1.5 Defining Development
Although we commonly use the phrase “development,”
there is considerable debate over precisely what it means. In its most common usage, development
is equated broadly with economic growth and perhaps more precisely with a change in the
structure of an economy. In this sense, the transition from a preindustrial to an industrial
economy, as occurred in England during the Industrial Revolution, is “development.”
Today, the he World Bank divides the world into three broad categories of development:
High Income: those countries with a GDP per capita of more than $9,385.
Middle Income: those countries with a GDP per capital of between $766 and $9,385.
Low Income: those countries with a GDP per capita of less than $766.
These categories leave out some important groups, such as transition countries (the
former Soviet bloc countries) and high income developing countries like the oil-rich Gulf
States. But for the most part, this provides us with a way of thinking about the features
shared by developing countries. It also provides us with some insight into
what precisely we mean by development. Development has traditionally been defined
in economic terms, as increasing the size of the economy. This is most commonly measured
as gross domestic product per capita; the total value of goods and services produced
by an economy in a given year, divided by the population of that economy. This figure
is frequently—though often inaccurately— used to represent the quality of life in a
particular country. But this measure has its limits.
It’s difficult to compare figures across countries. If we price GDP in local currency terms, we
may have a more accurate figure, but we can’t compare across countries. If we say that South
Africa’s GDP per capita is 71,499 rand and India’s GDP per capita is 81,703 rupee, what
does that tell us? Not much. But if we convert it into dollars, we learn that South Africa’s
per capita GDP is $8,078, while India’s is $1,514. Now we are in a better position to
compare the two economies. A word of caution, though: Nominal currency
conversions, which use official exchange rates, tend to understate the size of the economy
in developing countries. This is known as the Penn Effect and comes into practice because
developing countries tend to have lower costs of living than developed countries. To get
around this, economists will sometimes use the Purchasing Power Parity, or PPP, estimate.
Rather than comparing economies using currency conversion rates, PPP compares the price of
a basket of good and uses that as the basis for exchange, leading to more accurate comparisons.
Whenever you have a choice, then, you should always opt for PPP GDP rather than nominal
GDP. This chart gives you a sense of the difference
between nominal GDP per capita, measured in the first column, and purchasing power parity
GDP per capita, as reflected in the third column. Note the differences between the two
numbers by country. For most developed countries and for many oil rich states, nominal GDP
per capita tends to overstate the size of the economy. Norway, for example, which is
both a developed country and an oil rich state, has a nominal GDP per capita nearly $40,000
larger than its real PPP GDP per capita. This suggests that the cost of living in Norway
is high. By contrast, many developing countries—as reflected in the table here by South Africa,
china, India, Bangladesh, and others—have a PPP GDP that is higher than their nominal
GDP, suggesting their currency is undervalued and reflecting a lower cost of living in each
of those countries. For some, the difference is quite large. India’s economy, for example,
is effectively twice as large when measured using PPP GDP rather than nominal GDP.
And sometimes it’s difficult to be sure that the figures are even accurate. In his recent
book on economic activity in Africa, economic historian Morten Jerven of Simon Frasier University
in Canada, noted that even setting aside the problems posed by conversion rates, there
is considerable disagreement about the relative rankings of the size of national economies.
Looking at the rankings of African economies for the year 2000, for example, Jerven observes
that the three different rankings—all of which purport to measure the same thing, the
size of the national economy—arrive at quite different conclusions. They agree that the
Democratic Republic of the Congo (formerly Zaire) is Africa’s poorest country. But among
the ten poorest countries in Africa in the three rankings, only six consistently appear
in all three rankings—the DRC, Sierra Leone, Niger, Burundi, Tanzania, and Ethiopia. There
is better agreement about the ten richest countries. But there is wide variation the
relative rankings, across all categories. One ranks Guinea, for example, as Africa’s
seventh poorest economy while another ranks it as Africa’s tenth richest, with an economy
five times the size of the lower estimate. Mozambique is similarly ranked as the eighth
poorest economy on one table and the twelfth richest in another, with an economy ten times
the size larger in one estimate than the other. And Liberia jumps twenty places in the rankings,
moving from Africa’s second poorest in one ranking to a comfortable mid-ranked 22nd.
