Dr Rajiv Desai

An Educational Blog

Development of Nation

Development of Nation:

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Prologue:

When evolution of human species occurred, all humans all over the world were same. Most people have lost sight of the fact that a short time ago—very short in terms of the life span of the earth—people were nomadic food gatherers, garnering an existence as best they could from what nature threw their way. It has been only about 10,000 years since the Neolithic Agricultural Revolution, when people changed from food gatherers to food producers. Throughout most of subsequent human history, civilizations have been based on a comfortable life for a privileged minority and unremitting toil for the vast majority. Only within the past two centuries, ordinary people are able to expect leisure and high consumption standards, and that only in the world’s economically developed countries. The total major countries of the world are 188 out of which only 32 are developed and remaining 156 are developing. But why developed nations have higher standard of living, better health care, better education and better care of handicapped and elderly?  Is it because people of developed nation are more intelligent and more hard-working?  Is it because of geography, culture, policies, resources and colonisation?  I attempt to answer these questions knowing fully well that I am a student of science and not economics.

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Abbreviations and synonyms:

GDP = gross domestic product

GNP = gross national product

GNI = gross national income

LEDC = less economically developed country

LDC = least developed country

MEDC = more economically developed country

MDC = more developed country

NIC = newly industrialised country

LLDC = landlocked developing countries

OECD = organization of economic cooperation and development

HDI = human development index

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What is development?

Does development mean human development, economic development or economic development giving rise to human development?

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Human development:

The definition of development is fundamental to the comparison of developed and developing countries. The United Nations Development Program’s (UNDP) annual Human Development Report (HDR) defines human development as, “the expansion of people’s freedoms and capabilities to lead lives that they value and have reason to value. It is about expanding choices. Freedoms and capabilities are a more expansive notion than basic needs.” In other words, people in developing countries strive to move up the ladder of development in order both to meet basic needs and to have the opportunity to lead richer, more fulfilling lives. It is worth noting that this definition aligns development with more choice and may not be directly comparable to well-being or happiness, which can depend on social relationships and a variety of other factors. Human development – or the human development approach – is about expanding the richness of human life, rather than simply the richness of the economy in which human beings live. It is an approach that is focused on people and their opportunities and choices.

People:

Human development focuses on improving the lives people lead rather than assuming that economic growth will lead, automatically, to greater wellbeing for all. Income growth is seen as a means to development, rather than an end in itself.

Opportunities:

Human development is about giving people more freedom to live lives they value. In effect this means developing people’s abilities and giving them a chance to use them. For example, educating a girl would build her skills, but it is of little use if she is denied access to jobs, or does not have the right skills for the local labour market. Three foundations for human development are to live a long, healthy and creative life, to be knowledgeable, and to have access to resources needed for a decent standard of living. Once the basics of human development are achieved, they open up opportunities for progress in other aspects of life.

Choice:

Human development is, fundamentally, about more choice. It is about providing people with opportunities, not insisting that they make use of them. No one can guarantee human happiness, and the choices people make are their own concern. The process of development – human development – should at least create an environment for people, individually and collectively, to develop to their full potential and to have a reasonable chance of leading productive and creative lives that they value.

The human development approach remains useful to articulating the objectives of development and improving people’s well-being by ensuring an equitable, sustainable and stable planet.

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Development is a process where nations achieve higher standards of living, happiness and fulfilment often through economic growth. Development refers to developing countries working their up way up the ladder of economic performance, living standards, sustainability and equality that differentiates them from so-called developed countries. The point at which developing countries become “developed” comes down to a judgment call or statistical line in the sand that is often based on a combination of development indicators.  Development is a concept that is difficult to define; it is inevitable that it will also be challenging to construct development taxonomy. Countries are placed into groups to try to better understand their social and economic outcomes. The most widely accepted criterion is labelling countries as either developed or developing countries. There is no generally accepted criterion that explains the rationale of classifying countries according to their level of development. This might be due to the diversity of development outcomes across countries, and the restrictive challenge of adequately classifying every country into two categories.

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Economic development:

Economic development is a process whereby simple, low-income national economies are transformed into modern industrial economies. Although the term is sometimes used as a synonym for economic growth, generally it is employed to describe a change in a country’s economy involving qualitative as well as quantitative improvements. The theory of economic development—how primitive and poor economies can evolve into sophisticated and relatively prosperous ones—is of critical importance to underdeveloped countries, and it is usually in this context that the issues of economic development are discussed. Economic development first became a major concern after World War II. As the era of European colonialism ended, many former colonies and other countries with low living standards came to be termed underdeveloped countries, to contrast their economies with those of the developed countries, which were understood to be Canada, the United States, those of western Europe, most eastern European countries, the then Soviet Union, Japan, South Africa, Australia, and New Zealand. As living standards in most poor countries began to rise in subsequent decades, they were renamed the developing countries.

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There is no universally accepted definition of what a developing country is; neither is there one of what constitutes the process of economic development. Developing countries are usually categorized by a per capita income criterion, and economic development is usually thought to occur as per capita incomes rise. A country’s per capita income (which is almost synonymous with per capita output) is the best available measure of the value of the goods and services available, per person, to the society per year. Although there are a number of problems of measurement of both the level of per capita income and its rate of growth, these two indicators are the best available to provide estimates of the level of economic well-being within a country and of its economic growth. The economic development of a country or society is usually associated with (amongst other things) rising incomes and related increases in consumption, savings, and investment. Of course, there is far more to economic development than income growth; for if income distribution is highly skewed, growth may not be accompanied by much progress towards the goals that are usually associated with economic development.

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Economic development as an objective of policy:

The field of development economics is concerned with the causes of underdevelopment and with policies that may accelerate the rate of growth of per capita income. While these two concerns are related to each other, it is possible to devise policies that are likely to accelerate growth (through, for example, an analysis of the experiences of other developing countries) without fully understanding the causes of underdevelopment. Studies of both the causes of underdevelopment and of policies and actions that may accelerate development are undertaken for a variety of reasons. There are those who are concerned with the developing countries on humanitarian grounds; that is, with the problem of helping the people of these countries to attain certain minimum material standards of living in terms of such factors as food, clothing, shelter, and sanitation. For them, low per capita income is the measure of the problem of poverty in a material sense. The aim of economic development is to improve the material standards of living by raising the absolute level of per capita incomes. Raising per capita incomes is also a stated objective of policy of the governments of all developing countries. For policymakers and economists attempting to achieve their governments’ objectives, therefore, an understanding of economic development, especially in its policy dimensions, is important. Finally, there are those who are concerned with economic development either because they believe it is what people in developing countries want or because they believe that political stability can be assured only with satisfactory rates of economic growth. These motives are not mutually exclusive. Since World War II many industrial countries have extended foreign aid to developing countries for a combination of humanitarian and political reasons. Those who are concerned with political stability tend to see the low per capita incomes of the developing countries in relative terms; that is, in relation to the high per capita incomes of the developed countries. For them, even if a developing country is able to improve its material standards of living through a rise in the level of its per capita income, it may still be faced with the more intractable subjective problem of the discontent created by the widening gap in the relative levels between itself and the richer countries. (This effect arises simply from the operation of the arithmetic of growth on the large initial gap between the income levels of the developed and the underdeveloped countries. As an example, an underdeveloped country with a per capita income of $100 and a developed country with a per capita income of $1,000 may be considered. The initial gap in their incomes is $900. Let the incomes in both countries grow at 5 percent. After one year, the income of the underdeveloped country is $105, and the income of the developed country is $1,050. The gap has widened to $945. The income of the underdeveloped country would have to grow by 50 percent to maintain the same absolute gap of $900.) Although there was once in development economics a debate as to whether raising living standards or reducing the relative gap in living standards was the true desideratum of policy, experience during the 1960–80 period convinced most observers that developing countries could, with appropriate policies, achieve sufficiently high rates of growth both to raise their living standards fairly rapidly and to begin closing the gap.

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Harvard’s Lant Pritchett usefully defines development as a four-fold process of modernization, culminating in the following conditions in each:

1. Economic:  An economy characterized by high levels of productivity, typically dominated by large corporations with professional management.

2. Political:  A polity in which the citizens collectively constitute the state, which in turn exists legitimately only as an expression of their will.  It ensures universal equal treatment to all citizens by the state.

3. Administrative:  State functions are administered by a civil service bureaucracy characterized by merit-based recruitment, tenure in office not linked to personal or political patron, hierarchical structures, and performance through an impersonal application of rules.

4. Social:  All citizens perceive themselves and other citizens as members of a national community.

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Development indicators and its correlations:

Geographers use a series of development indicators to compare the development of one region against another. Geographers compare the statistics for different countries to see if there is a relationship or correlation between the data for different countries. A correlation helps to show what factors contribute to development. There is no single way to calculate the level of development because of the variety of economies, cultures and peoples.

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Measuring development:

Studying development is about measuring how developed one country is compared to other countries or to the same country in the past. Development measures show how economically, socially, culturally or technologically advanced a country is. The two most important ways of measuring development are economic development and human development.

•Economic development is a measure of a country’s wealth and how it is generated (for example agriculture is considered less economically advanced than banking).

•Human development measures the access the population has to wealth, jobs, education, nutrition, health, leisure and safety – as well as political and cultural freedom. Material elements, such as wealth and nutrition, are described as the standard of living. Health and leisure are often referred to as quality of life.

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Economic development indicators:

To assess the economic development of a country, geographers use economic indicators including:

•Gross Domestic Product (GDP) is the total value of goods and services produced by a country in a year.

•Gross National Product (GNP) measures the total economic output of a country, including earnings from foreign investments.

•GNP per capita is a country’s GNP divided by its population. (Per capita means per person.)

•Economic growth measures the annual increase in GDP, GNP, GDP per capita, or GNP per capita.

•Inequality of wealth is the gap in income between a country’s richest and poorest people. It can be measured in many ways, (e.g. the proportion of a country’s wealth owned by the richest 10 per cent of the population, compared with the proportion owned by the remaining 90 per cent).

•Inflation measures how much the prices of goods, services and wages increase each year. High inflation (above a few percent) can be a bad thing, and suggests a government lacks control over the economy.

•Unemployment is the number of people who cannot find work.

•Economic structure shows the division of a country’s economy between primary, secondary and tertiary industries.

•Demographics study population growth and structure. It compares birth rates to death rates, life expectancy and urban and rural ratios. Many LEDCs have a younger, faster-growing population than MEDCs, with more people living in the countryside than in towns. The birth rate in the UK is 11 per 1,000, whereas in Kenya it is 40.

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Human development indicators:

Development often takes place in an uneven way. A country may have a very high GDP – derived, for example, from the exploitation of rich oil reserves – while segments of the population live in poverty and lack access to basic education, health and decent housing. Hence the importance of human development indicators measuring the non-economic aspects of a country’s development.

Human development indicators include:

•Life expectancy – the average age to which a person lives, e.g. this is 79 in the UK and 48 in Kenya.

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The figure below shows life expectancy worldwide. In general, developed nations have higher life expectancy than developing nations.

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•Infant mortality rate – counts the number of babies, per 1000 live births, who die under the age of one. This is 5 in the UK and 61 in Kenya.

•Poverty – indices count the percentage of people living below the poverty level, or on very small incomes (e.g. under £1 per day).

•Access to basic services – the availability of services necessary for a healthy life, such as clean water and sanitation.

•Access to healthcare – takes into account statistics such as how many doctors there are for every patient.

•Risk of disease – calculates the percentage of people with diseases such as AIDS, malaria and tuberculosis.

•Access to education – measures how many people attend primary school, secondary school and higher education.

•Literacy rate – is the percentage of adults who can read and write. This is 99 per cent in the UK, 85 per cent in Kenya and 60 per cent in India.

•Access to technology – includes statistics such as the percentage of people with access to phones, mobile phones, television and the internet.

•Male/female equality – compares statistics such as the literacy rates and employment between the sexes.

•Government spending priorities – compares health and education expenditure with military expenditure and paying off debts.

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Determining Development by the UN:

To determine a country’s development, these statistics are usually considered by the United Nations:

1. GDP (Gross Domestic Product)

2. Life Expectancy

3. Literacy Rate

4. Education

5. Healthcare System

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Development Indicators can be qualitative and quantitative:

1. Quantitative Indicators – are based on objective and truthful pieces of information; and often collected in surveys or in a census.

2. Qualitative Indicators – are based on subjective feelings, impression and opinion. These provide a good indication of the social health of a country.

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Comparing Levels of Development:

Countries are unequally endowed with natural resources. For example, some countries benefit from fertile agricultural soils, while others have to put a lot of effort into artificial soil amelioration. Some countries have discovered rich oil and gas deposits within their territories, while others have to import most “fossil” fuels. In the past a lack or wealth of natural resources made a big difference in countries’ development. But today a wealth of natural resources is not the most important determinant of development success. Consider such high-income countries as Japan or the Republic of Korea. Their high economic development allows them to use their limited natural wealth much more productively (efficiently) than would be possible in many less developed countries. The productivity with which countries use their productive resources – physical capital, human capital, and natural capital – is widely recognized as the main indicator of their level of economic development. Theoretically, then, economists comparing the development of different countries should calculate how productively they are using their capital. But such calculations are extremely challenging, primarily because of the difficulty of putting values on elements of natural and human capital. In practice economists use gross national product (GNP) per capita or gross domestic product (GDP) per capita for the same purpose. These statistical indicators are easier to calculate, provide a rough measure of the relative productivity with which different countries use their resources, and measure the relative material welfare in different countries, whether this welfare results from good fortune with respect to land and natural resources or from superior productivity in their use.

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GDP, GNP and GNI:

Gross domestic product (GDP) is the total market value of all goods and services produced in the country, in a given year or quarter. GDP is equal to all government, consumer, and investment spending, plus the value of exports, minus the value of imports. GDP includes earnings made by foreigners while inside the country. GDP does not include earnings by its residents while outside of the country.

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Gross National Product (GNP) is the total market value of all goods and services produced by domestic residents. GNP includes domestic residents earnings from goods and services produced and sold abroad, and investments abroad. GNP does not include earnings by foreign residents while inside the country. GNP = GDP + Net property income from abroad. This net income from abroad includes, dividends , interest and profit.  GNP includes the value of all goods and services produced by nationals whether in the country or not.

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GNP measures the income of the people within the country whereas GDP measures economic activity in the country. If economic activity occurs in the country but the income from this activity accrues to foreigners, it will still be counted in GDP but not in GNP.

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There are two ways of calculating GDP and GNP:

•By adding together all the incomes in the economy – wages, interest, profits, and rents.

•By adding together all the expenditures in the economy- consumption, investment, government purchases of goods and services, and net exports (exports minus imports).

In theory, the results of both calculations should be the same. Because one person’s expenditure is always another person’s income, the sum of expenditures must equal the sum of incomes. When the calculations include expenditures made or incomes received by a country’s citizens in their transactions with foreign countries, the result is GNP. When the calculations are made exclusive of expenditures or incomes that originated beyond a country’s boundaries, the result is GDP. GNP may be much less than GDP if much of the income from a country’s production flows to foreign persons or firms. For example, in 1994 Chile’s GNP was 5 percent smaller than its GDP. If a country’s citizens or firms hold large amounts of the stocks and bonds of other countries’ firms or governments, and receive income from them, GNP may be greater than GDP. In Saudi Arabia, for instance, GNP exceeded GDP by 7 percent in 1994. For most countries, however, these statistical indicators differ insignificantly.

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Gross National Income (GNI) is GDP plus income paid into the country by other countries for such things as interest and dividends (less similar payments paid out to other countries).  The World Bank define GNI as the sum of value added by all resident producers plus any product taxes (minus subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. In this respect, GNI is quite similar to GNP, which measures output from the citizens and companies of a particular nation, regardless of whether they are located within its boundaries or overseas. The World Bank now uses GNI rather than GNP.

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Per capita income:

GDP and GNP can serve as indicators of the scale of a country’s economy. But to judge a country’s level of economic development, these indicators have to be divided by the country’s population. GDP per capita and GNP per capita show the approximate amount of goods and services that each person in a country would be able to buy in a year if incomes were divided equally. That is why these measures are also often called “per capita incomes.”

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North America, Western Europe and Australia show highest GDP per capita.

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Limitation of per capita income:

It’s important to remember that GDP and GNP are measures of the big picture of a nation’s economy. As a result, there are statistics closer to home that don’t match up with GDP/GNP, particular when we look at per capita figures.

1. Personal income.

Per Capita GDP in the US is $49,922 for 2012. This should not be confused with anything resembling average income! Per capita GDP is simply the GDP divided by the population of the country. It is not an average wage. According to the Social Security Administration, the average wage was closer to $43,000 in 2012.

2. Income distribution.

We can look at GDP/GNP numbers to determine the overall economic strength of a given nation, but that number does not indicate the income distribution within the country. A nation could have a relatively high GDP/GNP, or a high per capita GDP/GNP because it has a small number of very large industries (typical of oil producing countries). In this way, high GDP/GNP numbers could mask the fact that the majority of people in a country are relatively poor.

3. Living conditions:

Because per-capita income is the overall income of a population divided by the number of people included in the population, it does not always give an accurate representation of the quality of life due to the function’s inability to account for skewed data. For instance, if there is an area where 50 people are making $1 million per year and 1,000 people making $100 per year the per capita income is $47,714, but that does not give a true picture of the living conditions of the entire population.

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Nominal vs. Purchasing Power Parity (PPP):

The lack of comparable reporting from one country to another has given rise to two methods of computing either GDP or GNP, nominal and purchasing power parity, or PPP. Nominal is measuring the size of a nation’s economy on the basis of its economy in local currency, converted to dollars (typically). The conversion is based on currency exchange rates in the currency market. PPP ignores currency exchange rates, and measures the economy of countries based on the cost of a common basket of goods and services. The amount of goods and services one can purchase depends on two things: income and the price level. Same amount of income buys fewer goods and services if prices are high compared to the case when prices are low. This implies that if we ignore differences in price level across countries, then just the comparison of per-capita income across countries can give misleading picture of differences in the standards of living. It turns out that on average prices in developing countries are lower than prices in developed countries. One dollar spent in India buys more goods and services than in the United States. The main reason for lower prices in developing countries is relatively low labor cost. Researchers have tried to take into account such price differences across countries and developed the concept of purchasing power parity (PPP). PPP is calculated using a common set of international prices for all goods and services produced, valuing goods in all countries at U.S. prices. PPP 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 markets as $1 would buy in the United States. GNP in PPP terms thus provides a better comparison of average income or consumption between economies.  In developing countries real GNP per capita is usually higher than nominal GNP per capita, while in developed countries it is often lower. Thus the gap between real per capita incomes in developed and developing countries is smaller than the gap between nominal per capita incomes.

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Nominal and real GNP per capita in various countries, 1999

GNP per capita
(US Dollars)
GNP per capita
(PPP Dollars)
India
China
Russia
Brasil
USA
Germany
Japan
340
620
2,245
3,640
26,980
27,510
39,640
1,400
2,920
4,480
5,400
26,980
20,070
22,110

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North America, Western Europe, Australia and Gulf-states show highest GDP-PPP per capita.

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The figure above shows wide gap in GDP per capita between developed and developing nations over last three decades.

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Limitations of GDP/GNP/GNI:

Gross domestic product (GDP) is the magical term often used to describe the economic growth of a country. Governments, experts and news reports point to it as a measure of progress. In development, a field often dominated by economists, GDP is all but an obligatory part of the discussion when it comes to country level progress. The problem is many other experts say GDP is actually not very good at measuring either progress or development.  Nobel Prize winning economist Joseph Stiglitz is among the most vocal opponents of overusing GDP as a yardstick for development. He says that it does not capture equally important issues like poverty levels and inequality. The overall economies of countries can hum along for years showing solid GDP growth without meaningful change for the majority of its citizens. One need not look further than the US to see how middle class incomes have held steady over the past few decades, despite overall GDP growth and wealth accumulation at the top.  Although they reflect the average incomes in a country, GNP per capita and GDP per capita have numerous limitations when it comes to measuring people’s actual well-being. They do not show how equitably a country’s income is distributed. They do not account for pollution, environmental degradation, and resource depletion. They do not register unpaid work done within the family and community, or work done in the shadow economy. And they attach equal importance to “goods” (such as medicines) and “bads” (cigarettes, chemical weapons) while ignoring the value of leisure and human freedom. Thus, to judge the relative quality of life in different countries, one should also take into account other indicators showing, for instance, the distribution of income and incidence of poverty, people’s health and longevity, access to education, the quality of the environment, and more. Experts also use composite statistical indicators of development.

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Other limitations of GDP:

Non-market transactions – GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated.

Underground economy – Official GDP estimates may not take into account the underground economy, in which transactions contributing to production, such as illegal trade and tax-avoiding activities, are unreported, causing GDP to be underestimated.

Non-monetary economy – GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures.

Sustainability of growth – GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment.

One main problem in estimating GDP growth over time is that the purchasing power of money varies in different proportion for different goods, so when the GDP figure is deflated over time, GDP growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure

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A development index measures a country’s performance according to specific development indicators. Some countries may appear to be developed according to some indices, but not according to others.

Vietnam and Pakistan:

Both countries have a similar per capita GDP. However, life expectancy and literacy are considerably higher in Vietnam than they are in Pakistan.

Saudi Arabia and Croatia:

Saudi Arabia has a per capita GDP comparable to that of Croatia. However, in Saudi Arabia there is greater inequality between men and women when considering access to education and political power. So, although they are equal on an economic development index – Saudi Arabia is less developed on a human development index.

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Problems with indices:

Development indices can be misleading and need to be used with care. For example:

•Many indices are averages for the whole population of a country. This means that indices do not always reveal substantial inequalities between different segments of society. For example, a portion of the population of a highly developed country could be living below the poverty line.

•In some countries, the data used in indices could be out of date or hard to collect. Some countries do not wish to have certain index data collected – for example, many countries do not publish statistics about the number of immigrants and migrants.

To balance inaccuracies, indices tend to be an amalgamation of many different indicators. The United Nations Human Development Index (HDI) is a weighted mix of indices that show life expectancy, knowledge (adult literacy and education) and standard of living (GDP per capita). As Vietnam has a higher literacy rate and life expectancy than Pakistan, it has much higher HDI value even though it has a similar per capita GDP.

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HDI:

The United Nations Development Programme’s (UNDP) Human Development Index (HDI) is probably the most widely recognized tool for measuring development and comparing the progress of developing countries. The HDI scores and ranks each country’s level of development based on three categories of development indicators: income, health and education. The Human Development Index is a composite statistics of life expectancy, education, and income per capita indicators, which are used to rank countries into four tiers of human development. The human development report (HDR) classifies countries into four levels of development based on their HDIs: “very high human development,” “high human development,” “medium human development” and “low human development.” Each level of development is generally accompanied by higher income, longer life expectancy and more years of education, which combine to provide people with more capabilities, freedoms and choices. Over half of the world’s population live in countries with “medium human development” (51%), while less than a fifth (18%) populate countries falling in the “low human development” category. Countries with “high” to “very high” human development account for slightly less than a third of the world’s total population (30%). From 2007 to 2010, the first category was referred to as developed countries, and the last three are all grouped in developing countries. The 2010 Human Development Report introduced an Inequality-adjusted Human Development Index (IHDI). While the simple HDI remains useful, it stated that “the IHDI is the actual level of human development (accounting for inequality),” and “the HDI can be viewed as an index of ‘potential’ human development (or the maximum IHDI that could be achieved if there were no inequality).”. HDI is measured between 0 and 1. A HDI between 1 and 0.8 is considered high, 0.8 and 0.6 is considered medium and 0.6 to 0.4 is considered low. The USA has an HDI of 0.994 whereas Kenya has an HDI of 0.474.

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Human Development Report (HDR) combines three dimensions:

•A long and healthy life: Life expectancy at birth

•Education index: Mean years of schooling and Expected years of schooling

•A decent standard of living: GNI per capita (PPP US$)

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What does the Human Development Index tell us?

The Human Development Index (HDI) was created to emphasize that expanding human choices should be the ultimate criteria for assessing development results. Economic growth is a mean to that process, but is not an end by itself. The HDI can also be used to question national policy choices, asking how two countries with the same level of GNI per capita can end up with different human development outcomes. For example, Malaysia has GNI per capita higher than Chile, but in Malaysia, life expectancy at birth is about 7 years shorter and expected years of schooling is 2.5 years shorter than Chile, resulting in Chile having a much higher HDI value than Malaysia. These striking contrasts can stimulate debate about government policy priorities.

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Can GNI per capita be used to measure human development instead of the HDI?

No. Income is a means to human development, and not the end. The GNI per capita only reflects average national income. It does not reveal how that income is spent, nor whether it translates to better health, education and other human development outcomes. In fact, comparing the GNI per capita rankings and the HDI rankings of countries can reveal much about the results of national policy choices. Gabon with a GNI per capita of $16,367 (PPP$) has a GNI rank of 68, but an HDI rank 110 – the same as that of Indonesia whose GNI per capita is only $9,788 (PPP$).

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Life expectancy at birth: Number of years a newborn infant could expect to live if prevailing patterns of age-specific mortality rates at the time of birth stay the same throughout the infant’s life.

Expected years of schooling: Number of years of schooling that a child of school entrance age can expect to receive if prevailing patterns of age-specific enrolment rates persist throughout the child’s life.

Mean years of schooling: Average number of years of education received by people ages 25 and older, converted from education attainment levels using official durations of each level.

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In its 2010 Human Development Report, the UNDP began using a new method of calculating the HDI. The following three indices are used:

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The health dimension is assessed by life expectancy at birth component of the HDI is calculated using a minimum value of 20 years and maximum value of 85 years. The education component of the HDI is measured by mean of years of schooling for adults aged 25 years and expected years of schooling for children of school entering age. Expected years of schooling is capped at 18 years. The indicators are normalized using a minimum value of zero and maximum aspirational values of 15 and 18 years respectively. The two indices are combined into an education index using arithmetic mean. The standard of living dimension is measured by gross national income per capita. The goalpost for minimum income is $100 (PPP) and the maximum is $75,000 (PPP). The minimum value for GNI per capita, set at $100, is justified by the considerable amount of unmeasured subsistence and nonmarket production in economies close to the minimum that is not captured in the official data. The HDI uses the logarithm of income, to reflect the diminishing importance of income with increasing GNI. The scores for the three HDI dimension indices are then aggregated into a composite index using geometric mean. HDI ranges from a theoretical minimum of zero (for a life expectancy = 25 years, complete illiteracy and a GDP per capita = $100 at purchasing power parity) to a theoretical maximum of one (for a life expectancy = 85 years, 100% literacy and a GDP per capita = $40,000 at purchasing power parity). In practice, the observed range is 0.3 – 0.97. The HDI simplifies and captures only part of what human development entails. It does not reflect on inequalities, poverty, human security, empowerment, etc.

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Why is geometric mean used for the HDI rather than the arithmetic mean?

In 2010, the geometric mean was introduced to compute the HDI. Poor performance in any dimension is directly reflected in the geometric mean. That is to say, a low achievement in one dimension is not anymore linearly compensated for by high achievement in another dimension. The geometric mean reduces the level of substitutability between dimensions and at the same time ensures that a 1 percent decline in index of, say, life expectancy has the same impact on the HDI as a 1 percent decline in education or income index. Thus, as a basis for comparisons of achievements, this method is also more respectful of the intrinsic differences across the dimensions than a simple average.

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Why is the HDI using the logarithm of income component?

In addition to capping, the income enters the HDI as a logarithmically transformed variable. The idea is to emphasize diminishing marginal utility of transforming income into human capabilities. This means that the concave logarithmic transformation brings closer the notion that an increase of GNI per capita by $100 in a country where the average income is only $500 has a much greater impact on the standard of living than the same $100 increase in a country where the average income is $5,000 or $50,000.

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HDI 2014:

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Criticism of HDI:

The Human Development Index has been criticized on a number of grounds including alleged ideological biases towards egalitarianism and so-called “Western models of development”, failure to include any ecological considerations, lack of consideration of technological development or contributions to the human civilization, focusing exclusively on national performance and ranking, lack of attention to development from a global perspective, measurement error of the underlying statistics, and on the UNDP’s changes in formula which can lead to severe misclassification in the categorisation of ‘low’, ‘medium’, ‘high’ or ‘very high’ human development countries. Given its focus on basic education and health measures, the HDI is most relevant in countries with low or medium human development. Just as the Millennium Development Goals have been a galvanizing force for efforts to support the world’s poorest countries, the HDI is a useful benchmark for such countries. However, it lacks a broader set of measures to guide progress once basic levels of need have been addressed. As a result there is little variation in scores amongst high-income countries. Though the HDI covers 187 countries, the limited range of indicators mean that its descriptive and explanatory value is limited for upper middle and high income countries.

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Can the HDI alone measure a country’s level of human development?

No. The concept of human development is much broader than what can be captured by the HDI, or by any other composite index in the Human Development Report (Inequality-adjusted HDI, Gender development index, Gender Inequality Index and Multidimensional Poverty Index). The composite indices are a focused measure of human development, zooming in on a few selected areas. A comprehensive assessment of human development requires analysis of other human development indicators and information presented in the statistical annex of the report (see the Readers guide to the Report).

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Multidimensional Poverty Index (MPI):

Like development, poverty is multidimensional — but this is traditionally ignored by headline money metric measures of poverty. The Multidimensional Poverty Index (MPI), published for the first time in the 2010 Report, complements monetary measures of poverty by considering overlapping deprivations suffered at the same time. The index identifies deprivations across the same three dimensions as the HDI and shows the number of people who are multi-dimensionally poor (suffering deprivations in 33% or more of weighted indicators) and the number of deprivations with which poor households typically contend with. It can be deconstructed by region, ethnicity and other groupings as well as by dimension, making it an apt tool for policymakers.  The MPI can help the effective allocation of resources by making possible the targeting of those with the greatest intensity of poverty; it can help address MDGs strategically and monitor impacts of policy intervention. The MPI can be adapted to the national level using indicators and weights that make sense for the region or the country, it can also be adopted for national poverty eradication programs, and it can be used to study changes over time. Almost 1.5 billion people in the 101 developing countries covered by the MPI—about 29 percent of their population — live in multidimensional poverty — that is, with at least 33 percent of the indicators reflecting acute deprivation in health, education and standard of living. And close to 900 million people are vulnerable to fall into poverty if setbacks occur – financial, natural or otherwise.

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GDP vs. HDI:

While GDP and HDI may seem different with HDI being considered more advanced than GDP, which it technically is, GDP and HDI according to Hans Rosling are actually quite similar and tell similar results. In his own words: “There is today a very strong correlation between GDP/capita and HDI as seen from the graph above. If you exclude 6 countries on the right side of the strong correlation that have higher GDP/capita than HDI due to oil or diamonds; and if you exclude 6 former Soviet Republics with collapsed economy but still high literacy rate on the left side of the correlation; you will find that the GDP/capita and the value on Human Development Index follow each other very closely from the worst-off country Congo to the best-off country Norway. The reason seems to be that nations today are surprisingly capable in converting the available national income (measured as GDP/capita) into a longer lifespan for the people (measured as Life expectancy at birth) and into access to education (measured by mean of years of schooling for adults aged 25 years and expected years of schooling for children of school entering age).  But the reason may also be that nations today are very good at converting improved health and education into economic growth. Most probably the causality goes in both directions.  If you want better health and education fix economic growth. If you want faster economic growth provide better education and health service. GDP/capita appears to be as good a measure of progress of nations as are HDI. This is because with high GDP, the government and the people have more money to spend on education and health care. Vice versa, with better education and health service comes faster economic growth, because now people are healthier meaning more likely to work and as they have better education they are more likely to further themselves in their field earning more money. But, the analysis for different income group of countries suggests that the positive relationship between GDP and HDI is more prominent for the low income countries and weakens for the middle and high income countries in all the years.

