IDP lecture set 1 (1-3)

Differences Between Developed and Developing Countries

Developed Countries:

• More advanced markets, state functions, and institutions.

• Focus on macroeconomic management, income distribution, and microeconomic interventions.

• Less emphasis on long-term structural issues.

Developing Countries:

• Incomplete or absent markets and weak public administration.

• Fragmented economic legislation and widespread poverty

• High income, faster growth but wealth inequality.

brandt line

A geographical representation of the North-South divide in economies, based on per capita GDP. Proposed by Willy Brandt in the 1980s, basis of term global south

Why Is a Specific Economic Policy Needed for Developing Countries?Challenges of Applying Traditional Economic Models:

• First-best policies (optimal neoclassical solutions) are rarely applicable.

• Second-best economic policies need to be adapted to local conditions and institutions.

• No single "optimal" policy exists; policies must be tailored to each country’s reality.

Why Is a Specific Economic Policy Needed for Developing Countries? Diversity Among Developing Countries

• Huge differences between subsistence economies and middle-income economies.

• Economic giants like China and India have institutions that differ from smaller developing economies.

• Small developing countries (populations under 1 million) are highly dependent on global markets

Why Is a Specific Economic Policy Needed for Developing Countries? Other Key Differences

• Economic structure (diversified vs. specialized economies).

• Development of economic institutions (property rights, banking regulations). • Market efficiency (goods and factor markets)

• Geographical position (proximity to international markets)

• Colonial history, geography, and culture (impacting equity, gender, and ethnic discrimination).

Economic Policies in Developing Countries: Theory vs. Reality - Key Discrepancies:

• Many neoclassical or Keynesian models do not accurately reflect conditions in developing countries.

• Heterogeneity in economic agents makes it difficult to assume a "representative agent" in these economies.

• Information asymmetry and future uncertainty are much higher than in developed countries

Economic Policies in Developing Countries: Theory vs. Reality - Common Economic Features of Developing Countries

• Dual and segmented markets (lack of unified market structures).

• Limited or non-existent credit and insurance markets.

• Multiple economic equilibria instead of a single "optimal" solution.

• Price rigidities in agricultural goods and inflation expectations are more significant

Key Economic Policy Issues in Developing Countries

Structural, institutional, and sectoral challenges

• Examples: Land reform, human capital development, taxation policies.

Impact of international flows

• Trade, capital, technology, and migration have a stronger influence on economic stability in developing countries.

The necessity of country-specific economic policy solutions

• Standard economic policies often fail due to structural and institutional differences in developing countries

the Seven Horsemen of Underdevelopment.

Countries remain underdeveloped not because of a single obstacle but because several disadvantages interact and reinforce one another. These disadvantages create a complex system of constraints that limit opportunities and make development difficult.

A country may achieve progress in one dimension while continuing to struggle in others. Sustainable development therefore requires addressing multiple constraints at the same time

The seven Horsemen of underdevelopment

1. Low levels of national per capita income (sufficient/insufficient economic growth? Beta convergence and sigma divergence)

2. Poverty, food insecurity and hunger

3. Inequality

4. Vulnerability to shocks and poverty traps

5. Lack satisfaction of basic needs (especially Health and Education)

6. Sustainability in access to and use of natural resources

7. Unsatisfactory “quality of life” in several dimensions (individual freedoms, human rights, Sen (1985)’s capabilities

beta convergence, sigma convergence low income

Beta convergence means poorer countries grow faster than richer countries, so they gradually catch up.

Sigma convergence means the overall dispersion of income across countries becomes smaller.

graphics/figures: growth history of today’s low-income countries, classified by their GNI per capita in 1962 - growth downturns (reading)

The important message is that average growth rates were not dramatically higher for poorer countries. For example, the “Low” group had mean growth of about 1.97%, while the “Upper Middle” group had 2.58%. This challenges a simple convergence story: poorer countries did not automatically grow much faster.

Low-income countries had positive growth in only 71% of years. Lower-middle-income countries had 76%. Upper-middle-income countries had 86%. High-income countries had 90%.So richer countries experienced positive growth more consistently.

The policy message is that underdevelopment is not only about low growth; it is also about frequent and damaging reversals. Countries may make gains, but crises, shocks, conflict, commodity collapses, droughts, or financial instability can erase progress.

many developing countries are not permanently incapable of growth. They can have “growth miracles.” But the problem is sustaining growth and avoiding collapses. This supports a view of development as a problem of growth episodes, volatility, institutions, and resilience, not just long-run averages.

For high-income countries, the relationship appears more clearly negative: higher volatility is associated with lower growth. For middle-income countries, the relationship is weaker. For low-income countries, the relationship may even look different, suggesting that volatility-growth dynamics are not identical across income groups.

