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Hello and welcome to the second lecture of the NPTEL MOOC’s course on Economic Growth and Development In today’s lecture we will be studying the Structural characteristics or structural features of the developed and the underdeveloped countries of the world The flow of the presentation of the lecture today has been arranged as follows; first I will recapitulate from the last class, the first lecture Then I will give country-classification followed by the World Bank based on income criterion Then we will have a brief look into what is meant by developing countries, who constitute the First, Second and the Third Worlds We will also look at the population and GDP distribution of the developed and underdeveloped countries of the world And then we will look at some of the specific features with respect to occupation and production structures, demographic features, social security arrangements and a brief discussion of the other features that distinguish the developing countries from the developed countries In the last class we studied a working definition of economic growth, which basically meant a sustained increase in the standards of living of people which is usually measured in terms of income We also looked at the circular flow of income and output in an economy Usually there are many sectors in an economy for example, the household sector, the firm sector, the government sector, the foreign sector, but to make things simple, we looked at a simple closed economy constituting the households and the firms and we saw how the households provide factors of production or factor services to the firms, in the form of say land, labour and capital, and how the firms make factored payments to the households Similarly, we also saw the flows of how firms provide output to the households and the households provide consumption expenditure or incomes in the form of consumption expenditure back to the firms After looking at the circular flow of income and output in the economy, we also studied the national income estimation methods There are three broad methods- the product method, the income method and the expenditure method, we briefly discussed what are these methods, how to avoid double counting And then we specifically picked up some of the important National Income concepts such as the Gross National Product, the Net National Product, the Gross Domestic Product, the Net Domestic Product, personal income, personal disposable income and per capita income We also studied the difference between real and nominal GDP to understand how it is important to adjust for inflation to be able to do any real comparisons of GDP across time and across states or across regions We also saw the difference between GDP at market price and factor cost, emphasizing on why it is important to look at GDP at factor cost because we want to understand the distributive shares of different factors of production within the economy I also introduced you to the concept of purchasing power parity, which is basically used for international comparisons of price and income We saw that it is basically a price index and it is different from exchange rates and it is used as one form of a price index similar to the Consumer Price Index for international comparisons of price and income Now taking the discussion from the first lecture forward, let us also look at some of the limitations of using GDP as an estimator Now, the GDP is conventionally the most accepted indicator used by many economists to evaluate the production of output such as goods and services However, the information it gives is incomplete, biased and questionable for at least the following 4 reasons First is, it does not take into account unpaid work provided mainly by women So, unpaid work basically means the work of housewives or women and men staying back at home, taking care of the elderly, taking care of the children In macroeconomics there is a term for this, which is referred to as ‘Social Reproduction’ So, GDP estimations do not take into account unpaid work and which is a serious limitation because they are all productive work adding to the human capital formation of a country Secondly, damage to environment is not treated as a debit This basically means that when there is production of goods and services in an economy there is a corresponding use of natural resources, which means that there is some kind of a damage

to the environment However, the damages to the environment does not enter into the valuation process of GDP Therefore, damage to environment is not treated as a debit is a serious limitation of the GDP estimate The third limitation is that, the unit on which the calculation is based is the price of a commodity or a service and not the amount of work it requires If you recollect from the last class on the definition of GDP, you would remember that we discussed that GDP refers to the valuation of all the final goods and services produced in a country in a given period of time- in a given year particularly Now, when we are referring to final goods and services, we are not referring to the amount of time and effort required to produce those goods and services Now, the time required to produce the goods and services in a country A and a country B may be very different, and the terms and conditions of works may be different, the environment under which the workers are working may be very different For example, a country A may be producing a product by putting in let us say 6 hours of work, but a country B may be producing a product by putting in let us say 10 hours of work However, these differences in working conditions are not taken into consideration while making a valuation of GDP Therefore, this is a serious limitation The fourth limitation is that inequalities within a country do not enter into the calculation of GDP We know that there are sharp income differences within a country However, since