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Economic Growth and Life Expectancy:

The relationship between income and life expectancy has been demonstrated by a number of statistical studies. The so-called Preston curve, for example, indicates that individuals born in wealthier countries, on average, can expect to live longer than those born in poor countries. It is not the aggregate growth in income, however, that matters most, but the reduction in poverty. The most obvious explanation behind the connection between life expectancy and income is the effect of food supply on mortality. Historically, there have been statistically convincing parallels between prices of food and mortality. Higher income also implies better access to housing, education, health services and other items which tend to lead to improved health, lower rates of mortality and higher life expectancy. It is not surprising therefore that aggregate income has been a pretty good predictor of life expectancy historically. However correlation does not necessarily imply causality running from income to health. It could actually be that better health, as proxied by life expectancy, contributes to higher incomes, rather than vice versa. Better health can increase incomes because healthier individuals tend to be more productive than sick ones; on average they work harder, longer and are more capable of focusing efficiently on production tasks.  Furthermore, better health may affect not just the level of income but also its growth rate through its effect on education. Healthier children spend more time at school and learn faster, thus acquiring more human capital which translates into higher growth rates of incomes later in life.

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Preston curve:

 

The x-axis shows GDP per capita in 2005 international dollars, the y-axis shows life expectancy at birth. Each dot represents a particular country. The Preston curve indicates that individuals born in richer countries, on average, can expect to live longer than those born in poor countries. However, the link between income and life expectancy flattens out. This means that at low levels of per capita income, further increases in income are associated with large gains in life expectancy, but at high levels of income, increased income has little associated change in life expectancy. In other words, if the relationship is interpreted as being causal, then there are diminishing returns to income in terms of life expectancy.

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Literacy:

Literacy is the ability to read and write with understanding in any language. This is a definition which closely matches the UNESCO’s definition.

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Why Education Matters:

Education is the single best investment in prosperous, healthy and equitable societies. No country has ever achieved rapid and continuous economic growth without at least a 40% literacy rate. In sub-Saharan Africa, 1 in 4 children does not attend school; of those who attend, 1 in 3 will drop out before completing primary school. Worldwide, 69 million children are not in school; of those, 60% are girls. A single year of primary school increases a boy’s future earning potential by five to 15% and a girl’s even more. A child born to a literate mother is 50% more likely to survive past the age of five. Education provides a direct path towards food security and out of poverty. Education and food security are directly connected: doubling primary school attendance among impoverished rural children can cut food insecurity by up to 25. Educated parents are able to earn an income, produce more food through agricultural initiatives, and feed their children. Children who complete primary education are more likely to achieve food security as adults and end the cycle of poverty in their generation. Education leads to improved social, cognitive and health outcomes. Education increases people’s confidence, enabling them to become self-sufficient, fully contributing members of their communities. Education leads to gender equality and equity – girls and women who achieve higher levels of education are greater contributors to overall economic development and to children’s welfare within communities. Achieving educational equity for girls – including educating communities on the value of girls’ education – is an essential factor in sustainable poverty alleviation. Education is the single-most important driver of economic empowerment for individuals and countries.

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Literacy and economic growth:

Literacy is always considered to be an important key for socio-economic growth. Economic prosperity of a country entirely depends on the economic resources it has and human resource is an important part of economic resource. Human resource includes the population, its growth rate, skills, standard of living and the working capacity of the labor force and all the above factors can be enhanced by increasing the literacy rate of a population. Thus literacy rate plays a key role in economic growth of a country. Japan can be an example where an economy has developed by excelling in human resources despite the deficiency of natural resource. As the biggest asset India has is its human resource, effective utilization of the human resource becomes very crucial for the country’s economic progress and thus literacy plays all the more an important role in determining India’s growth. Just being literate does not make people competent enough to enter the labor force in the market. Moreover enhancing additional supplementary skills is a necessity in an economy which has a lot of structural unemployment. It will reduce the occupational immobility of labor and will also improve the employability of the labor supply. Unskilled labors are seasonally employed, mainly in agricultural fields, and paid minimal wages. Imbibing skills in these workers will ensure them more permanent jobs and higher wage rates. Agricultural sector, which employs more than 50% of the workforce in India, is highly unproductive. Imbibing technical skills in these workers will enable them to work in productive, decent-wage jobs in industries. Thus enabling better utilization of human capital and making most of the human resource. Because we have lacked direct measures for ‘skills,’ indicators of educational attainment have typically been used as a proxy measure, with educational attainment being measured either as years of schooling or as highest level of education completed, ranging from less than high school to having one or more university degrees. Friedrich Huebler (2005) shows the correlation between GDP per capita and education by plotting the school net enrolment ratios (NER) against GDP per capita of 120 different countries. Higher the income levels of a country, higher the levels of school enrolment. However, these indirect indicators cannot distinguish between the acquisition of specific knowledge versus general literacy skills. The development of new surveys that allow ‘skill’ to be measured more directly have permitted researchers to tackle these issues. One such survey is the International Adult Literacy Survey (IALS) which provides measures of directly-assessed literacy skills for the population aged 16 to 65 years for twenty-three OECD countries.  A recent study used data from IALS to investigate the relationship between educational attainment, literacy skills and economic growth. That study found that investment in human capital, that is, in education and skills training, is three times as important to economic growth over the long run as investment in physical capital, such as machinery and equipment. The results also show that direct measures of human capital based on literacy scores perform better than years-of-schooling indicators when explaining growth in output per capita and per worker.  One of the study’s key conclusions is that human capital accumulation matters a great deal for the long-run wellbeing of nations. In fact, the study suggests that differences in average skill levels among OECD countries explain fully 55% of the differences in economic growth over the 1960 to 1994 period. This implies that investments in raising the average level of skills could yield large economic returns.  Furthermore, the study finds that the average literacy score in a given population is a better indicator of growth than one based solely on the percentage of the population with very high literacy scores. In other words, a country that focuses on promoting strong literacy skills widely throughout its population will be more successful in fostering growth and wellbeing than one in which the gap between high-skill and low-skill groups is large.  Also using data from IALS, Green and Riddell focused their research on individuals, rather than countries, to determine the relative contributions of education and literacy skills to earnings levels. Green and Riddell found that each additional year of education raises earnings by approximately 8%.

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The Relationship between Literacy Rate and GDP per Capita:

There is sufficient evidence to conclude that there is a positive relationship between literacy rate and the log of GDP per capita for all world countries. The graph above shows a clear positive correlation between adult literacy and GDP per capita. Developed countries such as the USA and the United Kingdom have high literacy rates as well; poorer countries such as Sierra Leone and Liberia have lower literacy rates as well. From another observational study, authors conclude that there is a positive, exponential relationship between literacy rate and GDP per capita of world countries. This means that as literacy rate increases, so does GDP per capita.

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Western developed nations had high literacy rate even in the year 1800 and even that time GDP per capita was higher in them compared to developing nations.

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Literacy and population growth:

When a study of India’s population growth is done over the past century, it depicts a typical case of classical theory of demographic transition. According to the classical demographic transition model, a country undergoes a transition from high birth and death rates to low birth and death rates as it develops from a pre-industrial to an industrialized economic system. The population of India in 1901 was 238 million with a density of 77 per sq km, from 1901-1921 India almost had a stagnant population. The period 1921-1951 saw India having a steady growth rate but from 1951-1981 the country underwent a rapid high growth in population with growth rate averaging around 19%. From 1981-2001 India faced high growth with definite slowing down. The latest census data of 2011 also shows this slowing down as India’s population grew at a rate of 17.64% in the past decade. India has successively passed through all the phases of demographic transition and is now widely believed to have entered the fifth phase, characterized by rapidly declining fertility. When the total fertility rate (TFR) data of past 50 years is considered, it has come down from 5.9 in 1960 to 2.65 in 2010. If literacy rate in the same period is considered, India had a literacy rate of mere 6% in 1901. It has been on an increase ever since. After independence schooling was made free and compulsory for children aged between 6 and 14 under the Right to Education Act. If data of past 50 years is considered, literacy rate has increased from 28.31% in 1961 to 74.04% in 2011. So if one notices there has been an increase in the literacy rate and a decrease in TFR. Studies show a very strong negative correlation between literacy rate and TFR and thus a strong reduction in population growth rate with an increase in literacy.

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Education to reduce fertility rate:

Fertility rates tend to be highest in the world’s least developed countries. When mortality rates decline quickly but fertility rates fail to follow, countries can find it harder to reduce poverty. Poverty, in turn, increases the likelihood of having many children, trapping families and countries in a vicious cycle. Conversely, countries that quickly slow population growth can receive a “demographic bonus”: the economic and social rewards that come from a smaller number of young dependents relative to the number of working adults. For longer term population stability the goal is to reach replacement-level fertility, which is close to 2 children per woman in places where mortality rates are low. Industrial countries as a group have moved below this level. Some developing countries have made progress in reducing fertility, but fertility rates in the least developed countries as a group remain above 4 children per woman.  One of the most effective ways to lower population growth and reduce poverty is to provide adequate education for both girls and boys. Countries in which more children are enrolled in school—even at the primary level—tend to have strikingly lower fertility rates.

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Primary School Enrolment and Total Fertility Rates for Selected Countries:

Rank Country Primary School Enrolment Total Fertility Rate
Percent Number of children
per woman
1 Japan 100.0 1.3
2 Spain 99.8 1.5
3 Iran 99.7 1.8
4 Georgia 99.6 1.6
5 United Kingdom 99.6 1.9
181 Equatorial Guinea 53.5 5.3
182 Guinea-Bissau 52.1 5.7
183 Djibouti 40.1 3.9
184 Sudan 39.2 4.2
185 Eritrea 35.7 4.6

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Female education is especially important. Research consistently shows that women who are empowered through education tend to have fewer children and have them later. If and when they do become mothers, they tend to be healthier and raise healthier children, who then also stay in school longer. They earn more money with which to support their families, and contribute more to their communities’ economic growth. Indeed, educating girls can transform whole communities. School meal programs help improve all children’s attendance in low-income countries, but for girls the benefit is profound. Girls are more likely to be expected to contribute to their families by working at home, so sending each additional girl to school may cost her family not only tuition but labor as well. Providing free meals at school helps to offset these costs, particularly when programs include take-home rations. As a result, girls are both more likely to go to school and to keep coming back year after year. This is significant because girls who reach secondary school are especially likely to have fewer children. Worldwide, 69 million elementary-school-aged children were not in school in 2008, 37 million fewer than in 1999. By 2005, almost two thirds of developing countries had achieved gender parity in elementary school enrolment. Still, a majority of children not in school are female, and early marriage and motherhood keep many of the world’s poorest girls from completing secondary school.  Extending educational opportunities to all the world’s children can clearly reap vast rewards in lower population growth—which in turn brings greater stability, prosperity, and environmental sustainability.

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Fertility and economic growth:

Contrary to the idea of population growth having an impact on economic growth, it can be more confidently put that economic growth does impact the population growth and slows it down. When the fertility rate in 171 countries was plotted against the GNI (Gross National Income) by Philip N. Cohen in 2009, the graph, shown below, was showing lower fertility rates with nations with higher GNI than the nations with lower GNI. This can be inferred to as declining fertility rates for an economy with increasing growth.

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Demographic-economic paradox:

The demographic-economic “paradox” is the inverse correlation found between wealth and fertility within and between nations. The higher the degree of education and GDP per capita of a human population, subpopulation or social stratum, the fewer children are born in any industrialized country. In a 1974 UN population conference in Bucharest, Karan Singh, a former minister of population in India, illustrated this trend by stating “Development is the best contraceptive.” The term “paradox” comes from the notion that greater means would enable the production of more offspring as suggested by the influential Thomas Malthus.  Roughly speaking, nations or subpopulations with higher GDP per capita are observed to have fewer children, even though a richer population can support more children. It is hypothesized that the observed trend has come about as a response to increased life expectancy, reduced childhood mortality, improved female literacy and independence, and urbanization that all result from increased GDP per capita, consistent with the demographic transition model.  A reduction in fertility can lead to an aging population which leads to a variety of problems.  Some scholars have recently questioned the assumption that economic development and fertility are correlated in a simple negative manner. A study published in Nature in 2009 has found that when using the Human Development Index instead of the GDP as measure for economic development, fertility follows a j-shaped curve: with rising economic development, fertility rates indeed do drop at first, but then begin to rise again as the level of social and economic development increases, while still remaining below the replacement rate.

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Correlation between indices for development:

The figure above shows that education is the single most important factor promoting development of a nation and population explosion is the single most important factor hampering development of a nation.

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Standard of living:

How do you define “standard of living”?

The World Bank says:

Standard of living is the level of well-being (of an individual, group or the population of a country) as measured by the level of income (for example, GNP per capita) or by the quantity of various goods and services consumed (for example, the number of cars per 1,000 people or the number of television sets per capita).

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Standard of living is the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. The standard of living includes factors such as income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities, gross domestic product, inflation rate, number of vacation days per year, affordable (or free) access to quality healthcare, quality and availability of education, life expectancy, incidence of disease, cost of goods and services, infrastructure, national economic growth, economic and political stability, political and religious freedom, environmental quality, climate and safety. The standard of living is closely related to quality of life. The standard of living is often used to compare geographic areas, such as the standard of living in the United States versus Canada, or the standard of living in St. Louis versus New York. The standard of living can also be used to compare distinct points in time. For example, compared with a century ago, the standard of living in the United States has improved greatly. The same amount of work buys an increased quantity of goods, and items that were once luxuries, such as refrigerators and automobiles, are now widely available. As well, leisure time and life expectancy have increased, and annual hours worked have decreased.

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Standard of living in different nations:

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Actual standard of living may be disguised:

As an example, countries with a very small, very rich upper class and a very large, very poor lower class may have a high mean level of income, even though the majority of people have a low “standard of living”. This mirrors the problem of poverty measurement, which also tends towards the relative. This illustrates how distribution of income can disguise the actual standard of living. Likewise Country A, a perfectly socialist country with very low average per capita income would receive a higher score for having lower income inequality than Country B with a higher income inequality, even if the bottom of Country B’s population distribution had a higher per capita income than Country A. Real examples of this include former East Germany compared to former West Germany or North Korea compared to South Korea. In each case, the socialist country has a low income discrepancy (and therefore would score high in that regard), but lower per capita incomes than a large majority of their neighbouring counterpart. This can be avoided by using the measure of income at various percentiles of the population rather than the highly relative and controversial income inequality.

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Measurement of standard of living:

Standard of living is generally measured by standards such as real (i.e. inflation adjusted) income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality, and educational standards are also used. Examples are access to certain goods (such as number of refrigerators per 1000 people), or measures of health such as life expectancy. It is the ease by which people living in a time or place are able to satisfy their needs and/or wants.

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Ways to measure your standard of living include:

1. GDP per capita (discussed vide supra)

2. HDI (discussed vide supra)

3. Satisfaction with Life Index:

Developed by a psychologist at the University of Leicester, the Satisfaction with Life Index attempts to measure happiness directly, by asking people how happy they are with their health, wealth, and education, and assigning a weighting to these answers. This concept is related to the idea of Gross National Happiness that came from Bhutan in the 1970’s. The idea is that material and spiritual development should take place side by side, underpinned by sustainable development, cultural values, conservation, and good governance.

4. Happy Planet Index:

The Happy Planet Index was introduced by the New Economics Foundation in 2006. The premise is that what people really want is to live long and fulfilling lives, not just to be filthy rich. The kicker is that this has to be sustainable both worldwide and down through the generations. The HPI is calculated based on life satisfaction, life expectancy, and ecological footprint. It doesn’t measure how happy a country is, but how environmentally efficient it is to support well-being in that country. In other words, if people are happy but they’re guzzling more than their fair share of natural resources, the country will not have a high Happy Planet Index. But if people are happy and have a medium environmental impact, or are moderately happy and with a low impact, the country’s score will be high.

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A new measure of standard of living:

Many people complain that conventional measures of GDP fail to capture a country’s true standard of living. But their attempts to improve on these conventional metrics are ad hoc. In a new paper Charles Jones and Peter Klenow of Stanford University propose a new measure of standards of living based on a simple thought experiment: if you were reborn as a random member of another country, how much could you expect to consume, in goods and leisure, over the course of your life? America, for example, has a higher GDP per person than France. But Americans also tend to work longer hours and live shorter lives. They also belong to a less equal society. If you assume that people do not know what position in society they will occupy, and that they dislike being poor more than they like being rich, they should prefer more egalitarian societies, everything else equal. For these reasons, the authors calculate that France and America have about the same standard of living as seen in the figure below. Nonetheless, broadly speaking, the figure below also shows falling standard of living with lower GDP per capita.

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Comparing Standards of Living in the Global Economy:

People living in the developed countries of the world enjoy a higher standard  of living than people living in the developing or transition countries. It is not possible to measure with any precision standard of living for peoples living in different world regions, who have different histories and cultures, and different values and world views. Yet, by examining some basic indicators, as shown below, we can piece together a general profile of a country and make some general commentary on the overall standard of living for the 7 billion people inhabiting the planet today. The standard of living comparisons will be made according to income status: high income countries, middle-income countries, and low-income countries.

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Health indicators:

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Availability of essential goods:

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Availability of essential services:

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As noted in three tables above, high income countries have best health indicators and maximum availability of essential services and goods. In other words, their standard of living is higher than middle and low income countries. In other words, high income countries are developed nations and rest developing nations.

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Quality of Life versus Standard of Living:

Quality of life and standard of living are often used interchangeably. But in fact they are two different concepts that are not necessarily related. Standard of living is generally measured by levels of consumption and thus, by levels of income. Satisfaction of basic needs of food, clothing and shelter are all standard of living issues. Quality of life is related to feeling good about one’s life and one’s self. One can have a very high standard of living and a low quality of life. And one can have a low standard of living and a high quality of life. It is not strange that we tend to confuse quality of life and standard of living.

• Increase in income may bring material comfort, but it certainly does not make one happy in life. This means that a high standard of living is no guaranty of a high quality of life.

• Standard of living is measurable as it is composed of indicators that are tangible and quantifiable. On the other hand, there are factors such as happiness, freedom and liberty in quality of life that are subjective and hard to evaluate.

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An evaluation of standard of living commonly includes the following factors:

•income

•quality and availability of employment

•class disparity

•poverty rate

•quality and affordability of housing

•hours of work required to purchase necessities

•gross domestic product (GDP)

•inflation rate

•number of paid vacation days per year

•affordable access to quality health care

•quality and availability of education

•life expectancy

•incidence of disease

•cost of goods and services

•infrastructure

•national economic growth

•economic and political stability

•political and religious freedom

•environmental quality

•climate

•safety

When you think about standard of living, you can think about things that are easy to quantify. We can measure factors like life expectancy, inflation rate and the average number of paid vacation days workers receive each year, for example.

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Factors that may be used to measure quality of life include the following:

•freedom from slavery and torture

•equal protection of the law

•freedom from discrimination

•freedom of movement

•freedom of residence within one’s home country

•presumption of innocence unless proved guilty

•right to marry

•right to have a family

•right to be treated equally without regard to gender, race, language, religion, political beliefs, nationality, socioeconomic status and more

•right to privacy

•freedom of thought

•freedom of religion

•free choice of employment

•right to fair pay

•equal pay for equal work

•right to vote

•right to rest and leisure

•right to education

•right to human dignity

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The main difference between standard of living and quality of life is that the former is more objective, while the latter is more subjective. Standard of living factors such as gross domestic product, poverty rate and environmental quality, can all be measured and defined with numbers, while quality of life factors like equal protection of the law, freedom from discrimination and freedom of religion, are more difficult to measure and are particularly qualitative. Both indicators are flawed, but they can help us get a general picture of what life is like in a particular location at a particular time. While standard of living is more concerned with a predetermined, artificial status that has become accepted as a measure of good living, quality of life is focused on more intangible objects that do not necessarily depend on wealth.

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Other approaches to assessing Development and Developing Countries:

Legatum Prosperity Index:

Some organizations have devised other approaches to evaluating the progress of developed and developing countries. The London-based Legatum Institute describes its Prosperity Index as “the world’s only global assessment of prosperity based on both income and well-being.” The Legatum Prosperity Index scores and ranks countries’ prosperity based on eight “foundations for national development,” including: economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom and social capital. The most recent version of the Prosperity Index covers 110 countries, whereas the HDI evaluates development indicators for 187 countries.

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Social progress index:

There have been numerous efforts to go beyond GDP to improve the measurement of national performance. The Social Progress Index is distinct from other wellbeing indices in its measurement of social progress directly, independently of economic development, in a way that is both holistic and rigorous. Most wellbeing indices, such as the Human Development Index and the OECD Your Better Life Index, incorporate GDP or other economic measures directly. These are worthy efforts to measure wellbeing and have laid important groundwork in the field. However, because they conflate economic and social factors, they cannot explain or unpack the relationship between economic development and social progress. The Social Progress Index has also been designed as a broad measurement framework that goes beyond the basic needs of the poorest countries, so that it is relevant to countries at all levels of income. It is a framework that aims to capture not just present challenges and today’s priorities, but also the challenges that countries will face as their economic prosperity rises.

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Inadequacy of mainstream economics:

Our main tool for understanding poor countries – mainstream economics – is woefully inadequate and all about the rich world.  A sample of 76,000 economics journal articles published between 1985 and 2005 shows that more papers were published about the United States than on Europe, Asia, Latin America, the Middle East and Africa combined. Economists start from the assumption that humans are individualistic, utility-maximising and strictly rational in a narrow sense. Actually many people are communitarian, social, non-calculating, uncertain about the future and often act according to sentiment or whim. Mainstream economics allows no theory of power or politics and can’t see the world economy as a system.  The economic statistics on poor countries are awful. The most basic metric of development, GDP, should not be treated as an objective number but rather as a number that is a product of a process in which a range of arbitrary and controversial assumptions are made. The discrepancy between different GDP estimates is up to a half in some cases. In the least developed countries, statistics offices are usually underfunded and don’t have the resources to collect data often or well enough.

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Classification of nations based on their development:

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Four Worlds:

After World War II the world split into two large geopolitical blocs and spheres of influence with contrary views on government and the politically correct society:

1 – The bloc of democratic-industrial countries within the American influence sphere, the “First World”.

2 – The Eastern bloc of the communist-socialist states, the “Second World”.

3 – The remaining three-quarters of the world’s population, states not aligned with either bloc were regarded as the “Third World.”

4 – The term “Fourth World” refers to widely unknown nations (cultural entities) of indigenous peoples, living within or across national state boundaries.

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Although classification into first, second and third word was political, it is almost economical with first world high income, second world middle income and third world low income countries.

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What makes a nation third world?

Despite ever evolving definitions, the concept of the third world serves to identify countries that suffer from high infant mortality, low economic development, high levels of poverty, low utilization of natural resources, and heavy dependence on industrialized nations. These are the developing and technologically less advanced nations of Asia, Africa, Oceania, and Latin America. Third world nations tend to have economies dependent on the developed countries and are generally characterized as poor with unstable governments and having high rates of population growth, illiteracy, and disease. A key factor is the lack of a middle class — with impoverished millions in a vast lower economic class and a very small elite upper class controlling the country’s wealth and resources. Most third world nations also have a very large foreign debt. These countries were at one point colonies which were formally led by imperialism. The end of imperialism forced these colonies to survive on their own. With lack of support, these colonies started to develop characteristics such as poverty, high birth rates and economic dependence on other countries. The term was then affiliated to the economic situation of these former colonies and not their social alliances to either capitalism or communism.

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Global North and Global South:

The terms “Global North” and “Global South” divide the world in half both geographically. The Global North contains all countries north of the Equator in the Northern Hemisphere and the Global South holds all of the countries south of the Equator in the Southern Hemisphere. This classification groups the Global North into the rich northern countries, and the Global South into the poor southern countries. This differentiation is based on the fact that most of developed countries are in the north and most of the developing or underdeveloped countries are in the south. Issue with this classification is that not all countries in the Global North can be called “developed,” while some of the countries in the Global South can be called developed. In the Global North, some examples of the developing countries include: Haiti, Nepal, Afghanistan, and many of the countries in northern Africa. In the Global South, some examples of the well-developed countries include: Australia, South Africa, and Chile.

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The map above shows North South divide. MEDCs are countries which have a high standard of living and a large GDP. LEDCs are countries with a low standard of living and a much lower GDP. Most of the southern hemisphere is less developed, while countries in the northern hemisphere are more developed.

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North-South divide:

The North–South divide is broadly considered a socio-economic and political divide. Generally, definitions of the Global North include North America, Western Europe and developed parts of East Asia. The Global South is made up of Africa, Latin America, and developing Asia including the Middle East. The North is home to four of the five permanent members of the United Nations Security Council. The North mostly covers the West and the First World, along with much of the Second World, while the South largely corresponds with the Third World. While the North may be defined as the richer, more developed region and the South as the poorer, less developed region, many more factors differentiate between the two global areas. 95% of the North has enough food and shelter. Similarly, 95% of the North has a functioning education system. In the South, on the other hand, only 5% of the population has enough food and shelter. It “lacks appropriate technology, it has no political stability, the economies are disarticulated, and their foreign exchange earnings depend on primary product exports”. In economic terms, the North—with one quarter of the world population—controls four fifths of the income earned anywhere in the world. 90% of the manufacturing industries are owned by and located in the North. Inversely, the South—with three quarters of the world populations—has access to one fifth of the world income. It serves as a source for raw material as the North which subjected large portions of the global South to direct colonial rule.

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Classification of countries based on economic development:

Countries are categorized according to their economic development. The United Nations classifies countries as developed, developing, newly industrialized or developed, and countries in transition such as Kazakhstan, Kyrgyztan, Turkmenistan, and the former USSR. The classification of countries as a developed and developing country is based on economic status like GDP, GNP, per capita income, industrialization, standard of living, etc.

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The classification of a country does not only depend on its income but also on other factors that affect how their citizens live, how their economies are integrated into the global system, and the expansion and diversification of their export industries.   A developed country is one that has a high level of industrial development, bases its economy on technology and manufacturing instead of agriculture. The factors of production such as human and natural resources are fully utilized resulting in an increase in production and consumption which leads to a high level of per capita income. A country with a high Human Development Index (HDI) rating is considered a developed country. It not only measures the economic development and GDP of a country but also its education and life expectancy. A developed country’s citizens enjoy a free and healthy existence. The term “developed country” is synonymous to “industrialized country, post-industrial country, more developed country, advanced country, and first-world country.” The United Kingdom, France, Germany, Canada, Japan, Switzerland, and the United States of America are only a few of those considered as developed countries.  A developing country, on the other hand, is one that has a low level of industrialization. It has a higher level of birth and death rates than developed countries. Its infant mortality rate is also high due to poor nutrition, shortage of medical services, and little knowledge on health. The citizens of developing countries have a low to medium standard of living because their per capita income is still developing, and their technological capacity is still being developed. There is also an unequal distribution of income in developing countries, and their factors of production are not fully utilized. Developing countries are also referred to as third-world countries or least-developed countries.

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A more popular, though apparently more disputable, approach involves dividing all countries into “developing” and “developed”—despite the general understanding that even the most developed countries are still undergoing development. Dividing countries into “less developed” and “more developed” does not help much, because it is unclear where to draw the line between the two groups. In the absence of a single criterion of a country’s development, such divisions can only be based on convention among researchers. For example, it is conventional in the World Bank to refer to low-income and middle-income countries as “developing,” and to refer to high-income countries as “industrial” or “developed.” The relatively accurate classification of countries into “developing” and “developed” based on their per capita income does not, however, work well in all cases. There is, for instance, a group of “high-income developing countries” that includes Israel, Kuwait, Singapore, and the United Arab Emirates. These countries are considered developing because of their economic structure or because of the official opinion of their governments, although their incomes formally place them among developed countries. Another challenge is presented by many of the countries with “transition” or “formerly planned” economies—that is, countries undergoing a transition from centrally planned to market economies. On the one hand, none of these countries has achieved the established threshold of high per capita income. But on the other, many of them are highly industrialized.

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MDCs and LDCs:

“MDC” stands for More Developed Country and “LDC” stands for Least Developed Country. The terms MDCs and LDCs are most commonly used by geographers. This classification is a broad generalization but it can be useful in grouping countries based on factors including their GDP per capita, political and economic stability, and human health, as measured by the Human Development Index (HDI). While there is debate as to at what GDP threshold an LDC becomes and MDC, in general, a country is considered an MDC when it has a GDP per capita of more than US $4000, along with a high HDI ranking and economic stability.

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LEDC and MEDC countries:

LEDC stands for Less Economically Developed Country and MEDC stand for More Economically Developed Country. LEDC’s and MEDC’s are determined due to many things such as the standard of living in that country, the birth rate, the death rate, the infant mortality etc. MEDC countries have better standard of living i.e. a higher birth rate, a higher death rate, a higher infant mortality etc. As LEDC countries are less developed, they have lower rates and standard of living. The main difference between LEDC’s and MEDC’s is the level of industrial development. Kenya, Afghanistan, and India are examples of LEDC’s. The United States, Japan, and the UK are examples of MEDC’s.

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Developed and Developing Countries:

The most commonly used terms to describe and differentiate between countries are “developed” and “developing” countries. Developed countries describes the countries with the highest level of development based on similar factors to those used to distinguish between MDCs and LDCs, as well as based on levels of industrialization. These terms are the most frequently used and the most politically correct; however, there is really no actual standard by which we name and group these countries. The implication of the terms “developed” and “developing” is that developing countries will attain developed status as some point in the future.

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Origin of the Term:

After World War II, the world saw the birth of many new nations. It also saw the establishment of the United Nations, an institution focused on cooperation among countries. The richest countries began to see it as their responsibility to support new and less industrialized nations. More international organizations were established with the mission of helping richer nations send money and resources to poorer nations to help them grow and modernize.  By the 1960s, many scholars and economists began to use the term developing nation to describe these nations that had a mostly agriculturally based economy, high population growth, and high unemployment. The focus on these developing countries picked up more momentum in the year 2000, when the UN General Assembly adopted the Millennium Declaration. This included a commitment to specific development goals, like cutting in half the proportion of the world’s people living on less than $1 a day by 2015.

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Confusing Classification:

It’s not always clear where to draw the line between developed and developing nations, like in the case of Russia and China. These countries have extremely productive industrial bases, but are still classified as developing nations because of other factors. These factors can range from economic status to quality of life. International organizations use different information and standards to make their classifications.

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Money Matters:

The IMF (International Monetary Fund) and World Bank look primarily at economic statistics for classifying nations. They look at how strong a nation’s economy is, how much money the average citizen has, and what sort of industry and resources a nation has. For example, in 2002 the World Bank looked at the GNI (Gross National Income) per capita of nations to analyze development. But even those statistics can vary. For example, the GNI per capita of Ethiopia was $100, while in Malaysia it was $3380, but they are both considered developing nations.

 

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Although economic statistics are very important, they don’t tell a complete story. In the 1990’s, Amartya Sen, winner of the 1998 Nobel Prize in economics, began arguing that we can’t just look at a nation’s economy to determine if it’s developing. He suggested that development must look at an average citizen’s standard of living.

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OECD:

The developing/developed countries taxonomy became common in the 1960s as a way to easily categorize countries in the context of policy discussions on transferring resources from richer to poorer countries. For want of a country classification system, some international organizations have used membership of the Organization of Economic Cooperation and Development (OECD) as a main criterion for developed country status. Though not expressly stating a country classification system, the preamble to the OECD convention does include a reference to the belief of the contracting parties that economically more advanced nations should co-operate in assisting to the best of their ability the countries in process of economic development. This consequently resulted in about 80-85 percent of the world’s countries labelled as developing and 15-20 percent as developed.

