between countries

Economic Development: Between Countries (Cambridge IGCSE/A‑Level 11.3)

1. What is Economic Development?

• Definition: The process by which a country improves the economic, social and institutional well‑being of its population.
• Economic growth vs. development:
  • Growth – increase in real GDP (or GNI) over time.
  • Development – growth plus improvements in living standards, health, education, equality and environmental sustainability.

2. Classification of Economies (Syllabus 11.3.1 & 11.3.2)

The World Bank and United Nations classify economies by GNI per capita (PPP). PPP adjusts for differences in price levels, allowing a more realistic comparison of the real purchasing power of incomes across countries.

Income Category	2023 GNI per capita (PPP, US$)	Typical characteristics
Low‑income	< 4,255	Large share of agriculture, limited industry, high poverty.
Lower‑middle‑income	4,256 – 13,205	Rapid structural change, expanding manufacturing, moderate poverty.
Upper‑middle‑income	13,206 – 41,095	Diversified economies, higher human‑capital, growing services sector.
High‑income	> 41,095	Advanced technology, dominant services, low poverty.

Example countries (2023):

Country	GNI per capita (PPP, US$)	Income Category	Development Status
United Kingdom	46,300	High‑income	Developed
Brazil	15,900	Upper‑middle‑income	Developing (Emerging market)
India	7,500	Lower‑middle‑income	Developing
Kenya	4,200	Low‑income (borderline lower‑middle)	Developing

3. Measuring Development – Key Indicators (Syllabus 11.3.3)

Cambridge expects you to name, explain and, where appropriate, calculate the following indicators.

1. Real GDP per capita (US$) – average income after adjusting for inflation; reflects material well‑being.
2. GNI per capita (PPP) – adds net primary income from abroad and corrects for price‑level differences; the preferred cross‑country measure.
3. Human Development Index (HDI) – geometric mean of three equally‑weighted components:
   • Life expectancy at birth
   • Mean years of schooling (MYS) and Expected years of schooling (EYS)
   • GNI per capita (PPP)

   Formula:
   HDI = (LEI × EI × GNIindex)1/3 where each sub‑index is normalised between 0 and 1.

4. Multidimensional Poverty Index (MPI) – combines health, education and living‑standard deprivations; useful for non‑monetary poverty assessment.
5. Measure of Economic Welfare (MEW) – adjusts GDP for leisure time, environmental damage and income distribution.
6. Poverty head‑count ratio – % of population living below a defined poverty line (e.g., $5.50 a day PPP).
7. Literacy rate – % of people aged 15+ who can read and write a simple statement.
8. School enrolment ratios – Gross enrolment rates for primary, secondary and tertiary education.
9. Life expectancy at birth – average years a newborn is expected to live.
10. Environmental sustainability indicators – CO₂ emissions per capita, renewable‑energy share, ecological footprint.

4. Illustrative Comparative Data (2022‑23 estimates)

Country	Real GDP per capita (US$)	HDI (0–1)	Poverty (% of pop.)	Literacy Rate (%)	Life Expectancy (years)
Rounded figures
United Kingdom	45,000	0.932	0.5	99	81.2
Brazil	9,800	0.765	4.9	93	75.0
India	2,200	0.645	21.9	74	69.7
Kenya	1,800	0.601	33.5	78	66.5

5. Theoretical Explanations for Differences in Development (Syllabus 11.3.4)

Use the following framework to answer “Why do countries differ?” – give at least three factors, explain the mechanism, and provide a real‑world example.

1. Resource endowment
   • Natural resources can provide a rapid boost to income.
   • Without strong institutions, the “resource curse” may lead to rent‑seeking and slower development (e.g., Nigeria’s oil wealth vs. weak governance).
2. Human capital
   • Education and health raise labour productivity.
   • Mincer earnings function:
     ln w = α + β S + γ X + ε where S = years of schooling, X = experience.
   • Example: South Korea’s massive investment in schooling and health from the 1960s onward.
3. Technology & innovation
   • Diffusion of ideas raises total factor productivity (TFP).
   • Cobb‑Douglas production function:
     Y = A K^α L^{1‑α} where A captures technology.
   • Example: Japan’s post‑war technology adoption and export‑led growth.
4. Institutions
   • Secure property rights, rule of law, low corruption, efficient bureaucracy encourage investment.
   • Empirical illustration: Singapore’s strong legal framework and rapid development.
5. Geography & climate
   • Influences disease burden, agricultural potential, transport costs and access to sea routes.
   • Example: Landlocked, tropical Ethiopia faces higher costs than coastal, temperate Chile.
6. Trade openness
   • Access to larger markets fosters export‑led growth, technology transfer and economies of scale.
   • Example: Vietnam’s liberalisation since the 1990s.
7. Foreign Direct Investment (FDI)
   • Provides capital, managerial expertise and spill‑over effects.
   • Example: China’s special economic zones attracted massive FDI in the 1980s‑90s.
8. Cultural & social factors
   • Trust, social capital, attitudes to entrepreneurship, gender norms affect productivity.
   • Example: High social trust in Nordic countries correlates with innovative firms.
9. Solow growth model (conditional convergence framework)
   • Steady‑state output per worker depends on savings rate, population growth, human capital and technology.
   • Helps explain why poorer countries may or may not catch up, depending on these structural variables.