we are looking largely at the organized formal sector in which goods and services are produced therefore, informal sector or the unorganized sector is largely left out of the valuation of GDP and consequently inequalities of incomes do not get captured in the GDP calculation Now, despite these inadequacies, GDP is an important indicator of economic imbalances between the Global North and the Global South GDP and other monetary figures in the international literature are usually expressed in USD or the US dollar since more than half of exchange reserves, international loans, and exchanges are still transacted in US dollars Now, let me introduce you to the World Bank’s country classification using income criterion Generally, in the literature of development economics or the growth literature we do make references to developing countries, developed countries, underdeveloped countries and so on However, the growth story of the last 25 odd years tells us that these categorizations have become very fluid The underdeveloped countries of the past have caught up very rapidly with the developed countries as a result of which income continues to be the most important criterion for distinguishing the rate of growth of countries across the world And World Bank being a Bretton Woods Institution and being at the helm of affairs as far as policies are concerned at the international level, the World Bank classification is widely used and therefore, I am introducing you to the World Bank country-classification going by income The World Bank comes up with a report called World Development Indicators I have used the estimates from the recent World Development Indicators Report of 2017 which uses Gross National Income estimates as per 2015 data Now going by the World Bank country-classification by income, there are 4 country categories and this is mainly used for operational and analytical purposes The Gross National Income Per Capita is converted into US dollars So, for example, if you see the report of WDI- the World Development Indicators 2017 you will see that there are detailed country classifications fixed by GNI per capita for the most recent year, which in this case is for the year 2015 So, there are 4 country classifications The first is low-income economies, second is lower middle-income economies, third is upper middle-income economies and the fourth is high-income economies Now, note here that although these categorizations of incomes are made there are huge inequalities or there are huge disparities within these country classifications as well However, that is not what we are discussing now The low-income economies are those which have GNI per capita of USD 1,025 or less This is going by the 2015 estimates The lower middle-income economies are those with a GNI per capita of USD 1,026 to 4,035

Upper middle-income economies are those with a GNI per capita of USD 4,036 to 12,475 and high-income economies are those with a GNI per capita of USD 12,476 or more Now generally these countries, which are classified under ‘upper middle-income economies’ or ‘high income economies’ are referred to as developed countries of the world However, there is nothing sacrosanct about these classifications I would like to show you the map given by the World Development Indicators So, this is the map which is given by the World Development Indicators Report and dark blue areas in the map are the low-income countries If you see closely you will see that these are mostly the countries in Sub-Saharan Africa For example, you have Chad, Niger, Rwanda- all of these dark blue areas are the low-income countries The light blue areas are the lower middle-income countries Most of South Asia falls under the lower middle-income countries Central Asia, Russian federation, South America countries coming under these light red areas are the upper middle-income countries and America, North America and Western Europe are largely the high-income countries Since I have already introduced you to GDP at market prices and GDP at purchasing power parity in the last class, this is just to show you how the countries are ranked going by the latest estimates of GDP 2015, which came out in the WDI report of 2017 Going by the GDP market prices or the market exchange rates, you would see that the countries are ranked as, United States as the first ranked country followed by China, Japan, Germany, UK, France, India, Italy, Brazil and Canada Most of the developed countries are ranked first However, going by the purchasing power parity exchange rates, China surpasses all other countries followed by United States, and India Now this is the importance of looking at GDP at market price versus GDP by purchasing power parity exchange rates Now, let us come to the vocabulary It is very important that we define developing countries The terms North, rich countries, industrialized countries, or Triad- all refer to the countries of Western Europe, North America, Japan, South Korea, Australia, New Zealand and a number of other high-income countries However debatable it may seem to group such diverse countries such as Thailand, Haiti, Brazil, Nigeria, Niger, Russia or Bangladesh into one category, the terminologies found in the statistics provided by the World Bank and the IMF as well as the OECD, the UNDP and other UN agencies are the most widely used Therefore, to be able to scrape through all of this literature we have to use the terminology is referred to by them Thus, we refer to all countries outside the triad as developing countries Now within this category for historical reasons, distinction is made between groups of countries designated as Central and Eastern Europe, Turkey and Central Asia, Latin America and the Caribbean, Middle East and North Africa, Sub-Saharan Africa, South Asia, East Asia, and the Pacific claimed as the third world or the South Now, there is a very interesting story to the First, Second and the Third Worlds It is said that this