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Due to the absence of a methodology in classifying countries based on the level of development, I will focus on the development taxonomies of the UNDP, World Bank and IMF.

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A. United Nations Development Programme’s (UNDP) Country Classification System:

The UNDP’s country classification system is calculated from the Human Development Index (HDI), which aims to take into account the multifaceted nature of development. HDI is a composite index of three indices measuring countries achievement in longevity, education and income. To identify high HDI achievers and consequently developed countries, the UNDP used a number of factors. One way is to look at countries with positive income growth and good performance on measures of health and education relative to other countries at comparable levels of development. Another way was to look for countries that have been more successful in closing the “human development gap,” as measured by the reduction in their HDI shortfall (the distance from the maximum HDI score).

 

B. World Bank’s Country Classification Systems:

The classification tables include all World Bank members, plus all other economies with populations of more than 30,000. The World Bank’s classification of the world’s economies is based on estimates of gross national income (GNI) per capita PPP. The GNI is gross national income converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GNI as a U.S. dollar has in the United States. The GNI per capita is also used as input to the Bank’s operational classification of economies, which determines their lending eligibility. As of 1 July 2015, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,045 or less in 2014; middle-income economies are those with a GNI per capita of more than $1,045 but less than $12,736; high-income economies are those with a GNI per capita of $12,736 or more. Lower-middle-income and upper-middle-income economies are separated at a GNI per capita of $4,125. The term country, used interchangeably with economy, does not imply political independence but refers to any territory for which authorities report separate social or economic statistics.  Low- and lower middle-income economies are usually referred to as developing economies, and the Upper Middle Income and the High Income are referred to as Developed Countries. The World Bank adds that the term is used for convenience; ‘it is not intended to imply that all economies in the developing group are experiencing similar development or that other economies in the developed group have reached a preferred or final stage of development’.

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Why use GNI per capita to classify economies into income groupings?

While it is understood that GNI per capita does not completely summarize a country’s level of development or measure welfare, it has proved to be a useful and easily available indicator that is closely correlated with other, nonmonetary measures of the quality of life, such as life expectancy at birth, mortality rates of children, and enrolment rates in school. There are some limitations associated with the use of GNI that users should be aware of. For instance, GNI may be underestimated in lower-income economies that have more informal, subsistence activities. Nor does GNI reflect inequalities in income distribution.

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C. IMF’s Country Classification Systems:

The IMF uses a flexible classification system that considers (1) per capita income level, (2) export diversification—so oil exporters that have high per capita GDP would not make the advanced classification because around 70% of its exports are oil, and (3) degree of integration into the global financial system. The IMF uses either sums or weighted averages of data for individual countries. However, the IMF’s statistical Appendix explains that this is not a strict criterion, and other factors are considered in deciding the classification of countries. The IMF refers to the classification of countries as Advanced and Emerging and Developing Economies. Advanced Economies are sub-catergorised into Euro Area, Major Advanced Economies (G7), Newly Industrialized Asian Economies, Other Advanced Economies (Advanced Economies excluding G7 and Euro Area), and the European Union. The Emerging and Developing Economies are sub categorised into Central and Eastern Europe, Commonwealth of Independent States, Developing Asia, ASEAN-5, Latin America and the Caribbean, Middle East and North Africa, Sub-Saharan Africa.

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Country Classification Systems in Selected International Organizations:

UNDP IMF World Bank
Name of Developed Country Developed Countries Advanced Countries High income countries
Name of Developing Country Developing Countries Emerging and developing countries Low- and middle-income countries
Development Threshold 75 percentile in the HDI distribution Not explicit US$ 4000 GNI per capita
Subcategories of developing countries (1) Low human development countries, (2)Medium human development countries, and (3) High human development countries 1) Low-income developing countries and(2) Emerging and other developing countries (1) Low-income countries and(2) Middle-income countries

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The CIA gives the following definitions:

•Advanced Economies: A term used by the International Monetary Fund (IMF) for the top group in its hierarchy. Similar to the term “Developed countries” but adds Hong Kong, South Korea, Singapore and Taiwan, but drops Malta, Mexico, South Africa, and Turkey.

•In transition: A term used by the International Monetary Fund (IMF) for the middle group in its hierarchy. This group is identical to the group traditionally referred to as the “former USSR/Eastern Europe”. The group includes the countries which are close to reaching “advanced economy” status, such as Moldova, Albania, Montenegro, FYR Macedonia, Serbia, Bosnia and Herzegovina, Armenia, Georgia, Azerbaijan, Turkmenistan, Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan, Belarus and Ukraine.

•Less developed: The bottom group in the hierarchy. Mainly countries and dependent areas with low levels of output, living standards, and technology; per capita GDPs are generally below $5,000 and often less than $1,500; however, the group also includes a number of countries with high per capita incomes, areas of advanced technology, and rapid rates of growth; includes the advanced developing countries, developing countries, low-income countries, middle-income countries, newly industrialized economies (NIEs), the South, Third World, and underdeveloped countries.

•Least developed: Subgroup of the less developed countries (LDCs) initially identified by the UN General Assembly in 1971 as having no significant economic growth, per capita GDPs normally less than $1,000, and low literacy rates; also known as the undeveloped countries.

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After going through so many different classifications of nations by different agencies, I put forward simplified version of classification:

HDI GNI PPP per capita in US$ Development status
>0.85 >12000 Developed nations
0.75 to 0.85 4000 to 12000 Nations in transition
0.5 to 0.75 1000 to 4000 Developing nations
<0.5 < 1000 Least developed nations

In event of inconsistency between HDI and GNI per capita for developmental status, please go by HDI because HDI includes GNI per capita besides health and education. In other words, if GNI per capita puts nation in higher development status compared to HDI, it means more industrial development without concomitant improvement in health and education. The classical example is India whose GNI per capita PPP is 5497 US$ making it transition nation but HDI 0.609 making is developing nation.  The implication of the terms “developed” and “developing” is that developing countries will attain developed status as some point in the future.

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Overlap between developed and developing nations:

 

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Characteristics of a developed nation:

Developed Countries are the countries which are developed in terms of economy and industrialization. The Developed countries are also known as Advanced countries or the first world countries, as they are self-sufficient nations. Human Development Index (HDI) statistics rank the countries on the basis of their development. The country which is having a high standard of living, high GDP, high child welfare, health care, good medical, transportation, communication and educational facilities, better housing and living conditions, industrial, infrastructural and technological advancement, higher per capita income, increase in life expectancy etc. are known as Developed Country. These countries generate more revenue from the service sector as compared to industrial sector as they are having a post-industrial economy. They are contrasted with developing countries, which are in the process of industrialization, or undeveloped countries, which are pre-industrial and almost entirely agrarian. The following are the names of some developed countries: Australia, Canada, France, Germany, Italy, Japan, Norway, Sweden, Switzerland, and United States. To be considered a developed nation, a country generally has a per capita income around or above $12,000. In addition to having high per capita income and stable population growth rates, developed nations are also characterized by their use of resources. In developed countries, people consume large amounts of natural resources per person and are estimated to consume almost 88% of the world’s resources. According to the International Monetary Fund, advanced economies comprise 60.8% of global nominal GDP and 42.9% of global GDP (PPP) in 2014. Some of the common characteristics of a developed economy are low birth rate and higher life expectancy, high level of literacy and a well trained workforce and the export of high value added goods.

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Similar terms:

Terms similar to developed country include “advanced country”, “industrialized country”, “‘more developed country” (MDC), “more economically developed country” (MEDC), “Global North country”, “first world country”, and “post-industrial country”. The term industrialized country may be somewhat ambiguous, as industrialization is an on-going process that is hard to define. The first industrialized country was the United Kingdom, followed by Belgium. Later it spread further to Germany, United States, France and other Western European countries. According to some economists such as Jeffrey Sachs, however, the current divide between the developed and developing world is largely a phenomenon of the 20th century.

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Generalized characteristics of developed countries:

•Post-industrial economies

•High level of industrial development

•High level of affluent citizens

•Low levels of unemployment

•Higher education rates

•Technological advantages

•Better roads

•Stable governments

•Good health care

•Human and natural resources are fully utilized

•High level of per capita income

•High Human Development Index (HDI)

•Increased life expectancy

•Low birth rates

•Low death rates

•Good housing conditions

•Safe water supplies

•Abundant food supplies

•Easy to access advanced medical services

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Characteristic of developing nations:

The countries who are going through the initial levels of industrial development along with low per capita income are known as Developing Countries. These countries come under the category of third world countries. They are also known as lower developed countries. Developing Countries depend upon the Developed Countries, to support them in establishing industries across the country. The country has a low Human Development Index (HDI) i.e. the country does not enjoy healthy and safe environment to live, low Gross Domestic Product, high illiteracy rate, poor educational, transportation, communication and medical facilities, unsustainable government debt, unequal distribution of income, high death rate and birth rate, malnutrition both to mother and infant which case high infant mortality rate, poor living conditions, high level of unemployment and poverty. The following are the names of some developing countries: China, Colombia, India, Kenya, Malaysia, Singapore, Sri Lanka, Thailand, Turkey, U.A.E. Terms such as “emerging countries,” “third world countries” and “developing countries,” are commonly used to refer to countries that do not enjoy the same level of economic security, industrialization and growth as developed countries. The United Nations Conference on Trade and Development (UNCTAD) points out that the least developed of the developing countries are “deemed highly disadvantaged in their development process – many of them for geographical reasons – and (face) more than other countries the risk of failing to come out of poverty.”

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Similar terms:

A variety of terms have been used to refer to these “developing” countries. These include less-developed countries, underdeveloped countries, undeveloped countries, backward countries, Third World countries, and newly industrializing countries. Except for Third World, which was advanced in the late 1960s and early 1970s to refer affirmatively to countries that were politically independent of the United States and the Soviet Union, these terms are more-or-less pejorative. Newly industrializing is more specific than the other terms, in that it refers to a limited number of countries that have begun industrializing since the 1970s.

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Developing nations can be divided further into moderately developed or less developed countries. Moderately developed countries have an approximate per capita income of between $1,000 and $12,000. The average per capita income for moderately developed countries is around $4,000. As of 2012, the list of moderately developed nations is very long and accounts for around 4.9 billion people. Some of the most recognizable countries that are considered moderately developed include Mexico, China, Indonesia, Jordan, India, Thailand, Fiji, and Ecuador. In addition to these specific countries, many others from Central America, South America, northern and southern Africa, south-eastern Asia, Eastern Europe, the former U.S.S.R., and many Arab states, are all considered moderately developed countries. Less developed countries are the second type of developing nations. They are characterized by having the lowest income, with a general per capita income of approximately less than $1,000. In many of these countries the average per capita income is even lower, at around $500. The countries listed as less developed are found in eastern, western, and central Africa, and other countries in southern Asia. In 2012, there were around 0.8 billion people who lived in these countries and survived on very little income.  Overall, in 2012, developing nations accounted for a total of 5.7 billion people. Even though the income range is quite large, there are still nearly 3 billion people that live on less than $2 a day. Can you image living on less than $2 a day? That would be a very hard task for most of us to do. In addition to low income levels, developing countries are also characterized as having high population growth rates. It is estimated that these countries are going to increase by 44% over the next 40 years. By 2050, it is predicted that over 86% of the human population will live in developing countries.

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For the purposes of World Bank financing, debt relief, technical assistance and advisory services, and special initiative, developing countries are categorized as Heavily Indebted Poor Countries (HIPC), Middle-Income Countries (MIC), Low-Income Countries Under Stress (LICUS) and Small States. Middle-income countries, have made great strides in successfully entering the world economy and are creating better-paying jobs, better and more equitably available education and health services, and are investing in infrastructure improvements. However, middle-income countries continue to face substantial development challenges: achieving sustained growth that provides productive employment; reducing poverty and inequality; reducing volatility, particularly in their access to private financial markets; and strengthening the institutional and governance structures that underpin viable market-based economies.

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A developing country may be one:

◦That is largely rural or with a population that is migrating to poorly equipped cities, with a low-performing economy that is based primarily on agriculture and where non-agricultural jobs are scarce and low-paying;

◦Where the populace is often hungry and sorely lacks education, where there is a large knowledge gap and technological innovation is scarce;

◦Where health and education systems are poor and/or lacking and where transportation, potable water, power and communications infrastructure is also scarce;

◦Where the amount of government debt is unsustainable;

◦Where the land mass, population, and domestic markets are small and far disbursed, often on remote islands or in island groups, susceptible to natural disasters, with limited institutional capacity, limited economic diversification; and/or

◦Where government has collapsed and armed conflict has left a fragile state with weak institutions and policies, either unwilling or unable to provide basic social services, especially for the poor. It is estimated that a third of people living in absolute poverty around the world live in fragile states in a vicious cycle of poverty and conflict.

Implicit in the term developing countries is the suggestion that things will improve over (some unforeseeable period of) time. However, this terminology has been used to hide the exploitation and oppression of people in the so-called developing countries—exploitation by corporations headquartered in the developed countries, by dictators installed or supported by the U.S. government or its allies, or by the governments and militaries of the developing countries themselves.

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Economies in transition:

Since the fall of the Berlin Wall, a new category, Economies in Transition, has come about. These include most of the former Soviet Union countries and often include South Africa. Conditions are not as bad as in developing countries but neither are they developed. The potential in these markets is great, as are the risks.

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Newly industrialized country:

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Newly industrialized country (NIC), country whose national economy has transitioned from being primarily based in agriculture to being primarily based in goods-producing industries, such as manufacturing, construction, and mining, during the late 20th and early 21st centuries. An NIC also trades more with other countries and has a higher standard of living than developing countries. However, it has not yet reached the level of economic advancement of developed countries and regions such as the United States, Japan, and Western Europe. NICs began to be recognized during the second half of the 20th century, when economies such as those of Hong Kong, South Korea, Singapore, and Taiwan underwent rapid industrial growth. Several other countries—such as Turkey, Thailand, Malaysia, Mexico, Brazil, Argentina, South Africa, Russia, China, and India—industrialized during the late 20th and early 21st centuries. Each experienced a general rise in per capita income, although a higher income does not necessarily reflect a higher development status. For example, India and China, because of their large populations, have low per capita incomes even though they have significant economic growth rates and large manufacturing sectors. Industrialization and growth in NICs has been achieved through diverse means: for example, import substitution (substituting domestically produced products for those previously imported) in India, export-oriented growth in Taiwan and South Korea, investment in fossil-fuel extraction in Russia, and attraction of inward foreign investment in China. Yet there are some common features usually shared by NICs. Those include political and economic reforms allowing for greater civil rights and market liberalization, strengthening of the legal and economic environment to foster increased competition and privatization of industries, and trade liberalization policies allowing increased exchange of goods and cross-border investment. In almost all NICs, greater industrialization has led to increased trade, greater economic growth, participation in regional trading blocs, and attraction of foreign investment, especially from developed countries.

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Landlocked developing countries:

Landlocked developing countries (LLDC) are developing countries that are landlocked. Landlocked developing countries are countries with serious constraints on the overall socio-economic development due to lack of territorial access to the sea and therefore remoteness and isolation from world markets causing high transit and transportation costs. These countries are among the poorest of the developing countries, of the thirty landlocked developing countries in the world, sixteen are classified as being least developed. High transport costs due to distance and terrain result in the erosion of competitive edge for exports from landlocked countries. Also, the constraints on landlocked countries to be mainly physical, as in lack of direct access to the sea, isolation from world markets and high transit costs due to physical distance. Geographic remoteness is one of the most significant reasons as why developing landlocked nations are unable to alleviate themselves while European landlocked cases are mostly developed because of short distances to the sea through well-developed transient countries.

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Least developed country:

A least developed country (LDC) is a country that, according to the United Nations, exhibits the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria:

•Poverty, GNI PPP per capita less than 1000 US$

•Human resource weakness (based on indicators of nutrition, health, education and adult literacy)

•Economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, handicap of economic smallness, and the percentage of population displaced by natural disasters)

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Characteristics of Developing countries:

Developing or underdeveloped countries are those countries in which most of the citizens are compelled to live below poverty line. As a result of this problems in consumption arise in various time periods due to scarcity or shortages of goods and services. In such countries technical and monetary level will be of low quality. In such countries there will be no proper association between production, consumption and distribution. As a result of unemployment propensity to consume will be high resulting in low saving and low investment. In such countries available natural resources will not be utilized property or adequately. In view of these various reasons the per capita income of such countries will also be low. Developing or underdeveloped economy is that economy in which there are low level of living, absolute poverty, low per capita income, low consumption level, poor health services, high death and birth rates and dependence on foreign countries. Despite having high possibilities of economic development such countries are in the group of underdeveloped countries. Low per capita income, unequal distribution of national income, major section of the people dependent upon agriculture, inefficient administration, objectiveless political parties, lack of development in industries, lack of job oriented education, etc. are the characteristics of underdeveloped countries. Developing countries have a burgeoning youthful population and a great need for necessities at low prices. They often provide lucrative markets for services and products associated with infrastructure upgrading, particularly where development aid is available to fund certain projects.

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Among other maladies, developing countries suffer from poor sanitation, nutrition, and education.

Sanitation:

In 2004, 2.6 billion people, or more than 40% of the world’s population, did not have access to basic sanitation. In Kevin Watkins’ (head of the United Nations Development Program) words, “‘No access to sanitation’ is a polite way of saying that people draw water for drinking, cooking and washing from rivers, lakes, ditches and drains fouled with human and animal excrement. Over one billion people drink unsafe water, and the poor sanitation contributing 1.8 million deaths of children each year from diarrhoea, the second largest cause of global children mortality.  According to the 2006 Human Development Report, of which Watkins was the principal author, a child has a 60% better chance of reaching one year of age if a toilet is installed at home. As UNICEF’s Executive Director Carol Bellamy states, “children are being born into a silent emergency of simple needs” and the disparity between the developed and developing world must be addressed.

Hunger:

Food represents yet another basic necessity. It is neither unreasonable nor is it novel, but nearly 16,000 children die from hunger-related causes each day. These deaths account for one third of child deaths around the world. The world is in a tragic situation where the developing world suffers from under-nourishment while the developed world lounges in over-nourishment.

Education:

As with sanitation and nutrition, developing countries lack in the education sector. One in five children does not attend school. For those that can attend 4 – 6 years of school, 30 – 50% cannot read or write. In September 2001, there were 1 billion non-literate adults, which is equivalent to 26% of the world adult population. 98% of nonliterates live in developing countries, and 2/3 of non-literates are women. Although education is a serious issue, people often raise the question whether education is even worth improving, when compared with the struggle to survive. Such a viewpoint proposes that the world should only concentrate on one specific aspect, but the plight of developing countries is a complex one, and so it should be addressed from different angles and in every way possible.

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Some of the characteristics of developing countries are:

•A low average real per capita income

•A high proportion of the labour force being involved in agriculture and other primary activities

•Low life expectancy

•A high rate of illiteracy

•A high rate of population growth

• Tend to have serious shortages of foreign exchange

•To be more protectionist about their economies and industries than industrialised countries. (I.e. Trade is restricted in order to protect local producers against competition from foreign producers of the same product(s), as well as to stimulate employment).

•High infant mortality

•Less medical facilities

•Poor sanitation

•Low standard of living

•Inadequate housing

•Low levels of labour productivity

•High level of unemployment and under employment

•Technological backwardness

•Less agriculture productivity

•Often contain undeveloped rural villages

•Unstable governments

•High level of birth rates

•High level of death rates

•Dirty, unreliable water supplies

•Poor nutrition

•Limited technological capacity

•Unequal distribution of income

•Factors of production are not fully utilized

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The most important structural features of developing countries:

1. Lower per-capita income

2. Low levels of human capital

3. High levels of poverty and under-nutrition

4. Higher population growth rates

5. Predominance of agriculture and low levels of industrialization

6. Low level of urbanization but rapid rural-to-urban migration

7.  Dominance of informal sector

8. Underdeveloped labor, financial, and other markets.

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1. Lower Per-Capita Income:

As we have already discussed, developing countries have lower per-capita income compared to developed countries. Figure above depicts the annual per-capita income of selected countries in 2005 in the U.S. dollar. Figure shows a wide disparity in income levels. In 2005, the country with the highest per capita income, Switzerland, had 345 times the per capita income of one of the poorest countries of the world, Ethiopia, and 76 time that of one of the world’s largest nations, India. However, such per-capita income comparison exaggerates the differentials in standards of living between developing and developed countries. That is because per-capita income in terms of PPP in developing countries is much higher compared to per-capita income in terms of nominal exchange rate. For example, the exchange rate per-capita income in Bangladesh was $470, but PPP per-capita income was $2,090 in 2005. Measured in PPP dollars, the gap between the United Sates and Burundi would be 66 to 1 rather than 436 to 1 as measured at the official exchange rate.

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2. Low Levels of Human Capital:

Table above summarizes various indicators of health and education. It shows that low income countries have substantially lower life expectancy at birth and higher under-5 mortality rate compared to high income countries. The average life expectancy in low income countries in 2005 was 59 years, while in high income countries it was 79 years. Thus, people in high income countries, on average, live 20 more years than people in low income countries.

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Education:

Table above shows net primary school enrolment rate and student (pupil)-teacher ratio in primary schools for 2005. Net primary school enrolment rate is defined as the ratio of the number of children actually attending primary school to the number of school-age children in the population. Student-teacher ratio captures the quality of education. Higher is this ratio, lower is the quality of schooling. Table clearly shows that low income countries have lower primary school enrolment and much higher student-teacher ratio. Only 78 percent of children (5-14) in low income countries go to school. Also the children who go school, they receive lower quality of education. Regional pattern shows that Sub-Saharan countries have the lowest primary school enrolment and the highest student-teacher ratio followed by South Asian countries.

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3. High Levels of Poverty and Under-Nutrition:

Developing countries, particularly low income countries, are characterized by very high incidence of poverty and prevalence of hunger and under-nutrition. Figure above depicts the trend in number of people living in abject poverty in various regions of world in 2002. The incidence of abject poverty varies widely around the developing world. The world Bank estimates that the share of the population living on less than $ 1 a day is 9.1% in East Asia and the Pacific, 8.6% in Latin America and Caribbean, 1.5% in the Middle East and North Africa, 31.7% in South Asia, and 41.1% in Sub-Saharan Africa. The incidence of people living in extreme poverty has declined over years. However, most of the decline has taken place in East Asian and Pacific Region. The decline in Sub-Saharan and South Asian regions has been painfully slow.

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4. Higher Population Growth Rate:

Developing countries, particularly low income countries, are characterized by relatively high population growth rate despite the fact that they have high child mortality rate. High population growth rate is due to very high birth rate.

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5. Predominance of Agriculture and Low Levels of Industrialization:

One striking feature of developing countries is that agriculture accounts for a large part of gross domestic product and employment. In many developing countries, agriculture accounts for more than a quarter of GDP. Its dominance in employment is even more striking. In many developing countries, majority of male and female are employed in agriculture.

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6. Low Level of Urbanization:

Most of the people in developed countries live in urban areas. On the other hand, the share of urban population in developing countries is much smaller. Only 41 percent of population lived in urban areas in less developed countries, while the share of urban population was 77 percent in more developed countries. The share of urban population is particularly low in South Central Asia and Sub-Saharan countries. Figure above traces relationship between the level of urbanization and per-capita income. It shows a strong positive relationship between the two. Higher the per-capita, larger is the level of urbanization. In any developing world country there are massive differences between urban and rural areas. Rural areas are far less likely to have access to clean water and sanitation, health and education facilities or to get help from international aid.

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7. Dominance of Informal Sector:

One very important feature of the developing countries is the dominance of informal sector in economic activities. The main characteristics of the informal sector jobs are: (i) low skill, (ii) low productivity, (iii) self-employment (iv) lack of complementary inputs particularly capital, (v) small scale measured in terms of sales, assets, employment etc., (vi) favored by recent migrants, (vii) ease of entry for employers and workers, and (viii) lack of formal contractual agreements. Rural areas in developing countries are largely informal. Even in cities informal sector in developing countries is quite big. Due to the dominance of informal sector, most of the workers are engaged in low productivity and low paying jobs. Dominance of the informal sector is largely due to underdeveloped labor, financial, and other markets in developing countries.

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8. Underdeveloped Labor, Financial, and Other Markets:

Markets and institutions in developing countries are quite different from markets and institutions in developed countries. Markets and institutions are largely informal in developing countries. Informality of these markets can largely be traced to informational and incentive constraints and limits to contractual enforcement.

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Diversity between developing countries:

Despite common characteristics and structural similarity, no two less economically developed countries are the same! There is a huge amount of diversity between them. Think about some of the key structural economic differences between nations – for example:

1. The size of an economy (i.e. population size, basic geography, annual level of national income)

2. Historical background including years since independence from colonial rule

3. Natural resource endowment

4. The age structure of the population

5. Ethnic and religious composition

6. Relative size / importance of public and private sectors of the economy

7. Structural of national output (e.g. primary, secondary, tertiary and quarternary sectors)

8. Structure of international trade (both geographical and the commodity pattern of trade)

9. Political stability, strength of democratic institutions, transparency of government

10. Ethnic and gender equality and tolerance

11. The ease with which new businesses can be created and sustained

12. Other competitiveness indicators including the relative size and strength of high-knowledge / high-technology industries

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Why are poor countries poor?

There is probably no simple answer to that question. Most likely, there are numerous factors that play a role as discussed below. A number of countries in this world are economically less developed. There is no clear definition of what a “poor country” is. The common understanding is that a country is poor if the majority of its people do not have a certain minimum living standard.  There is considerable dispute about the right term for “poor countries”. The word “poor” has a very negative connotation. Furthermore, “poor countries” are not necessarily poor: They often have vast natural resources. On the other hand, terms such as “developing” or “industrializing” are very positive. These terms imply that the country would actually be moving out of poverty although presently life is hard for a large number of people.

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Factors contributing to a country’s level of development:

A country’s level of development is influenced by a number of interrelated factors. Clearly geography plays a role.  Climate, raw materials, farmland, fresh water, access to the sea, and other factors all help a nation grow and prosper. History, too, has an influence. In nations with established traditions of political independence, democracy, social mobility, and a relatively free market, people are generally more efficient and less corrupt and thus better able to use foreign aid for its intended purpose. While it is difficult to separate these factors, they can be broken down into several major categories: geographical, historical, political, economic, human, social, cultural and environmental. Most developing nations of the world face development challenges as a result of a combination of these factors. These factors are responsible for making a nation developed or developing. Some environmental factors which contribute to a country’s level of development, such as natural disasters, are beyond human control. The majority of the development issues however have been created and continue due to the direct actions of humans. The very high rate and level of development experienced by most rich countries of the world is another factor which perpetuates many challenges faced by people in developing countries.

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A. Historical factors that affect development:

Studying the past gives humans an enormous insight into the present. Using historical analysis in development geography helps to explain why many countries face development challenges, because a country’s history is a huge contributing factor to its level of development.  Often, analysing a country’s history will provide explanations for many of the political, economic, social and environmental factors that also contribute to its level of development. In developing countries of the world today, one of the most significant historical factors that has hindered development is colonisation.

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Colonisation (colonialism):

Colonisation occurs when a country or group of people who wish to control ‘new’ territories form permanent settlements (or colonies) there. It usually involves the large-scale movement of people from the colonising power (also known as the mother or parent country) to the ‘new’ territory (the colony). Colonisation also usually involves the domination of the original inhabitants of the colony (the indigenous population). In most historical cases, colonisation has occurred as a result of the colonising power’s desire to exploit new lands and peoples for their own economic and political gain. Natural resources, agricultural commodities, minerals, plants and spices are some common examples of products that colonising powers throughout history have taken from their colonies. In addition to this, the indigenous populations of colonies have often been forced to work under slave-like conditions for colonising powers. In almost all instances, land has been taken away from indigenous peoples and divided amongst colonial settlers.  This was the case during the Age of Colonialism, which began in the early 16th century, soon after Christopher Columbus first arrived in the Americas. For centuries following this ‘discovery’ in 1492, the European colonial powers of Spain, Portugal, France, England and the Netherlands formed colonies in North, Central and South America, which had a detrimental effect on the indigenous culture and heritage of these regions. At the same time colonisation was occurring in the Americas, the same process was unfolding throughout large sections of Asia and Africa. It is considered an effect of colonisation that today the regions of Asia, Africa and Latin America comprise the least developed countries of the world. With only a few exceptions, such as Ethiopia, Iran, and Thailand (formerly Siam), most of the world’s developing countries were formerly colonies. While formal colonization has largely ended, either through the granting of independence or through wars of liberation, many formerly colonized countries have continued their earlier political-economic relationships with their former colonial master. The reason for this is easy to understand: Colonization involved structuring the economy of the colonized country to serve the needs of the colonizing country and its corporations. Local administrators trained during the colonial period know little else, and therefore the old relationships have continued, only under new leadership. This continuation of earlier colonial political-economic relations is generally referred to as neo-colonialism. Neocolonial relationships have been encouraged by both the International Monetary Fund (IMF) and the World Bank. Both have promoted neoliberal development programs. This neoliberal economic model has resulted in what Kim Scipes’s study of the Philippines from 1962 to 1999 calls “detrimental development” (Scipes 1999).

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What impact did colonialism have on development in the developing world?

Colonialism is defined as the policy of countries extending their powers over other territories. In the 18th and 19th centuries, during the industrial revolution due to industrialization European nations became stronger, therefore they started eyeing the other countries that are rich with natural resources, and the countries that would be good markets for their goods and started occupying them by the process called colonization. They started occupying those countries that have failed to industrialize during the industrial revolution. This process had positive and negative impacts on the development of the colonized territory, it had positive impacts since it often led to modernization of the colony, provided better education, since they opened and established universities, institutions, schools and faculties with European systems of education, and started learning and using foreign languages, also led to the modernization and development of the society due to the interactions between the people from the two different countries and cultures. Clearly the process was not entirely negative. The Europeans brought their laws, education systems and views about civilization in to the colony and helped modernizing their societies; for the most part the Europeans were able to suppress opposition within the countries they ruled. They increased trade, used raw material to feed industries back home, and improved infrastructure by building roads, railways and electricity plants and improving irrigation projects. Distances that once took weeks to cover were covered in days. Schools were built that offered a European-style education. Some were built by the colonizers. But these improvements were spotty and generally didn’t have much effect on the majority of the population. On the other hand colonialism had negative impacts as well, since the powerful countries were using and exploiting the colonized country’s natural resources and they were using them as their markets, the colonized countries found their local economies destroyed or at least dramatically transformed as their populations were forced and used to produce and consumer goods for the country that had colonized them rather for themselves. The population of the colonized country became second class citizens as the people in the other country began to think of themselves as superior and feel it was their duty to civilize and educate the people in the colony. Therefore colonialism in some cases could lead to imperialism (which is defined as the policy of one nation to exercise and use their power over another nation to exploit their resources and use their people as their labor and consumer goods and use their land as their goods market and benefit from every aspect and era of that country). And this often led to the decrease in the development rate of the colony especially economically. Hence imperialism is often considered as “geographical violence.” For example, when Britain occupied India, India had to grow and provide cotton for Britain, then they were shipped to Manchester, England where it was made into finished goods which were sold back to India for a tidy profit. The colonizers also exerted pressure by controlling trade, defining the terms of the trade and forcing the colonies to become indebted to them so they could demand concessions. And most importantly the rise of capitalism, the colonizers owned the production means such as factories farms and work areas and the people from the colonized country were only the workers. There were also cultural traditional and social changes, and more than that, they began using European languages instead of their native language and attended European universities. Therefore it could be argued that it is difficult to state whether the colonization was all a positive or all a negative process in the history of development in the developing countries, since it had both positive and negative impact on the development on the colonized developing countries.

