human values, all of which will serve
not only to enhance material wellbeing but also to generate greater individual and national
self-esteem.
3. To expand the range of economic and social choices available to individuals and nations by
freeing them from servitude and dependence, not only in relation to other people and
nation-states, but also to the forces of ignorance and human misery.
 Comparative Economic Development
Commonalities & Diversity
Common Characteristics of developing countries

1. Lower levels of living and productivity

2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social fractionalization
6. Larger rural population- rapid migration to cities
7. Lower levels of industrialization and manufactured exports
8. Adverse geography
9. Underdeveloped financial and other markets
10. Colonial legacies- poor institutions etc.
 Defining the Developing World

• For operational and analytical purposes, WB divided economies among income groups
according to 2019 gross national income (GNI) per capita, calculated using the World Bank
Atlas method.
• low-income economies are defined as those with a GNI per capita of $1,035 or less;
• lower middle-income economies are those with a GNI per capita between $1,036 - and
$4,045;
• upper middle-income economies are those with a GNI per capita between $ 4,046 and
$12,535;
• high-income economies are those with a GNI per capita of $12,536 or more.
• (Source WB, June 2020)
• Developed Countries
• Developing Countries
• Least Developed countries
• Emerging Economies
 Indicators of Development
• Basic indicators of development:
1. Real income per capita adjusted for purchasing power: In accordance with the World
Bank’s income-based country classification scheme, gross national income (GNI) per capita,

• the most common measure of the overall level of economic activity, is often used as a
summary index of the relative economic well-being of people in different nations.

• It is calculated as the total domestic and foreign value added claimed by a country’s
residents without making deductions for depreciation of the domestic capital stock.

• Per capita GNI comparisons between developed and less developed countries however,
exaggerated by the use of official foreign-exchange rates to convert national currency
figures into U.S. dollars.

• This conversion does not measure the relative domestic purchasing power of different
currencies.
 Indicators of Development
• In an attempt to resolve this problem, researchers have tried to compare relative GNIs and
GDPs by using purchasing power parity (PPP) instead of exchange rates as conversion
factors.

• PPP is calculated using a common set of international prices for all goods and services.

• In a simple version, purchasing power parity is defined as the number of units of a foreign
country’s currency required to purchase the identical quantity of goods and services in the
local developing country market as $1 would buy in the United States.

• In practice, adjustments are made for differing relative prices across countries so that living
standards may be measured more accurately.
 Indicators of Development (Cont.....)

2. Health as measured by life expectancy, undernourishment, and child mortality:

• Besides average incomes, it is necessary to evaluate a nation’s average health
and educational attainments, which reflect core capabilities.
• Life expectancy is the average number of years new born children would live if subjected to
the mortality risks prevailing for their cohort at the time of their birth.
• Undernourishment means consuming too little food to maintain normal levels of activity;
• it is what is often called the problem of hunger.
• High fertility can be both a cause and a consequence of underdevelopment, so the birth rate
is reported as another basic indicator.

3. Educational attainments as measured by literacy and schooling :

• Literacy is the fraction of adult males and females reported or estimated to have basic
abilities to read and write;
• functional literacy is generally lower than the reported numbers.
 Indicators of Development (Cont.....)

• Note that in addition to big differences across these income groupings, the low-income
countries are themselves a very diverse group with greatly differing development challenges.

• For example, even Bangladesh has a real income that is now more than five times greater
than the Democratic Republic of Congo (DRC); and India’s income is more than 10 times
greater.

• Under-5 malnutrition (underweight) is higher in Bangladesh, at 41.3%, than DRC (a still very
high 28.2%).

• The under-5 mortality rate in Bangladesh is 46, while that of the DRC is nearly quadruple
that number at 168.

• Life expectancy in Congo is just 48, compared with 69 in Bangladesh.

• But while India and Bangladesh clearly do better overall than countries like the DRC, most
low- and lower middle-income countries still face enormous development challenges as
seen by comparing these statistics even to Botswana, Peru, or Thailand.
 Indicators of Development (Cont.....)

• Is per-capita GDP a good indicator of development?

Some problems:
1. cost of living → PPP adjusted
2. underreporting + low quality data
3. home production
4. black markets
5. other important dimensions: literacy, health.
→Human Development Index:
Holistic measure of living levels: Human Development Index (UNDP, 1990)
HDI = (income index +life expectancy + education index)/3
income= (log INC- log min INC)/ (log max INC-log min INC) where INC is PPP per capita
income
Life Exp (LE) = (LE - min LE)/ (max LE – min LE) x 100
Education = (2 x alphab + scol)/3
Indicators
Overall, however, GDP per-capita is not perfect but still a good measure since it’s a
good PROXY for other things, i.e. GDP is positively related to education and
positively related to life expectancy.
 Characteristics of the Developing World:
Diversity within Commonality
• There are 10 major areas of “diversity within commonality” in the developing world.
1. Lower Levels of Living and Productivity
• At very low income levels, in fact, a vicious circle may set in, whereby low income leads to
low investment in education and health as well as plant and

• equipment and infrastructure, which in turn leads to low productivity and economic
stagnation.
• This is known as a poverty trap.

