July 18, 2011Doug Hadden
Carlos Lipari, FreeBalance Washington
This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.
There are different indicators that can be used to determine the level of development of one country. The most famous one, produced by the United Nations is the Human Development Index (HGI). This indicator is based on the level of income per capita, life expectancy and education levels of a country. The HDI ranks countries dividing them in four large groups: very high, high, medium and low developed countries.
The idea behind the HDI ranking is that development does not depend exclusively in one variable such as income but in a set of variables that cover different dimensions of a person’s life, such as life expectancy and education. By using income, education and life expectancy as determinants of development, the HDI might be accused of been over simplistic since it does not include other potential relevant variables such as the income distribution level in an economy or, for instance, aspects such as its environmental protection policies. In any case, it is hard to reach a consensual definition about the importance that additional variables should have when quantifying something as qualitative as development and the process of gathering additional reliable information, itself, could be hard to do in developing nations. In addition to this, more variables would not necessary translate into a better model or ranking since the current HDI variables end up absorbing much of the impact that other development variables might have. Environmental policies might, for instance, influence life expectancy and a higher level of education tends to be correlated with better environmental policies. Using life expectancy is, therefore, a way of reflecting many other variables that do not, necessarily, need to be in the model.
One important thing to have in mind is that factors that affect development tend to affect growth and vice-versa. Therefore, when analyzing variables that determine the development level of a given developing nation we should pay special attention to the ones that are traditionally used as fundamentals of growth. According to economic theory (Solow-Swan model), those factors are the stock of capital of an economy, the amount of human capital and the quality of the technology available.
By stock of capital we refer to aspects such as the amount and type of the machinery available, existing land, mineral resources, infrastructures or financial resources at the disposal of the economy. By human capital we point out to issues such as the amount labor available but also the level of education and skills that it has. Finally, technology should be interpreted as the variable that will leverage both productivities of the human and stock of capital available.
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