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18.1: The Nature and Challenge of Economic Development

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  • Learning Objectives

    1. Define a developing country and discuss how incomes are compared across countries.
    2. State and explain the general characteristics of low-income countries.
    3. Discuss what is meant by economic development.

    Throughout most of history, poverty has been the human condition. For most people life was, in the words of 17th-century English philosopher Thomas Hobbes, “solitary, poor, nasty, brutish, and short.” Only within the past 200 years have a handful or so of countries been able to break the chains of economic deprivation and poverty.

    Consider these facts (United Nations Development Program, 2007):

    • Over a third of the world’s people live in countries in which total per capita income in 2005 was less than $610 per year; 85% live in countries in which total per capita income in 2005 was $2,808 or less. Adjusting for purchasing power, the per capita income levels would be $2,531 and $7,416, respectively. The latter numbers compare to per capita income in high-income countries of over $30,000.
    • Babies born in poor countries are 16 times more likely to die in their first five years than are babies born in rich countries.
    • About a quarter of the populations of low-income countries is undernourished.
    • About 40% (over 50% for women) of the people 15 years old and older in low-income countries are illiterate.
    • Roughly one-fourth of the people in low-income countries do not have access to safe drinking water.

    Clearly, the high standards of living enjoyed by people in the world’s developed economies are the global exception, not the rule. This chapter looks at the problem of improving the standard of living in poor countries.

    Rich and Poor Nations

    The World Bank, an international organization designed to support economic development by providing financial assistance, advice, and other resources to poor countries, classifies over 200 countries according to their levels of per capita gross national income. The categories in its 2008 report, as shown in Table 19.1 “World Incomes, Selected Countries”, were as follows:

    • Low-income countries: These countries had per capita incomes of $935 or less in 2007. There were 49 countries in this category. About 20% of the world’s total population of about 6.5 billion people lived in low-income countries in 2007.
    • Middle-income countries: There were 95 countries with per capita incomes of more than $936 but less than $11,455. Middle-income countries are further subdivided into lower middle-income and upper middle-income countries. Roughly two-thirds of the world’s population lived in middle-income countries in 2007. We should note that the percentage of the world’s population living in middle-income countries increased dramatically (and the percentage living in low-income countries decreased dramatically) when China and India moved from being low-income to middle-income countries.
    • High-income countries: There were 65 nations with per capita incomes of $11,456 or more. Just 16% of the world’s total population lived in high-income countries in 2007.

    Countries in the low- and middle-income categories are often called developing countries. A developing country is thus a country that is not among the high-income nations of the world (The World Development Report, 2006). Developing countries are sometimes referred to as third-world countries.

    How does the World Bank compare incomes across countries? The World Bank converts gross national income (GNI) figures to dollars in two ways. One is to take GNI in a local currency and convert using the exchange rate, averaged over a three-year period in order to smooth out the effects of currency fluctuations. This type of comparison can, however, be misleading. A country could have a relatively high standard of living but, for a variety of reasons, a low exchange rate. The per capita GNI figure would be quite low; the country would appear to be poorer than it is.

    A better approach to comparing incomes converts currencies to dollars on the basis of purchasing power. This measure is reported in what are called international dollars. An international dollar has the same purchasing power as does a U.S. dollar in the United States. This is reported in the column labeled “2007 International $” in Table 19.1 “World Incomes, Selected Countries”.

    Table 19.1 World Incomes, Selected Countries

    Gross National Income per Capita, 2007
    Low-income countries Middle-income countries High-income countries
    Country 2007 $ 2007 Int. $ Country 2007 $ 2007 Int. $ Country 2007 $ 2007 Int. $
    Burundi 110 330 India 950 2,740 Czech Repub. 14,450 22,020
    Sierra Leone 260 660 China 2,360 5,370 Saudi Arabia 15,440 22,910
    Mozambique 320 690 Thailand 3,400 7,880 Israel 21,900 25,930
    Bangladesh 470 1,340 Iran 3,470 10,800 Greece 29,630 32,330
    Haiti 560 1,150 Jamaica 3,710 6,210 Japan 37,670 34,600
    Uzbekistan 730 2,430 Costa Rica 5,560 10,700 France 38,500 33,600
    Vietnam 790 2,550 Brazil 5,910 9,370 Canada 39,420 35,310
    Zambia 800 1,220 Argentina 6,050 12,990 United States 46,040 45,850
    Pakistan 870 2,570 Russian Fed. 7,560 14,400 Ireland 48,140 37,090
    Nigeria 930 1,770 Turkey 8,020 12,350 Norway 76,450 53,320
    Average 578 1,494 Average 2,872 5,952 Average 37,566 36,100
    Ave., lower middle 1,887 4,543
    Ave., upper middle 6,987 11,868

    Source: World Development Indicators database, World Bank, revised October 17, 2008.

    The international dollar estimates typically show higher incomes than estimates based on an exchange rate conversion. For example, in 2007 Mozambique’s per capita GNI, based on exchange rates, was $320. Its per capita GNI based the international dollars was $690.