• The low-income countries are themselves a very diverse group with greatly differing
development challenges.

• One common misperception is that low incomes result from a country’s being too small to
be self-sufficient or too large to overcome economic inertia.

• However, there is no necessary correlation between country size in population or area and
economic development
 Characteristics of the Developing World:
Diversity within Commonality

• Some star performers among now high-income economies such as South Korea and
Taiwan were once among the poorest in the world.
• Some middle income countries are also relatively stagnant, but others are growing
rapidly— China.
• Indeed, income growth rates have varied greatly in different developing regions
and countries, with rapid growth in East Asia,
• slow or even no growth in sub-Saharan Africa, and intermediate levels of growth in
other regions.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
2. Lower Levels of Human Capital
• Human capital—health, education, and skills—is vital to economic growth and
human development.

• Great disparities in human capital around the world.

• Compared with developed countries, much of the developing world has lagged in
its average levels of nutrition, and education.

• The under-5 mortality is 17 times higher in low income countries than in high-
income countries, although great progress has been made since 1990, as shown
graphically in Figure 2.4.

• Teacher absence remains a serious problem in South Asia and sub-Saharan Africa.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
• The well-performing developing countries are much closer to the developed world
in health and education standards than they are to the lowest income countries.

• Although health conditions in East Asia are relatively good, sub-Saharan Africa
continues to be plagued by problems of malnourishment, malaria, tuberculosis,
AIDS, and parasitic infections.

• Despite progress, South Asia continues to have high levels of illiteracy, low
schooling attainment, and undernourishment.

• Still, in fields such as primary school completion, low income countries are also
making great progress; for example, enrollments in

• India are up from 68% in the early 1990s to a reported 94% by 2008.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
3. Higher Levels of Inequality and Absolute Poverty
• Globally, the poorest 20% of people receive just 1.5% of world income.
• Absolute poverty: The situation of being unable or only barely able to meet the subsistence
essentials of food, clothing, shelter, and basic health care.
• The lowest 20% now roughly corresponds to the approximately 1.2 billion people
living in extreme poverty on less than $1.25 per day at purchasing power parity.
• Bringing the incomes of those living on less than $1.25 per day up to this minimal poverty
line would require less than 2% of the incomes of the world’s wealthiest 10%.
• Thus, the scale of global inequality is also enormous
•
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
• But the enormous gap in per capita incomes between rich and poor nations is
not the only manifestation of the huge global economic disparities.

• To appreciate the breadth and depth of deprivation in developing countries, it is

also necessary to look at the gap between rich and poor within individual
developing countries.

• A problem, however, arises when one recognizes that these minimum subsistence
levels will vary from country to country and region to region,
• reflecting different physiological as well as social and economic requirements.

• Economists have therefore tended to make conservative estimates of world

poverty in order to avoid unintended exaggeration of the problem.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
4. Higher Population Growth Rates
• Global population has skyrocketed since the beginning of the industrial era,
from just under 1 billion in 1800 to 1.65 billion in 1900 and to over 6 billion by
2000. World population topped 7 billion by 2012.
•Rapid population growth began in Europe and other now developed countries.
•But in recent decades, most population growth has been centered in the developing
world.
• Compared with the developed countries, which often have birth rates near or even
below replacement (zero population growth) levels, the low-income developing
countries have very high birth rates.
•More than five-sixths of all the people in the world now live in developing countries;
and some 97% of net population growth (births minus deaths) in 2012 took place in
developing regions.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
• But population dynamics varies widely among developing countries.
• Populations of some developing countries, particularly in Africa, continue to grow
rapidly.
•From 1990 to 2008, population in the low-income countries grew at 2.2% per
year, compared to 1.3% in the middle-income countries (the high-income countries
grew at 0.7% per year, reflecting both births and immigration).
•Dependency burden: The proportion of the total population aged 0 to 15 and 65+,
which is considered economically unproductive and therefore not counted in the
labor force.
•That not only are developing countries characterized by higher rates of population
growth,
•but they must also contend with greater dependency burdens than rich nations,
though with a wide gulf between low- and middle-income developing countries.
• Crude birth rate: The number of children born alive each year per 1,000
population.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
5. Greater Social Fractionalization
• Fractionalization: Significant ethnic, linguistic, and other social divisions within a country.

• Ethnic and religious diversity need not necessarily lead to inequality, turmoil, or instability,
and unqualified statements about their impact cannot be made.

• There have been numerous instances of successful economic and social integration of
minority or indigenous ethnic populations in countries as diverse as Malaysia and Mauritius.