6. Development Strategies (Syllabus 11.3.5)

Strategy	Core idea	Typical policies	Strengths	Weaknesses / Risks
Import Substitution Industrialisation (ISI)	Replace imports with domestically produced goods.	High tariffs, import quotas, state‑owned enterprises, protective subsidies.	Creates an initial industrial base; reduces foreign‑exchange dependence.	Often leads to inefficiency, limited export markets, fiscal deficits; many Latin‑American cases (e.g., Brazil 1950‑80) showed stagnation.
Export‑Led Growth	Specialise in goods where a comparative advantage exists and sell abroad.	Trade liberalisation, de‑valuation, export subsidies, logistics investment.	Higher productivity, foreign‑exchange earnings, technology transfer.	Vulnerability to external demand shocks; may increase income inequality (e.g., East‑Asian “miracle” economies).
Structural Transformation	Shift labour from low‑productivity agriculture to higher‑productivity manufacturing and services.	Rural‑urban migration policies, skill‑development programmes, infrastructure.	Boosts overall productivity; creates urban employment.	Urban congestion, environmental pressures, short‑run agricultural decline.
Human‑Capital‑Focused Policies	Invest in health, education and nutrition to raise labour quality.	Universal primary education, free primary health care, school‑feeding schemes.	Long‑run growth acceleration; reduces poverty.	High fiscal cost; benefits realised over a longer horizon.
Institution‑Building	Strengthen legal and regulatory frameworks.	Anti‑corruption agencies, land‑reform, judicial independence.	Improves investment climate; reduces rent‑seeking.	Reforms can be politically costly and take time to bear fruit.
Aid‑Led Development	Use external assistance to fill financing gaps, build capacity and reduce poverty.	Official Development Assistance (ODA), debt relief, technical assistance programmes.	Can accelerate infrastructure development; provides a safety net for fragile states.	Risk of aid dependence, poor coordination, “Dutch disease” if aid inflows are large.
Sustainable‑Development‑Oriented Strategies	Integrate environmental and social goals with economic growth (green & inclusive growth).	Carbon pricing, renewable‑energy subsidies, universal health coverage, rural micro‑finance.	Addresses climate change, reduces inequality, improves long‑term resilience.	Higher short‑run costs; requires strong institutions and policy coherence.

7. Convergence (Syllabus 11.3.6)

• Absolute convergence – In the Solow model, all economies tend towards the same steady‑state per‑capita income; predicts faster growth for poorer countries.
• Conditional convergence – Each country converges to its own steady‑state, determined by structural variables (savings, population growth, human capital, institutions).

Beta‑convergence regression (empirical test):

$$\Delta \ln y_{i,t} = \alpha - \beta \ln y_{i,t-1} + \gamma X_{i,t-1} + \varepsilon_{i,t}$$

• $\Delta \ln y_{i,t}$ = growth rate of real GDP per capita for country $i$.
• $\beta > 0$ indicates convergence (higher initial income → slower subsequent growth).
• $X$ = vector of controls (e.g., investment/GDP, human‑capital index, institutional quality).
• Interpretation: a significant positive $\beta$ together with significant $\gamma$ coefficients supports conditional convergence.

Illustrative graph (description for exam sketches): Plot two economies – a low‑income country (steeper upward slope) and a high‑income country (flatter slope) on a log‑GDP per capita vs. time axis, showing the low‑income line catching up.

8. Inequality and the Kuznets Curve (Syllabus 11.3.7)

The Kuznets hypothesis proposes an inverted‑U relationship between income inequality (Gini coefficient) and per‑capita income.

• Early stage – Structural transformation moves labour from low‑productivity agriculture to higher‑productivity manufacturing; inequality rises.
• Later stage – Wider education, stronger institutions and redistribution policies reduce inequality.

Diagram to draw: Gini (vertical) vs. real GDP per capita (horizontal) with a clear inverted‑U shape.

Empirical debate – Recent studies show mixed evidence; some countries (e.g., China) have risen in income without the expected fall in inequality, while others (e.g., Brazil) exhibit a flatter curve. This provides material for AO3 evaluation.

Policy implication – During the rising‑inequality phase governments may need progressive taxation, social safety nets, or minimum‑wage legislation.

9. Sustainable Development (Syllabus 11.3.8)

Three pillars – economic, social and environmental – must be pursued simultaneously.

Pillar	Goal	Concrete policy example
Economic	Inclusive, sustained growth	Micro‑finance programmes for small‑holder farmers (e.g., Grameen Bank)
Social	Improved health & education outcomes	Universal health coverage with free primary care
Environmental	Decoupling growth from carbon emissions	Carbon tax combined with subsidies for solar and wind power

These policies align with the United Nations Sustainable Development Goals (SDGs) – a universal framework of 17 goals covering poverty, education, climate action, etc.

10. Summary Checklist for Exam Answers (Syllabus 11.3.9)

1. Define economic development and distinguish it from economic growth.
2. State and briefly explain at least three quantitative indicators (e.g., GNI‑PPP, HDI – include the geometric‑mean formula, MPI, MEW).
3. Classify the four example countries into World Bank income categories; comment on their development status.
4. Discuss the main reasons for differences in development – choose at least three factors, give the underlying mechanism and a real‑world example (e.g., resource curse in Nigeria, human‑capital investment in South Korea, institutional quality in Singapore).
5. Compare two development strategies (e.g., ISI vs export‑led growth). For each, outline core idea, typical policies, strengths and weaknesses; comment on their likely effectiveness in low‑ vs middle‑income contexts.
6. Explain convergence:
   • Define absolute and conditional convergence.
   • Show the beta‑convergence regression and interpret the sign of β and the role of control variables.
   • Sketch a simple convergence graph (low‑income catch‑up).
7. Describe the Kuznets curve, sketch the inverted‑U diagram, and evaluate its relevance using recent empirical evidence.
8. Outline the three pillars of sustainable development and give one concrete policy for each (economic, social, environmental).
9. Remember to:
   • Use appropriate diagrams (Kuznets, convergence, SDG wheel, etc.).
   • Include quantitative data where possible to support arguments.
   • Structure answers with clear headings, definitions, explanations, examples and evaluation (AO1‑AO3).