indicators of economic development

Development Economics Web Guide, Unit 5B 4

Issue 1 � May 2003Authorised by Peter Goff

Indicators of developmentin developing countries insub-Saharan Africa, Asiaand Latin America

Absolute and relativepoverty.

Differences betweendeveloping countries.

Compare and contrast GDP percapita and other measures ofeconomic and social development,e.g. life expectancy, literacy rates,the proportion of populationemployed in agriculture. Understandthe distinction between these terms.

Compare how the record ofeconomic development differs insub-Saharan Africa, Asia and LatinAmerica and explain reasons forthese differences.

Understand the limitations ofnational income statistics asindicators of development.Explain the inter-relationshipsbetween these indicators.

Understand how there aredifferences in countries bothbetween and within the threecontinents and a considerationof these differences.

Indicators of Economic Development

Introduction

The specification refers to two categories of country, �developed� and �developing�. Avariety of economic and social indicators can be used to classify countries in this way.However, some of these are more reliable than others.

Further classifications are possible between countries within the �developing�category � for example, strong differences by region emerge: Africa, South Asia, EastAsia and Latin America have rather different sets of characteristics. However, it isalso true that countries within each of these regions differ widely.

Some Important Indicators

A very wide variety of indicators can be used to characterise the difference betweendeveloped and developing countries. Only a small selection is considered here. Thedata reported below comes from the United Nations Human Development Report for2001.

1 GDP per capita

GDP per capita is the total value of (final i.e. not intermediate) goods and servicesproduced within a country divided by the total population. The bar chart below showsthe extraordinary difference between countries in terms of GDP per head. It alsoillustrates the relative difference between countries categorised as �developing�:Ghana had $1881 per capita in 1999, Zambia only $756. It is worth pausing toconsider the figures for Zambia: on average, people there live on no more than about$2 a day. As a measure of development this seems to be the most important indicator:if people want to be in a position to buy commodities and enjoy high standards ofhealth and education then they will need the income to match.



GDP per capita, PPP US $, 1999

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UK Ghana Zambia

There are some issues concerning the reliability of this indicator. One problem ismeasuring GDP in countries where much economic activity is unofficial. The dataitself may be collected by governments who use different and more or less efficientmethods of measurement. The measurement of inflation is also problematic: ifinflation is under-estimated then real output will be over-estimated. Governmentofficials may have an incentive to over-value output (particularly the unsold output ofnationalised industries). Another major problem is the high level of subsistencefarming in developing countries: non-marketed output may never get measured.

To enable cross-country comparisons the data needs to be standardised to a particularcurrency. Using current exchange rates is unlikely to be appropriate for this � they areonly based on traded goods and are greatly affected by speculative capital flows. Thealternative, finding a purchasing power parity (PPP) rate with which to do theconversion, is non trivial in a world where goods and services differ so widelybetween countries.

There are some other problems. First, it may be more informative to see patterns ofGDP per capita growth over time, rather than just a snapshot of a particular year.Second, there is no sense in which this indicator can tell the whole story of acountry�s economic or social situation � for example, there can be widely varyingstandards of health and education for countries with similar levels of GDP per head.The distribution of GDP may also vary, in some countries being much more uneventhan in others. Third, increasing GDP per capita may bring with it costs as well asbenefits, particularly if it is brought about in a non-sustainable way: the level ofnegative externalities needs to be considered.

The rate of growth of GDP is also crucial. Over the last ten years real GDP per headin the UK has grown by 2.1% per year. Over the same period, the figure for Ghanawas 1.6% and for Zambia minus 2.4%.



2. Life Expectancy

In 1999, Ghana had a life expectancy at birth of 56.6 years, contrasting with Zambia�s41.0 years and the UK�s 77.7 years. A variety of factors may contribute to thesedifferences � the stability of food supplies, the extent to which an area is contested bywar, and the incidence of disease are all important.

It is therefore possible for countries with similar levels of GDP per head to have verydifferent life expectancies: for example, Vietnam currently has an almost identicalincome per head to Ghana, but a considerably higher life expectancy of 67.8 years.

According to World Bank figures, over the past 40 years, life expectancy at birth indeveloping countries as a whole increased by 20 years. The figures above suggest thatthis was not evenly distributed. In many countries in sub-Saharan Africa lifeexpectancy is now falling due to the AIDS epidemic.

3. Literacy Rates

The UN Development Report defines adult literacy rates as the percentage of thoseaged 15 and above who are able to read and write a short, simple, statement on theireveryday life. This is a very narrow definition of literacy.

Interestingly, on this measure Zambia has a literacy rate of 77.2%, compared toGhana�s 70.3%, and better than that of Saudi Arabia which has fourteen times higherGDP per head. However, and once again, a single indicator cannot tell the whole story� an important part of development economics consists in trying to understand theorigins of such differences.

