In this chapter, students will be able to understand: State some comparative statistics on rich and poor countries, differentiate growth from development and explain how those differences affect macroeconomic policy, explain the particular problems of monetary policy in a developing country context, list seven obstacles facing developing countries.
Lecture 4 Measuring Economic Growth and Development The Process of Economic Development • • • • • • • • • • • Is Development synonymous simply with Economic Growth? Different Development Goals of Society Equality of opportunity Rising income and standard of living Equity in the distribution of income and wealth Political democracy and widespread participation Expanded role for women, minorities and all social classes in public life Increased opportunities for education and self improvement Expanded availability of and improvements in health care Public and private safety nets to protect the vulnerable A clean and healthy environment Efficient, competent and fairly administered public sector A reasonable degree of competition in the private sector Highquality growth • Over the 1990s, the IMF seemed slowly to be learning from the criticisms of its policies • Now, the IMF sees itself as promoting socalled `highquality growth’, • • “defined as growth that is sustainable, brings lasting gains in employment and living standards and reduces poverty. Highquality growth should promote greater equity and equality of opportunity. It should respect human freedom and protect the environment. Obviously, growth cannot be high quality if it does not benefit fully, tangibly, and equitably a group that constitutes more than one half the population of the world and still bears the primary responsibility for the care, nutrition, and education of the world’s children. Achieving highquality growth depends, therefore, not only on pursuing sound economic policies, but also on implementing a broad range of social policies.” IMF(1995) Measuring Economic Growth and Development What is the criterion for development? 1. The economic growth / income criterion: GNP, GDP, rate of growth • Simple and easy to use • Yet does it really capture development? 2. The indicators criterion: e.g. Human Development Index (HDI), PI, GDI, GPI • More comprehensive and realisitc • Yet difficult to measure and use for international comparisons The economic growth or economic income criterion Gross National Product (GNP) is the total value of all income (= value of final output) accruing to residents of a country, regardless of the sources of that income Gross Domestic Product (GDP) is the total value of all income (= value of final output) created within the borders of a country, regardless of whether the ultimate recipient of that income resides within or outside the country Difference between GNP vs. GDP • • • • • If an economy were closed, GNP = GDP with capital & labor flows across borders, GNP & GDP diverge from one another. – profits – dividends – interest payments – worker remittances net income from the rest of the world= income flows into the country from the ROW – income leakages from the country to the ROW If inflows > outflows, then GNP > GDP If inflows GNP Table 2.1 GDP and GNI comparisons, selected nations, 1990 & 2006 Algeria Argentina Bangladesh Bolivia Botswana Brazil Cambodia Chile China Côte d’Ivoire Costa Rica Egypt Ethiopia Ghana Guatemala Haiti India Indonesia J amaica Kenya Korea (Rep.) Malaysia Mexico Mozambique Nigeria Pakistan Philippines Rwanda Sri Lanka Sudan Thailand Venezuela Vietnam Population Total (millions) GDPa 1990 2006 1990 2006 25.3 33.3 62.0 114.7 32.6 39.1 141.4 214.1 104.0 144.3 30.1 62.0 6.7 9.3 4.9 11.2 1.4 1.8 3.8 10.3 149.4 188.7 462.0 1,068.0 9.7 14.4 1.1 7.2 13.2 16.5 31.6 145.8 1,135.2 1,311.8 354.6 2,668.1 12.7 18.5 10.8 17.5 3.1 4.4 7.4 22.1 55.7 75.4 43.1 107.5 51.2 72.7 12.1 13.3 15.5 22.5 5.9 12.9 8.9 12.9 7.7 35.3 6.9 8.6 2.9 5.0 849.5 1,109.8 316.9 906.3 178.2 223.0 114.4 364.5 2.4 2.7 4.6 10.5 23.4 35.1 8.6 21.2 42.9 48.4 263.8 888.0 17.8 25.8 44.0 148.9 83.2 104.2 262.7 839.2 13.4 20.1 2.5 7.6 94.5 144.7 28.5 114.7 108.0 159.0 40.0 128.8 61.1 84.6 44.3 116.9 7.1 9.2 2.6 2.5 17.0 19.8 8.0 27.0 26.1 37.0 13.2 37.6 54.6 64.7 85.3 206.2 19.8 27.0 47.0 181.9 66.2 84.1 6.5 60.9 Total GDP/GNI GNI per capita GNIa g a p b ( $ ) 9 0 0 9 0 60.0 107.3 