terminology “Third World” was first used by the French Economist and Demographer Alfred Sauvy in an article that he wrote for the French magazine- the Observateur in 1952 It was titled “Three Worlds, One Planet” It is said that the terms ‘First, Second and Third World’ were used in the beginning of the Cold War when the political divide between western capitalism and Soviet Union or the soviet socialism was at its peak And there were certain groups of countries which were former colonies, who did not want to be part of either the Western Capitalist Block or the Soviet Socialist Block Now, thinking of these three factions, Alfred Sauvy, the French Economist and Demographer, talked about the three worlds The first world consisted of the US, Western Europe and their allies, the Second World was the so-called communist block and the Third World constituted the former colonies Now because many of these Third World were impoverished, they were also referred to as

the ‘poor world’ Over a period of time after the fall of Soviet Union, the terminology Second World went out of the vocabulary of the First, Second and Third Worlds and the terms that were largely used or frequently used in the growth literature or the development literature was the First World and the Third World Now this is an additional reading for those interested in looking at the history of the formation of the third world, the composition of the third world I would urge you to look at B.R Tomlinson’s essay on “What was the Third World” which was published in the journal of Contemporary History in 2003 Now, moving on So, if we want to look at who constitute the developing countries, we can categorize them further into the Third World or the South and then the Central and Eastern Europe plus Turkey and Central Asia They are both referred to as the developing countries of the world Now, let us look at some distributions The World Development Indicators Report of 2008 brought up the 2006 estimates of world population And going by the distinction that we just made with respect to the Global North the Global South and Central and Eastern Europe plus Turkey and Central Asia, you would see that in 2006, 77 percent of the world population resided in the Third World, 16 percent in the Triad, and 7 percent in Central and Eastern Europe, Turkey and Central Asia So, which means that out of a world population of approximately more than 6 billion people about 84 percent lived in the developing countries and this number has not changed much If you look at the distribution of Global GDP, you would see that and this is GDP in trillion dollars in 2006 brought out by the WDI in 2008, the share of the Triad or the share of the Global North in Global GDP was about 76 percent, the Third World- 19 percent and Central and Eastern Europe Turkey and Central Asia about 5 percent Note the difference in these graphs While the world population largely resides- in the Third World, incomes are largely seen concentrated in the Global North or the Triad It is interesting if you look at the GDP per inhabitant data of 2006, you would see that the GDP per inhabitant in the Triad or the Global North was about 28,600 dollars in contrast to just about 1,520 US dollars in the Third World Note the difference in these graphs where the incidence of population or concentration of world population is largely concentrated in the Third World However, incomes are concentrated in the Global North and that is the kind of imbalance and inequality that we are talking about when we are looking at different country classifications Now the GDP per inhabitant data reveals the economic gulf separating the North and the South However, this provides an incomplete overview of the world economic situation as it often ignores the flagrant income disparities within a given country For example, the UNDP’s Human Development Report of 2006 tells us that income of the world’s 500 richest people exceeded the cumulative income of the world’s 416 million poorest people based on the income statistics reported in 2006 Now, I must mention here that the term ‘developing countries’ has been scathingly criticized by various economists and social scientists working on growth and development literature And rightly so, because this term essentially means that these countries- the developing countries are trying very hard to catch up with the developed countries as if there is only one way to develop and as if the model of the developed countries are the best and as if some countries were further along the road than the others in the race to make up for lost time So, the critics claim that the purpose of using this pernicious term is to have the world believe that there is only one possible form of development and to legitimize the decisions of the major powers and institutions that shared the same logic And, when I am referring to the institutions here, the critics make a reference to the Bretton Woods Institutions such as the World Bank, the IMF and the other international financial institutions So, the critics claim that the purpose of using this term developing countries is to have the world believe that there is only one possible form of development And to legitimize the decisions of the major powers and institutions that share the same