More extensive definitions of literacy are available, for example �functional literacy�based on the International Adult Literacy Survey. This survey tests people�s ability tounderstand printed text, to interpret documents adequately and perform basicarithmetic. One problem with such indicators is the care needed to ensure that thesurvey is appropriate to the local culture � you cannot ask people to interpret texts thatrefer to areas outside of their experience. �Literacy� is likely to be considerablydetermined within a culture rather than across cultures. The wider the definition ofliteracy the greater this problem will be.

Another problem is the distribution of literacy: a number of countries have aconsiderable gender divide, denying women access to the same levels of education asmen.



4 Measures of Poverty

It is important to understand the difference between absolute and relative poverty.Absolute poverty refers to the inability to acquire goods necessary to satisfy basicneeds e.g. the means to obtain the minimum level of nutrition necessary to sustain anactive life. Basic needs also tend to include clothing and shelter. Put simply, absolutepoverty is having �just enough to survive� but no more. However, it is well worthconsidering whether what counts as �absolute� poverty is, to some extent, relative tothe culture concerned: the concept is by no means uncontroversial.

Relative poverty refers to the differential of income and wealth between people orcountries. That is, it involves some comparison across economies.

One indicator of absolute poverty is the percentage of the population receiving lessthan the equivalent of $1 a day income. This stood at 38.8% for Ghana and 63.7% forZambia in 1999. For most developed countries there is no absolute poverty accordingto this measure because of social security benefits. The World Bank estimates that1.2bn people live off less than $1 a day, with a further 1.6bn existing on less than $2 aday.

The figures for absolute poverty have to be treated with some caution for reasonssimilar to those discussed for GDP per capita. The concept is itself rather loose, and a$x a day measure is somewhat arbitrary: especially as local costs of living varyenormously and there are wide variations across countries of, for example, climate.

There is also something of a preconceived idea involved in defining poverty in termsof income levels � it may be that for some people there are other more pressingobjectives e.g. having shoes to wear or establishing a separation of living quarters forpeople and animals. These other objectives may be improving even when income isfalling. Many commentators therefore prefer to see �poverty� as a multidimensionalconcept. This is important because the way poverty is conceptualised will influencethe policy measures adopted to deal with it. For example, a definition basedexclusively on income will tend to see growth in GDP per head as the only solution topoverty.

Other dimensions of absolute poverty might include access to �essential� drugs(Ghana 44%, Zambia 66%, UK 100%) and the proportion of the population usingregulated water supplies (only 64% in both Ghana and Zambia).

To shed light on relative poverty it is possible to compare GDP per capita betweencountries or to look at income distributions within a particular country. Theinequalities of income in developing countries can be very pronounced. In 1999 therichest 10% of the population in the UK had a 27.3% share of income. For Ghana thefigure was 29.5%, for Zambia it was as high as 41%.

Note that relative poverty is an issue even at a local scale of description. For example,within households there can be widely varying distributions of resources e.g. on thebasis of age or gender.



5 Demographic Indicators

The table below contrasts Ghana and Zambia through a variety of further possibledemographic (to do with population) indicators of development:

Indicator UK Ghana ZambiaAnnualPopulationGrowth Rate

0.1% 2.1% 2.3%

Urban Population� percentage oftotal

89.4% 37.9% 39.5%

Percentage of thePopulation Underthe age of 15

19.1% 41.4% 46.5%

Infant MortalityRate per 1,000live births, 1999figures,(1970 figures inbrackets)

6 (18) 63 (111) 112 (109)

6 Disease Indicators

Disease is endemic in many developing countries due to low levels of health care,expensive drugs, contaminated water supplies, and poor health education. The figuresin the table below speak for themselves.

Indicator UK Ghana Zambia% of adultpopulation withHIV/AIDS

0.11% 3.6% 19.95%

Malaria cases(per 100,000people)

0 11,941 37,458

Tuberculosis cases(per 100,000people)

10 53 482



Aggregate Indices of Development

To minimise the problems with individual indicators discussed above it is possible tocombine a selection of indicators to form an index of development. Several of theseare published by various organisations. The UN Development Report, for example,ranks countries by their �Human development index� which includes the majorindices of life expectancy, adult literacy, and GDP per capita. This then creates aleague table of development with the UK, at 14th, ranked as a country with �highhuman development�, Ghana at 119th classified as having �medium humandevelopment� and Zambia, at 143rd in the category �low human development�.

As with any index, weights have to be used to construct the overall figure. These areto some extent arbitrary. However, it is interesting to see that some countries e.g.Pakistan, have relatively high GDP per capita but are much lower than this mightsuggest in the overall development index. This may suggest failures of governmentpolicy.