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How Britain become rich nation exploiting India’s economy during its colonial rule:

Britain’s rise for 200 years was financed by its depredations in India. In fact Britain’s industrial revolution was actually premised upon the de-industrialisation of India. India share of the world economy when Britain arrived on its shores was 23 per cent, by the time the British left it was down to below 4 per cent. British rulers destroyed India’s handloom industry and turned the country’s “weavers into beggars”. The handloom weavers were famed across the world whose products were exported around the world, and Britain came right in, broke their looms, imposed tariffs and duties on their cloth and products and started, of course, taking their raw material from India and shipping back manufactured cloth flooding the world’s markets with what became the products of England. That meant that the weavers in India became beggars and India went from being a world famous exporter of finished cloth into an importer.  India also funded both world wars through taxes as well as supplied ammunition and garments. Of Britain’s total World War II debt of 3 billion pounds (in 1945), it owed 1.25 billion pounds to India, and no part of it was ever paid.

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Neo-colonialism:

Neo-colonialism is the geopolitical practice of using capitalism, business globalization, and cultural imperialism to influence a country, in lieu of either direct military control (imperialism) or indirect political control (hegemony). It is the indirect continuation of economic, political and social domination, influenced by colonialism after a country has gained formal independence from colonialism.  The result of neo-colonialism is that foreign capital is used for the exploitation rather than for the development of the less developed parts of the world. Investment, under neo-colonialism, increases, rather than decreases, the gap between the rich and the poor countries of the world. The struggle against neo-colonialism is not aimed at excluding the capital of the developed world from operating in less developed countries. It is aimed at preventing the financial power of the developed countries being used in such a way as to impoverish the less developed. There are numerous examples of the developed countries impeding the growth of single countries or stalling steps for ensuring world stability and security for their own reasons. Furthermore, instruments of debt perpetuation such as the International Monetary Fund (IMF) and the World Bank (WB) give incentives to the underdeveloped countries to fulfil their short run goals by incurring long term debts on a scale that has long crossed the level of pay-ability. Whole economies have been wrecked by such measures taken by the WB and the most disturbing fact is that the motive behind such ‘help’ is not to alleviate the problems of an indebted country but to establish coercive leverage upon it. The government of developing nation is forced, through compliance of economic coercion, to adopt policies that benefit the developed countries, especially the US in the long run. Economic neo-colonialism extracts the human and the natural resources of a peripheral (poor) country to flow to the economies of the wealthy countries at the center of the global economic system; hence, the poverty of the peripheral countries is the result of how they are integrated in the global economic system. Critics of neo-colonialism also argue that investment by multinational corporations enriches few in underdeveloped countries, and causes humanitarian, environmental and ecological devastation to the populations which inhabit the neocolonies whose “development” and economy is now dependent on foreign markets and large scale trade agreements. This, it is argued, results in unsustainable development and perpetual underdevelopment; a dependency which cultivates those countries as reservoirs of cheap labor and raw materials, while restricting their access to advanced production techniques to develop their own economies. One variant of neo-colonialism theory critiques the existence of cultural colonialism, the desire of wealthy nations to control other nations’ values and perceptions through cultural means, such as media, language, education and religion, ultimately for economic reasons.

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B. Political factors that affect development:

The political environment of a country, which is often closely linked to its history, also has a significant impact on its level of development. In general, governments have the power to take actions which direct a country’s social and economic development. In many developing countries with unstable political histories, however, government corruption and greed have caused problems which have hindered such progress.  Wars caused by political tensions – within and between countries – also hinder governments’ abilities to find solutions to development challenges. This is because wars are very costly and cause widespread death and destruction. Wars also often cause disunity amongst the population, which can lead to a breakdown in social cohesion.  Developing countries that lack a stable system of government or those that have experienced (or are experiencing) war, often become burdened with political crises which impede their development. These political problems can sometimes become firmly established and some countries can find it difficult to recover from them.

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1. Government meddling reducing economic growth:

In earlier thinking about development, it was assumed that the market mechanisms of developed economies were so unreliable in developing economies that governments had to assume central responsibility for economic activity. This was to be done through economic planning for the entire economy, which in turn would be implemented by active government participation in the economy and pervasive controls over all private-sector economic activity. Government participation took many forms: Public-sector enterprises were established to manufacture many commodities, including steel, machine tools, fertilizers, heavy chemicals, and even textiles and clothing; government marketing boards assumed monopoly power over the purchase and sale of many agricultural commodities; and government agencies became the sole importers of a variety of goods, and they often became exporters as well. Controls over private-sector activity were even more extensive: Price controls were established for many commodities; import licensing procedures eliminated the importing of commodities not given priority in official plans; investment licenses were required before factories could be expanded; capacity licenses regulated maximum permissible outputs; and comprehensive regulations governed the conditions of employment of workers. The consequence, frequently, was that indigenous entrepreneurs often found it more financially rewarding to devote their energies and ingenuity to the task of procuring the necessary government import licenses and other permits and exploiting the loopholes in government regulations than to the problem of raising the efficiency and productivity of resources. For public-sector enterprises, political pressures often resulted in the employment of many more persons than could be productively used and in other practices conducive to extremely high-cost and inefficient operations. The consequent fiscal burden diverted resources that might otherwise have been used for investment, while the inefficient use of resources dampened growth rates.

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2. Foreign Meddling:

Developing countries have not just economic relationships with Western countries, but also political relationships. This relationship is asymmetric. Foreign countries, notably the US and Europe, or companies from these countries, influence politics in developing countries by

• financing election campaigns

• buying certain political choices from politicians with money

• sponsoring coup-d’états in case of an undesired government

• going to war to remove undesired governments

For some cases of foreign influence, there is concrete evidence. For example, the International Institute for Democracy and Electoral Assistance (IDEA) complains that France supported Yssoufou Mahamadou, the candidate of the PNDS party in Nigeria. France first backed the dictator of Central Africa, then ousted him in 1979, and then granted him asylum in France. The United States helped topple the governments of Cuba (1952), Iran (1953), Brazil (1955), and Pakistan (1977) and helped establish the dictatorship of Augusto Pinochet in Chile (1973). It obtained sovereignty of the Panama Canal, and invaded the country in 1988. The meddling will influence politics in a way that is beneficial to the foreign country, but not necessarily to the developing country. The intervention may impose foreign values or policies, force a dependency upon the developing country, or force an opening of the local market. Notably, foreign countries and companies want mainly their own products sold in the developing country. This, however, suffocates the local economy.

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3. Land Grabbing:

Developing countries and developed countries maintain vivid trade relationships. One source of trade is the exploitation of natural resources and agriculture in the developing country. Foreign investors own large parts of the lands in developing countries.

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Land allocated by large land deals, with proportion of the total land area:

Country Area (ha) % of total
Philippines 5182021 17%
Sierra Leone 1078742 15%
Malaysia 4819483 15%
Benin 1040900 9%
Madagascar 3747741 6%
Cambodia 1139208 6%
Liberia 679000 6%
Indonesia 7527760 4%
Mozambique 2280132 3%
Ghana 669900 3%

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The use of the land is diverse. The land is used to produce crops for export, for biofuel production, for large-scale infrastructure projects, for carbon-credit mechanisms, or simply for speculation. Investor countries are Western countries, but also China, and Arab countries that aim to produce food for their populations.  Large land deals are connected to hopes for benefits for both the investor and the host country. The investor expects productivity and fertility of the land, and a rich source of income. The host country expects fees for land use, income from taxes or customs, job creation for the local population, and the attraction of further foreign investment. In reality, neither the hopes of the investor nor the hopes of the host country always materialize.

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4. Red Tape:

Everybody hates complicated bureaucratic procedures. Bureaucracy is even more cumbersome in developing countries who burden themselves with unnecessary red tape. The World Bank regularly rates the ease of doing business in countries across the world. Factors include, e.g., the number of days needed to start a business, to obtain a construction permit, to employ a worker, to register property, to get credit, and to enforce a contract. Developing countries consistently figure at the bottom of these rankings. In Sub-Saharan Africa, for example, it takes a company twice as many hours to prepare a tax return document as it takes a company in the rich countries. It takes 4 times longer to open a business in Latin America than to open one in the rich countries. The procedure is more expensive and takes more separate bureaucratic steps. It takes twice as long, and is twice as expensive, to register land in Sub-Saharan Africa as it is in the rich countries. Inefficient or excessive bureaucracy can hamper business severely. It not only costs time and money, but it also prolongs the state of legal insecurity between a decision and the completion of an act. This invites bribes and fuels corruption. Finally, red tape discourages business initiative, foreign investment, and the creation of employment.

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C. Economic Factors in Economic Development:

In a country’s economic development the role of economic factors is decisive. The stock of capital and the rate of capital accumulation in most cases settle the question whether at a given point of time a country will grow or not. There are a few other economic factors which also have some bearing on development but their importance is hardly comparable to that of capital formation. The surplus of food grains output available to support urban population, foreign trade conditions and the nature of economic system are some such factors whose role in economic development has to be analyzed:

1) Capital Formation:

Capital is what people use to increase their ability to produce the goods and services they need to improve their living conditions. Physical capital includes plows, warehouses, and irrigation systems, tools, machines, and factories, office buildings, copy machines, telephones, ports, roads, trucks etc.  Human capital is the knowledge and skills that people use to produce goods and services. The strategic role of capital in raising the level of production has traditionally been acknowledged in economics. It is now universally admitted that a country which wants to accelerate the pace of growth, has no choice but to save a high ratio-of its income, with the objective of raising the level of investment. Great reliance on foreign aid is highly risky, and thus has to be avoided. Economists rightly assert that lack of capital is the principal obstacle to growth and no developmental plan will succeed unless adequate supply of capital is forthcoming. Whatever be the economic system, a country cannot hope to achieve economic progress unless a certain minimum rate of capital accumulation is realized. However, if some country wishes to make spectacular strides, it will have to raise its rate of capital formation still higher.

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Education, technical know-how, and human capital in development:

Education is usually universally seen as the means to cure all types of national problems. Better educated people tend to earn more, have fewer children, contribute more to the national economy, are of more use to the government, and are more likely to have educated children. Education for women, in particular, is commonly seen as the most effective means for birth control. The Girl Effect Movement cites a UN study that shows that women who received 7 or more years of education have 2.2 less children on average. On the long run, a country’s economy tends to shift from manufacturing and agriculture to service-oriented and intellectual economic activity. A better educated population is better prepared for this future.  As it became apparent that the physical accumulation of capital was not by itself the key to development, many analysts turned to a lack of education and skills among the population as being a crucial factor in underdevelopment. Numbers of people matter, and so does their training and experience. Human resources are an important factor in economic development. Man provides labour power for production and if in a country labour is efficient and skilled, its capacity to contribute to growth will decidedly be high. The productivity of illiterate, unskilled, disease ridden and superstitious people is generally low and they do not provide any hope to developmental work in a country. Health epidemics such as HIV/AIDS reduce productivity of a nation. In case human resources remain either unutilized or the manpower management remains defective, the same people who could have made a positive contribution to growth activity prove to be a burden on the economy. It has never been, doubted that the level of technical know-how has a direct bearing on the pace of development. As the scientific and technological knowledge advances, man discovers more and more sophisticated techniques of production which steadily raise the productivity levels.  Schumpeter was deeply impressed by the innovations done by the entrepreneurs, and he attributed much of the capitalist development to this role of the entrepreneurial class. A well-developed entrepreneurial class, motivated and trained to organize resources for efficient production, is often missing in poor countries. The cause may be that managerial positions are awarded on the basis of family status or political patronage rather than merit, it may be the prevalence of economic or cultural attitudes that do not favour acquisition of wealth by organizing productive activities, or it may simply be an absence of the quantity or quality of education or training that is required. In today’s world, much production is knowledge-intensive, thus putting a premium on a well-educated workforce. The abilities to read, to do basic calculations, to operate electronic equipment, and to follow relatively complex instructions are important requirements for much modern labour. Failure to develop such essential labour skills can be an important cause of lack of growth. Poor health is another source of inadequate human resources. When the labour force is healthy, less working time is lost, and more effective effort is expended. Poor countries have low allocation of budget onto education & health sector. This is due to three factors. Firstly, falling export revenue of agriculture produce due to various import restrictions from developed countries e.g. CAP (Common Agriculture Policy). Secondly, large proportion of national income was devoted to service debts to IMF & World Bank. Thirdly, these financial institutions imposed various austerity measures as a condition for rescheduling of loans. Low spending on education means many will not know how to read, write, perform basic arithmetic, operate electronic equipment & to take complex instructions. Lesser availability of healthcare means lower life expectancy, more days taken off as leave resulting in lower output & loss of workforce at productive age etc. Since technology has now become highly sophisticated, still greater attention has to be given to Research and Development for further advancement. Under assumptions of a linear homogeneous production function and a neutral technical change which does not affect the rate of substitution between capital and labour, Robert M. Solow has observed that the contribution of education to the increase in output per man hour in the United States between 1909 and 1949 was more than that of any other factor. No nation can develop in spites of its natural endowment if such nation does not take seriously human capital development which could be derived through sound academic foundation that is tailored towards a good cradle of nursery, primary and secondary school. Our major focus should be in the education sector because it is the education sector that produces the human capital that is needed to develop other industries of the whole nation. Before a nation could be referred to as developed, it must have developed people that can think for the country.

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2. Natural Resources:

The principal factor affecting the development of an economy is the natural resources. Among the natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of natural resources in abundance is essential. Countries naturally rich in coal and oil, for example, do not need to spend money on importing these resources, which are used to produce energy. When exported, natural resources also generate wealth for countries, which means that money can then be spent on other, new industries. Countries with well-developed industries are able to provide jobs, infrastructure and services for their populations, which increase the overall quality of life of their citizens. A country deficient in natural resources may not be in a position to develop rapidly. In fact, natural resources are a necessary condition for economic growth but not a sufficient one. Japan and India are the two contradictory examples. According to Lewis, “Other things being equal man can make better use of rich resources than they can of poor”. In less developed countries, natural resources are unutilized, under-utilized or mis- utilized. This is one of the reasons of their backwardness. This is due to economic backwardness and lack of technological factors. According to Professor Lewis, “A country which is considered to be poor in resources may be considered very rich in resources some later time, not merely because unknown resources are discovered, but equally because new methods are discovered for the known resources”. Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because it has been able to discover new use for limited resources. One of the populist policies following the Mexican Revolution early in the twentieth century was the redistribution of land from large landowners to ordinary peasants. Today, however, fragmented land ownership prevents Mexican agriculture from producing at costs low enough to compete in international markets. The Mexican government now faces an agonizing choice between allowing its populist land reforms to be reversed or continuing to protect a large agricultural sector whose inefficiency is increasing relative to competing suppliers. Although abundant supplies of natural resources can assist growth, they are neither sufficient to ensure growth nor necessary for it. Some countries with large supplies of natural resources have poor growth performance because the economic structure encourages waste. Prime examples are the former Soviet Union, Argentina before the 1990s, and Uganda. In contrast, other countries have enjoyed rapid rates of economic growth based on human capital and entrepreneurial ability despite a dearth of natural resources. Prime examples are Switzerland in earlier centuries, Japan over the past 100 years (until its significant current economic malaise, beginning in the early 1990s), and Singapore, Hong Kong, and Taiwan since the end of the Second World War. Inefficiently managed resource is the hallmark of poor nations. Many poor countries do not achieve both productive & allocative efficiency. Productive inefficiency exists due to absence of competition, contracts & projects are awarded to family members or political patronage, government adopting a close economy policy etc. Allocative inefficiency persists as factors of production like labor & capital are used to produce too much of something & too few of something else. As such someone else can still be made better off without making someone else worse off. For e.g. Indian government was being criticised for encouraging the production of oilseeds & sugar cane where it has no comparative advantage. It should concentrate on rice, wheat & cotton. A third kind of inefficiency, called X-inefficiency, occurs either when firms do not seek to maximize their profits or when owners of the factors of production do not seek to maximize their well-being. Like allocative and productive inefficiency, X-inefficiency also puts the economy inside its production possibilities boundary. Professor Harvey Liebenstein of the University of California, the economist who developed the concept, has studied X-inefficiency in developing countries. He cites psychological evidence to show that non-maximizing behaviour is typical of situations in which the pressure that has been placed on decision makers is either very low or very high. According to this evidence, if the customary living standard can be obtained with little effort, people are likely to follow customary behaviour and spend little time trying to make optimal decisions that would improve their well-being. When pressure builds up, so that making a reasonable income becomes more difficult, optimizing behaviour becomes more common. Under extreme pressure, however, such as very low living standards or a rapidly deteriorating environment, people become disoriented and once again do not adopt optimizing behaviour.

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3. Agriculture:

A developing country whose labour force is mainly devoted to agriculture has little choice but to accept this basic allocation of resources. It can build up its industrial sector, and if its efforts are successful, the proportion of the population devoted to urban pursuits will rise. But the change will come slowly, leaving a large portion of the country’s resources in rural pursuits for a long time to come. It follows that policies to help the agriculture sector raise productivity are an important part of the development strategy in any agriculture-based poor country. These can fill the dual purposes of raising incomes of rural workers and reducing the cost of food for urban workers. A developing country’s government may choose to devote a major portion of its resources to stimulating agricultural production, say, by mechanizing farms, irrigating land, using new seeds and fertilizers, and promoting agricultural research and development. Modern developments of new crops and new growing techniques put a premium on agricultural research and development (R&D) so that a country can adopt, and usually adapt, other country’s agricultural innovations. Also, nonfood agricultural and forest products are becoming increasingly important, and R&D expenditures are often needed if these are to become established products. If successful, the country will stave off starvation for its current population, and it may even develop an excess over current needs and thus have a crop available for export. A food surplus can earn foreign exchange to buy needed imports. The gains from this strategy, while large at first, are subject to diminishing returns. Further gains in agricultural production have an ever-higher opportunity cost, measured in terms of the resources needed to irrigate land and to mechanize production. Critics of reliance on agricultural output argue that developing economies must start at once to develop other bases for economic growth. Many developing countries (as well as many developed ones) suffer from misguided government intervention in the agriculture sector. In India, for example, the government— motivated by a desire to diversify agricultural production by increasing the number of crops under cultivation—has encouraged crops such as oilseeds and sugarcane, in which India has a comparative disadvantage, and discouraged crops such as rice, wheat, and cotton, in which India has a strong comparative advantage. It has subsidized food prices, thus giving large benefits to the urban population. The term ‘marketable surplus’ refers to the excess of output in the agri­cultural sector over and above what is required to allow the rural population to subsist. The importance of the marketable surplus in a developing economy emanates from the fact that the urban industrial population subsists on it. With the development of an economy, the ratio of the urban population increases and increasing demands are made on agriculture for food grains. These demands must be met adequately; otherwise the consequent scarcity of food in urban areas will arrest growth. In case a country fails to produce a sufficient marketable surplus, it will be left with no choice except to import food grains which may cause a balance of payments problem

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4. Conditions in Foreign Trade:

The classical theory of trade has been used by economists for a long time to argue that trade between nations is always beneficial to them. In the existing context, the theory suggests that the presently less developed countries should specialize in production of primary products as they have comparative cost advantage in their production. The developed countries, on the contrary, have a comparative cost advantage in manufactures including machines and equipment and should accordingly specialize in them. In the recent years, a powerful school has emerged under the leadership of Raul Prebisch which questions the merits of unrestricted trade between developed and under-developed countries on both theoretical and empirical grounds. Foreign trade has proved to be beneficial to countries which have been able to set-up industries in a relatively short period. These countries sooner or later captured international markets for their industrial products. Therefore, a developing country should not only try to become self-reliant in capital equipment as well as other industrial products as early as possible, but it should also attempt to push the development of its industries to such a high level that in course of time manufactured goods replace the primary products as the country’s principal exports. In countries like India the macro-economic interconnections are crucial and the solutions of the problems of these economies cannot be found merely through the foreign trade sector or simple recipes associated with it.

 

5) Economic System:

Two fundamental obstacles to development:

1. How to adopt the right policies

2. How to find sufficient funds

The economic system and the historical setting of a country also decide the development prospects to a great extent. There was a time when a country could have a laissez faire economy and yet face no difficulty in making economic progress. Laissez-faire is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies. The phrase laissez-faire is part of a larger French phrase and literally translates to “let (it/them) do”, but in this context usually means to “let go”. In today’s entirely different world situation, a country would find it difficult to grow along the laissez-faire path of development. The Third World countries of the present times will have to find their own path of development. They cannot hope to make much progress by adopting a laissez faire economy. Further, these countries cannot raise necessary resources required for development either through colonial exploitation or by foreign trade. They now have only two choices before them:

i) They can follow a capitalist path of development which will require an efficient market system supported by a rational interventionist role of the State.

ii) The other course open to them is that of economic planning.

The latest experiments in economic planning in China have shown impressive results. Therefore, from the failure of economic planning in the former Soviet Union and the erstwhile East European socialist countries it would be wrong to conclude that a planned economy has built-in inefficiencies which are bound to arrest economic growth.

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Fiscal policy for developing nations:

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6. Domestic Saving:

Although modern development strategies call in many instances for a large infusion of imported foreign capital, the rise of domestically owned firms, which will reap some of the externalities created by foreign technology, is one key to sustained development. This requires a supply of domestic saving to finance their growth. If more domestic capital is to be created at home by a country’s own efforts, resources must be diverted from the production of goods for current consumption. This reallocation of resources implies a reduction in current living standards. If living standards are already at or near the subsistence level, such a diversion will be difficult. At best, it will be possible to reallocate only a small proportion of resources to the production of capital goods.

Shortage of savings:

Given the broad relationship between capital accumulation and economic growth established in growth theory, it was plausible for growth theorists and development economists to argue that the developing countries were held back mainly by a shortage in the supply of capital. These countries were then saving only 5–7 percent of their total product, and it was manifest (and it remains true) that satisfactory growth cannot be supported by so low a level of investment. It was therefore thought that raising the savings ratio to 10–12 percent was the central problem for developing countries. Early development policy therefore focused on raising resources for investment. Steps toward this end were highly successful in most developing countries, and savings ratios rose to the 15–25 percent range. However, growth rates failed even to approximate the savings rates, and theorists were forced to search for other explanations of differences in growth rates. It has become increasingly clear that there can be much wastage of capital resources in the developing countries for various reasons, such as wrong choice of investment projects, inefficient implementation and management of these projects, and inappropriate pricing and costing of output. These faults are particularly noticeable in public-sector investment projects and are one of the reasons why the Pearson Commission Report of the International Bank for Reconstruction and Development (1969) found that “the correlation between the amounts of aid received in the past decades and the growth performance is very weak.” But even in the private sector there may be a considerable distortion in the direction of investment induced by policies designed to encourage development. Thus, in most underdeveloped countries, a considerable part of private expansion investment, both foreign and domestic, has been diverted into the expansion of the manufacturing sector, catering to the domestic market through various inducements, including tariff protection, tax holidays, cheap loans, and generous foreign-exchange allocations granting the opportunity to import capital goods cheaply at overvalued exchange rates. As a consequence, there developed a very considerable amount of excess capacity in the manufacturing sector of the underdeveloped countries pursuing such policies.

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7. Infrastructure:

Key services, called infrastructure, such as transportation and a communications network, are necessary for efficient commerce. Roads, bridges, railways, and harbours are needed to transport people, materials, and finished goods. Phone and postal services, water supply, and sanitation are essential to economic development. The absence of a dependable infrastructure can impose severe barriers to economic development. Many governments feel that money spent on a new steel mill shows more impressive results than money spent on such infrastructure investments as automating the telephone system. Yet private, growth-creating entrepreneurial activity will be discouraged more by the absence of good telephone communications than by the lack of domestically produced steel. Due to the burden of debt & austerity measures imposed onto many developing countries, infrastructure development is far left behind. Nothing much has been done to improve the telecommunication & transportation which are key services that will attract foreign investment. Roads, bridges, harbours & railways are in bad condition & may affect the timely delivery of goods. The IMF & World Bank are not to be fully blamed for all the economic mess in developing countries. While it is true that austerity measures had played some role in putting poor countries in tighter condition, the recipients of aid must shoulder the blame too. It is not uncommon to hear that some corrupt country leaders had siphoned those monies into their own account, use it for political agenda etc. Also it depends on their prudence on using the fund provided.

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8. Foreign Debt:

Many developing countries of the world are heavily indebted (owing money) to international financial institutions and foreign banks based in developed countries. The debt these countries are facing today is a result of large loans that were issued to them during the 1960s and 1970s. While these loans initially came attached with low interest rates, over time the banks which lent out the money have increased the interest rates on repayments. In most cases, interest rates have been increased to levels which are near impossible for developing countries to meet. In this way, debts continue to accumulate, and the money which could be spent by governments on such things as infrastructure and healthcare is spent on repaying debts. Another factor which has exacerbated both the debt crisis and economic challenges in general in many developing countries is government corruption. Some of the countries which borrowed money from foreign creditors or international banks, for example, have since undergone periods of dictatorial rule. During these periods, some leaders have laundered public money instead of repaying their country’s debt.  Debt has crippled many developing countries. Often based on loans taken out by prior rulers and dictators (many of which various Western nations put into power to suit their interests), millions face poorer and poorer living standards as precious resources are diverted to debt repayment.

The Scale of the Debt Crisis:

Total debt continues to rise, despite ever-increasing payments, while aid is falling. For example:

•The developing world now spends $13 on debt repayment for every $1 it receives in grants.

•For the poorest countries (approximately 60), $550 billion has been paid in both principal and interest over the last three decades, on $540bn of loans, and yet there is still a $523 billion dollar debt burden.

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9. Foreign exchange shortages:

With high levels of protection for domestic industry, and with exchange rates that were often maintained at unrealistic levels (usually in an effort to make imported capital goods “cheap”), the experience of most developing countries was that export earnings grew relatively slowly. The simultaneously sharp increase in demand for imported capital goods (and for raw materials and replacement parts as well) resulted in unexpectedly large increases in imports. Most developing countries found themselves with critical foreign-exchange shortages and were forced to reduce imports in order to cut their current-account deficits to manageable proportions. The cutbacks in imports usually resulted in reduced growth rates, if not recessions. This result led to the view that economic stagnation was caused primarily by a shortage of foreign exchange with which to buy essential industrial inputs. But over the longer term the growth rates of countries that continued to protect their domestic industries heavily not only stagnated but declined sharply. Contrasting the experience of countries that persisted in policies of import substitution with those that followed alternative policies subsequently demonstrated that foreign-exchange shortage was a barrier to growth only within the context of the protectionist policies adopted and was not inherently a barrier to the development process itself.

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10. Globalisation and the free market economy:

The process of globalisation has significantly changed the nature of how countries of the world trade their goods with one another. The free market system of international trade, while benefiting the economies of most developed countries of the world, has adversely affected the economies of many developing countries. One way in which the global free trade market has done this is through the introduction of reduced protective tariffs and increased exclusionary trading blocs. Tariffs are a form of tax placed on foreign goods that arrive in a country. When a tariff is placed on an imported product, the price of that product in the receiving country will be higher and consumers will therefore be less likely to purchase it. Sometimes countries place tariffs on goods which they produce domestically for protective reasons. Even though tariffs are often designed to protect local producers, they contradict the principles of the free market economy. Proponents (advocates) of free trade believe tariffs are harmful and free trade bodies, such as the World Trade Organisation (WTO), endeavour to eliminate tariffs entirely. The introduction of free trade principles and the reduction of tariffs in developing countries have, however, already adversely affected millions of poor people around the world. Globalisation has led to a rise in powerful transnational corporations, which often outsource their labour to countries where workers are exploited. However, globalisation does help development of developing nations and it is discussed later on in this article.

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11. War and Civil War:

When watching the news, it seems that most military conflicts happen in poor countries. The developing countries are plagued more than average by war, civil war, and ethnic strife.  Wars and conflicts severely hamper the progress of a country. Wars kill people, induce human suffering, destroy homes, and damage infrastructure and equipment. They also bind resources that might find better uses elsewhere.

Military spending as % of GDP:

Country % of GDP Country % of GDP
S. Arabia 11.2 Djibouti 3.7
Oman 9.7 Namibia 3.7
UAE 7.3 Colombia 3.7
Timor Leste 6.8 Bahrain 3.7
Israel 6.3 Kyrgyzstan 3.6
Chad 6.2 Chile 3.5
Jordan 6.1 Sri Lanka 3.5
Georgia 5.6 Morocco 3.4
Iraq 5.4 Sudan 3.4
USA 4.7 Ecuador 3.4
Kuwait 4.4 Azerbaijan 3.4
Singapore 4.3 Greece 3.2
Russia 4.3 Swaziland 3.1
Angola 4.2 Brunei 3.1
Armenia 4.2 Botswana 3.0
Lebanon 4.1 S. Korea 2.9
Syria 4.0 Ukraine 2.9
Yemen 3.9 Lesotho 2.8
Algeria 3.8 India 2.8
Burundi 3.8 Pakistan 2.8
Mauritania 3.8 Turkey 2.7

Many poor nations have a high military spending. The Stockholm International Peace Research Institute regularly estimates the amount of money that countries invest in military equipment. Among the top 40 spenders by percentage of their GDP, only 3 are high-income nations (the US, Israel, and Greece). The remainder is roughly equally split between the Middle East, Africa, and the remainder of Asia. In particular, the list contains some of the poorest nations of the world. These numbers indicate that these countries attach a larger relative importance to the military than the rest of the world. This is surprising, since one would expect that these countries would need as many resources as possible to fight poverty, to build up education, and to support their economy. People argue that historical boundaries should be kept. Yet, the benefit of keeping historical boundaries is not clear, in particular if populations have changed since the borders have been defined, or if the historical boundaries do not correspond to ethnic boundaries. It is people who define boundaries, not boundaries that define people. India and Pakistan have fought many wars and spent enormous amount money over Kashmir, all in the end preventing development of these nations. Developing countries have to learn from developed nations how to solve territorial dispute and rights of self-determination. In Canada, e.g., the region of Quebec has repeatedly staged referendums to decide whether the region should stay with the main land or not. So far, the official result is that the majority has voted to stay with Canada. In the United Kingdom, Scotland is debating an exit from the country. In both cases, it is out of question that the mainland invades the region with military force to prevent secession. Most likely, a wish to secede will just be respected. Northern Ireland seems a violent exception to this rule. Yet, it is not. The current status in Northern Ireland is based on an 1998 agreement between the United Kingdom, Northern Ireland, and the Republic of Ireland. The agreement states that Northern Ireland shall belong to whatever country the majority of its population prefers. So far, the majority of people in Northern Ireland is in favor of staying in the UK. It remains to hope that other countries handle the question of separation as democratically and peacefully as these countries.

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12. Poverty:

Poverty is a state or condition in which a person or community lacks the financial resources and essentials to enjoy a minimum standard of life and well-being that’s considered acceptable in society. Poverty rates are an important statistics to follow to a global investor as a high poverty rate is often indicative of larger scale issues within the country in question. Poverty is the principal cause of hunger. The causes of poverty include poor people’s lack of resources, an extremely unequal income distribution in the world and within specific countries, conflict, and hunger itself. As of 2015 (2011 statistics), the World Bank has estimated that there were just over 1 billion poor people in developing countries who live on $1.25 a day or less.  Progress in poverty reduction has been concentrated in Asia, and especially, East Asia, with the major improvement occurring in China. In Sub-Saharan Africa, the number of people in extreme poverty has increased.

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Poverty trap:

Countries stuck in destitution because of weak institutions put in place by colonial overlords, or because of climates that foster disease, or geographies that limit access to global markets, or simply by the fact that poverty is overwhelmingly self-perpetuating. Apparently the trap can be escaped.