logic, while marginalizing the arguments of those who affirm that there are other possible and alternative ways of development Since the most important objective of this lecture is to introduce you to some of the structural features of the developing countries which essentially also means that we are differentiating between the structural features of developed and the developing countries, let me quickly introduce you to some of these structural features Now, these are certain graphs which have been collected from the ‘globaleconomy.com’ which is an initiative of the World Bank, which gives country comparisons based upon various, macroeconomic estimates If you look at this graph here, it tells us the value added in agricultural sector as percentage of GDP What it basically means is that what is the contribution of agricultural sector to the GDP of a country And this is all in US dollars and these are all in percentages The countries that I have taken in here are Japan, USA, UK, France which would qualify as developed countries, India and Bangladesh as low-income countries and China as an upper middle-income country Now you would see that Japan, USA, UK, and France the value added in agriculture sector as percentage of GDP ranges about within 1 to 6 percent whereas, in the case of India and Bangladesh while declining over the period 2000 to 2015 it is still very close to 20 percent as of 2015 But if we put all the developing countries together, the share of agriculture to total output or total GDP will be very close to about 30 percent or in the range of 25 to 30 percent Now what does this mean? This means that agriculture basically accounts for a significant fraction of production in developing countries and since substantial agricultural output is produced for self-consumption in these countries, the numbers may actually be much higher than what this data shows However, one common characteristic is that the share of agriculture in total output or total GDP is higher for the developing countries If you look at employment in agriculture as percentage of total employment, it also tells us a similar story in terms of patterns For example, in India and Bangladesh here, you would see that more than 40 percent of employment is still in agriculture which means that agriculture is still the biggest contributor to not just output, but also employment However, note here that while the percentage contribution to GDP is about close to 20 percent in 2015, percentage dependence on employment from agriculture is much higher than its share in output which also shows that the pressure on agriculture is very high in developing countries I have also put together the GDP per capita in purchasing power parity and here you will see that the story is reversed In terms of GDP per capita purchasing power parity, India, Bangladesh, China, the levels are much lower than the developed countries of the world So, what does this mean here? It means that, while agriculture is the biggest contributor to output, agriculture is the biggest contributor to employment, the levels of per capita incomes are very low compared to the developed countries And this is one of the commonalities of the developing countries across the world High pressure on agriculture and low incomes I have also put together the Human Development Index of these countries and you would see that India, China and Bangladesh ranked lower than the developed countries of the world While the Human Development Reports over the years have shown us that apart from income, health and education also goes on to show that it is not just income, but health and education also affects the rankings of countries So, it is not necessary that those countries which are very high incomes may also have very high levels of human development, but in general we do see that high-income countries also have high levels of human development compared to the low-income countries Now, if you look at the percentage of urban population in countries, you would see that the developed countries have a more urbanized population and the developing countries have more population in the rural areas And, it makes sense when you have a very large population dependent on agriculture and you have a very large population dependent on employment from agriculture it is but obvious that the percentage of population in rural areas is higher than in the urban areas

So, the developed countries have a more urbanized population than the low-income countries Now, what are we trying to say here? In terms of structural characteristic, it basically means that agricultural activity forms a significant part of the lives of people living in developing countries The overall numbers for production and occupational structure suggests that agriculture often has lower productivity than other economic activities In many developing countries capital intensity in agriculture is at a bare minimum and there is often intense pressure of population on land And if we add to this the fact that agriculture, especially one where not protected by assured irrigation and ready availability of fertilizer and pesticides, it can be a highly risky venture Many farmers bear enormous risks and these risks may not look very high if shown in terms of US dollars, but they often make a huge difference to the subsistence of marginal and small farmers in the developing countries of the world The second structural characteristic that needs emphasis here is with respect to demographic features and there are clear differences in the demographic structure of the developed and the developing countries I have again put together some graphs based upon the World Bank estimates First is the population ages 0 to 14 percentage of total population You would see that the developed countries such as Japan, USA, UK including China, China is an exception here because of it is ‘one child’ norm However, the developed countries have a very low share of young population in their country whereas, India and Bangladesh show a very high share, although declining, the share of population in the ages 0 to 14 is much higher than that in the developed countries Similarly, if you see the number of births per 1000 people in a year, it is the same story The developing countries generally have very high birth rates and as we see in this figure here India and Bangladesh have very high number of births per 1000 people though declining over a period of time and there are important reasons why this decline has taken place over a period of time and this decline has been so across countries However, the difference in levels is what is