Introduction to International Economics II

Characteristics of Developed Economies
As indicated earlier, income is not the only criterion to consider a country as developed. There is indeed some important difference between economic growth and development. An increase in income is an indication of economic growth. Economic development, beside growth, has some qualitative dimensions too, such as the distribution of income, standard of living, composition of output, characteristics of working conditions and over all improvement in economic welfare.

Kindle berger and Herrick observe: Economic development is generally defined to include improvements in material welfare, especially for persons with the lowest incomes, the eradication of mass poverty with its correlates of illiteracy and disease and early death, changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agricultural towards industrial activities, the organisation of the economy in such a way that productive employment is general among the working age population rather than the situation of a previliged minority and the correspondingly greater participation of broadly based groups in making decisions about the directions, economic and otherwise, in which they should move to improve their welfare.

Developed economies are characterised by high per capita income, well developed social infrastructure and widespread use of modern technology and amenities. Amartya Sen has added certain human rights to the dimensions of development.

Characteristics of Developing Economies
Low income is just an indication of deprivation. It prevents access to even basic necessities, not only better and modern amenities. Further, in developing economies the inequality in the distribution of income is very high and, as a result, a large proportion of the population lives in abject poverty. Although many countries have achieved considerable reduction in poverty, the incidence of poverty is still very high in many countries. And this, poverty, has several dimensions and manifestations.

One route for investigating the cause of poverty is to examine the dimensions highlighted by poor people which include the following:
* Lack of income and assets to attain basic necessities.
* Sense of voicelessness and powerlessness in the institutions of state and society.
* Vulnerability to adverse shocks, linked to an inability to cope with them.

To understand the determinants of poverty in all its dimensions, it helps to think in terms of people’s assets, the return to (or productivity of) these assets and the volatility of returns. These assets are of several kinds:
* Human assets, such as the capacity for basic labour, skills and good health.
* Natural assets, such as land.
* Physical assets, such as access to infrastructure.
* Financial assets, such as savings and access to credit.
* Social assets, such as networks of contacts and reciprocal obligations that can be called on in time of need, and political influence over resources.

The returns to these assets depend on access to market and all the global, national and local influences on returns in these market. But returns depend not just on the behaviour of markets, but also on the performance of institutions of state and society.

Poor people consistently emphasize the centrality of work to improve their lives. A country’s overall wealth is an important influence on this: as countries grows richer, so on average do poor people in those countries, with the main mechanism being better-paid work.

With economic growth, income poverty falls, with economic contraction, income poverty rises. While economic growth is systematically associated with the poverty reduction, the rate at which growth translates into lower poverty depends on the initial level of inequality in the distribution of income and how that distribution changes over time. Growth — and its effectiveness in reducing poverty — also depends on sound and stable governance. So confronting socio-economic inequalities and building sound institutions can be important both for providing a socially sustainable basis for overall growth and for ensuring that poor people gain substantially from that growth.

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