• And in the United States, diversity is often cited as a source of creativity and innovation.

• The broader point is that the ethnic and religious composition of a developing nation and
whether or not that diversity leads to conflict or cooperation can be important
determinants of the success or failure of development efforts.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
6. Larger Rural Populations but Rapid Rural-to-Urban Migration
• One of the hallmarks of economic development is a shift from agriculture to
manufacturing and services.
• In developing countries, a much higher share of the population lives in rural areas,
and correspondingly fewer in urban areas, as seen in Table 2.8.
• Although modernizing in many regions, rural areas are poorer and tend to suffer
from missing markets, limited information, and social stratification.
• A massive population shift is also under way as hundreds of millions of people are
moving from rural to urban areas, fueling rapid urbanization, with its own
attendant problems.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
7. Lower Levels of Industrialization and Manufactured Exports
• Industrialization is associated with high productivity and incomes and has been a
hallmark of modernization and national economic power.
• It is no accident that most developing-country governments have made
industrialization a high national priority, with a number of prominent success
stories in Asia.
• Along with lower industrialization, developing nations tended to have a
higher dependence on primary exports.
• Most developing countries have diversified away from agricultural and mineral
exports to some degree.
• The middle income countries are rapidly catching up with the developed world in
the share of manufactured goods in their exports, even if these goods are typically
less advanced in their skill and technology content.
• However, the low-income countries, particularly those in Africa, remain highly
dependent on a relatively small number of agricultural and mineral exports.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
8. Adverse Geography
• Many analysts argue that geography must play some role in problems of agriculture, public
health, and comparative development more generally.
• Landlocked economies, common in Africa, often have lower incomes than coastal
economies.
• As can be observed on the map on the inside cover, developing countries are primarily
tropical or subtropical, and this has meant that they suffer more from tropical pests and
parasites, endemic diseases such as malaria, water resource constraints, and extremes of
heat.
• A great concern going forward is that global warming is projected to have its greatest
negative impact on Africa and South Asia.
• The extreme case of favorable physical resource endowment is the oilrich Persian Gulf
states.
• At the other extreme are countries like Chad, Yemen, Haiti, and Bangladesh, where
endowments of raw materials and minerals and even fertile land are relatively minimal.
• However, as the case of the DRC shows vividly, high mineral wealth is no guarantee of
development success.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
•9. Underdeveloped Markets
• Imperfect market : A market in which the theoretical assumptions of perfect competition
are violated by the existence of, for example, a small number of buyers and sellers, barriers
to entry, and incomplete information.
• Incomplete information: The absence of information that producers and consumers need to
make efficient decisions resulting in underperforming markets.
• Imperfect markets and incomplete information are far more prevalent in developing
countries .
• Some aspects of market underdevelopment are that they often lack
– (1) a legal system that enforces contracts and validates property rights;
– (2) a stable and trustworthy currency;
– (3) an infrastructure of roads and utilities that results in low transport and communication costs so as to facilitate
interregional trade;
– (4) a well-developed and efficiently regulated system of banking and insurance, with broad access and with
formal credit markets that select projects and allocate loanable funds on the basis of relative economic
profitability and enforce rules of repayment;
– (5) substantial market information for consumers and producers about prices, quantities, and qualities of
products and resources as well as the creditworthiness of potential borrowers; and
– (6) social norms that facilitate successful long-term business relationships.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
10. Lingering Colonial Impacts and Unequal International Relations
• Colonial Legacy: Most developing countries were once colonies of Europe or otherwise
dominated by European or other foreign powers, and institutions created during the colonial
period often had destructive effects on development that in many cases have persisted to the
present day.

• Despite important variations that proved consequential, colonial era institutions often favored
extractors of wealth rather than creators of wealth, harming development then and now.

• Both domestically and internationally, developing countries have more often lacked
institutions and formal organizations of the type that have benefited the developed world:

• Domestically, on average, property rights have been less secure, constraints on elites have
been weak, and a smaller segment of society has been able to gain access to and take
advantage of economic opportunities.

•Problems with governance and public administration , as well as poorly performing markets,
often stem from poor institutions.
 Characteristics of the Developing World:
Diversity within Commonality (Cont……)
• External Dependence:
• Relatedly, developing countries have also been less well organized and influential in
international relations, with sometimes adverse consequences for development.

• For example, agreements within the World Trade Organization (WTO) and its predecessors
concerning matters such as agricultural subsidies in rich countries that harm developing-
country farmers and one-sided regulation of intellectual property rights have often been
relatively unfavorable to the developing world.

• Developing nations are also dependent on the developed world for environmental
preservation, on which hopes for sustainable development.

• Thus the developing world endures what may be called environmental dependence, in
which it must rely on the developed world to cease aggravating the problem and

• to develop solutions, including mitigation at home and assistance in developing countries.