important There is a difference in the levels of the number of births per 1000 people per year Now in this figure I had put together the developed countries or the high-income countries along with the low-income countries But in this figure, I have brought in 3 Sub-Saharan African countries- Somalia, Angola and Benin And you would see that the number of births are much higher than what you see in India and Bangladesh So, the very low-income countries have the characteristic of having very high birth rates The death rates on an average has been declining across countries globally, primarily because of advances in medical technology and also the rate of development However, it is also a fact that very poor countries are largely characterized by both high birth rates and high death rates Similarly, fertility rate or the births per woman also shows a clear difference in pattern In the developed countries the fertility rates are much lower than that of the developing countries If I juxtapose the Sub-Saharan African countries such as Somalia, Angola and Benin into this, you would see that there is a huge difference in levels Whereas, in India and Bangladesh just about close to 2.5, in Somalia it is still close to 6 or say a little more than 6 whereas, in the developed countries it is in the range of 1 to 2 Now, it is important to understand here that as development proceeds, death rates plummet downward, often birth rates remain high before they finally follow the death rates on the downward course And in this process a gap opens up between the birth date and the death rate and that leads to a high population growth rate And this high population growth has 2 effects It means that overall income must grow faster to keep per capita growth at reasonable levels To be sure of the fact that population is growing helps income to grow because there is a greater supply of productive labour however, it is not clear which one has an edge over the other, the larger amount of production or the larger population that makes it necessary to divide that population among more people The negative population effect may well end up dominant, especially if the economy in question is not endowed with large quantities of capital- both physical and human

There is a second effect of high population growth or high birth rates to be precise and that is the overall population is quite young Now it is easy to get an intuition for this High birth rates mean that the proportionately large number of children are always entering into the population This means that population is heavily weighted in favor of children and this may also mean that you have a very high young population and a productive population in future which may add to human capital formation and so on and so forth However, it also has its negative effects because it also means that the ill effects of child labour are also very high or the overall levels of productivity in a country are also very low because there are many more mouths to feed in a household So, there are many untoward consequences of an abnormally young population and that is one of the commonalities of the developing countries of the world or the so-called underdeveloped countries of the world Now, in terms of international trade and terms of trade we see that there are clear differences between developing and developed countries However, in this figure I have not brought in exports or imports figures- the recent figures because the recent figures show quite an amount of diversity and mix with respect to the developed and developing countries However, what I have shown here is, what is referred to as competitiveness in World Economic Forum Index This is what the World Bank refers to And the Global Competitiveness Index is composed of 12 pillars of competitiveness They are organized as for example, basic requirements of institutions, infrastructure, macroeconomic stability, health and primary education, efficiency enhancers, higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness, market size, innovation and sophistication factors, etc Now going by the Global Competitiveness or World Economic Forum Index again you would see that India and Bangladesh rank much lower than that of the developed countries of the world However, a very important point to be noted with respect to international trade and the commonalities in international trade or terms of trade between the developed and developing countries is as follows The developing countries are often exporters of primary products such as raw materials, cash crops and sometimes food are major export items, textiles and light manufactured items also figure on the list In contrast the bulk of exports from developed countries is in the category of manufactured goods ranging from capital goods to consumer durables Of course, there are many exceptions to these broad generalizations, but this is the overall picture and one of the summaries that can come from international trade and terms of trade is that developing countries are likely to have a high ratio of primary goods in their total exports, but as far as imports are concerned there is significantly less variation Now, there are other important structural characteristics which differentiates the developed countries with respect to the developing countries and that is related to the pressure of population on agriculture, because of the pressure of population on agriculture, there are rapid rural-urban migrations as well And the rural-urban migrations have been increasing while the agricultural sector within the developing countries has been declining of late There is no substantial non-agricultural sector as well However there continues to be a high pressure of pollution in the agricultural sector in the developing countries of the world Other important structural features that characterize developing countries are very low productivity and low human capital formation in the economy Now one last