    Ranking of countries, both rich and poor, by per capita GNI differs depending on the measure used. According to the per capita GNI figures in Table 19.1 “World Incomes, Selected Countries”, which convert data in domestic currencies to dollars using exchange rates, the United States ranked fifteenth of all countries in 2007. Using the international dollars method, its rank is tenth. China is ranked at 132 when per capita GNI is based on the exchange rate conversion method but rises to 122 based on the international dollar method.

    Characteristics of Low-Income Countries

    Low incomes are often associated with other characteristics: severe inequality, poor health care and education, high unemployment, heavy reliance on agriculture, and rapid population growth. We will examine most of these problems in this section. Population growth in low-income nations is examined later in the chapter.


    Not only are incomes in low-income countries quite low; income distribution is often highly unequal. Poverty is far more prevalent than per capita numbers suggest, as illustrated by Lorenz curves, introduced in the chapter on inequality, that show the cumulative shares of income received by individuals or groups.

    Consider Costa Rica and Panama, two Latin American countries with roughly equivalent levels of per capita GNI (Costa Rica’s was $5,560 and Panama’s $5,510 in 2007). Panama’s income distribution is comparatively less equal, while Costa Rica’s is far more equal. Figure 19.1 “Poverty and the Distribution of Income: Costa Rica versus Panama” compares the 2003 Lorenz curves for Costa Rica and Panama, the most recent year for which the information was available. The 20% of the households with the lowest incomes in Costa Rica had twice as large a share of their country’s total income as did the bottom 20% of households in Panama. That means Costa Rica’s poor were about twice as well off, in material terms, as Panama’s poor.

    Figure 19.1 Poverty and the Distribution of Income: Costa Rica versus Panama

    Costa Rica had about the same per capita GNI as Panama in 2003, but Panama’s income distribution was far more unequal. Panama’s poor had much lower living standards than Costa Rica’s poor, as suggested by the Lorenz curves for the two nations.

    Source: World Development Indicators Online (revised October 17, 2008).

    In general, the greater the degree of inequality, the more desperate is the condition of people at the bottom of an income distribution. Given the high degree of inequality in many low-income countries, it is very important to look at income distributions when we compare living standards in different countries.

    Health and Education

    Poor nations are typically characterized by low levels of human capital. Where health-care facilities are inadequate, that human capital can be reduced further by disease. Where educational resources are poor, there will be little progress in improving human capital.

    One indicator of poor health care appears on the supply side. Low-income countries have fewer doctors, relative to their populations, than high-income countries. For example, the UN estimates that in 2006 about 60% of mothers giving birth in developing countries had access to a skilled health-care provider (doctor, nurse, or midwife). While that is up from 47% in 1990, the lack of access to a health-care provider may explain much of the difference in maternal death rates between developed and developing countries: about nine maternal deaths per 100,000 live births in developed countries compared to about 450 per 100,000 in developing countries (United Nations, 2008).

    We can also see the results of poor health care in statistics on health. Among the world’s developing countries, the infant mortality rate, which reports deaths in the first year of life, was 57 per 1,000 live births in 2005. There were six infant deaths per 1,000 live births among the high-income countries that year (United Nations Development Program, 2007).

    Another health issue facing the world’s low-income countries is malnutrition. Malnutrition rates in all developing countries in the 2002 to 2004 period averaged 17%, 35% in the least developed countries.

    Still another issue is the spread of HIV/AIDS. Here there is some progress. The number of people newly infected declined from 3 million in 2001 to 2.7 million in 2005. Antiretroviral treatments are also leading to a reduction in deaths from 2.2 million in 2005 to 2 million in 2007. Longer survival means that the number of people living with HIV (from just under 30 million in 2001 to about 33 million in 2007) is rising and most of the people living with HIV are in Sub-Saharan Africa (United Nations, 2008).

    Education in poor and middle-income nations is improving. In 1991, about 80% of children in developing countries were enrolled in primary schools. In 2005, about 85% were. The comparable numbers in developed countries are about 95%. Enrollment rates taper off for high school (about 53% in 2005 in developing countries compared to 91% in developed countries) (United Nations Development Program, 2007).


    Unemployment is pervasive in low-income nations. These nations, already faced with low levels of potential output, are producing well below their potential. Unemployment rates in low-income countries vary widely, reaching as high as 15% or more in some countries. If we count discouraged workers, people who have given up looking for work but who would take it if it were available, and people who work less than full time, not by choice but because more work is unavailable, then unemployment in low-income countries soars—often to more than 30%.

    Migration within low-income countries often contributes to unemployment in urban areas. Factors such as ethnic violence, poverty, and drought often force people to move from rural areas to cities, where unemployment rates are already high.

    Reliance on Agriculture

    One of the dominant characteristics of poor nations is the concentration of employment in agriculture. Another is the very low productivity of that employment. Agriculture in low-income countries often employs a majority of the population but produces less than one-third of GDP.

    One of the primary forces behind income growth in wealthy countries has been the shift of labor out of agriculture and into more productive sectors such as manufacturing. This shift is also occurring in low-income nations but has lagged far behind.

    The solution to these problems lies in economic development, to which we turn next.