The policy lesson is that volatility is not just a statistical inconvenience. It is a development problem. Poor countries often face external shocks, weak fiscal buffers, dependence on primary commodities, political instability, and climate exposure. Development policy therefore needs stabilization tools: social protection, countercyclical fiscal policy, diversified economies, disaster-risk management, and institutions that can manage shocks.

horseman one: 1. Low levels of national per capita income (sufficient/insufficient economic growth? Beta convergence and sigma divergence)

not simply “low GDP per capita.” It is a combination of:

low income, insufficient catch-up, volatile growth, severe downturns, weak resilience, unequal distribution, and persistent gaps between poor and rich countries.

The figures show that many poor countries can grow quickly, but they often suffer from instability and reversals. The convergence slides then show that faster growth by poorer countries does not automatically reduce global inequality. That is why international development policy must combine economic growth strategies with stabilization, resilience, human-capital investment, institutional reform, and inequality reduction.

Beta convergence

β convergence between countries is a necessary but not sufficient condition for reducing income dispersion across countries; • β convergence highlights the difference in growth rates between economies at different income levels (and is testable)

The slide shows that poorer countries do not automatically catch up with richer ones. Beta convergence is usually conditional: countries tend to converge only toward the income level made possible by their own savings, population growth, human capital, institutions, and policies. Therefore, convergence often occurs within similar “clubs” rather than across the entire world economy.

The main development-policy conclusion is that low initial income alone is not enough to generate rapid growth. Successful catch-up requires strong institutions, investment in education and health, adequate infrastructure, productive investment, and stable economic policies. Without these conditions, poorer countries may remain trapped on a lower growth path despite having greater theoretical potential to grow.

sigma convergence

However, this does not imply that income dispersion has decreased over time.

Naïve Example: • Economy A: GDP 100 10% = 110 • Economy B: GDP 1000 2% = 1020 • Difference: Pre = 900, Post = 910 •

Empirical evidence shows that income disparity between rich and poor countries tends to increase over time (polarization effect). • This is consistent with the growth theory as well (Solow model)

De Janvry and Sadoulet call the growth effect on poverty

: when average income rises, fewer people remain below a fixed poverty line.

graphic China: The 2000 distribution is wider than the earlier distributions, suggesting that while most people became richer, income gains were not identical across the population. Poverty may therefore fall while inequality rises.

China illustrates that rapid growth can generate enormous poverty reduction, but poverty reduction and inequality reduction are not the same outcome.

poverty reduction through economic growth: mean shifts, poverty line stays the same (graffic effect of growth)

the distribution effect, effect of reduced inequality

The strongest poverty reduction normally occurs when growth and improved distribution operate together. Growth increases available resources; redistribution and inclusive policies determine how widely the benefits are shared.

The average income does not necessarily change substantially, but the income distribution becomes narrower and more equal.

Income is effectively redistributed from the upper part of the distribution toward the lower part. Consequently, fewer individuals remain below the poverty line.

This is poverty reduction through lower inequality or redistribution.

De Janvry and Sadoulet therefore describe changes in poverty as the result of two components:

1. A growth component, caused by changes in mean income.

2. A distribution component, caused by changes in inequality.

The effect of growth on poverty depends strongly on the initial distribution. When inequality is high, poor households may receive only a small share of additional national income. The textbook calls attention to the quality of growth: labor-intensive and broadly shared growth is more poverty-reducing than growth concentrated in capital-intensive sectors or among high-income groups.

The seven Horsemen of underdevelopment

1. Low levels of national per capita income (sufficient/insufficient economic growth? Beta convergence and sigma divergence)

2. Poverty, food insecurity and hunger

3. Inequality

4. Vulnerability to shocks and poverty traps

5. Lack satisfaction of basic needs (especially Health and Education)

6. Sustainability in access to and use of natural resources

7. Unsatisfactory “quality of life” in several dimensions (individual freedoms, human rights, Sen (1985)’s capabilities

The World Bank’s evolving development paradigm

Development thinking gradually moved from “how can countries accumulate capital?” toward “how can societies create inclusive, institutionally sound, sustainable, and resilient improvements in wellbeing?” The textbook similarly shows how aid objectives evolved from growth and industrialization toward basic needs, adjustment, governance, ownership, and results.

MDG’s to SDGs

The transition from the MDGs to the SDGs reflects the textbook’s multidimensional approach: development problems are interconnected and cannot be solved by focusing exclusively on income poverty.

The SDGs are more comprehensive, universal, participatory, and integrated than the MDGs, but they are also much more difficult to finance, coordinate, and measure.

developing countries → universal

8 goals → 17, 3 dimensions of sustainable development

Un secreatariat → country ownership

north-south finance → global partnership

African Union’s Agenda 2063: The Africa We Want

The seven aspirations include:

1. Inclusive growth and sustainable development.

2. Continental integration and political unity.

3. Good governance, democracy, human rights, and rule of law.

4. Peace and security.

5. Strong cultural identity and shared values.

6. People-driven development, particularly involving women and youth.

7. A strong and influential role for Africa internationally.

country and regional ownership.