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Circle of poverty:

Because a country has little capital per head, it is poor; because it is poor, it can devote few resources to creating new capital rather than to producing goods for consumption; because little new capital can be produced, capital per head remains low, and the country remains poor. The vicious circle can be made to seem an absolute constraint on growth rates. Of course, it is not; if it were, we would all still be at the level of the early agricultural civilizations. The grain of truth in the vicious-circle argument is that some surplus must be available somewhere in the society to allow saving and investment. In a poor society with an even distribution of income, in which nearly everyone is at the subsistence level, saving may be very difficult. But this is not the common experience. Usually there is at least a small middle class that can save and invest if opportunities for the profitable use of funds arise.

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Absolute poverty:

Absolute poverty refers to being unable to afford basic human needs, such as clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live in absolute poverty today.

Relative poverty:

Relative poverty refers to the lacking a usual or socially acceptable level of resources or income as compared with others within a society or country. What is considered ‘acceptable’ inevitably various from country to country and is significantly higher in developed countries than in developing countries. The common international poverty line has in the past been roughly $1 a day. However in 2008, the World Bank revised this figure to $1.25 at 2005 purchasing-power parity (PPP).

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About a third of the world lives on less than $2 a day. The poorest half of the world – 3.5 billion people – own only 0.71% of the world’s wealth between them. A billion people live in chronic hunger. Nearly a third of all children are chronically malnourished, which unless addressed before the age of two often leaves them stunted and mentally impaired.  A sixth of the world’s adults can’t read or write and many more have only rudimentary literacy. Sub-Saharan Africa has only two doctors for every 10,000 people, which is partly why on average its inhabitants live to an average age of 56. Most countries aren’t well-off. The World Bank data shows that most countries have a relatively low level of national income per capita. 120 nations earn less per person than the world average. Everybody seems to be wittering on about the Asian Century these days – and Asian development has been miraculous. But about 69% of Indians live on less than US$2 per day: 850 million people. A third of Chinese, 400 million, remain similarly poor despite the country’s amazing success in reducing poverty. Together those two countries contain more poor people than there are Africans. Rather than a term like “developing” to describe these people and countries, the travel writer Dervla Murphy’s phrase “majority world” is more accurate.

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Myth: We need economic growth to eradicate poverty.

Fact: One of the first things the growth lobby will say if you criticize economic growth is that you are condemning the poor to eternal poverty. Not true – anyone interested in poverty eradication would advocate a re-distribution of wealth. There is enough wealth in the world for everyone to live comfortably – it’s just that most of it is in the hands of a tiny minority. Sharing and a fair distribution of resources will alleviate poverty, not growth. We’ve had 200 years of growth and although some people have been lifted out of poverty, concentration of wealth and power means that there are now more poor people in the world than ever before. There is a case for economic growth in poor countries but economic growth does not necessarily eliminate poverty. India has achieved great economic growth but due to population explosion, corruption and poor governance, one third of the population lives below poverty line. Although the world’s economy has grown 5 times since 1950 there are arguably more people in absolute poverty today than there were then.

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Energy poverty and development:

Today, 1.5 billion people live without electricity, a situation known as energy poverty. For them, life still moves to the patterns of the sun and the moon. Work and study mostly come to an end when the sun goes down. Cooking happens the way it has for centuries before – over smoky indoor fires that do no favors for lungs or life expectancies. In Binika, Kurdistan, “the village pools their money to run a community generator one or two hours each day.” The generator cannot power heavy appliances or machinery. “While satellite dishes and televisions are cheap in the area, fuel for a generator is ‘very expensive.’”   Energy poverty reaches beyond the villages of developing countries. The lengthy economic downturn has created new classes of energy poor in advanced economies. In Solihull, England, Richard has, “gone four years without heat and dares not turn his lights on for fear of increasing the severe debt” to his energy company. Charting the HDI against the yearly electric consumption per capita, A. Pasternak observes that 4,000 kWh per capita constitutes a threshold. The reasons for choosing 4,000 kWh are the following. No country with an electric consumption below 4,000 kWh has an HDI above 0.9 and, barring four cases (South Africa, Saudi Arabia,  Russia and South Korea), all countries consuming more than this value per capita have an HDI greater than 0.9. Neither the Human Development Index nor the Gross Domestic Product of developing countries will increase without an increase in electricity use.

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D. Social and cultural factors in Economic Development:

1. Social Organisation:

Mass participation in development programs is a pre-condition for accelerating the growth process. However, people show interest in the development activity only when they feel that the fruits of growth will be fairly distributed. Experiences from a number of countries suggest that whenever the defective social organisation allows some elite groups to appropriate the benefits of growth, the general mass of people develop apathy towards State’s development programs. Under the circumstances, it is futile to hope that masses will participate in the development projects undertaken by the State. India’s experience during the whole period of development planning is a case in point. Growth of monopolies in industries and concentration of economic power in the modern sector is now an undisputed fact. Furthermore, the new agricultural strategy has given rise to a class of rich peasantry creating widespread disparities in the countryside.

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2. Corruption:

Transparency International’s definition of corruption is: “the abuse of entrusted power for private gain”. This can mean not only financial gain but also non-financial advantages. Corruption is rampant in developing countries at various levels and it operates as a negative factor in their growth process. Until and unless these countries root-out corruption in their administrative system, it is most natural that the capitalists, traders and other powerful economic classes will continue to exploit national resources in their personal interests. The regulatory system is also often misused and the licenses are not always granted on merit. The art of tax evasion has been perfected in the less developed countries by certain sections of the society and often taxes are evaded with the connivance of the government officials. An estimated one trillion US dollars get siphoned off through bribes every year according to the World Bank. Corruption can take many forms that vary in degree from the minor use of influence to institutionalized bribery.

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Global Corruption, as compiled by Transparency International shows that corruption is less in developed nations and more in developing nations. The majority of citizens in the West have never bribed an official. The majority of people in developing countries did.

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Corruption has a devastating effect on the country. This is because corruption makes government officials do something for their own interest that is against the interest of their country. Moreover, corruption eradicates the trust in the law and the government.  Corruption also reinforces itself. Once the majority of people are corrupt, the ones who are not are disadvantaged. Hence, as soon as a critical mass of people is corrupt, the rest is likely to follow.  We might think that the bad government services force people to pay bribes. Yet, the bad government services are themselves operated by people from developing country. Policemen, civil servants, public officials, and military people who demand bribes are all part of the society. Thus, both bribe payers and bribe receivers are just the people themselves. It appears that corruption is an illness that is deeply rooted in the society. Whoever does not take part, will finally just be disadvantaged. Therefore, most people participate. This may make corruption part of the general culture. In the worst case, people would no longer regard corruption as evil, but as part of life. Corruption may be facilitated by a larger inequality of income in the developing countries. If a policeman earns a few dollars per month, but a business owner makes thousands of dollars per month, then it is very easy and tempting for the businessman to hand over a few dollars to the policeman. Corruption is a cheap solution. It also makes money trickle down to the less well-paid professions. Another big contributor of corruption may be organized crime and drug cartels. These organizations typically have financial power that exceeds that of the ordinary population by orders of magnitude. The government may also play its part. A general public tolerance of corruption, the lack of a culture of transparency, and a slow and cumbersome legal system that hinders the ability to successfully prosecute cases promote corruption. Corruption is a significant problem for all nations, but it can hugely undermine societies where complex systems of governance and scrutiny have yet to be put in place. It strikes at four levels.

•Funds are stolen and taken overseas, often at levels which are comparable with net investment. Executive power is abused to raise loans, where default either precipitates a banking crisis or leads to unsustainable overseas debt.

•Decisions are taken on poor grounds: bridges are built where they are not needed. Such ‘pork’ projects are almost never given maintenance funding. Nepotism is commonplace: relations are promoted to jobs which they are unable to perform satisfactorily. Ethnic groups come to dominate key ministries and other areas, such as the military, which they then exploit for sectarian purposes.

•The population lose trust in civil society: law is for the wealthy, the state is a predator, the police and the bureaucrats sell permissions to operate and come into the average life in order to extract a fee.

•Tax evasion impoverishes the state, and regulatory evasion cripples its capacity to direct and operate.

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Corrupt elite and Observance of the Rule of Law:

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The figure above shows that rule of law is obeyed mainly in developed nations:

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A country is governed mostly by its elite: politicians, bureaucrats and businessmen. In developing countries, these elite does not always act responsibly. The government does not function the way it should function, it does not provide a reliable law and a reliable implementation of it, and the administration and judiciary do not work the way they should.  As an example, take the use of money for the poor. As the Economist noted in 2010, “70% of the money allocated for drugs and supplies by the Ugandan government in 2000 was lost to ‘leakage’; in Ghana, 80% was siphoned off. In India only 16% of the resources earmarked for the poor under the country’s subsidized food distribution scheme ever reached them.”  If the government cannot or does not guarantee the rule of law, then the very basics of trade, economy, and justice are under threat. If a merchant cannot trust that a business partner who does not fulfil his obligations will be put to justice, then he has to take potential losses into account when making business. If a company cannot trust on laws and their implementation, then it cannot make long-term investments. If people see that those who do not follow the law prosper, they will themselves start deviating from the law.  If the ruling elite uses its power mainly to reinforce its own position, then the country cannot progress. Since it is the elite who makes and implements laws, it is difficult to make and implement laws that fight against corrupt elite.

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Foreign Corruption:

Transparency International report of 2009 states that “large numbers of multinational corporations from the richest nations are pursuing a criminal course to win contracts”. One recent example was the case of Siemens, which bribed several governments around the world, as reported by the New York Times. Siemens “used bribes and kickbacks to foreign officials to secure government contracts for projects like a national identity card project in Argentina, mass transit work in Venezuela, a nationwide cellphone network in Bangladesh and a United Nations oil-for-food program in Iraq under Saddam Hussein”. In total “the company paid an estimated 1.4 billion US dollars in bribes to government officials in Asia, Africa, Europe, the Middle East and Latin America”. Most Western countries had no law against giving bribes to foreign officials. A state contract obtained by corruption always indicates that the contract went to a company that offers a suboptimal cost/benefit ratio. Thus, the developing country suffers an economic disadvantage by making a contract based on a bribe. It can also happen that the state contract would not have been made at all, if it were not for the bribe. In these cases, the bribe wastes public money and makes things happen that are not in the interest of the country. Furthermore, state contracts usually come with large amounts of money. They also often come with long-lasting follow-up engagements. Thus, the state contract would secure long-lasting employment for locals, if it went to a local company. It would also help build up local know-how and create a sustainable local industry. If the contract goes to a foreign company instead, these advantages are sacrificed. This does not mean that local companies should be favoured on principle over foreign companies. It just means that an illegal bias towards foreign companies through corruption will hurt the local economy.

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Corruption and poor nations:

Although corruption is a global phenomenon found in all countries – but evidence shows it harms poor people more than others, stifles economic growth and diverts desperately needed funds from education, healthcare and other public services. Nations with the highest risk of corruption are often the desperately poor, where foreign aid and assistance can easily be transferred through back channels of oppressive regimes. As a result, the impact of corruption can extend well beyond any economic detraction to affect the quality of life for millions of citizens. Corruption is the single greatest obstacle to economic and social development. Corruption is a major cause of many human rights abuses.  Not all poor countries are corrupt. Corruption tends to be more obvious in some poor countries because the police aren’t very good, the rule of law isn’t established and small-scale bribery may have become entrenched, but a country isn’t necessarily poor because the wealth has all been stolen. All sorts of other more important reasons explain poverty, like political instability, bad economic policy, colonial history, an over-reliance on tropical commodities, distance from major markets, being landlocked and poor health and education. Corruption doesn’t necessarily cause poverty: that’s like blaming poor countries for their own failures. In some cases quite the reverse can be true. Nicholas Shaxson’s excellent book Treasure Islands suggests that Transparency International’s corruption perceptions index has things the wrong way round: we should rank countries on banking secrecy, not graft. The real economic issue is that rich nations harbour ill-gotten spoils, not that Charles Taylor foists himself on Liberia. Relatively un-corrupt poor countries include Vanuatu, Fiji, Kiribati, Tuvalu, Samoa, Tonga, the Federated States of Micronesia, Bhutan, Cape Verde and Mauritius.

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3. Desire to Develop:

Development activity is not a mechanical process. The pace of economic growth in any country depends to a great extent on people’s desire to develop. If in some country level of consciousness is low and the general mass of people has accepted poverty as its fate, then there will be little hope for development. According to Richard T. Gill, “The point is that economic development is not a mechanical process; it is not a simple adding- up of assorted factors. Ultimately, it is a human enterprise. And like all human enterprises, its outcome will depend finally on the skill, quality and attitudes of the men who undertake”.

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4. Women empowerment:

Why is empowerment of women in developing countries important, and what effect does their empowerment have on development?

–Evidence shows that expanding opportunities for girls and women not only improves their positions in society, but it also has a major impact on the overall effectiveness of development. Evidence also shows that when women and men are relatively equal, economies tend to grow faster, the poor move more quickly out of poverty, and the well-being of men, women, and children is enhanced. Studies show that the education of mothers improves the health of their children and lowers the fertility rate. Studies also show that when women have more control over the family’s income or productive assets, the family’s overall situation improves.

–In Brazil, income in the hands of mothers has four times the impact on children’s height-for-age as income in the hands of fathers.

–In Sub-Saharan Africa, a large proportion of women are farmers. If women could participate in agriculture on an equal basis with men, total agricultural output could increase by up to 20 percent.

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5. Population Growth:

Population growth is one of the central problems of economic development. Some developing countries have population growth rates in excess of their GDP growth rates and therefore have negative growth rates of per capita GDP. Many developing countries have rates of population growth that are nearly as large as their rates of GDP growth. As a result, their standards of living are barely higher than they were 100 years ago. They have made appreciable gains in aggregate income, but most of the gains have been literally eaten up by the increasing population.

High Fertility Rate:

A large fertility rate has not only consequences on malnutrition. It seems that it also has a consequence on education. If it is hard for the parents to send 1 child to school, it is harder to send 5 children to school. If it is hard to find university scholarships for thousands of students, it is harder to find scholarships for tens of thousands of students. If people cannot be sent to school or university, they lose out in today’s world.  In other words, the exorbitant growth of population seems to have outpaced the resources and infrastructure that the countries provide. A high fertility rate will lead to a large working force, and may thus ultimately benefit the local economy. This phenomenon is known as the demographic dividend. Yet, this dividend can pay off only when the fertility rate decreases at some point of time. If it does not decrease, then the needy part of the population will always be larger than the working-age part of the population. There are two reproduction strategies, the R-selection (which produces lots of offspring and invests little in them), and the K-selection (which produces less offspring, but takes more care of them). While the R-selection produces more children, the K-selection produces more competitive children i.e. Children, grand-children, and great-grand children alike get better marks at school, are more likely to go to university and have higher incomes as adults. Therefore, as child mortality decreases, the advantages of R-selection have decreased, while the advantages of K-selection become more prevalent as the society values education more.

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As you can see in the figure, stabilization ratio in developed nations has fallen from more than 2 to less than 1.  A lack of government spending on promoting contraception (prevention of pregnancy) in some developing countries has seen birth rates rise considerably. High birth rates in developing countries exacerbate problems related to poverty, as often these countries do not have the social or economic stability to support such a large population. It should be noted, however, that people’s decisions not to use birth control are often also cultural and/or religious.

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6. Culture:

Cultural values may hinder or accelerate human progress. Having good climate, good natural resources, and good policy advice may not be enough to make a nation succeed. Scholars are now looking seriously at the role of having a good culture for improving prospects for national prosperity. At the end of World War II, much of Western Europe and Japan lay in ruins. Yet, today these regions are once more among the richest and most powerful on earth. Marshall Plan money and America’s benevolent example and protection get much of the credit for these postwar economic miracles. But massive aid and well-intentioned guidance have not produced comparable results in Latin America, Africa, and elsewhere including pockets of poverty within the highly developed nations themselves. Why not? What went wrong? Geography and history alone do not explain why some countries flourish and others lag behind. In 1960, for example, the economies of South Korea and Ghana were roughly equal; today, only Korea has developed into a global economic power. Even within nations different areas develop unevenly. Northern Italy, for example, has prospered more than the south, and certain minorities within the U.S. population remain relatively poor. Sociologists and scholars now look for other factors to explain obvious differences in development among nations and within them. One intriguing area of interest is “culture”-defined as the prevailing values, attitudes, beliefs, and underlying assumptions about life held by concept of wealth that emphasizes majority or minority groups in a society. There is a link between cultural values and human progress.  Scholars are beginning to explore how political and social action can make cultures more favourable to progress.

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Gunnar Myrdal thought that South and Southeast Asians are soft societies with low expectations. He said that they are lazy and do not demand much. As a result, they do not grow. However, the rise of Japan, the emergence of China as an industrial giant, and the Newly Industrializing Countries (South Korea, Singapore, Taiwain and Hong Kong) as well as ASEAN proved his foresight was limited.

Two basic ideological concerns crop up:

(1) Are some cultures truly “better” than others?  That is, do certain sets of beliefs and practices offer distinct advantages in dealing with life’s challenges?

(2) If existing cultures can be changed to promote progress, who should be changing, and how?

Some cultural attitudes or mind-sets that appear to help promote progress:

1. Time Orientation: Progressive cultures emphasize the near future, while static cultures focus on the past or the far future.

2. Work is valued for its own sake in progressive cultures, but viewed as a burden in static cultures.

3. Frugality is respected as prudent in progressive cultures, but viewed with suspicion as selfishness in static cultures.

4. Education is ideally offered to all in progressive cultures; it is the exclusive privilege of the elite in static cultures.

5. Merit is considered the only proper basis for advancement in progressive cultures, while family and connections matter more in static cultures.

6. Community is more broadly defined in progressive cultures, which tends to trust and identify with many groups; in static cultures; individuals feel closely bound only to their own family or nearest neighbors.

7. Ethical Codes are more rigorous in progressive cultures, which tend to be less corrupt than static cultures-though there are notable exceptions.

8. Justice and fair-play are held as universal ideals in progressive societies, but more cynically perceived in static cultures as dependent on wealth and influence.

9. Authority tends to be more widely dispersed in progressive cultures; it is more concentrated and exercised from above in static cultures.

10. Religion’s influence on civic life tends to be small in progressive cultures; in static cultures, religious institutions often exercise substantial influence in public affairs.

These traits may not be universally beneficial, since changing world conditions can turn advantages into liabilities and vice-versa. Certainly cultural traits change over time. And efforts to include ethics and values training in the public schools demonstrate the widespread belief that such changes can be brought about through direct action. But critics of cultural interference have a point, too. It is unlikely that Western standards of utility and moral behavior can be imposed from outside to change a nation or a group’s beliefs. Even military action seems to have had little impact on the aims and values of citizens or their leaders in “rogue” nations. Lasting changes arise from within a culture; to achieve progress the value of these changes must be clear even to those who focus exclusively on local needs and interests, which may not necessarily be identical with global priorities and norms. Mariano Gronda, a writer and scholar from Argentina, identifies 20 specific factors that appear to make cultures more conducive to economic and social development. These include trust in the individual and a concept of wealth that emphasizes not what exists now, but what future potential may be realized from product of work and investment. Grondona notes that religion influence progress as well: Systems of belief that tend to praise or value poverty as a benefit to salvation and spiritual progress (Buddhism, Catholicism) may make economic development difficult “because the poor will feel justified in their poverty and the rich will be uncomfortable because they see themselves as sinners.” In contrast, cultures that treat poverty as a test to be endured or a condition to be overcome (Confucianism, Protestantism) encourage poor and rich alike to improve their condition and celebrate their success.

Cultural Barriers:

Traditions and habitual ways of doing business vary among societies, and not all are equally conducive to economic growth. In developing countries, cultural forces are often a source of inefficiency. Sometimes personal considerations of family, past favours, or traditional friendship or enmity are more important than market incentives in motivating behaviour. In a traditional society in which children are expected to stay in their parents’ occupations, it is more difficult for the labour force to change its characteristics and to adapt to the requirements of growth than in a society in which upward mobility is a goal itself. The fact that existing social, religious, or legal patterns may make growth more difficult does not imply that they are undesirable. Instead, it suggests that the benefits of these patterns must be weighed against the costs, of which the limitation on growth is one. When people derive satisfaction from a religion whose beliefs inhibit growth or when they value a society in which every household owns its own land and is more nearly self-sufficient than in another society, they may be quite willing to pay a price in terms of forgone growth opportunities. Many critics argue that development plans, particularly when imposed by economists coming from developed countries, pay too little attention to local cultural and religious values. Even when they are successful by the test of increasing GDP, such success may be at too great a cost in terms of social upheaval for the current generation. A country that wants development must accept some alteration in traditional ways of doing things. However, a trade-off between speed of development and amount of social upheaval can be made. The critics argue that such a trade-off should be made by local governments and should not be imposed by outsiders who understand little of local customs and beliefs. An even more unfavourable possibility is that the social upheaval will occur without achieving even the expected benefits of GDP growth. If the development policy does not take local values into account, the local population may not respond as predicted by Western economic theories. In this case, the results of the development effort may be disappointingly small.

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7. Lack of Incentives:

In the early stage of development, some inequality stimulates human desires to achieve a better life. Lack of private ownership did not contribute much to economic growth in the former Soviet Union. The rich or aristocrats provide a role model for the poor to reach higher income levels. Welfare programs destroy incentives for the poor to work. In the former Soviet Union, people were reluctant to work because pay was not linked to work.

Note:

Welfare programs destroy incentives for the poor to work; and people are reluctant to work because pay is not linked to work for everybody. India is a classic example of these two economic maladies. As a doctor working in government hospital catering poor people, my experience tells me that free medical treatment to poor people make them not work. Once poor people know that free medical treatment is available, there is no incentive to work as survival is ensured by free government hospital. Also, I know many government doctors who hardly work because they get monthly salary irrespective of their work. What I am telling is a tip of the iceberg and when these two maladies are multiplied in all segments of Indian society, you know why India cannot become developed nation.

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E. Natural disasters:

Natural disasters cause more damage in developing nations than developed nations.

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F.  Science and technology:

Science is the study of knowledge which can be made into a system and usually depends on seeing and testing facts and stating general laws. Technology on the other hand is the practical application of scientific knowledge or indentations to the solving of everyday problems or facilitating tedious human activities. For any successful economy, particularly in today’s quest for knowledge based economies, science, technology and engineering are the basic requisites. If nations do not implement science and technology, then the chances of getting themselves developed becomes minimal and thus could be even rated as an undeveloped nation. Science and Technology is associated in all means with modernity and it is an essential tool for rapid development. The product of science and technology has contributed to the development of countries such as America, Japan, China and to an extent in some developing countries. If carefully analysed, one gets to understand that countries which have a strong base in science and technology are the ones that developed faster. A few examples are of countries like Russia, Japan, Brazil, China, India and many more. It is really disheartening that many do not understand that the major difference between underdeveloped countries and developed nations is basically technological capability. This refers to how a country can access, create and utilize science and technology for solving socio-economic issues. The world is increasingly being driven by technological innovation. Medicine, education, agriculture, environment and energy, manufacturing and services, transportation, water and clean air are all based ultimately on science and technology. Hence, it is apparent that to become successful in this modern world, technology elements must be incorporated into the improvement process. Developments in science and technology are fundamentally altering the way people live, connect, communicate and transact, with profound effects on economic development. To promote tech advance, developing countries should invest in quality education for youth, and continuous skills training for workers and managers. The adoption of technology by developing countries has had profound effects on their economies, such as reducing the national costs of production, establishing standards for quality, and allowing individuals to communication from a distance. Unfortunately, the current process remains one of adaptation, rather than innovation. In addition, the need for technologies appropriate to the capabilities of a developing country’s poor has only recently been recognized. One major challenge to the diffusion of technology in low-income nations that persists is its uneven distribution and penetration within the country. The rapid spread of technology fuelled by the Internet has led to positive cultural changes in developing countries. Easier, faster communication has contributed to the rise of democracy, as well as the alleviation of poverty. Globalization can also increase cultural awareness and promote diversity. However, the diffusion of technology must be carefully controlled to prevent negative cultural consequences. Developing countries risk losing their cultural identities and assimilating themselves into an increasingly westernized world.

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What common factors are associated with successful development?

Experts who have experience in development policy, investment, and finance noted several common factors associated with overall progress in development:

1. Economic Growth:

Countries that have reduced poverty substantially and in sustained manner are those that have grown the fastest. Successful development requires sustained periods of high per capita income growth.

2. Vibrant Private Sector:

Private firms, including small and medium-sized businesses in rural nonfarm areas, play a critical role in generating employment, particularly for youth and poor people.

3. Empowerment:

All people should have the ability to invest in their health and education and to shape their own lives by being able to participate in the opportunities provided by economic growth and have their voices heard about decisions that affect their lives. Access to essential public services, such as health, education, and safe water is critical and should be provided equitably.

4. Good Governance:

An active state with good governance in both the public and private sectors fosters an environment where contracts are enforced and markets can operate efficiently. It also ensures that basic infrastructure functions, adequate health and education services, and social protections exist, and people can participate in decisions that affect their lives.

5. Ownership:

Countries need to own their development agenda. This helps ensure that there is widespread support for development programs and the reform measures that underpin them.

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Development Model postulated by Rostow:

Developing country —generally referring to the countries of Africa, Asia, and Latin America—is a term that was inspired by Walt Whitman Rostow’s classic work, The Stages of Economic Growth: A Non-Communist Manifesto (1960). Rostow argued that all countries go through a series of stages of economic development from “underdeveloped” to “developed”; that the United States, Western Europe, and Japan had reached the “highest stage” or “developed-country” status; and that those countries that were not mature, developed capitalist countries were in the process of “developing” and moving through the required stages. According to Rostow, third World countries are in transition from traditional lifestyles towards the modern lifestyle which began in the Industrial Revolution in the 18th and 19th centuries.

Rostow’s Five Stages of Growth:

1. Pre-development: the traditional society is highly active in agriculture and “non-productive” activities such as military.

2. The preconditions for take-off: new investments in technology and infrastructure to increase productivity.

3. The take-off: the nation grows fast economically through certain industries.

4. The drive to maturity: more and more industries “take-off”, growing and specializing.

5. The age of mass consumption: shifting from heavy industry to consumer goods.

Examples: South Korea, Singapore, Taiwan, and Hong Kong: the “four dragons”. Lacking natural resources, they produced specific manufactured goods (clothing and electronics) which turned out to be inexpensive (low labor costs) for developed nations and the developing nations grew.

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How did developed countries develop?

IMF recently provided a list of following ten countries as developed nations:

United States, France, Germany, Australia, Canada, Italy, Japan, South Korea, Spain and the United Kingdom. This is not in any order.

•The countries have had significant advantage in terms of the time when they began to grow their economic development and have been doing so more or less continuously. Many of them except South Korea started latest by 19th century. UK, USA, Germany, France have developed even in 17th and 18th centuries.

•For UK, France, Spain colonizing helped them to grow economically.

•Although Australia and Canada have been dominions of British Empire, they were allowed considerable freedom by UK to grow their economies.

•Most of the countries participated and were devastated by WW I and WW II. But they were well developed even before (except South Korea)

•Although they have been impacted by war, they continued in economic development afterwards.

•In the case of South Korea, it was quite an impoverished nation till they were helped by USA. But USA invested a lot on South Korea and they also followed similar economic policies of USA. With aid and free market policy, they were able to grow economically.

•All these countries are post-industrial economies with service sector contributing to a great share of their economy.

•The Human Development Index in these countries are very high.

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The figure below shows roadmap to economic development of a nation:

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Convergence and divergence in development:

Many times there is a clear distinction between First and Third Worlds. When talking about the Global North and the Global South, the majority of the times the two go hand in hand. People refer to the two as “Third World/South” and “First World/North” because the Global North is more affluent and developed, whereas the Global South is less developed and often poorer. To counter this mode of thought, some scholars began proposing the idea of a change in world dynamics that began in the late 1980s, and termed it the Great Convergence. As Jack A. Goldstone and his colleagues put it, “in the twentieth century, the Great Divergence peaked before the First World War and continued until the early 1970s, then, after two decades of indeterminate fluctuations, in the late 1980s it was replaced by the Great Convergence as the majority of Third World countries reached economic growth rates significantly higher than those in most First World countries”. So divergence means economic growth rate of rich nations higher than poor nations, convergence means economic growth rate of poor nations higher than rich nations.  One puzzle of the world economy is that for 200 years, the world’s rich countries grew faster than poorer countries, a process aptly described by Lant Pritchett as “Divergence, Big Time.” When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country – probably the Netherlands – was about four times that of the poorest countries. Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand. But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand. Spotting this reversal, the Nobel laureate economist Michael Spence has argued that the world is poised for The Next Convergence. Yet some countries are still diverging. While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4 times richer. What could explain generalized divergence in one period and selective convergence in another? Why didn’t they grow faster for so long, and why are they doing so now? Why are some countries now converging, while others continue to diverge? There are potentially many answers to these questions. The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. Goods and services are made by stringing together productive capabilities – inputs, technologies, and tasks. Countries that have a greater variety of capabilities can make more diverse and complex goods. Learning to master new technologies and tasks lies at the heart of the growth process. If, while learning, you face competition from those with experience, you will never live long enough to acquire the experience yourself. This has been the basic argument behind import-substitution strategies, which use trade barriers as their main policy instrument. The problem with trade protection is that restricting foreign competition also means preventing access to inputs and knowhow. Participating in global value chains is an alternative way to learn by doing that is potentially more powerful than closing markets to foreign competition. It enables a parsimonious accumulation of productive capabilities by reducing the number of capabilities that need to be in place in order to get into business. This strategy requires a highly open trade policy, because it requires sending goods across borders many times. But this does not imply laissez-faire; on the contrary, it requires activist policies in many areas, such as education and training, infrastructure, R&D, business promotion and the development of links to the global economy.

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Gap between developed and developing nations:

Now let me discuss the disparity between developed and developing nations:

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The figure below depicts basic differences between developed and developing nation:

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Difference in poverty:

Poverty in India means per capita daily income less than Rs 32 (half dollar) in rural area and Rs 47 (three quarter dollar) in urban area. World Bank poverty line is per capita income less than $ 1.25 per day. In the U.S. poverty line in 2010 for a family of 4 with no children under 18 years of age is $22,541 per year. It comes to 15$ per capita per day. So you cannot compare Indian poverty with American poverty. Despite the poverty line being higher in developed nations compared to developing nations, small segment of population live below poverty line in developed nations while very large segment of population live below poverty line in developing nations.

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Difference between Ecological Footprint:

The ecological footprint is a measure of human demand on the Earth’s ecosystems, the amount of natural capital used each year. The footprint of a region can be contrasted with the natural resources it generates. The world-average ecological footprint in 2007 was 2.7 global hectares per person (18.0 billion in total). With world-average biocapacity of 1.8 global hectares per person (12 billion in total), this leads to an ecological deficit of 0.9 global hectares per person (6 billion in total). There is no country in the world that has achieved high human development index within the limits of Earth’s ecosystem. What we need is high human development using low ecological foot print per capita. If everyone in the world lived like an average American, a total of four Earths would be required to regenerate humanity’s annual demand on nature. What we need is high level of human development without exerting unsustainable pressure on the planet’s ecological resources.

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Ecological footprint worldwide:

The figure above shows more developed countries generally have a higher ecological footprint than poorer, less developed countries. The rapid economic expansion of Brazil, Russia, India, Indonesia, China and South Africa – the so-called BRIICS group – merits special attention when looking at the Ecological Footprint and the pressure on biocapacity. High population growth in the BRIICS group along with increasing average consumption per person is contributing to an economic transformation. As a result, the BRIICS economies are expanding more rapidly than those of high-income countries. This growth will bring important social benefits to these countries. The challenge, however, is to do this sustainably.