Many other countries jump at least ten places. All of this suggests that the use of gross
domestic product as a measure of development, particularly in the global south, should be
greeted with a high degree of skepticism. GDP as a proxy for development also suffers
from other shortcomings. GDP gives us no indication about the structure
of an economy, only its size. What proportion of the economy is structured around manufacturing
production? How much is based on the export of a single primary commodity? Most countries
would prefer to have a diversified economy, with some agriculture, some industry, and
some service sector contributions. But many developing countries are disproportionately
dependent on agricultural production, and are frequently dependent on a single commodity
or raw material for their export earnings. The International Monetary Fund currently
lists Qatar is the world’s wealthiest country, with a per capita GDP of almost $100,000.
Yet the economy is almost entirely dependent on a single primary commodity—oil—for
all if its export earnings and economic activity. Should Qatar be classified as a highly developed
country? As a developing country? GDP doesn’t given us an answer to this question.
GDP also tell us nothing about income distribution in a country. A society in which everyone
is middle class, and a society in which there is extreme poverty accompanied extreme wealth
would have equal levels of “development” in this respect. Again, Qatar is a telling example.
While the per capita GDP is almost $100,000, foreign expatriates comprise approximately
20 percent of the total population of the country. Many of these people are guest workers
from countries like the Philippines, Sri Lanka, and Nepal, who work as domestic laborers and
doing manual labor tasks for low wages. Just knowing that Qatar has a high GDP per capita
doesn’t give us a sense of how people in that country live. The Gini Index, a measure of
inequality, gives us a better sense of this. Here, we note many developing countries are
highly unequal. This map shows Gini coefficients from around the world. Note that most countries
in red—the countries with the highest levels of inequality—are located in the global
south. GDP does not generally include informal sector
activities or unpaid labor. In developing countries, where much of the productive activity
of a country takes place outside the formal economy, either illicitly through the informal
economy or as subsistence household production, this means that a large portion of economic
activity remains unaccounted for. This exclusion carries gendered implications, as the work
traditionally performed by women is disproportionally excluded from national accounts.
Similarly, subsistence farming activities, which can occupy the productive labor of a
majority of the people in many developing countries, remains excluded from the formal
system of national accounts because such labor is unpaid and the output of the labor—the
farm crops—are generally consumed in the household rather than being sold on the formal
market. As a result, the GDP for many developing countries often understates the actual level
of economic activity in those countries. Finally, GDP fails to account for externalities,
that is, for costs of production that are not embodied in the price of a good. GDP is
merely additive. When an oil well springs a leak in the Gulf of Mexico, the cost of
cleaning that spill is added to the economy of the United States. Environmental damage
is not deducted from the system of national accounts. This leads to a perverse outcome,
where natural or human-generated disasters can actually register as positives for the
economy. Importantly, externalities can be both positive
or negative. Education carries positive externalities, or broader benefits not priced into the good.
This is why the state historically paid for education, as a public good. Society benefits
when its members are educated. Higher levels of education generally mean higher wages,
which translate into higher tax bases for cities and countries. Similarly, a more educated
workforce is more competitive globally, and is thus more likely to attract investment.
As a result, education is often cited as an example of a positive externality.
Most of the time, though, we think of negative externalities, that is, of costs associated
with a particular good that are not priced into that good. The price of the pollution
that escapes my car’s tailpipe as a I drive down the street, for example, is not included
in the price of the car I drive or in the gas I purchase. This is an example of a negative
externality. And this is the real paradox. I doubt many
people would associate oil spills with progress. Yet the use of gross domestic product as the
primary measure of development runs the danger of doing precisely this, because all economic
activity increases GDP. To that end, some economists argue we should rethink GDP and
use something like the Genuine Progress Indicator (GPI) as a proxy for development instead.
Unlike GDP, the GPI removes the costs of externalities and the depletion of nonrenewable resources
from our economic activity. But according the GPI, progress has been slow. The chart
here shows that despite a steady increase in GDP in the United States over the past
fifty years, our GPI has remained unchanged. This suggests that our development has been
unsustainable, something we’ll return to later in the course.