7.4 2,371 3,218 135.2 208.6 5.4 4,148 5,333 30.8 65.4 -3.5 296 453 4.6 10.8 0.4 694 1,156 3.7 9.7 0.7 2,580 5,498 449.7 1,038.4 29.5 3,010 5,503 1.1 6.9 0.3 114 481 29.8 129.8 16.0 2,261 7,892 355.7 2,694.8 -26.8 313 2,054 9.2 16.0 1.5 728 865 7.2 21.4 0.8 2,325 4,870 42.0 108.0 -0.5 755 1,433 12.0 13.3 0.0 235 183 5.8 12.8 0.1 373 569 7.5 35.3 0.0 843 2,735 2.8 4.3 0.6 413 501 312.7 900.9 5.3 368 812 109.2 348.7 15.7 613 1,563 4.2 9.4 1.1 1,740 3,525 8.2 20.9 0.3 351 596 263.6 888.0 0.0 6,149 18,340 42.2 144.2 4.7 2,362 5,596 254.1 830.7 8.5 3,053 7,970 2.3 6.9 0.7 173 344 25.6 103.3 11.4 271 713 41.7 126.2 2.7 387 793 44.1 127.8 -10.9 721 1,511 2.6 2.5 0.0 362 268 7.9 26.6 0.4 462 1,344 12.4 34.2 3.4 476 925 84.3 202.1 4.1 1,542 3,122 46.3 180.4 1.5 2,342 6,676 6.1 59.4 1.5 92 706 a billions of US dollars b GDP/GNI gap = GDP – GNI, in billions of US dollars. A positive value means that GDP > GNI; a negative value indicates that GNI > GDP Source: World Bank, World Development Indicators Online Using GNP or GDP for Ranking Nations: Five Necessary Adjustments 1. Adjusting for Population Size GNP per capita = GNP total population GDP per capita = GDP total population % change GNI per capita = % (total GNI/total population) = % total GNI – % population • Caution: this an identity, no causal relation – not correct to infer from this equation that slow population growth causes a faster rate of growth of income per person or that rapid population growth causes slower growth in income per person. Using GNP or GDP for Ranking Nations: Five Necessary Adjustments 2. Adjusting for Nominal Income Total nominal GDP = i=1n PiQi n :the no. goods and services produced; P the price of each good Q the quantity of each good Real GDP at base year’s prices 2008 GDP at 1992 prices = i=1 n Pi,1992 Qi,2008 Alternatively: Real GDP = nominal GDP / GDP deflator total nominal GDP in 2008 = US$3,337 million, the price index for 2008 (deflator)= 331.7 1992, the base year deflator = 100 Then 2008 total GDP x 100 = US$3,337 million x 100 2008 Price Index 331.7 = US$1,006 million Using GNP or GDP for Ranking Nations: Five Necessary Adjustments Accounting for Income Distribution: Gini Coefficient hypothetical income distribution for a country: Accounting for Income Distribution:Gini Coefficient The Gini coefficient = area A/ area(A+B) percentage of income X % of families receive exactly X % of income 10% of the population receive 10% of the income dispersion of actual income distribution what would be a perfectly equal distribution percentage of population Table 2.3 Income distribution, selected economies Country Algeria (1995) Poorest 20% 7.0 R iches t 20% 42.6 R i ches t %a Gini Poores t 20% coeffi ci ent 6.1 35.3 Argentina (2004) Bangladesh (2000) Botswana (1993) Brazil (2004) Chile (2003) China (2004) Côte d’Ivoire (2002) Egypt (1999-2000) Ethiopia (1999-2000) Ghana (1998-99) Guatemala (2002) India (2004-05) Indonesia (2002) Jamaica (2004) Kenya (1997) Korea (1998) Malaysia (1997) Mexico (2004) Morocco (1998–99) Mozambique (2002-03) Pakistan (2002) Philippines (2003) Rwanda (2000) Thailand (2002) Venezuela (2003) Vietnam(2004) 3.1 8.6 3.2 2.8 3.8 4.3 5.2 8.6 9.1 5.6 2.9 8.1 8.4 5.3 6.0 7.9 4.4 4.3 6.5 5.4 9.3 5.4 5.3 6.3 3.3 4.2 55.4 42.7 65.1 61.1 60.0 51.9 50.7 43.6 39.4 46.6 59.5 45.3 45.3 51.6 49.1 37.5 54.3 55.1 46.6 53.6 40.3 50.6 53.0 49.0 52.1 44.3 7.9 5.0 20.3 21.8 15.8 12.1 9.8 5.1 4.3 8.3 20.5 5.6 5.4 9.7 8.2 4.7 12.3 12.8 7.2 9.9 4.3 9.4 10.0 7.8 15.8 10.5 51.3 33.4 60.5 57.0 54.9 46.9 44.6 29.5 25.5 40.8 55.1 36.8 34.3 45.5 42.5 31.6 49.2 46.1 39.5 47.3 30.6 44.5 46.8 42.0 48.2 34.4 Japan (1993) US (2000) 10.6 5.4 35.7 45.8 3.4 8.5 24.9 40.8 a Share of total income (or, for some economies, consumption) received by the richest 20 percent of the population divided by the share of total income (or consumption) received by the poorest 20 percent of the population Using GNP or GDP for Ranking Nations: Necessary Adjustments Accounting for value of home or non market production – Nonmarket activities left out: • Homebaked cake vs. market bought cake • Kindergarten care vs. home care • Cleaning lady vs. selfcleaning – Mostly women’s work –invisible work – Yet very important • Women’s unpaid activities estimated around 50% of global GDP • they account for an important share of a population’s consumption contributing