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The Digital Divide:

During the heyday of the dotcom bubble, the notion arose of a digital divide, the disparity between the widespread internet access in industrialized nations vs. the limited connectivity in developing ones. Development could be accelerated, so the theory went, if internet access became available to the nations with the fewest resources. However, the fallacy with this notion is that it defines the digital divide as the cause of underdevelopment, rather than as a symptom. Healthcare, food, and personal safety are more pressing needs. Notwithstanding, the UN and various non-profit agencies have attempted to open regional computer centers and build internet infrastructures in developing nations, but these efforts have added few new users to the systems. Even Microsoft Chairman, Bill Gates, one of the world’s most generous philanthropists, has focused upon health, rather than technology, in developing nations.

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Global Mobile Phone Usage, 2011

Region Mobile Phone Subscriptions per 100 Inhabitants
Africa 53
Asia & Pacific 74
Americas 103
Europe 120
Source International Telecommunication Union (2011)

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Nearly All Future Population Growth will be in the World’s Less Developed Countries:

World population grew to 7.06 billion in mid-2012 after having passed the 7 billion mark in 2011. Developing countries accounted for 97 percent of this growth because of the dual effects of high birth rates and young populations. Conversely, in the developed countries the annual number of births barely exceeds deaths because of low birth rates and much older populations. By 2025, it is likely that deaths will exceed births in the developed countries, the first time this will have happened in history.  While virtually all future population growth will be in developing countries, the poorest of these countries will see the greatest percentage increase. As defined by the United Nations, these 48 countries have especially low incomes, high economic vulnerability, and poor human development indicators such as low life expectancy at birth, very low per capita income, and low levels of education. Of these countries, 33 are in sub-Saharan Africa, such as Burundi, Ethiopia, Mozambique, and Zambia; 14 in Asia, including Bangladesh, Cambodia, Nepal, and Yemen; and one in the Caribbean, Haiti. They are growing at 2.4 percent per year and are projected to reach at least 2 billion by 2050.

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The Demographic Divide:

The radically different demographic situation between developed and developing countries illustrates the “demographic divide”: the vast gulf in birth and death rates among the world’s countries. On one side of this divide are mostly poor countries with relatively high birth rates and low life expectancies. On the other side are mostly wealthy countries with birth rates so low that population decline is all but guaranteed and where average life expectancy extends past age 75, creating rapidly aging populations. The table shows just how wide these gaps have become.

Tanzania Spain
Population (2012) 48 million 46 million
Projected Population (2050) 138 million 48 million
Lifetime Births per Woman (TFR) 5.4 1.4
Annual Births 1.9 million 483,000
Percent of Population Below Age 15 45% 15%
Percent of Population Ages 65+ 3% 17%
Percent of Population Ages 65+ (2050) 4% 33%
Life Expectancy at Birth 57 years 82 years
Infant Mortality Rate (per 1,000 live births) 51 3.2
Annual Number of Infant Deaths 98,000 1,600
Percent of Adults Ages 15-49 With HIV/AIDS 5.6% 0.4%

Even though Tanzania and Spain have almost the same population size today, Tanzania is projected to more than double its population from 48 million to 138 million in 2050. Spain’s population will only slightly increase, from 46 million today to 48 million by 2050. The cause of this enormous difference is lifetime births per woman. Tanzania’s total fertility rate of 5.4 children per woman is almost four times greater than Spain’s rate of 1.4.

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Age Structure:

Although the most commonly discussed characteristics of a population have to do with births and deaths, there is another important characteristic that combines these statistics. This characteristic is the population’s age structure, which is the distribution of the population based on age categories. The age structure of a population is often displayed using age-sex pyramids as seen in the figure below, which graphically represent how the population is distributed by both age and sex. The pyramid is comprised of many horizontal bars representing the size of the population at each age category, with young categories at the bottom of the pyramid and old at the top.

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Due to the variation in infant mortality and fertility rates between developed and developing countries, the age structure is always quite different. In developed countries, the population is distributed relatively evenly over all age categories. This results in a median age in the late thirties and an age-sex pyramid with very straight sides due to the evenly sized horizontal bars.

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Real Economic Growth: Developed vs. Emerging & Developing Nations:

Investment: Developed vs. Developing Countries:

Over the last 20 years, a major shift in the origin of the World investment has occurred. Developed economies used to produce in their economies about 80% of the World investment (measured in current prices), against approximately 20% of the Emerging and Developing Economies. Today these two set of countries are investing about the same amount of money. Therefore, over the last 20 years, developed nations moved from a position where they were investing four times as much as the rest of the world towards a position where they currently invest approximately the same amount.

Savings: Developed vs. Developing Countries:

One might ask if this increase has been done via saving transfers from developed to developing nations but the reality shows us that, in general, the increase in investment in Emerging and Developing economies has been financed with savings generated among these set of countries. In fact, most of the world gross savings are already been produced in Emerging and Developing nations. This big shift in the World investment distribution might help us understand why we have experienced a shift in the world economic growth from the so called “first world” towards the “third world” but also why we might be experiencing an increase trend of the world economic growth while investment, in percentage of the GDP, appears to have diminished slightly.

Growth: Developed vs. Developing Countries:

For this assumption to hold, though, one should expect a higher ratio of growth/capital in developing nations to exist.  Is this actually the case? Analyzing historical data from the IMF allows as to see that by 2007, before the last world crises began, emerging and developing countries were already responsible for about 2/3 of all the World real economic growth (twice as much as the growth generated by the so called Developed world) and they were doing so with just 34.6% of the World volume of investment. This finding is relevant because it indicates that the Emerging and Developing countries, right before our most recent world economic crises, were being able to grow much faster than developed economies for the each dollar they invested in their economy. This becomes even more relevant when we acknowledge that they are already producing most of the world savings.

With such high saving, developing nations could afford to maintain high investment growth rates during the latest economic crises. In fact, recent stimulus packages to promote growth in China and other developing economies, looking forward to sustain growth while World exports were plummeting during the 2008/2009 crises, might help to explain part of the most recent jump in the World investment quota that less developed experienced. Also, this increase might contribute to a lower gap between the productivity of investment in Developed nations and the rest of the world. In fact, some evidence can be found that this might be happening since 2008 even though Emerging and Developing nations continue to register on average roughly twice as much real economic growth as the one registered by developed economies per each nominal dollar of gross investment.

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Growth of developing countries:

The table below shows the annual percentage change of global output by region, showing that developing countries tend to demonstrate higher growth rates than the developed ones.

Region 2007 2008 2009 2010
World Output 5.4 2.9 -0.5 5.0
Advanced Economies 2.7 0.2 -3.4 3.0
Emerging and Developing Economies 8.8 6.1 2.7 7.3
Least Developed Countries 9.0 6.9 5.2 5

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The figure below shows world map of economic growth. Developing countries like India and China are growing much faster than developed nation. This is because developed nations are in post-industrial service sector economy while developing nations are in the process of industrialization.

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Widening gap:

The figure below shows that although economic growth occurred in developing nations in last 50 years, the gap between developed and developing nations has widened. This is because although some developing nations are growing faster than developed nations, their population explosion reduces GDP per capita substantially compared to developed nations.

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The uneven pattern of Development: income inequality:

Data on per capita incomes throughout the world as shown in the table below cannot be accurate down to the last $100 because there are many problems in comparing national incomes across countries. For example, home-grown food is vitally important to living standards in developing countries, but it is excluded from or at best imperfectly included in the national income statistics of most countries. Nevertheless, the data reflect enormous real differences in living standards that no statistical inaccuracies can hide. The development gap—the discrepancy between the standards of living in countries at either ends of the distribution—is real and large. 1% of the world’s population has come to accumulate half of the world’s total wealth, and the richest 300 individuals lay claim to more than the poorest 3 billion.

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In 2014, Credit Suisse researchers estimate, individuals holding over $1 million in wealth — the richest 0.7 percent of adults globally — held 44 percent of global net worth. Is the world, as a whole, growing more or less unequal? This simple question has no simple answer. Branko Milanovic, a senior scholar with the Luxembourg Income Survey now at the City University of New York’s Graduate Center, has done the world’s most rigorous research on the global income inequality picture. His latest research, published in December 2014, carries the theme “national vices, global virtue.” Inequality within nations is increasing, Milanovic notes, but inequality worldwide seems to be slightly decreasing as middle classes emerge in China and India and the incomes of typical families in the United States and other rich countries stagnate and even, after inflation, decrease. But this slight worldwide decrease in overall inequality, Milanovich cautions, may be somewhat illusory since available national data regularly underestimate top 1 percent incomes and global tax havens conceal still more income at the economic summit.

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The gap between rich and poor keeps widening. Growth, if any, has disproportionally benefited higher income groups while lower income households have been left behind. This long-run increase in income inequality not only raises social and political concerns, but also economic ones. It tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole. The econometric analysis suggests that income inequality has a sizeable and statistically significant negative impact on growth. The new OECD report finds that between 1990 and 2010 gross domestic product per person in 19 core OECD countries grew by a total of 28 percent, but would have grown by 33 percent over the same period if inequality had not increased after 1985. This estimate is based on an econometric analysis of 31 high- and middle-income OECD countries, which concluded that lowering inequality by just one “Gini-point” (a standard measure of inequality used by economists) would raise the annual growth rate of GDP by 0.15 percentage points.

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Affluent citizens in Japan and in the West are also likely to worry about income inequality. A widening gap between the wealthy and the rest of society may foster growth by encouraging many people to work hard, but in the long term, high levels of inequality could well undermine popular support for democracy. Can a country with very unequal incomes have political freedom for long? The United Kingdom and the United States, two of the industrial countries near the top of the freedom index, seem bent on testing the question.

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Interaction between developed and developing nations:

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Aid:

Rich countries don’t spend much on aid. The amount officially spent on each poor person globally is US$20 a year, according to the World Bank. The amount has doubled in the last decade following a dip in the late 1990s. But several opinion polls show that rich country inhabitants think they’re much more generous than they really are. Americans think that their government spends 28% of the budget on aid when it’s really about 1%. Brits are almost as bad. The result of this widespread overestimation of generosity is that many people in rich countries want to cut aid. We need rich countries to transfer money to poor countries, to be sure, and in much greater quantities than they presently do. But these transfers should not be considered charity; they should be considered a form of justice. Franz Fanon puts it best: “Colonialism and imperialism have not settled their debt to us once they have withdrawn from our territories. The wealth of the imperialist nations is also our wealth. Europe is literally the creation of the Third World. The riches which are choking it are those plundered from the underdeveloped peoples. So we will not accept aid for the underdeveloped countries as ‘charity’. Such aid must be considered the final stage of a dual consciousness – the consciousness of the colonised that it is their due, and the consciousness of the capitalist powers that effectively they must pay up.”

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Aid works:

Both developmental and humanitarian aids do work. It’s not widely known that development aid was instrumental in supporting the growth of Singapore, one of the world’s most remarkable economic success stories. The United Nations Development Programme contributed 744 technical assistants from 1950 onwards and spent US$27 million on development help. In 1960 a visiting UNDP team led by Dutchman Dr Albert Winsemius, who became a trusted adviser to Lee Kuan Yew until the 1980s, wrote a report entitled “A proposed industrialisation programme for the State of Singapore”. This document formed the basis of early development strategy. Other major aid recipients that now receive very little include Botswana, Morocco, Brazil, Mexico, Chile, Costa Rica, Peru, Thailand, Mauritius and Malaysia. Bill Gates reckons that through a combination of aid and spontaneous economic development there won’t be any very poor people left by 2035. He calculates that 100 million deaths have been avoided since the drop in child mortality since 1980, the start of the “Child Survival Revolution” that made vaccines and oral rehydration therapy much more widespread. Total aid, $500 billion, counts money for vaccines, HIV/AIDS, family planning, and water and sanitation from all donors. That works out at US$5000 per life saved, which he rightly says is quite cheap. Hundreds of millions of people have been immunized against Polio, treated for TB and given anti-retroviral treatment for HIV/AIDS.

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Foreign aid and development:

During the Cold War, unaligned countries of the Third World were seen as potential allies by both the First and Second World. Therefore, the United States and the Soviet Union went to great lengths to establish connections in these countries by offering economic and military support to gain strategically located alliances (e.g., United States in Vietnam or Soviet Union in Cuba). By the end of the Cold War, many Third World countries had adopted capitalist or communist economic models and continued to receive support from the side they had chosen. Throughout the Cold War and beyond, the countries of the Third World have been the priority recipients of Western foreign aid and the focus of economic development through mainstream theories such as modernization theory and dependency theory. By the end of the 1960s, the idea of the Third World came to represent countries in Africa, Asia and Latin America that were considered underdeveloped by the West based on a variety of characteristics (low economic development, low life expectancy, high rates of poverty and disease, etc.). These countries became the targets for aid and support from governments, NGOs and individuals from wealthier nations. One popular model discussed earlier, known as Rostow’s stages of growth, argued that development took place in 5 stages (Traditional Society; Pre-conditions for Take-off; Take-off; Drive to Maturity; Age of High Mass Consumption). W. W. Rostow argued that Take-off was the critical stage that the Third World was missing or struggling with. Thus, foreign aid was needed to help kick-start industrialization and economic growth in these countries. However, despite decades of receiving aid and experiencing different development models (which have had very little success), many Third World countries’ economies are still dependent on developed countries, and are deep in debt. There is now a growing debate about why Third World countries remain impoverished and underdeveloped after all this time. Many argue that current methods of aid are not working and are calling for reducing foreign aid (and therefore dependency) and utilizing different economic theories than the traditional mainstream theories from the West. Historically, development and aid have not accomplished the goals they were meant to, and currently the global gap between the rich and poor is greater than ever, though not everybody agrees with this.

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Economic freedom vs. aid:

A few decades ago, policymakers in Washington and other Western capitals believed that they could hasten economic progress in poor countries with extensive aid and investment programs. They encouraged private companies to invest as well, but they believed that only governments could assemble enough capital to jump-start disadvantaged economies. Much of the money that was poured into those countries, however, went into grandiose but unproductive projects, propping up over-valued currencies and enriching corrupt officials. After dismal failures in Latin America, Africa, and southern Asia, the political will in much of the West has moved increasingly to the opposite strategy of letting poor countries fix themselves. More and more analysts now say that economic freedom is the main driver of economic development. Executives looking for growth opportunities abroad, they argue, should ask the same questions about the investment climate that they ask in more familiar settings: How high are the taxes? What regulations and licenses will we have to worry about? How easy is it to send goods and profits back and forth? For the past three years, the Heritage Foundation has made these and other calculations easier with its Index of Economic Freedom, an annual assessment of almost all the countries of the world. The Index of Economic Freedom is based on a composite of ten crude, mostly quantitative indicators: tariff rates, taxation, government’s share of output, inflation (a proxy for monetary policy), limits on foreign investment, banking restrictions, wage and price controls, property rights, general business regulation, and the extent of the black market. The Wall Street Journal joined the effort this year, making an expanded edition possible and ensuring broader readership. The new edition, which compiles reports from several authors, claims more confidently than ever that the prosperous countries of the world got that way—and are getting more so—by letting markets do the work. The editors write that “although there are many theories about the origins and causes of economic development, the findings of this study are conclusive: Those countries with the most economic freedom have higher rates of economic development than those with less economic freedom.” Undoubtedly, economic growth does depend on a degree of economic freedom, and under some circumstances, more freedom will promote additional growth. But the paths to growth that countries take are much more complicated than the Index indicates. In the case of newly prospering countries, the Index confuses cause and effect: freedom is more often the result than the cause of development. With regard to countries already rich, the book starts from a faulty assumption that growth is all that their citizens should care about. The Index is hardly a straightforward report of scientific research.

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Cash transfer as aid:

More aid should be in the form grants rather than loans. Cash transfers are the best way of delivering some help. For example the British Department for International Development works with Unicef and the Kenyan Government in Korogocho, Nairobi, to improve the lives of orphans and vulnerable children through a cash transfer scheme which gives very poor families 3000 Kenyan shillings (about £25) every two months for help with basic household expenses. It cuts out the middleman and it’s been proven through robust testing to reduce poverty, hunger and inequality.

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Donor Dependencies:

Developing countries receive a substantial amount of foreign aid. But this aid is not always given with good intention. Foreign countries that donate money do so in order to influence the developing country in their interest. Foreign countries use the dependency on donor aid in several ways. One standard method is “tied aid”, i.e., money that is given under the condition that it be spent on products from the donor country. Another one is an indirect political pressure on the developing country to make political decisions in the interest of the donor country. Finally, the money is not always donated in a way that supports sustainable progress in the recipient country. It is often donated to causes that harm the environment, to military equipment, or to counter-effective subsidies. By influencing the developing country, the donor country advances its own interests, and disregards the interests of the recipient country. If, e.g., all aid money has to be spent on products or services from the donor country, then the recipient country can suffocate its own local competitors. As Thomas Sankara remarked, “he who feeds you, controls you”.

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How Poor Countries Develop Rich Countries:

The problem with the dominant narrative about aid is that it casts Western countries in the role of benevolent benefactors, giving generously of their wealth to poor countries in the Global South. In reality, however, exactly the opposite is true. The flow of aid from rich countries to poor countries pales in comparison to the flow of wealth that runs the other direction. Developing countries receive about $136 billion in aid from donor countries each year. At the same time, however, they lose about $1 trillion each year through offshore capital flight, mostly in the form of tax avoidance by multinational corporations. That’s nearly 10 times the size of the aid budget. Because rich countries include debt cancellation as aid, it is only fair that we include debt service payments as part of the equation as well. Today, poor countries pay about $600 billion to rich countries in debt service each year, much of it on the compound interest of loans accumulated by rulers long since deposed. This alone amounts to nearly 5 times the aid budget. Using this metric, economist Charles Abugre calculates that the net flow of aid from the West to the Global South over the period 2002 to 2007 was minus $2.8 trillion. And that does not include the capital flight mentioned before. There are many other flows of wealth and income that are being siphoned from the Global South that we need to take into account. For example, Action Aid recently reported that multinational corporations extract about $138 billion from developing countries each year in tax holidays (which is different from tax avoidance). This figure alone outstrips the global aid budget. For another example, we can look at the WTO’s agreement on intellectual property rights (TRIPS), which has armed corporations with unprecedented rent-seeking powers. As a result of TRIPS, developing countries have been forced to pay $60 billion annually – half the aid budget – in extra patent licensing fees, over and above those required by normal laws, for the use of technologies and pharmaceuticals that are often essential to development and public health. We can see these figures as direct cash transfers from poor countries to rich countries. And this is to say nothing of other forms of extraction that are more difficult to quantify, such as land grabs. Fred Pearce shows that land exceeding the size of Western Europe has been grabbed from developing countries by corporations in the past decade alone. The US, UK, and China are leading this movement by snapping up agricultural land in regions where land tenure laws leave indigenous inhabitants vulnerable to dispossession. The point is that aid does not exist in any meaningful sense. Poor countries are net creditors to rich countries. Aid serves as an illusion to mask this fact; it makes the takers seem like givers.

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Aid as a tool of extraction:

Beginning in the early 1980s, Western governments and financial institutions like the World Bank and IMF changed their development policy from one that was basically Keynesian to one that remains devotedly neoliberal, requiring radical market deregulation, fiscal austerity, and privatization in developing countries as a condition of receiving aid. We were told that this neoliberal shock therapy – known as structural adjustment – would help stimulate the economies of poor countries. But exactly the opposite happened. Instead of helping poor countries develop, structural adjustment basically destroyed them. Cambridge economist Ha-Joon Chang has demonstrated that while developing countries enjoyed per capita income growth of more than 3% prior to the 1980s, structural adjustment cut it in half, down to 1.7%. When it was foisted on Sub-Saharan Africa, per capita income began to decline at a rate of 0.7% per year, and average GNP shrank by around 10%. As a result, the number of Africans living in basic poverty nearly doubled. It would be hard to overstate the degree of human suffering that these figures represent. Robert Pollin, an economist at the University of Massachusetts, estimates that developing countries have lost roughly $480 billion in potential GDP as a result of structural adjustment. Yet Western corporations have benefitted tremendously. It has forced open vast new consumer markets; it has made it easier to access cheap labor and raw materials; it has opened up avenues for capital flight and tax avoidance; it has created a lucrative market in foreign debt; and it has facilitated a massive transfer of public resources into private hands (the World Bank alone has privatized more than $2 trillion worth of assets in developing countries). Poverty in the Global South is not just a static given; it is being actively created. And the striking thing is that these atrocities are being perpetrated under the cover of aid. In other words, not only does aid serve as a powerful rhetorical device that cloaks takers in the guise of givers, it also operates as a powerful tool in the global wealth extraction system.

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Trade:

Trade is the exchange of goods and services between countries. Few economists dispute that properly handled, trade is essential for development. We must not forget that if development is the objective, then trade is the tool with which to achieve it. Developed and developing countries have to work together to achieve this goal. The governments have to serve as a helping hand in facilitating trade and maximising the benefits of market forces. Promoting growth and development, improving the standards of living and tackling poverty have to be at the heart of using trade for development purposes.

• Goods, e.g. raw materials, food and manufactured products are called visible trade.

• Services, e.g. money spent by tourists, or foreign aid, are called invisible trade.

Many developing countries export primary products. These include things like oil, cotton, iron, bananas, coffee and cocoa. Developed countries export a greater number and range of secondary products. These are often manufactured goods which are made from primary products from developing countries. Over 50% of trade takes place between developed countries, for example, the trading of cars to provide everybody with a greater choice. Less trading happens between developing countries as most of them produce the same products. Rich countries in North America, especially the USA, and countries in free trade areas, such as the EU, dominate world trade.

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Trade between developed and developing countries:

Difficult problems frequently arise out of trade between developed and developing countries. Most less-developed countries have agriculture-based economies, and many are tropical, causing them to rely heavily upon the proceeds from export of one or two crops, such as coffee, cacao, or sugar. Markets for such goods are highly competitive (in the sense in which economists use the term competitive)—that is, prices are extremely sensitive to every change in demand or in supply. Conversely, the prices of manufactured goods, the typical exports of developed countries, are commonly much more stable. Hence, as the price of its export commodity fluctuates, the tropical country experiences large fluctuations in its “terms of trade,” the ratio of export prices to import prices, often with painful effects on the domestic economy. With respect to almost all important primary commodities, efforts have been made at price stabilization and output control. These efforts have met with varied success. Trade between developed and less-developed countries has been the subject of great controversy. Critics cite exploitation of foreign labour and of the environment and the abandonment of native labour needs as multinational corporations from developed countries transport business to countries with cheaper labour pools and relatively little economic or political clout. Especially after 1999, when trade talks were disrupted by globalization protesters during the WTO ministerial conference in Seattle, the work of the WTO came under increasing scrutiny from its critics. These critics voiced a number of concerns about the power and scope of the WTO, with the gravest criticisms clustering around issues such as environmental impact, health and safety, the rights of domestic workers, the democratic nature of the WTO, national sovereignty, and the long-term wisdom of endorsing commercialism and free trade to the neglect of other values.

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Trade Regulations:

Trade between rich and poor countries is regulated through international treaties. However these treaties give a disadvantage to the poor countries. The Roca-Runciman Treaty, e.g., was a trade agreement between Argentina and the British Empire that severely disadvantaged Argentina. As Roca summarized, it made Argentina “an integral economic part of the British Empire”. Other influence happens through international organizations: the World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF). The WTO, in particular, has been criticized for representing mainly the interests of the rich countries. The main asymmetry is as follows:

1. Rich countries subsidize their agriculture. This means that their agricultural exports are cheap. This means that consumers (in rich and poor countries alike) buy rich countries’ products. These give a disadvantage to the poor countries, where a large part of the population depends on agriculture.

2. Rich countries want to tear down customs and trade restrictions to poor countries. This allows the rich countries to export into the poor countries. The poor countries do not yet have the economic infrastructure to compete with the rich countries’ products. Hence, people buy the rich countries’ products, and the industry of the poor country cannot develop.

3. At the same time, rich countries do their best to protect their own market from the products from poor countries. This makes it difficult for poor countries to export to the rich ones.

4. Finally, rich countries insist on protecting their patents, which leads to high prices for technology and medicine for poor countries.

Net result:

If rich countries force open the markets of poor countries, but subsidize their own agriculture at the same time, then the markets of poor countries are flooded with cheap food. This may help reduce hunger in the poor countries on the short run, but ultimately takes away the main economic activity of large parts of the population. This pushes these people into poverty — and ultimately increases hunger and misery. As Global Exchange, an activist group, summarizes, “WTO policies have allowed dumping of heavily subsidized industrially produced food into poor countries, undermining local production and increasing hunger”. The Economist further argues that trade obstacles for export from poor countries to rich countries severely hamper progress in the developing nations.

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Aid for Trade:

The debate over whether developing countries need aid or trade is at an end. Today, there is widespread recognition that developing countries need both. But WTO agreements do not guarantee increased trade flows: they provide opportunities. Some countries are better placed than others to grasp those opportunities. Some need help: “Aid for Trade” and various other tools are aimed at enhancing the capacity of developing countries to participate more effectively in the global marketplace.  Donor countries have committed an average of $40 billion a year to trade-related development programmes while recipient countries have had success in pinpointing the specific areas where aid is needed and in mainstreaming trade into their development strategies.

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Globalization:

The Impact of Globalization in the Developing Countries:

Globalization is a process of global economic, political and cultural integration. It has made the world become a small village; the borders have been broken down between countries. ”The history of globalization goes back to the second half of the twentieth century, the development of transport and communication technology led to situation where national borders appeared to be too limiting for economic activity”. Globalization is playing an increasingly important role in the developing countries. It can be seen that, globalization has certain advantages such as economic processes, technological developments, political influences, health systems, social and natural environment factors. It has a lot of benefit on our daily life. Globalization has created a new opportunities for developing countries. Such as, technology transfer hold out promise, greater opportunities to access developed countries markets, growth and improved productivity and living standards. However, it is not true that all effects of this phenomenon are positive. Because, globalization has also brought up new challenges such as, environmental deteriorations, instability in commercial and financial markets, increase inequity across and within nations. Developing countries such as India, China, Africa, Iraq, Syria, Lebanon and Jordan have been affected by globalization, and whether negatively or positively, the economies of these countries have improved under the influence of globalization. The size of direct foreign investment has increased and a lot of bad habits and traditions erased, but also globalization has brought many drawbacks to these countries as well. Many customs and cultures are disappeared such as traditions clothes and some language and expressions have changed. In addition, the violence and drugs abuse are increased and a lot of deadly diseases have spread under the influence of globalization. However, although globalization has many disadvantages, globalization has brought the developing countries many more benefits than the detriments. For example, we can see there is more and a biggest opportunity for people in both developed countries and developing countries to sell as many goods to as many people as right now, so we can say this is the golden age for business, commerce and trade.

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Brain drain:

The term “brain drain” designates the international transfer of resources in the form of human capital i.e., the migration of relatively highly educated individuals from the developing to developed countries. This phenomenon, in the terminology of development economics refers to the loss of high quality manpower, which was once productively employed in the native country. The last decade has seen an increase in the international mobility of highly skilled, talented individuals in response to the expansion of the knowledge economy accompanying globalization. This international movement of human capital can be identified, in practice, as the movement of scientists, doctors, educationists, engineers, executives, and other professionals across frontiers. These are people with special talents, high skills and specialized knowledge. The irony of international migration today is that many people who migrate legally from poor to richer lands are the ones that the Third World Countries can least afford to lose: the highly educated and skilled. Since the great majority of these migrants move on a permanent basis, this perverse brain drain not only represents loss of valuable human resources but could prove to be a serious constraint on the future economic progress of Third World nations. The number of international migrants increased from 75 million in 1960 to 190 million in 2005, at about the same pace as the world population, meaning that the world migration rate increased only slightly, from 2.5 to 2.9 percent. Over the same period, the world trade/GDP ratio increased threefold, rising from 0.1 to 0.2 between 1960 and 1990 and from 0.2 to 0.3 between 1990 and 2000; the ratio of FDI to world output, on the other hand, increased threefold during the 1990s alone. From these figures one might conclude that globalization is mainly about trade and FDI, not migration. However, the picture changes once the focus is narrowed to migration to developed countries and in particular its skilled component. The share of the foreign-born in the population of high-income countries has tripled since 1960 (and doubled since 1985). Moreover, these immigrants are increasingly skilled: while migration to the OECD area increased at the same rate as trade, high-skill migration (or brain drain) from developing to developed countries rose at a much faster pace and can certainly be regarded as one of the major aspects of globalization.

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Brain drain is the migration of skilled human resources for trade, education, etc. Trained health professionals are needed in every part of the world. However, better standards of living and quality of life, higher salaries, access to advanced technology and more stable political conditions in the developed countries attract talent from less developed areas. The majority of migration is from developing to developed countries. This is of growing concern worldwide because of its impact on the health systems in developing countries. These countries have invested in the education and training of young health professionals. This translates into a loss of considerable resources when these people migrate, with the direct benefit accruing to the recipient states who have not forked out the cost of educating them. The intellectuals of any country are some of the most expensive resources because of their training in terms of material cost and time, and most importantly, because of lost opportunity.  Employers in receiving countries take a different position; they have their own shortages of skilled people in specific fields and can drain a developing country of expertise by providing job opportunities.  Kupfer et al. provided the strategies to discourage migration to the USA, a major recipient country. However, keeping the social, political and economic conditions in the developing countries in mind, can we stop the brain drain? Probably not! The recent study on brain drain from 24 major countries published by the World Bank presented data on South Asian immigration to the USA as seen in the figure below.

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The recent literature shows that high-skill emigrations need not deplete a country’s human capital stock and can generate positive network externalities. The brain drain side of globalization creates winners and losers among developing countries, and certain source-country characteristics in terms of governance, technological distance, demographic size, and interactions between these, are associated with the ability of a country to capitalize on the incentives for human capital formation in a context of migration and seize the global benefits from having a skilled, educated diaspora. The case studies of the African medical brain drain, the exodus of European scientists to the United States, and the role of the Indian diaspora in the development of India’s IT sector, the conditions under which a country is gaining or losing are not a matter of fate; to a large extent, they depend on the public policies adopted in the receiving and sending countries.

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It has been estimated that foreign scientists from developing countries who are involved in research and development produce 4.5 tims more publications and 10 times more patents than their counterparts at home. Why is there such a vast difference in productive capacity? The context and conditions in which science and technology are able to prosper require political decisions, funding, infrastructure, technical support, and a scientific community; these are generally unavailable in developing countries. If developing countries provided world-class education and training opportunities, as well as opportunities for career advancement and employment, the migratory flow could be reduced. However, in reality, this may not make much difference. On the plus side, foreign-born graduates acquire expensive skills which are not available within their countries. On the negative side, these skills and knowledge never migrate back to their own countries. Remittances from expatriates living abroad constitute a significant proportion of foreign revenue for many developing countries.  In Bangladesh for example US$ 2 billion is received from citizens who have emigrated overseas, and these remittances are the second largest source of foreign revenue. The transfer and management of remittance revenues are potentially exploitable factors in plumbing the brain drain. Formalizing the transfer of remittances might permit the generation of revenues that could be invested nationally in the social and economic development of the developing home country. However, the magnitude and economic importance of remittances, economic development and growth, and ultimately social equity, depend on the endogenous capacity of each nation’s human resources. If only a small percentage of the multimillion dollar sums sent home by emigrants could be invested in research and development, might not opportunities for highly skilled and educated nationals improve at home? And would this not in turn spur economic development? Maybe to some extent—but without resources and skills, this may not have a huge impact on health and disease prevention.