Africa, Asia, Latin America

Development indicators suggest pronounced regional differences. The countries ofLatin America tend to be high up in the category �medium human development�.

The countries of Asia also tend to be in the medium development classification, butlower down the ranking than countries in Latin America.

The category of �low human development� is almost entirely made up of countriesfrom sub-Saharan Africa.

GDP per capita, 1999 US $

010002000300040005000600070008000

LatinAmerica

East Asia South Asia Sub-SaharanAfrica

$



However, growth within these regions has been by no means uniform:

� Chile and Uruguay have grown so fast in the past few decades that they arenow in the UN�s �high human development� group. Meanwhile, GDP in manyLatin American countries was falling in the 1980s � as it is again during thecurrent debt crisis.

� Countries in East Asia, including most recently China, have grown far morerapidly than those in South Asia e.g. India. Thus, according to the WorldBank, the number of people living in absolute poverty (less than $1 a day) fellby 139.2 million in East Asia and the Pacific between 1987 and 1998 whilst inSouth Asia the number increased by 47.6 million.

However, the economic performance of countries in sub-Saharan Africa was not onlypoor but much less diverse � it appears to be very difficult for the very poorestcountries to escape their poverty. According to the World Bank �sub-Saharan Africaas a region saw no increase in its per-capita incomes between 1965 and 1999, evenwith some improvement in the 1990s.�

Inter-Relationships Between Indicators

An important question is the extent to which the indicators outlined above are inter-related. This is a complex issue and only a few points are made here.

There is a strong positive correlation between GDP per capita and life expectancy.However the graph below shows that this is non-linear � for the obvious reason that asmall increase in wealth can enable basic standards of health and education to beestablished and thus dramatically improved increases in life span, whereasexpenditure on advanced medical care in developed countries only brings marginalincreases in longevity.



Low and Medium Development Countries

3035404550556065707580

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GDP per capita, $ 1999 PPP

Life

exp

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In the aggregate the correlation between these variables is striking. However, anumber of countries seem to be separate from the overall pattern, from Zimbabwe,through Angola and Namibia to South Africa marked on the graph.

The dramatic difference that levels of GDP per capita seem to be able to make to lifeexpectancy in most countries is shown on the following scatter diagram for thepoorest group:

Countries of Low Human Development

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GDP per capita, 1999 PPP $

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Zimbabwe South Africa



The relationship between GDP per head and adult literacy, whilst positivelycorrelated when all countries are included, is much less clear for the poorest countries.The graph below shows the relation between Adult literacy and GDP per capita forcountries of low human development:

Countries of Low Human Development

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GDP per capital, $ 1999 PPP

Adu

lt Li

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This data is, in fact, slightly negatively correlated suggesting that in no sense areeducation programmes a sufficient condition for development.

Resources for Pupils

www.worldbank.org/data/countrydata/countrydata.html

A very useful set of key economic indicators, some presented in graphical form, foreach country.

www.worldbank.org/poverty

Includes data and further links on poverty.

Suggested Activity

Scroll down the page on the first link above to �Countries at a glance�. Print out the�at a glance� pages for Brazil, Argentina, Ghana, Zambia, India and China. Youshould use these � or others of your choice - as case study countries. If you you�reyour own choice make sure that you include countries from each of the three mainregions mentioned in the specification: Latin America, Sub-Saharan Africa, and Asia.Also be sure to include two countries from each region so as to be able to draw out the

http://www.worldbank.org/data/countrydata/countrydata.html

http://www.worldbank.org/poverty



differences within the region. You will need information on specific countries to helpanswer the �Questions for Discussion� at the end of each section.

Using the World Bank resource listed above, prepare for a class presentation acomparison of either Brazil and Argentina (Latin America) or Ghana and Zambia(Sub-Saharan Africa) or India and China (Asia). You should also try to get hold arecent issue of the United Nations Development Report to retrieve the HumanDevelopment Indices (HDI) for your chosen countries.

Begin to collect newspaper reports and articles from The Economist about the selectedcountries.

Questions for Discussion

1 After the class presentations, draw up a list of differences between LatinAmerica, Sub-Saharan Africa and Asia.

2 Is �Asia� too large an area to be treated as a single region?

3 Is the concept of �literacy� of any interest in a discussion of economicdevelopment?

4 Examine the factors which might explain differences in infant mortalityrates between developing countries.

5 How clear cut is the concept of �poverty�? Does it matter?

6 What factors might explain why some countries are rising and somecountries falling in rank orders of human development?

7 ��GDP per head� is a very poor indicator of development.� Discuss.

8 Why is there so much discussion about what to call developing countries?

9 What is the significance of a negative figure for a GDP minus HDIranking?

10 Examine the implications of the statement (page 10) that �a small increasein wealth can enable basic standards of health and education to beestablished.�

indicators of economic development

Education