to higher life standards. • After all isn’t this what development is all about? Higher life standards Using GNP or GDP for Ranking Nations: Necessary Adjustments • Accounting for environmental destruction: • A number of productive activities that detract from quality of life, – production of military weapons – operations that cause environmental destruction of forests, – production processes that • spew toxic wastes into the air and water and then force society to pay for their cleanup or • which create health problems requiring remediation These are still counted as positive contributions to the measured level of GNP and GDP • Rather than adding to welfare, actually these are negative externalities of the production process • economists have developed some alternative measures of economic welfare International Comparisons of Income: Purchasing Power Parity • Qi,m = output vector of all newly produced final goods or services i, in country M • Pi,us = price vector for goods and services i in US prices • As such PPP measure provides the estimated value of Mozambique’s physical output and income weighted by the prices for such goods and services prevailing in the U.S Table 2.4 The purchasing power parity (PPP) measure of GNI per capita GNI per capita at official exchange rate, 2005 PPP GNI per capita, 2005 Algeria Argentina Bangladesh Botswana Brazil Chile China Côte d’Ivoire Egypt Ethiopia Ghana Guatemala Haiti India Indonesia Jamaica Kenya Korea Malaysia Mexico Morocco Mozambique Pakistan Philippines Thailand Rwanda Venezuela Vietnam 2,730 4,470 470 5,590 3,550 5,870 1,740 870 1,260 160 450 2,400 450 730 1,280 3,390 540 15,840 4,970 7,310 1,740 310 690 1,320 2,720 230 4,820 620 6,770 13,920 2,090 10,250 8,230 11,470 6,600 1,490 4,440 1,000 2,370 4,410 1,840 3,460 3,720 4,110 1,170 21,850 10,320 10,030 4,360 1,270 2,350 5,300 8,440 1,320 6,440 3,010 Ireland Japan 41,140 38,950 34,720 31,410 Source: World Bank, World Development Indicators 2007: Table 1.1, pp. 1416 Measuring Economic Growth and Development What is the criterion for development? 1. The economic growth / income criterion • Simple and easy to use • Yet does it really capture development? 2. The indicators criterion • More comprehensive and realistic • Yet difficult to measure and use for international comparisons The Indicators Criterion of Development • Measure of Economic Welfare (MEW) • Genuine Progress Indicator (GPI) • Human Development Index (HDI) “longevity, knowledge, and a decent standard of living” • Genderrelated Development Index (GDI) • Human Poverty Index Human Development Index HDI = 1/3 L + 1/3 E + 1/3 Y E = Educational attainment L = Life Expectancy Y = Income xi = E, L, Y xi = actual value of xi – minimum value of xi maximum value of xi – minimum value of xi E = 2/3 adult literacy rate (A) + 1/3 combined enrollment ratio (C) max E = 100%; min E = 0% min L= 25 yrs; max L = 85 yrs Y = log (PPP measure of GDP per capita) – log (100) log (40,000) – log (100) Calculation of the HDI Example: Albania 2001 L = 73.4 – 25 = 0.807 85 – 25 A = 85.3 – 0 = 0.853 100 – 0 C = 69 – 0 = 0.690 1000 E = 2/3(0.853) + 1/3 (0.690) = 0.798 Y = log(3680) – log(100) = 0.602 log(40,000) – log (100) HDI = 1/3 L + 1/3 E + 1/3 Y = 1/3 (0.807) + 1/3 (0.798) + 1/3 (0.602) = 0.735 Adjustments to the HDI • The genderrelated development index: GDI – takes into account the differences between women and men on the values of the indicators that enter the HDI. – All countries do worse as reflected in the deterioration of their HDI as converted into GDI • The human poverty index: HPI – corrects for another weakness of HDI in that it does not show what’s happening to the poorest members of society. – slightly different variables in the index – e.g. % of people not using improved water sources; % of children under five who are underweight, etc Table 2.5 Human development index (HDI) and GDI, selected countries, 1990 & 2004 HDI value 1990 2004 High Human Development (HDI > 0.800 in 2004) Australia 0.893 0.957 J apan 0.914 0.949 United States 0.917 0.948 United Kingdom 0.889 0.940 Singapore 0.823 0.916 Korea 0.823 0.912 Argentina 0.813 0.863 Chile 0.787 0.859 Costa Rica 0.793 0.841 United Arab Emirates 0.810 0.839 Mexico 0.766 0.821 Malaysia 0.723 0.805 HDI ranka PPPGDP rankingHDI Rankingb 2004 2004 18 25 26 36 38 48 49 53 61 Medium Human Development (0.500