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Global warming and climate change:

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The increase in atmospheric carbon dioxide to date is primarily due to the developed regions of the world: Europe, the United States, Japan, New Zealand, Australia, etc. However, future emissions will be dictated to an increasing degree by emerging countries that are experiencing their own industrial revolutions, which are being largely driven by increased consumption of fossil fuels. While most developed countries saw their carbon dioxide emissions decline between 2006 and 2010, developing countries experienced sharp increases in carbon dioxide emissions over that time frame. In 2006, China displaced the U.S. as the largest global emitter of carbon dioxide. Since then, China’s carbon dioxide emissions have increased by 28%, or 1.8 billion metric tons. In addition to China, some of the countries that experienced double-digit growth in carbon dioxide emissions between 2006 and 2010 include Peru (49%), India (40%), Vietnam (37%), Singapore (36%), and Saudi Arabia (28%). The net result was that even as the U.S., Canada, the European Union, Australia, New Zealand, Japan, and Malaysia all saw declines in total carbon dioxide emissions over the past five years, global emissions grew by 11% over the same time frame. An examination of the past decade shows that economic development in the Asia Pacific region is the current driver behind growing global carbon dioxide emissions. Over the past decade, carbon dioxide emissions declined slightly in North America and the EU, but grew steadily across the Asia Pacific region. Further development of the region could see it become responsible for 50% of global carbon dioxide emissions within a decade Not only does the Asia Pacific region emit the most carbon dioxide, it has the highest carbon dioxide emissions growth rate of any region. Other developing regions—the Middle East, Africa, and South and Central America—have much lower overall emissions than both the Asia Pacific region and more developed regions, all developing regions are experiencing rapid growth in carbon dioxide emissions. This is understandable, considering that the majority of the world’s population lives in developing regions, and they seek to raise their standards of living. Developed countries have done that by burning fossil fuels, and developing countries seek the same modern conveniences—dishwashers, televisions, computers, and cars—enjoyed by the developed world and which are currently powered mostly by fossil fuels. Thus, due to growth in developing countries, global carbon dioxide emissions are likely to continue to increase in this decade just as they did in the past decade. If that trend is to be reversed, future development would need to take place without fossil fuels. This may be possible in theory, but no country has yet provided the blueprint to show that it can be done in practice. Consider again the per capita emissions of the United States, China, and India. While the U.S. has heavily subsidized and incentivized renewable energy, per capita emissions in the U.S. are still more than 3 times those of China and over 13 times those of India. It is one thing to imagine that developing countries could rely on renewable energy to develop without increasing their use of fossil fuels, but the reality is that the developed regions have not shown that it can be done. Thus, the developed world is in the poor position of asking developing countries to do something they themselves have not done. The U.S. consumes 9 times as much oil per capita as China, and 24 times as much as India—thus the U.S. is an order of magnitude beyond being able to demonstrate an appealing, low-fossil-fuel lifestyle for these countries. Environmental Kuznets curve (EKC) suggests that the level of environmental degradation (pollution) and per capita income follows inverted-U-shaped relationship so that environmental quality deteriorates in early stage of economic development/growth and improves in later stage as an economy develops. However corruption, a high degree of income inequality, low level of literacy, lack of political rights and civil liberties, may impede the development of the EKC relationship. This is the reason why EKC theory fails in many Indian states. So economic growth may facilitate some environmental improvements but this is not an automatic process and will only result from investment and policy initiatives.

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It is hypocritical and unfair for rich developed countries to demand that poorer nations make environmental conservation their priority. After all, they became rich in the first place by destroying their environment in the industrial revolution. They worked hard and developed their economies but at the cost of cutting down their own trees, polluting their water sources and poured billions of tons of carbon into the air; and so they are in no position to tell others to behave differently. Also one cannot overlook a fact that developed nations have displaced some of its environmental costs by shifting pollution producing factories to less prosperous and less powerful developing nations. Rich developed nations have a historical responsibility for global warming because their factories released carbon emissions into the atmosphere long before the climate effects were known. The climate change phenomenon has been caused by the industrialization of the developed world. Both the developed and the developing nations should come together to protect the environment. Instead of questioning each other’s duties, they should collectively strive for a solution and step up their efforts to save the environment. In fact, every county should do its bit. The 2015 United Nations Climate Change Conference was held in Paris, France, from 30 November to 12 December 2015. It was the 21st yearly session of the Conference of the Parties (COP) to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties to the 1997 Kyoto Protocol. The conference negotiated the Paris Agreement, a global agreement on the reduction of climate change, the text of which represented a consensus of the representatives of the 196 parties attending it.  According to the organizing committee at the outset of the talks, the expected key result was an agreement to set a goal of limiting global warming to less than 2 degrees Celsius (°C) compared to pre-industrial levels. The agreement calls for zero net anthropogenic greenhouse gas emissions to be reached during the second half of the 21st century. In the adopted version of the Paris Agreement, the parties will also “pursue efforts to” limit the temperature increase to 1.5 °C. The 1.5 °C goal will require zero emissions sometime between 2030 and 2050, according to some scientists. On 12 December 2015 the participating 195 countries agreed by consensus to the final global pact, the Paris Agreement, to reduce emissions as part of the method for reducing greenhouse gas. In the 12-page document the members agreed to reduce their carbon output “as soon as possible” and to do their best to keep global warming “to well below 2 degrees C”. France’s Foreign Minister Laurent Fabius said this “ambitious and balanced” plan was a “historic turning point” in the goal of reducing global warming.  However, some others criticized the fact that significant sections are “promises” or aims and not firm commitments by the countries.  James Hansen, one of the first scientists to warn about global warming, calls the just-completed Paris climate summit a fraud. And, of course, he is right. Strictly speaking, the summit was fraudulent. It committed none of the 195 nations attending to do anything substantive to combat global warming. It recycled goals of past United Nations climate-change summits without providing a mechanism for attaining them. It was welcomed by countries that emit large quantities of greenhouse gases because, ultimately, it required nothing of them. The truth is every country wants economic development and blame other countries for climate change.

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Developing countries switching to low carbon economy at twice the pace of developed nations: 2014 study:

Developing countries are increasing their clean energy capacity twice as fast as developed nations, a new study suggests. Climatescope 2014 analyzed 55 developing countries in Africa, Asia, Latin America and the Caribbean – which together represent almost half of Earth’s population and a quarter of global GDP. The stronger clean energy growth shown in developing nations contradicts the common belief that only developed countries have the means to switch to a low carbon economy. Demand for energy in general is dramatically increasing all around the globe. Between 2008 and 2013, the nations included in the report added 603 gigawatts (GW) of new energy capacity, with a total grid capacity of 2,013 GW – a rise of more than 30%. At the same time, the developed countries that are part of the Organisation for Economic Co-operation and Development (OECD) grew just 9.6%, with a total capacity of 2,887 GW. Report authors underscore that the lion’s share of this dramatic increase is in clean energy, not including hydroelectric power. For the same period the developing nations scrutinized added 142 GW of clean energy, an increase of 143%: more than France’s total capacity. OECD nations added 213 GW, which is a rise of 84%. Throwing in large hydroelectric capacity too, Climatescope nations have 666 GW of clean energy now installed, while the OECD countries have 806 GW. In addition, in developing countries renewable energy has a larger percentage in the total energy mix, when compared to developed nations.

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The figure above shows total cumulative power generating capacity (GW) and annual growth rate (%) in Climatescope countries vs. OECD Nations, 2008 – 2013, from Climatescope 2014 report.

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Developing nations need healthcare, education, employment incentives to curb climate change:

According to SUNY Canton’s Umesh Kumar, the way to get developing countries to reduce greenhouse gas emissions is by helping them solve three issues that are more pressing to them than climate change — the life expectancy, education and income levels of their people. Along with Social and Ecological Management Fund co-founder John Fay, Ph.D., Mr. Kumar, Ph.D., an assistant professor of financial services, authored a paper which looked at why some developing countries don’t take advantage of financial incentives to reduce emissions offered by first world nations. In the paper, which has been selected for publication in the international journal “Climate and Development,” Mr. Kumar argued that countries are less likely to take advantage of those incentives if they have a poor Human Development Index number, a statistic which ranks countries by combining life expectancy, education and individual income levels. Mr. Kumar said if a country has a value above 150, it is not likely to invest in green technologies because it has not met those needs, which are considered the “three basic dimensions of human development.”  Mr. Kumar said this is the case for sub-Saharan African countries like Sudan and Eritrea, which have an HDI of 166 and 182, respectively, according to United Nations data from 2013.  “We’ve found that the HDI is a crucial factor for a country to take advantage of the financial incentives to reduce greenhouse gases offered,” said Mr. Kumar in a SUNY Canton release last week. “The findings of this article suggest that countries that have not achieved a minimum service level of basic needs, or have a low HDI, are unlikely to commit the resources for reducing emissions, even with economic incentives.” By contrast, developed countries like Norway have an HDI ranking within the top ten, and larger developing nations like China come in under 100, in the U.N. data. In that same data, the U.S. was ranked fifth overall. With those statistics in mind, Mr. Kumar said countries with an HDI value above 150 should be offered additional incentives to improve their education, healthcare and employment systems, because when they address those issues, they realize why it’s important to reduce emissions. “Any society that has got a higher income level, better life expectancy and better education, they become more environmentally conscious,” he said, adding that new incentives should focus on children, who are more receptive to the idea of curbing climate change. “When you become more environmentally conscious, you are willing to commit the resources, you are willing to go for a green economy.”  He said this means developing nations would be more willing to work on updating their fossil fuel-based energy systems, and more willing to take advantage of the $100 billion offered to them as part of this year’s Paris Climate Change Conference. When asked for examples of incentives, Mr. Kumar supported the work being done by the Bill & Melinda Gates Foundation and Warren Buffett to improve education and eradicate polio in developing nations.  Mr. Kumar, who teaches in the finance program at SUNY Canton, has been recognized four times for his economics research, winning awards for papers he presented with SUNY Canton Criminal Justice Professor Brian K. Harte, Ph.D., at Academy of Business Research conferences in 2011, 2012, 2014 and 2015.

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Sustainable development:

The issue of sustainability adds another dimension to the concept of development. Sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Some important factors that must be taken into account when discussing sustainable development are the rational use of natural resources and energy, pollution, and climate change. In development terms, sustainability means responsible growth—when social and environmental concerns are aligned with people’s economic needs. The current global development model is unsustainable, but it can be fixed. Rapid population growth and excessive consumption lay at the heart of the challenges to sustainable development. Civilization is faced with a perfect storm of problems driven by overpopulation, overconsumption by the rich, the use of environmentally malign technologies, and gross inequalities. This is not to discount the role that economic development has played in lifting billions of people out of extreme poverty and improving living standards around the world.

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Actions to address sustainable development:

•Value and Price in Environmental and Social Impacts:

The value of ecosystem services and natural capital must be incorporated in national accounting and decision-making processes across all sectors of society.  Factoring the full value of biodiversity and ecosystem services into decisions about energy production and use is a critical component of transitioning from climate-changing fossil fuels to renewable energy sources.

•Grow Green:

Low-carbon, green growth is the only sound basis for a sustainable recovery from the prolonged economic slowdown in developed countries.  If existing barriers are lowered and technologies scaled up accordingly, the share of renewable energy in global primary energy could increase to 30 to 75 percent.

•Empower Girls and Women:

Involving girls and women makes development efforts more effective, improves well-being and reduces inequality.  Women have critical parts to play in increasing agricultural productivity and managing the environment.

•Adapt to Climate Change:

Climate change is real and inevitable.  Even in the best case scenarios, countries need to take action to minimize the threats to living environments and loss of economic opportunities.

•Define and Operationalize Sustainability:

A clear, working definition and set of guiding principles for pursuing sustainability is “mandatory” for evaluating trade-offs, calculating potentials and impacts and cooperating across sectors and disciplines.

•Cooperate Regionally:

Regional cooperation has often proven more effective than more expansive global cooperation efforts.  The Association of Southeast Asian Nations (ASEAN) is cited as an example of a regional grouping of countries that has developed a common vision and interests which can facilitate the pursuit of sustainable development.  Successful regional efforts can also “grow into global building blocks.”

•Mainstream Grass Roots Action and Solutions:

The community groups, often in poor, rural areas ought to influence regional and national policy. The answer to addressing poverty and climate change is primarily social rather than technical.

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Can India become a developed nation?

In the recently published Human Development Report 2015, it was unveiled that India has been placed at 130th position in the 2015 Human Development Index (HDI) among the 188 countries. With a score of 0.609 on HDI, India stands well below the average score of 0.630 for countries in the medium human development group. But it is marginally above the South Asian countries’ average score of 0.607. According to the latest ranking, India stands higher than neighbours Bangladesh and Pakistan but lower than countries like Namibia, Guatemala and Tajikistan, even Iraq. According to International Monetary Fund World Economic Outlook (April-2015), GDP (nominal) per capita of India in 2014 at current prices is $1,627 compared to $1,508 in 2013. India is the ninth largest economy of the world. But, due to its huge population of more than 1.26 billion, India is at 145th position in term of GDP (nominal) per capita. Per capita income of India is 6.69 times lower than world’s average around of $10,880. This figure is 68.66 times lower than richest country of world and 6.5 times greater than poorest country of the world. India is at 34th position in the list of Asian countries. On the basis of PPP, GDP per capita of India stands at 5,855 International Dollar in 2014. GDP PPP per capita of world is 15,189 Int. $. World rank of India is 125 and Asian rank is 30. Despite the good economic performance, with over 200 million people who are food insecure, India is home to the largest number of hungry people in the world. In the ranking of the Global Hunger Index 2008 it covers position 66 out of 88 ranked countries and has an “alarming“ (23.7) food security situation. India is home to 194.6 million undernourished people, the highest in the world, according to the annual report by the Food and Agriculture Organization of the United Nations released in 2015. This translates into over 15 per cent of India’s population, exceeding China in both absolute numbers and proportion of malnourished people in the country’s population. Higher economic growth has not been fully translated into higher food consumption, let alone better diets overall, suggesting that the poor and hungry may have failed to benefit much from overall growth. The development project in India is nowhere near complete – indeed it has barely begun. Development is supposed to involve job creation, with more workers in formal employment in large units, but that has not happened. Manufacturing still counts for less than one-fifth of both output and employment. More than half of all workers languish in low productivity agriculture, while another quarter or so are in low grade services. About 95% of all workers are in informal employment, and roughly half are self-employed. What’s more, the recognised and paid participation of women in working life has actually been declining in a period of rapid income growth. This basic failure helps to explain several other failures of the development project so far: the persistence of widespread hunger and very poor nutrition indicators; the inadequate provision of basic needs like housing, electricity and other essential infrastructure; the poor state of health facilities for most people; and the slow expansion of education. Growing inequalities do mean that a rising middle class is emerging, but this should not blind us to the lack of fulfilment of basic social and economic rights for the bulk of people.

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Here are some factors affecting India in its journey to become a developed nation.

1. Education:

The present education scenario, although a little better than the last decade, is quite dismal. Factors affecting India in the education sector:

–Poor standards of literacy: The Indian government has decided very low bars for calling a person literate. In order to show high percentages of literacy, the actual standards of literacy are quite below par. So in spite of the figures, India is not really growing.

–Very high student to teacher ratio and resulting stagnation of village education: This is one factor which is a constant roadblock in our road to success. The average student to teacher ratio in India is almost twice as that in US or even China. As a result, very few students actually come to school and learn whereas the rest just waste their time. Because of the scarcity of teachers, enthusiastic students do go to their village schools but there are no teachers to teach there.

–Privatisation of education: More and more schools are being privatised in India. The government schools were established for a purpose to teach the under-privileged sections of society. But more and more privatisation of schools means that more teachers will drift away from govt to private schools. Also these schools charge fees according to their whims making it difficult even for a middle class family to educate their child. Also private tuition classes dominate education in big cities and even towns.

–Reservation: The increasing percentage of reservation in India’s A listed colleges is an enormous thorn in India’s path. Deserving candidates are sacrificed for a bunch of less deserving candidates belonging to lower caste. The blow itself disheartens the deserving child and hence curbs his inner fire, once and forever.

–Increasing number of drop-outs: The number of students acquiring higher education from primary education goes steadily decreasing.

2. Economy:

It is believed that economic reforms started in early 1990s are responsible for the fall down of rural economy in India. It also led to the agrarian crisis. Because of high debt, poor farmers are left with no other choice than to commit suicide. According to official statistics, number of farmers committing suicides has also increased since 1997. The new policies by the government encourage farmers to switch to cash crops in place of traditional crops. But this has led to a manifold increase in farm input cost which ultimate resulted in the economic burden and thus poverty. Also villages in India are not self-sufficient like they used to be. The rural youth is mostly not well educated, lack skill and even not interested in farming. All these are enough for a disastrous and poor future. Government should come up with plans to make villages self-reliant. Skill based education must be provided to the youth.

3. Corruption:

India, if not completely but is almost synonymous with the word corruption. Numerous scams in the recent years explain the saga of corruption. Almost all the government departments are affected from it. Corruption is regarded as one of the biggest reasons of poor development in India. Corruption in the Public Distribution System (PDS) is the worst of its kind.  The leading source of corruption in India is entitlement programmes and social spending schemes that are meant for the welfare of our society.  For an example – Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA),is a $9 billion program planned to offer 100 days of employment annually for the rural poor. But MNREGA failed because of corruption and mismanagement.  Just like MNREGA, the National Rural Livelihood Mission met the same fate. It was planned to empower. Though government is putting efforts to have an “inclusive growth” but corruption is playing its role. So all such programs designed for poor and needy failed to impress and help them. Instead poor are even denied of their basic right and needs. Corruption is just like an endemic in India. It leads to social inequalities and hits economy of nation. Funds granted to uplift the poor are misused. Poverty is further worsened by the administrative corruption. Even the simplest of the task is not performed without a bribe. Corruption also delays and diverts the economic growth. As per the data compiled by Bloomberg, near about $14.5 billion in food was plundered by the corrupt politicians in the state of Uttar Pradesh. The loot caused poor to survive without the required quantity of food and children to suffer from malnutrition. There are many other cases of administrative corruption further deterioration the situation and making poor poorer.

4. Judicial Incapability:

This is the most undervalued point during the development of any nation but is equally important. A better use of time would be possible if the cases are heard and solved. Hence the judge to people ratio should be improved.

5. High population growth rate:

It is rightly said that excess of everything is bad. This is true in this case as well. More people mean the need of more resource, food etc. If this surplus is trained in a right way only then it can take part in the economic development of the country.

6. Ever increasing economic inequality:

India’s growth model for sure has benefitted the businessmen but failed when we see that near about 213 million Indians go hungry every night. Rights of organized as well as unorganized workers are being violated. They are underpaid and not paid according to the industrial growth and ever rising inflation. Due to such a visible inequality each year thousands of girls are sexually exploited and trafficked for money. At the same time child labour has also increased. Wealthy are acquiring more wealth. In such an unequal scenario, top 5% of households have 38% of the total assets of India whereas bottom 60% has merely 13% of the assets.

7. Environmental degradation:

Environmental issues in India are many. Air pollution, water pollution, garbage pollution and wildlife natural habitat pollution challenge India. The situation was worse between 1947 through 1995. According to data collection and environment assessment studies of World Bank experts, between 1995 through 2010, India has made one of the fastest progress in the world, in addressing its environmental issues and improving its environmental quality. Still, India has a long way to go to reach environmental quality similar to those enjoyed in developed economies. Pollution remains a major challenge and opportunity for India.

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My view on India becoming developed nation:

After living in India for 48 years, I know India more than any westerner knows. In my view India will not become a developed nation for 100 years. India has population of 1.25 billion people but it cannot be considered as human capital because 80 % of Indians are uncivilized, undisciplined and unskilled. Instead of improving economic growth, they bring down all economic indices. They do not want to work hard to earn livelihood but depend on government’s welfare scheme for survival. Since they are massive in number for electoral purpose, no political party can antagonize them and so there is competition among political parties to please them with more and more welfare schemes. Welfare programs destroy incentives for the poor to work; and people are reluctant to work because pay is not linked to work for everybody. India is a classic example of these two economic maladies. The human capital has become drawback. No politician wants to control population as it hurts their electoral prospects. Despite abundant natural resources, India remains developing nation due to lazy, unskilled and unhealthy labour force and inefficient utility of natural resources. Corruption and reservation are other barriers to development. Almost all Indian data including economic data are incorrect due to poor data collection. So whatever GDP per capita is calculated is grossly incorrect and overestimated to please the elite of the nation. The elite of the nation include politicians, bureaucrats, corporates and media; the gang of four. This gang of four has consistently looted India just as British Empire was looting India during their colonial rule. Although India has democracy for 68 years, all democratic institutions are poorly developed including judiciary resulting in poor governance. Elections are fought on emotional issues rather than policies. Vote bank politics means electorates vote with herd mentality rather than thinking which candidate shall bring development to their constituency. Electoral system is faulty resulting in a party getting 280 seats out of 543 with 30 % vote share. India needs great political leaders to push the nation in a forward direction.

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How can developing nations become developed nations?

The fundamental driving force behind all human and economic activity is survival and self-preservation. It is an inherent part of our collective psyche and impacts human behaviour regarding all areas, including economic growth. Those less privileged in developing countries adhere to this philosophy as much, if not more, than in the West. It is therefore unwise to expect the despaired masses of the global South, who number in the billions, to forego this basic demand of survival so that the West can live with the guilt of centuries of industrial pollution and environmental degradation. Let there be no double standards or historical ignorance when it comes to matters of life and death, literally. In other words, developing nations can become developed nations by heavy industrialization with resultant increased emissions, pollution and environmental degradation. These adverse effects of development are undesirable although unavoidable.

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A country is made developed by its citizens and other natural resources. Impact of natural resources is limited and also depends on the citizens to unearth them and route them to the economy. However, citizens are the most prized asset for a developed country. It is a hen and egg scenario where flourishing of either aids the growth of another. Qualified citizens are attracted to developed countries and developed countries are built by talented citizens who contribute to its economy. The biggest difference among the countries in this respect is the culture of doing better business including the culture of entrepreneurship. Compared to the overall population, there are higher number of businessmen and entrepreneurs in developed countries, who not only aim to flourish in their own country but tend to spread across the world. This hunger earns the economy precious foreign exchange reserves and doing good business aids the tax coffers of the government. Foreign exchange reserves increase the value of the currency and the citizens get a higher value in exchange for goods and services from other countries. All developed countries, have a stronger currency and sell more than they buy in the international markets. Richer governments have money at their disposal for development and infrastructure. Only countries who have tasted success in investing in R&D and have been able to sell that technology to other countries at huge profits, are able to spend mammoth investments in R&D. More business generated by the citizens leads to more employment and more taxes, both of which contribute directly or indirectly to the economy. If developing country needs to become a developed economy, it needs to start doing better trade and business than developed countries. The three pillars of developmental economics are poverty alleviation, reduction in unemployment and reduction in inequality. The human developmental index falls short of the target of development when there is wide spread poverty, inequality and unemployment prevailing. So it is not a reliable measure of development. No human development index can measure the level of Tort prevailing in an economy unless people love each other, entertain written and unwritten contracts and maintain value of their words. This high level of manifestation of Tort which is the obligation and duty arising without written contract between each citizen is a highly civilized form of existence of societies. This level of civility for existence can be achieved only by addressing the issues of poverty alleviation, inequality and unemployment.

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Among the many frustrations in development, perhaps none looms larger than the “resource curse.” Perversely, the worst development outcomes–measured in poverty, inequality, and deprivation–are often found in those countries with the greatest natural resource endowments. Rather than contributing to freedom, broadly shared growth, and social peace, rich deposits of oil and minerals have often brought tyranny, misery, and insecurity to these nations. The correlation between energy dependence and authoritarianism is clear. There are twenty-three countries in the world that derive at least 60 percent of their exports from oil and gas and not a single one is a real democracy. There are numerous hypotheses to account for this correlation. Most obviously, easy resource revenues eliminate a critical link of accountability between government and citizens, by reducing incentives to tax other productive activity and use the revenue to deliver social services effectively. The same revenues also generate staggering wealth that facilitates corruption and patronage networks. Together, they consolidate the power of entrenched elites and regime supporters, sharpening income inequality and stifling political reform. The history of the oil-rich Arab Middle East has long been a case in point–with Saudi Arabia being classic example. Even when oil abundance produces high growth, it often benefits only a few corrupt elites rather than translating into higher living standards for most of the population. Oil-rich Angola is a case in point. Despite having one of the world’s highest growth rates from 2005 to 2010, averaging some 17 percent annually, its score on the human development index remained a miserable 0.49, and its infant mortality rate was lower than the sub-Saharan African average. The very presence of oil and gas resources within developing countries exacerbates the risk of violent conflict. The list of civil conflicts fought at least in part for control of oil and gas resources is long. A partial list would include Nigeria, Angola, Burma, Papua New Guinea (Bougainville), Chad, Pakistan (Balochistan), and of course Sudan. Econometric studies confirm that the risk of civil war greatly increases when countries depend on the export of primary commodities, particularly fossil fuels. At least three factors could explain this correlation. First, the prospect of resource rents may be an incentive to rebel or secede. Second, wealth from resources may enable rebel groups to finance their operations. Third, the high levels of corruption, extortion, and poor governance that accompany resource wealth often generate grievances leading to rebellion. Only democracy with strong democratic institutions, good governance and rooting out corruption can make them developed nation.

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The Rise of the new development policy, the Washington consensus:

During the 1980s, four important events contributed to advent of new development model. First, developing countries that had followed highly interventionist policies most faithfully had some of the poorest growth records. Second, the GDP growth rates of the more industrialized countries of Eastern Europe and the Soviet Union that had followed interventionist approaches to their own growth were visibly falling behind those of the market-based economies. Third, Taiwan, Singapore, South Korea, and Hong Kong, which had departed from the accepted model by adopting more market-based policies, were prospering and growing rapidly. Fourth, the globalization of the world’s economy led to an understanding that countries could no longer play a full part in world economic growth without a substantial presence of multinational corporations within their boundaries. Given the sizes of developing countries, this meant the presence of foreign owned multinationals. Let us discuss each of these four events in more detail.

1. Experience of the Developing Countries:

Highly interventionist economies fared poorly in the 1950s, 1960s, and 1970s. Economies as varied as Argentina, Myanmar (then Burma), Tanzania, Ethiopia, and Ghana were all interventionist and all grew slowly, if at all. In Ethiopia, the emperor was overthrown and the new government adopted rigid Soviet-style policies. Attempts to collectivize agriculture led, as they had 50 years previously in the Soviet Union, to widespread famine. Some countries, such as Ghana, Nigeria, and Myanmar, started from relatively strong economic positions when they first gained their independence but later saw their GDPs and living standards shrink. Other countries, such as India and Kenya, sought a middle way between capitalism and socialism. They fared better than their more highly interventionist neighbours, but their development was still disappointingly slow.

2. Experience of the Socialist Countries:

In the years following the Second World War, many observers were impressed by the apparent success of planned programs of “crash” development, of which the Soviet experience was the most remarkable and the Chinese the most recent. Not surprisingly, therefore, many of the early development policies of the poorer countries sought to copy the planning techniques that appeared to underlie these earlier socialist successes. In recent decades, however, the more developed socialist countries began to discover the limitations of their planning techniques. Highly planned government intervention seems most successful in providing infrastructure and developing basic industries, such as electric power and steel, and in copying technologies developed in more market oriented economies. However, it is now seen to be much less successful in providing the entrepreneurial activity, risk taking, and adaptivity to change that are key ingredients to sustained economic growth and technological change. The discrediting of the Soviet approach to development was given added emphasis when the countries of Eastern Europe and the former Soviet Union abandoned their system en masse and took the difficult path of rapidly introducing market economies. Although China, the last major holdout, posted impressive growth figures in the 1990s, two “nonsocialist” reasons are important in explaining its performance. First, over 90 percent of the population is engaged in basically free-market agriculture—because that sector has long been free of the central-planning apparatus that so hampered agriculture in the former Soviet Union. Second, while the state-controlled industries suffer increasing inefficiencies, a major investment boom took place in China’s southeast coastal provinces. Here foreign investment, largely from Japan and the Asian NICs, introduced a rapidly growing and highly efficient industrialized market sector.

3. Experience of the NICs:

South Korea, Taiwan, Hong Kong, and Singapore—the so-called Asian Tigers—have turned themselves from relative poverty to relatively high income in the course of less than 40 years. During the early stages of their development, they used import restrictions to build up local industries and to develop labour forces with the requisite skills and experiences. In the 1950s and early 1960s, however, each of the four abandoned many of the interventionist aspects of the older development model. They created market-oriented economies with less direct government intervention than other developing economies, which stuck with the accepted development model. Korea and Singapore did not adopt a laissez faire stance. Instead, both followed quite strong policies that targeted specific areas for development and encouraged those areas with various economic incentives. In contrast, Hong Kong and Taiwan have had somewhat more laissez faire attitudes toward the direction of industrial development. After local industries had been established, all four adopted outward-looking, market-based, export-oriented policies. This approach tested the success of various policies to encourage specific industries by their ability to compete in the international marketplace. With industries designed to serve a sheltered home market, it is all too easy to shelter inefficiency more or less indefinitely. With export-oriented policies not based on subsidies, the success of targeted firms and industries is tested in international markets, and unprofitable firms fail. Not far behind the NICs is a second generation of Asian and Latin American countries that have also adopted more market-oriented policies and have seen substantial growth follow. Indonesia, Thailand, the Philippines, Mexico, Chile, and Argentina are examples. Even Vietnam and Laos are liberalizing their economies as communist governments come to accept that a market economy is a necessary condition for sustained economic growth.

4. Globalization:

At the heart of globalization lies the rapid reduction in transportation costs and the revolution in information and communication technology that has characterized the past two decades. One consequence has been that the internal organization of firms is changing to become less hierarchical and rigid and more decentralized and fluid. Another consequence is that the strategies of transnational corporations (TNCs), which span national borders in their organizational structures, are driving globalization and much of economic development. Because most trade, and much investment, is undertaken by TNCs, no country can develop into an integrated part of today’s world economy without a substantial presence of TNCs within its borders. The importance of TNCs is now recognized, and most aspiring developing countries generally put out a welcome mat for them. Historically, only a few countries, notably Japan and Taiwan, have industrialized without major infusions of foreign direct investment (FDI). Moreover, these cases took place before the globalization of the world’s economy. It is doubtful that many (or any) of today’s poor countries could achieve sustained and rapid growth paths without a substantial amount of FDI brought in by foreign-owned transnationals. Without such FDI, both the transfer of technology and foreign networking would be difficult to achieve. Developing countries have gradually come to accept the advantages of FDI. First, FDI often provides somewhat higher-paying jobs than might otherwise be available to local residents. Second, it provides investment that does not have to be financed by local saving. Third, it provides training in worker and management skills that come from working with large firms linked into the global market. Fourth, it can provide advanced technology that is not easily transferred outside of the firms that are already familiar with its use.

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The Washington Consensus:

As a result of these various experiences, a new consensus on development policy emerged in the closing decades of the twentieth century. The revised model calls for a more outward-looking, international trade-oriented, and market-based route to development. It calls for accepting market prices as an instrument for the allocation of resources. This means abandoning both the heavy subsidization and the pervasive regulations that characterized the older approach. But it also calls for a careful use of government policy in providing basic infrastructure, public goods, and dealing with market failures. This consensus is often referred to as the “Washington Consensus.” It describes the conditions that are believed to be necessary for a poorer country to get itself on a path of sustained development. These views are accepted by a number of international agencies, including the World Bank, the IMF, and several UN organizations. The main elements of this consensus are as follows:

1. Government should adopt sound fiscal policies that avoid large budget deficits. In particular, persistent structural (or cyclically adjusted) deficits should be avoided.

2. Government should adopt sound monetary policies, with the goal of maintaining low and stable inflation rates. Exchange rates should be determined by market forces rather than being pegged by central banks.

3. The tax base should be broad, and marginal tax rates should be moderate.

4. Markets should be allowed to determine prices and the allocation of resources. Trade liberalization is desirable, and import licensing, with its potential for corruption, should be avoided.