structural characteristic which I would like to emphasize on is about social security arrangements in the developed versus the developing countries Now, as I have already discussed in the last class with respect to GDP calculations and the organized formal sector, the developed countries are characterized by a very large organized sector or very large formal sector whereas, the developing countries have a very large informal sector And one of the characteristic features of the developed countries is that social security grew massively after the Second World War and in the past 30 years many countries have introduced reforms in unemployment benefits and social assistance In developed countries social security covers workers and the dependents against old age, unemployment, health and other risks Social security systems are complex and large it may range from 31 percent of GDP in Sweden to about 16 percent in USA Cross country studies of income redistribution that examined the coverage of low-income risks by government programs show that, social security has helped reduce poverty drastically, by

at least 40 percent in Europe and in heavily insured countries like Belgium and Sweden it is by more than 70 percent and by 28 percent in the United States However, in contrast developing countries only have a large bouquet of anti-poverty programs The formal sector workers have access to social insurance and the very poor have some access to social assistance in health services, but large population groups are not covered So, extending social security coverage would require de-linking social security benefits and labour market status, creating new institutions to cover currently excluded groups, financing these new programs through general taxation, improving tax collection, reducing the costs of formal sector benefits and increasing the costs of informal sector benefits Now, to conclude this lecture on structural characteristics of the developed vis-a-vis the developing countries, there are a few important factors that need to be taken into account One is the overwhelming importance of the agricultural sector While the industrial sector is also increasing in the developing countries of the world, agriculture continues to be the mainstay of the developing countries A very large share of employment continues to come from the agricultural sector accompanied by very large rural-urban migrations The second important feature is with regard to the demographic profile or the demographic structure of the developing countries The developing countries or the so-called underdeveloped countries still have a very high birthrate and high fertility rates and therefore, the share of young population in the country is very high and that also leads to a very high dependence ratio However, research in the past have also shown that it also leads to a demographic dividend because you have a very large young population which is available for various kinds of employment opportunities and investments with respect to such countries The third important characteristic is with respect to international competitiveness or international trade The international trade mix of the developing countries is such that exports are primarily in terms of primary products while the import mix of developing countries and the developed countries are more or less the same However, exports are mostly in terms of primary goods whereas, the developed countries export more of manufactured goods In the final analysis social security arrangements The developed countries of the world seem to have very elaborate formal social security arrangements whereas, the developing countries have only a large bouquet of anti-poverty programs because a large section of the population continues to live in the informal sector So, to summarize our lecture today we began to define what is a developing country, what are the categorizations that are followed with respect to understanding a developing country I think we have a fair understanding now of what constitutes the Global North and the Global South We got introduced to these concepts of the First World, the Second World and the Third World I also introduced you to the World Bank country-classification by income and why it is important to look at these income classifications, what is the importance of Bretton Woods Institutions, and why these classifications are followed internationally Then I also took you through to the global population distribution with respect to the Global South, the Global North and Central Asia, Central Europe, Eastern Europe and Turkey some of these countries We also looked at the GDP per inhabitant distribution across these countries and then in the final run we looked at detail into some of the figures that tells us the position of the developed countries with respect to the developing countries of the world Finally, I would give you a short introduction to the next lecture which is a general lecture and it is titled as the ‘Global North and the Global South: Why the divide’ What we will try to do in the next lecture is to look at the historical reasons as to why the Global North and the Global South came to be known as they are The focus will be on the decade of the 1990’s and the 2000’s What were the most important debates that went on in the 1990’s with respect to the Global North and the Global South and similarly the important debates in the 2000 with respect to the Global North and the Global South These are some of the references and texts which you may refer to have more understanding

of some of the development indicators that I have referred to I would urge to look at the world development indicators to have a better understanding of what are the important macroeconomic estimates that are considered for understanding comparisons or making comparisons of development and growth across countries in the world Thank you

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