Core conclusion: Agenda 2063 presents development as an African-owned process combining economic transformation, regional integration, institutions, culture, peace, and human capabilities

SDG 1

No Poverty

Ending poverty requires more than raising average income. It requires social protection, resilience, access to services, and measures addressing the specific risks faced by different households.

Global poverty reduction has been highly uneven. Its geographical center has shifted toward regions where poverty interacts with rapid population growth, weak infrastructure, conflict, limited state capacity, and climate vulnerability.

Before the pandemic, the number of people living below the extreme-poverty line was expected to continue decreasing. The pandemic interrupted this trend and generated the first significant global increase in extreme poverty in decades.But before covid already signs of off track

SDG 2

End Hunger, food security, and agriculture

The child-nutrition figures distinguish three conditions:

Stunting

Low height for age, usually reflecting long-term or chronic malnutrition.

Wasting

Low weight for height, usually reflecting acute malnutrition.

Overweight

Excessive weight, which can coexist with nutritional deficiencies.

This coexistence is known as the multiple burden of malnutrition.

COVID-19 intensified global hunger and malnutrition:

The pandemic then interacted with several other shocks:

• Conflict

• Climate change

• Locust outbreaks

• Market and transport disruption

This illustrates a compound-shock problem: households and food systems may be able to manage one shock but fail when several shocks occur together.

SDGs progress

The substantial red and pink sections demonstrate that many targets are stagnating or moving backward.

Environmental and institutional goals appear particularly difficult, but weak progress is also visible for poverty, hunger, inequality, and basic services.

The SDG challenge is no longer mainly defining development objectives. It is creating institutions, finance, incentives, and accountability systems capable of delivering them

fourth horseman of underdevelopment: 4. Vulnerability to shocks and poverty traps

• Poverty is an ex-post condition: the household is poor now.

• Vulnerability is an ex-ante condition: the household has a high probability of being poor in the future.

household income 1: 120, 60 when raining; household income 2: 90 always

• Risk management: actions taken before a shock, such as diversification, savings, insurance, or irrigation.

• Risk coping: actions taken after a shock, such as selling livestock, reducing meals, borrowing, or withdrawing children from school.

Coping strategies may protect present consumption while damaging future earning capacity.

Core conclusion: Risk can reduce welfare even before poverty occurs. It can also keep households poor by discouraging productive investment.

fourth horsemanTransitory, chronic, and persistent poverty

Different poverty dynamics require different policies. Temporary poverty requires risk management and safety nets; chronic and persistent poverty require asset creation, human-capital investment, and structural economic opportunities

• Never poor

Income remains above the poverty line.

• Transitory poor

Average income is above the poverty line, but temporary shocks push the household below it. These households mainly require insurance, stabilization, and temporary assistance.

• Chronic poor

Average income is below the poverty line, although the household occasionally moves above it. These households require structural interventions in addition to protection.

• Persistent poor

Income remains below the poverty line throughout the period.They may lack land, education, health, productive assets, employment opportunities, or access to markets.

The Jalan and Ravallion study of rural China found:

• Never poor: 41%

• Transitory poor: 36%

• Chronic poor: 18%

• Persistent poor: 5%

Is a climate-induced poverty trap plausible?

A temporary shock becomes a poverty trap when it produces permanent or long-lasting effects.

A possible mechanism is:

Climate shock→income and asset loss→lower nutrition, health, schooling, and investment→lower future productivity→persistent poverty\text{Climate shock} \rightarrow \text{income and asset loss} \rightarrow \text{lower nutrition, health, schooling, and investment} \rightarrow \text{lower future productivity} \rightarrow \text{persistent poverty}Climate shock→income and asset loss→lower nutrition, health, schooling, and investment→lower future productivity→persistent poverty

For example, a drought may force a household to sell livestock. Without livestock, the household earns less after rainfall returns. Lower income then prevents it from rebuilding its herd.

A poverty trap therefore involves more than a temporary fall in income. It requires a mechanism that prevents recovery.

Poor countries are generally found to be more vulnerable to weather variability

2 distinct strands of research:

1. The development literature on poverty traps (investigating poverty persistence and divergence); growth

2. The emerging New Climate Economy Literature that studies short-run elasticities of weather shocks;

Core conclusion: Climate change can create or reinforce poverty traps when shocks destroy productive assets and human capital faster than households can recover. Climate policy is therefore also poverty, agricultural, health, education, and social-protection policy

De Janvry and Sadoulet’s multidimensional development framework.

The argument develops in six steps:

1. Growth can reduce poverty, as China demonstrates.

2. Distribution matters, because the same growth rate can produce very different poverty outcomes.

3. Development extends beyond income to health, education, institutions, sustainability, freedoms, and resilience.

4. The SDGs formalize this multidimensional approach, but implementation remains far behind ambition.

5. Poverty and hunger are dynamic, affected by conflict, pandemics, food systems, social protection, and agricultural conditions.

6. Risk and climate shocks can create persistent poverty, especially when households lose assets or human capital.