5. Targeted protection for specific industries and a moderate general tariff, say, 10 to 20 percent, may provide a bias toward widening the industrial base of a developing country. But such protection should be for a specified period that is not easily extended.

6. Industrial development should rely to an important extent on local firms and on attracting FDI and subjecting it to a minimum of local restrictions that discriminate between local and foreign firms. (Of course, restrictions will be required for such things as environmental policies, but these should apply to all firms, whether foreign owned or locally owned.)

7. An export orientation (as long as exports do not rely on permanent subsidies) provides competitive incentives for the building of skills and technologies geared to world markets, permits realization of scale economies, and provides access to valuable information flows from buyers and competitors in advanced countries.

8. Education, health (especially for the disadvantaged), and infrastructure investment are desirable forms of public expenditure. Because future demands are hard to predict and subject to rapid change, a balance must be struck between training for specific skills and training for generalized and adaptive abilities.

9. Finally, emphasis needs to be placed on poverty reduction for at least two reasons. First, poverty can exert powerful antigrowth effects. People in poverty will not develop the skills to provide an attractive labour force, and they may not even respond to incentives when these are provided. Malnutrition in early childhood can affect a person’s capacities for life. Second, although economic growth tends to reduce the incidence of poverty, it does not eliminate it.

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Economic growth to economic security:

As incomes have risen over the course of the twentieth century, citizens in nearly all the industrial countries have shifted their public priorities from economic growth to economic security. The bulk of the increases in government spending in rich countries have gone for programs such as insurance for health, unemployment, work-related accidents, and retirement. These same programs lie behind the rise in taxes relative to national output. In Western Europe, economic-security programs typically take 25% to 30% of national output, an amount equal to the rest of all government activities and far greater than the U.S. outlay. While the rich countries dismantled the protective systems at their borders, they erected new offsetting protective systems within. People’s priorities change as their incomes rise; spending for food and shelter as a percentage of income shrinks even as the food and shelter get better. Spending on health care, most of which is financed by some form of insurance, has risen from 8% to 15% of U.S. output since 1970. Like other aspects of the welfare state, it is designed to promote increased economic security. Though mostly private, and thus, in a sense, more free, the U.S. health-care system is at the same time the most expensive in the world. It is in large measure a tax on the community. The prosperous Asian countries have taken a different but parallel tack. Social spending in Japan is far less extensive than in the West, as government has officially left citizens to provide their own security to a far greater degree. But the government has implicitly encouraged corporations to provide much of that security in its stead.

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Are people in developing world not as intelligent as developed world?

Intelligence of population and development of nation:

IQ and the Wealth of Nations is a 2002 book by Richard Lynn, Professor of Psychology, and Tatu Vanhanen, Professor of Political Science. The book argues that differences in national income (in the form of per capita gross domestic product) are correlated with differences in the average national intelligence quotient (IQ). The authors further argue that differences in average national IQs constitute one important factor, but not the only one, contributing to differences in national wealth and rates of economic growth. The authors believe that average IQ differences between nations are due to both genetic and environmental factors. They also believe that low GDP can cause low IQ, just as low IQ can cause low GDP. The authors write that it is the ethical responsibility of rich, high-IQ nations to assist poor, low-IQ nations financially, as it is the responsibility of rich citizens to assist the poor. In several cases the actual GDP did not correspond with that predicted by IQ. In these cases, the authors argued that differences in GDP were caused by differences in natural resources and whether the nation used a planned or market economy. One example of this was Qatar, whose IQ was estimated by Lynn and Vanhanen to be about 78, yet had a disproportionately high per capita GDP of roughly USD $17,000. The authors explain Qatar’s disproportionately high GDP by its high petroleum resources. Similarly, the authors think that large resources of diamonds explain the economic growth of the African nation Botswana, the fastest in the world for several decades. The authors argued that the People’s Republic of China’s per capita GDP of at the time roughly USD $4,500 could be explained by its use of a communist economic system for much of its recent history. The authors also predicted that communist nations whom they believe have comparatively higher IQs, including China, Vietnam, and North Korea, can be expected to rapidly gain GDP by moving from centrally planned to more market based economic systems, while predicting continued poverty for African nations no matter their economic systems.  Critical responses have included questioning of the methodology and of the incompleteness of the data, as well as of the conclusions. Richardson (2004) argued, citing the Flynn effect as the best evidence, that Lynn has the causal connection backwards and suggested that “the average IQ of a population is simply an index of the size of its middle class, both of which are results of industrial development”.  A 2013 research paper shows how the differences in the timing of agriculture transition and the histories of States, not population IQ differences, predict international development differences before the colonial era. The average IQ of populations appears to be endogenous, related to the diverse stages of nations’ modernization, rather than being an exogenous cause of economic development.

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People in developing countries have lower IQs because their bodies are focused on surviving:  a 2010 study:

People in developing countries have lower IQs because their bodies divert energy from brainpower to fighting disease, researchers claimed. In hot nations blighted by deadly infections, the priority is survival and populations have evolved to develop stronger immune systems rather than intelligence, according to the controversial theory. U.S. researchers claimed their work could explain why national IQ scores vary around the world and are lower in some warmer countries stricken by diseases such as malaria, tetanus and tuberculosis. Infection could have as important an impact on intelligence as education, diet and wealth, said researcher Randy Thornhill and a team from the University of New Mexico. Children under five use most of their energy for brain development and this can be restricted if the body has to fight disease, they wrote in the Proceedings of the Royal Society. They compared data from worldwide IQ studies with disease maps drawn up by the World Health Organisation and concluded that the higher the level of infectious disease in a country, the lower the average national IQ.  ‘The effect of infectious disease on IQ is bigger than any other single factor we looked at,’ said Chris Eppig, lead author on the paper.  Disease is a major sap on the body’s energy, and the brain takes a lot of energy to build. If you don’t have enough, you can’t do it properly. ‘The consequence of this, if we’re right, is that the IQ of a nation will be largely unaffected until you can lift the burden of disease.’ Critics of the study argued there are many different kinds of intelligence that Western academic-based IQ tests fail to measure. Low IQ does not necessarily equate to stupidity or incompetence, they said. People in hot countries have the intellectual skills to survive in very difficult environments. The research could be abused to rationalise racism, just as the Nazis perverted scientific study in the 1930s, some critics said. Some critics warned the study could become an excuse for racism if it was used to suggest that people in the Third World are not as intelligent as those in cooler, richer climes. Experts pointed out that children fighting debilitating disease are likely to miss a lot of school, which could be the real reason for a lower IQ score, not compromised brain development. Professor Richard Lynn of Ulster University said the picture was complex, with low national IQs partly propagating the spread of infectious diseases.  HIV had a high infection rate in low-IQ nations, he said, because people did not understand how it was contracted and relied on baseless superstitions to avoid it.

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My view:

In my view, Worldwide IQ map shows Chinese population to be most intelligent but yet they are neither democratic nor developed nation. According to Lynn, Chinese did not become developed nation because they have centrally planned economy due to communism most of the time and only recently shifted to free market economy. In other words, had Chinese adapted to democracy with free market economy, they would have become developed nation long back. Who does not want better standard of living? If Chinese were so intelligent, they would have adapted democracy and free market economy long back. In other words, either Chinese are not intelligent or intelligence has nothing to do with development.  That means methodology of IQ measurement of population worldwide is faulty or high average IQ of a nation does not make it developed nation by itself.

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Genes vs. environment vis-à-vis nation development: Korea model:

North vs. South Korea:

In the last days of World War Two, when it became clear Japan would surrender to the Allied powers, the question of what would happen to Korea became louder than ever. After decades of occupying the Korean peninsula, Japan had retreated. The United States and Soviet Union agreed to divide Korea at the 38th parallel in August 1945, with the US taking the southern part and the Soviet Union the north. The plan was to hand back control to the Koreans and withdraw, and in 1948 several attempts were made at getting the nations to vote for reunification. But the distrust engendered by a few years of opposing ideologies had grown too deep. What started as an almost “accidental division” gave rise to one of the most hostile and heavily militarized borders in the world, and split one people in two. There is still no official peace between North and South Korea, despite the Korean War ending more than 60 years ago. Citizens remain separated by the “demilitarized zone” (DMZ), one of the most heavily armed borders in the world. Around 600,000 South Korean and 28,500 US troops face off against an estimated 770,000 North Korean soldiers stationed within 80 kilometers of the DMZ. While South Korea has turned itself into a technological superpower, North Korea’s government has struggled to supply its citizens with even basic foodstuffs. The UN estimates that more than a quarter of children under five show signs of chronic malnutrition.

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North Korea:

North Korea, a communist country led by the dynasty politics, is one of the most isolated economies in the world today. The doctrines of juche (self-reliance) and songun (military-first) have created a repressive atmosphere in the state. North Korea is often labelled an unreformed dictatorial economy. The nation that places its nuclear ambition over economic development has also time and again faced sanctions by the US and the European Union. The state receives much aid and concessionary assistance from international bodies like the United Nations and a handful of countries, particularly China. The North Korean economy deeply relies on its ally mainland China for economic and diplomatic support. This dependence makes the North Korean policy of juche impossible. The economic growth of the country has been fragile except during a short phase in the 1960s. North Korea faced its worst nightmare in 1990s as the region was hit by a series of natural disasters that kept its economic growth negative for a decade. Gradually, as the Sino-DPRK economic alliance strengthened, the nation started to develop Special Economic Zones (SEZs) to promote investment in the region. However, while North Korea may not be economically advanced, it does have plenty of unexplored natural resources, estimated to be worth trillions of dollars (most estimates give a figure of $6-$9 trillion). This is one reason why countries like China and Russia are enthusiastic about investing in DPRK.

South Korea:

The “miracle of the Han River,” as South Korea’s spectacular economic growth is popularly called, has transformed a nation that was once wracked by political chaos and poverty into a “trillion dollar club” economy. The country has clocked an average annual growth rate of seven percent, experiencing contraction only during two years. South Korea became a part of the Organization for Economic Cooperation and Development (OECD) in 1996, which marked its development into a rich industrialized nation. In 2004, it joined the elite club of trillion-dollar economies and today it ranks as the world’s 12th largest economy in terms of GDP. The economy of South Korea is multiple times (36.7 times as per current figures) that of North Korea’s in terms of GDP. According to 2013 figures, the GDP of North Korea is estimated at $33 billion, while that of South Korea is $1.19 trillion. The GDP per capita is $33,200 in South Korea, while it is $1,800 in the North. South Korea’s trade volume was a gigantic $1.07 trillion in 2013. By comparison, North Korea reported a relatively minuscule $7.3 billion. While North Korea runs a huge trade deficit, exports (goods and services) play an important role in South Korea’s growth story. According to World Bank data, exports of goods and services accounted for 53.9 percent of the GDP in 2013.

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Country North Korea South Korea
Population 24,720,407 48,955,203
GDP (purchasing power parity), $bn 40 1,622
GDP – real growth rate (%) 0.8 2.7
GDP – per capita (PPP), $ 1,800 32,400
Unemployment rate, % 3.8
Urban population (%) 60 83
Median age 33 39
Infant mortality rate, per 1,000 live births 26.21 4.08
Life expectancy at birth (total population) 69.2 79.3
Area 122,762 sq km 99,313 sq km
Corruption Index ranking 2012 174 45
Press Freedom Index 2013 178 50
Total executed, 2007-2011 105 0
Total sentenced to death, 2007-2011 0 13
CO2 Emissions (metric tons per capita) 3.1 10.4
% of rural population with access to an improved water source 97 88
Internet users per 100 people < 0.1 81.5
Intentional homicide, rate per 100,000 population 15.2 2.6
Intentional homicide, count per 100,000 population 3,658 1,251
Exports, $ billion 4.71 552.6
Imports 4 514.2
Net official development assistance (ODA) and official aid (current US$) 78,840,000 -69,070,000
Net ODA per capita (current US$) 3
Global Hunger Index score 19 N/A
Active duty military 1190000 655000
Reserve 600,000 (Armed Forces). Paramilitary 5,700,000 4,500,000. Paramilitary 3,000,000
Military expenditure as a percentage of GDP 22.3 2.8
Military spending, $ billion 8.21 26.1

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How did South Korea become a developed nation?

Stage 1: Achieving 100% literacy:

By 1940s, South Korea already had a fairly literate population by Asian standards of that time. This was partly because of Japanese occupation. While democracy and human rights suffered, Japanese have been quite instrumental in building Korea’s infrastructure and also strongly integrated the economy with Japan. That proved to be valuable in an export game in the following decades. Soon after the division of the Korean Peninsula, in 1945, South Korea already had in place the building blocks for growth: an educated population, property rights, land reform that boosted productivity, and the institutions of modern capitalism.  After the war, the South Korean government took a significant step in expanding the reach of literacy to all. This eliminated illiteracy by the 1960s giving it a significant advantage compared to most Asian countries. Human capital is the foundation of a developed nation.

Stage 2: Land reforms:

One of the most understated economic factor is land reforms. It is extraordinarily important for growth and peace. Land reforms make or break a nation. In Korea, key land reforms happened in late 1940s that built a significant middle class. It was partly done by the US who forced the Japanese land owners out and redistributed the property. In Korea and Taiwan, the absence of powerful economic interests and low levels of inequality due to sweeping land reform contributed to developing meritocratic and autonomous bureaucracy, which helped to curb corruption and capture.

Stage 3: Market Reforms:

Literacy and land reforms are necessary, but not sufficient conditions for growth. South Korea was still poor in 1960s, until the stage 3 in growth came. In fact, it was just rubbing shoulders with North Korea until then. Park Chung-hee forcefully took the country towards a freer market and opened up the economy. He also deepened the relationship with US and Japan. That’s where you start seeing the curve moving up.

Stage 4: Demographic Shift:

This is again an understated effect. Countries that have gone through a first phase of growth will have rapidly falling population growth rate leading to a virtuous circle for a while. People focus more on career than families – leading to fewer children. In the initial few decades this is a great advantage – as people will rapidly move up in career ladder and would not have kids to slow them down. They will get richer and mobile. Things all go well until it comes time for retirement. Then, all the things about putting career over family bites. In short, demographic shift is a one-time growth lottery that Japan and Korea used well. However, the lottery’s “high” wears off at some point and the hangovers are very severe. Japan is going through this painful process and South Korea has just started.

Other factors:

1. Constant threat from North Korea. This keeps South Koreans on their toes giving them no opportunity to go lax.

2. Lots of help from the US. At one point 60% of all investment came from the US. Of course, it doesn’t hurt to be a US ally.  The difference from Middle East allies of US is that South Korea did make its citizens literate, give them land and open up the economy, without which US Aid would have been ineffective.

In a nutshell:

South Korea’s growth is a combination of quick achievement of 100% literacy that started in Japanese occupation, significant land reforms that created the middle class, significant market reforms that helped the middle class trade with the world and a demographic one-time lottery. Most communist nations miss the stage 3 thus they are educated with land reforms with stunted growth. Many crony capitalist nations miss stages 1 & 2, thus they have a “free” market but without a populace that is educated and with land to make use of the market. South Korea ticked off all its boxes.

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My view:

North Korea has kept itself aloof from the outside influence, with its people living under regulations in a controlled environment. Between its impoverishment and its nuclear armament, it is hard to say what the future of North Korea will be like. But for now, it is a classic example of a secluded totalitarian economy. South Korea, on the other hand, is westernized and advanced. The country has moved very fast on the path of growth, from a war-devastated state into an economic powerhouse.

North Korea South Korea
Political system Dynasty Democracy
Economic system Centrally planned Free market economy
Military spending  22 % of GDP  2.8 % of GDP
Economic structure Agriculture based Industry based
Freedom No freedom Full freedom

You can see the difference between underdeveloped North Korea and highly developed South Korea.

So do genes or environment make a developed nation?

The Korean example gives answer. Till 1945, all Korean people were one people, having genetic homogeneity and same environment. Today South Korea is a developed nation and North Korea a developing nation. Since genetic factors are same, obviously environmental factors contributed to development. In other words, democracy, better education, land reforms, free market economy, meritocracy, corruption reduction and better use of foreign aid made South Korea developed nation despite scarce resources. All other developing nation can follow the suit.

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Work and development:

Hard work:

What nation would you consider as the hardest working in the world and why?

South Korea. They don’t mind working even for 24hrs a day. They have turned from an under developed into a completely developed nation within 30 years. Having almost no natural resources and suffering from overpopulation in its small territory, it deterred continued population growth and adapted an export-oriented economic strategy to fuel its economy, and in 2012, South Korea was the seventh largest exporter and seventh largest importer in the world. A look at the average annual hours worked per person in selected countries puts South Korea top with a whopping 2,193 hours, followed by Chile on 2,068.  British workers clock up 1,647 hours and Germans 1,408 – putting them at the bottom of the table, above only the Netherlands.

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Why Germans work fewer hours but produce more?

Working Hours mean Working Hours:

In German business culture, when an employee is at work, they should not be doing anything other than their work. Facebook, office gossip with co-workers, trolling Reddit for hours, and pulling up a fake spreadsheet when your boss walks by are socially unacceptable behaviors. Obviously, in the United States these behaviors are frowned up on by management. But in Germany, there is zero tolerance among peers for such frivolous activities. In the BBC documentary “Make Me A German“, a young German woman explained her culture shock while on a working exchange to the UK. “I was in England for an exchange… I was in the office and the people are talking all the time about their private things… What’s the plan for tonight?, and all the time drinking coffee; She was quite surprised by the casual nature of British workers. Upon further discussion, the Germans reveal that Facebook is not allowed in the office whatsoever, and no private email is permitted.

Goal-Oriented, Direct Communication is valued:

German business culture is one of intense focus and direct communication. While Americans tend to value small talk and maintaining an upbeat atmosphere, Germans rarely beat around the bush. German workers will directly speak to a manager about performance reviews, launch into a business meeting without any ‘icebreakers’, and use commanding language without softening the directives with polite phrases. Whereas an American would say, “It would be great if you could get this to me by 3pm,” a German would say, “I need this by 3pm”. When a German is at work, they are focused and diligent, which in turn leads to higher productivity in a shorter period of time.

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Work enhances human development by providing incomes and livelihoods, by reducing poverty, and by strengthening equitable growth. It also allows people to participate fully in society while affording them a sense of dignity and worth. And work that involves caring for others builds social cohesion and strengthens bonds within families and communities. Human beings working together not only increase material well-being, they also accumulate a wide body of knowledge that is the basis for cultures and civilizations. And when all this work is environmentally friendly, the benefits extend across generations. Ultimately, work can unleash human potential, human creativity and the human spirit. However some work, such as forced labour, can damage human development by violating human rights, shattering human dignity, and sacrificing freedom and autonomy. And without proper policies, work’s unequal opportunities and rewards can be divisive, perpetuating inequities in society. The fast changing world of work, driven by globalization of work and the digital revolution, presents opportunities, but at the same time poses risks. The benefits of this evolving new world of work are not equally distributed and there are winners and losers. Addressing imbalances in paid and unpaid work will be a challenge, particularly for women, who are disadvantaged on both fronts. Creating work opportunities for both present and future generations would require moving towards sustainable work. Work can enhance human development when policies expand productive, remunerative, satisfying and quality work opportunities—enhance workers’ skills and potential—ensure their rights, safety, and well-being—and specific strategies are targeted to particular issues and groups of people.

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Does money makes you happy?

Money doesn’t make you happy. Up to about US$75,000 a year it does – and most people aren’t anywhere near that level – but beyond that it doesn’t have any effect, according to Nobel prize-winning psychologist Daniel Kahneman. In my view, when basic needs like clean water, food, sanitation, housing, clothes, medicine, education, electricity, transport and internet are met anywhere, you should be happy.

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The moral of the story:

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1. Economic development is a measure of a country’s wealth and how it is generated while human development measures the access the population has to wealth, jobs, education, nutrition, health, leisure and safety, as well as political and cultural freedom.

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2. GDP/GNP/GNI per capita and its rate of growth are the best available indicators to provide estimates of the level of economic well-being within a country and of its economic growth. GDP growth can be understated due to non-market/ non-monetary transactions and underground economy.  You can have GDP growth without meaningful change for the majority of its citizens, without change in poverty level or income inequality.

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3. Human Development Index (HDI) is a composite index measuring average achievement in three basic dimensions of human development—a long and healthy life, knowledge and a decent standard of living but it does not reflect on inequalities (income and gender inequality), poverty, unemployment and human security. HDI ranges from a theoretical minimum of zero (for a life expectancy = 25 years, complete illiteracy and a GDP per capita = $100 at purchasing power parity) to a theoretical maximum of one (for a life expectancy = 85 years, 100% literacy and a GDP per capita = $40,000 at purchasing power parity).  Countries with “high” to “very high” human development account for slightly less than a third of the world’s total population (30%). In other words, two third of world population has low to medium human development.

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4. Barring few exceptions, electricity consumption correlate well with development of a nation, and neither HDI nor  GDP of developing countries will increase without an increase in electricity use.

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5. There is a very strong correlation between GDP per capita and HDI. This is because nations today are capable in converting the available national income (measured as GDP per capita) into a longer lifespan for the people and into access to education. This is because with high GDP, the government and the people have more money to spend on education and health care. The converse is also true. The nations today are also very good at converting improved health and education into economic growth. This is because healthier people are more likely to work and as they have better education they are more likely to further themselves in their field earning more money. If you want better health and education fix economic growth. If you want faster economic growth provide better education and health service. Despite plethora of criticism and limitation, despite advent of new indices and barring few exceptions, GDP per capita is still the best index of development of a nation.

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6. My Classification of nations as per development status:

HDI GNI PPP per capita in US$ Development status
>0.85 >12000 Developed nations
0.75 to 0.85 4000 to 12000 Nations in transition
0.5 to 0.75 1000 to 4000 Developing nations
<0.5 < 1000 Least developed nations

In event of inconsistency between HDI and GNI per capita for developmental status, please go by HDI because HDI includes health and education besides GNI per capita. In other words, if GNI per capita puts nation in higher development status compared to HDI, it means more industrial development without concomitant improvement in health and education. The classical example is India whose GNI PPP per capita is 5497 US$ making it  a nation in transition but HDI 0.609 making it a developing nation. Remember, mainstream economics is inadequate in understanding developing nations as compared to developed nations. The implication of the terms “developed” and “developing” is that developing countries will attain developed status as some point in the future. The priority of developing nation is economic growth while the priority of developed nation is economic security.

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7. GDP per capita correlates well with standard of living. High income (developed) countries have higher standard of living as compared to middle income (developing) and low income (least developed) countries.

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8. People in high income countries, on average, live 20 more years than people in low income countries.

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9. One striking feature of developing countries is that agriculture accounts for a large part of GDP and employment.

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10. The relationship between the level of urbanization and per-capita income shows a strong positive relationship. Higher the per-capita, larger is the level of urbanization. Only 41 percent of population live in urban areas in less developed countries, while the share of urban population is 77 percent in more developed countries.

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11. Rule of law is mostly obeyed in developed nations and less commonly obeyed in developing nations who need it most.

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12. Only 78 percent of children (5-14 years) in low income countries go to school and the children who go school receive lower quality of education. 98% of illiterates live in developing countries.

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13. Western developed nations had high literacy rate even in the year 1800 and even that time GDP per capita was higher in them compared to developing nations. Education is the single-most important driver of economic empowerment for individuals and countries. Learning ability to master new technologies and tasks lies at the heart of the growth process. Each additional year of education raises earnings in an individual by approximately 8%. No country has ever achieved rapid and continuous economic growth without at least a 40% literacy rate. Education leads to improved social, cognitive and health outcomes. Education also reduces fertility rate and control population overgrowth. Education is worth improving even if people are struggling to survive. Investment in human capital i.e. education and skills training, is three times as important to economic growth over the long run as investment in physical capital, such as machinery and equipment.  A country that focuses on promoting strong literacy skills widely throughout its population will be more successful in fostering growth and wellbeing than one in which the gap between high-skill and low-skill groups is large.

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14. Resource crunch is portrayed as biggest obstacle to development but worst development outcomes–measured in poverty, inequality, unemployment and violent conflicts–are often found in those countries with the greatest natural resource endowments especially oil-rich middle east. This is because they lack democracy and they have education polluted with religion resulting in poor human capital.

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15. Despite very limited natural resources, Japan has become developed nation due to skilled, hardworking and healthy labour force and advent of new methods to utilize limited resources efficiently. On the other hand, despite abundant natural resources, India remained developing nation due to lazy, unskilled and unhealthy labour force and inefficient utility of natural resources. Inefficiently managed resource is the hallmark of poor nations. Although natural resources are a necessary condition for economic growth, high standard of human capital can overcome scarcity of natural resources. Poor standard of human capital is a drawback uncorrected by any amount of natural resources.  No nation can develop in spites of its natural endowment if such nation does not take seriously human capital development which could be derived through sound academic foundation that is tailored towards a good cradle of nursery, primary and secondary school.

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16. Developing countries like India and China are growing much faster than developed nations. This is because developed nations are in post-industrial service sector economy while developing nations are in the process of industrialization. But the gap between developed and developing nations has widened despite many developing nations growing faster than developed nations, not only because of large initial gap between the income levels of the developed and the developing countries but also because of population explosion in developing nations which reduces GDP per capita substantially.

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17. Development of a nation is a human enterprise and its outcome will depend finally on the skill, quality and attitudes of the men who undertake. Population can help development of nation only if people are educated, skilled, healthy, hard-working, employed and having progressive culture; otherwise they will drain away resources for development and hamper development of a nation.

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18. Populations with higher GDP per capita are observed to have fewer children, even though a richer population can support more children; so economic development will reduce fertility rate and thereby control population explosion. In other words, if you want to control population explosion in a developing nation, besides educating women, go for higher economic growth.

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19. Education is the single most important factor promoting development of a nation and population explosion is the single most important factor hampering development of a nation. Since India has poor quality of education with 74 % literacy rate and population explosion, it is unlikely to become a developed nation in foreseeable future.

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20. Slavery, exploitation and resource extraction due to colonisation are responsible for economic development of many European nations and responsible to make many nations of Asia, Africa and Latin America poor; although geographical bad luck, wrong policies and unproductive culture equally contributed in keeping poor nations poor after their independence from colonial rulers.

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21. Corruption is rampant in developing countries at various levels and it harms poor people more than others, stifles economic growth and diverts desperately needed funds from education, healthcare and other public services.

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22. Wars and civil wars severely hamper development of a nation. Developing nations are hit hard due to military spending as it takes away resources from developmental work. Ironically poor nations spend higher percentage of GDP on military than rich nations. India and Pakistan have fought many wars and spent enormous amount money over Kashmir hindering development of these nations. Developing countries have to learn from developed nations how to solve territorial dispute and rights of self-determination. How Canada handles question of Quebec and how UK handles questions of Scotland and Northern Ireland, democratically and peacefully, is to be learned by developing nations.

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23. Foreign debts of developing nations undermine development because of reduced spending on infrastructure, healthcare, and education.

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24. Every developing country needs its economic policy based on its causes of underdevelopment rather than blindly following economic policies of developed nations.

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25. Barring few exceptions like South Korea and Singapore, foreign aid has not been effective at reducing poverty as it was utilized in unproductive projects, propping up over-valued currencies and enriching corrupt officials; and aid operates as a tool for rich countries to extract wealth, resources, and political compliance. Direct cash transfer to poor families in developing nations is proven to reduce poverty, hunger and inequality.

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26. Trade is the exchange of goods and services between countries and an essential tool for development. However, unfair subsidies, unfair tariff barriers, unfair patent protection and exploitation of cheap labour and environment hamper development of nations.

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27. There are two classic economic maladies of developing nations. First, although welfare program provides much-needed food, medical care and money to poor by redistributing wealth across the population, welfare programs destroy incentives for the poor to work. Second, people are reluctant to work because pay is not linked to work for everybody. India is a classic example of these two economic maladies. As a doctor working in government hospital catering poor people, my experience tells me that free medical treatment to poor people make them not work. Once poor people know that free medical treatment is available, there is no incentive to work as survival is ensured by free government hospital. Also, I know many government doctors who hardly work because they get monthly salary irrespective of their work. What I am telling is the tip of the iceberg and when these two maladies are multiplied in all segments of Indian society, you know why India will remain a developing nation.

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28. Although income inequality drags down GDP growth, a widening gap between the wealthy and the rest of society may foster growth by encouraging many people to work hard, but in India I find the opposite. The wealthy is taxed heavily to finance welfare scheme so that the poor need not work. Instead, the tax from the wealthy should be invested to generate employment for the poor.

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29. The Index of Economic Freedom is based on a composite of ten crude, mostly quantitative indicators: tariff rates, taxation, government’s share of output, inflation (a proxy for monetary policy), limits on foreign investment, banking restrictions, wage and price controls, property rights, general business regulation, and the extent of the black market. Those countries with the most economic freedom have higher rates of economic development than those with less economic freedom. However, economic freedom is more often the result than the cause of development.

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30. Brain drain from developing to developed countries occur because of better standards of living and quality of life, higher salaries, access to advanced technology and more stable political conditions in the developed countries.  It has been estimated that foreign scientists from developing countries involved in research and development produce 4.5 times more publications and 10 times more patents than their counterparts at home. In other words, productive capacity of intellectuals and talented people is far less in developing nations. I always felt that had I been brought up in a developed nation, I would have contributed much more to the world.  The recent literature shows that high-skill emigrations need not deplete a country’s human capital stock and remittances from expatriates living abroad constitute a significant proportion of foreign revenue for many developing countries. Remittances to India stood at $70.39 billion in 2014, accounts for over 4% of the country’s GDP.

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31. Developed countries have become developed by burning fossil fuels causing global warming and now they want developing countries to cut down their emission to reduce global warming. Even today, the U.S. consumes 9 times as much oil per capita as China, and 24 times as much as India, and it wants China and India to cut down their CO2 emission. The truth is every country wants economic development and blame other countries for climate change.

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32. Countries with very low HDI are unlikely to commit the resources for reducing emissions even with economic incentives because they are less environmentally conscious. In other words, economic aid should be given to improve HDI of least developed nations so that higher HDI would make them environmentally conscious to reduce emissions.

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33. All countries ought to incorporate sustainable development in their development policies by controlling overpopulation of the poor & overconsumption by the rich, by the use of environmentally friendly technologies, and by correcting gross inequalities. GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment.

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34. In gene vs. environment debate vis-à-vis development of a nation, Korean model proves that environmental factors contribute to development of a nation and not genetic factors.

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35.  Children of developing nations fight many debilitating diseases and so miss a lot of school, have access to poor education & poor diet, and stressful life (e.g. electricity shortage) which could reduce their intelligence. So low GDP per capita can lower average IQ of a nation. As GDP per capita rises with better standard of living, better health and better education, average IQ of a nation increases. Oil-rich Middle East is exception where they have high GDP per capita due to high petroleum resources but lower average IQ. They have not been able to translate high GDP per capita into better education due to lack of democracy and education polluted with religion. Conversely, whether high average IQ of a nation by itself increases GDP per capita is debatable.

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36. All countries must utilize science and technology for solving socio-economic issues. Greater the utility of science and technology, greater the development of a nation.

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37. Democracy, good governance, science and technology, empowerment, overpopulation control, gender equality, better education, better healthcare, land reforms, free market economy, well-developed entrepreneurial class , saving and investment, meritocracy, corruption elimination, hardworking people, curtailment of military expenditure and better use of foreign aid can make any developing nation developed despite limited resources.

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Dr. Rajiv Desai. MD.

January 5, 2016

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Postscript:

I was thrown out from developed nation into developing nation by politicians for the reasons best known to them although standard of living is much higher in a developed nation than a developing nation. In my view, India will not become a developed nation for 100 years. What India needs is better parenting and better education. What India needs is population control, meritocracy, zero corruption, no reservation and hard work. What India needs is to make poor people work and make pay linked to work for everybody.

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