Until recently, this process was largely confined to Asia, with Japan leading the way from the early 1960s, to be followed by the likes of South Korea, Taiwan, Hong Kong, Singapore and Malaysia during the 1970s and 1980s, and more recently by China, India and Vietnam. In the past five years, emerging economies in other parts of the world have also enjoyed rapid growth, often on the back of strong commodity prices. These include Russia, the Baltic states, Turkey, the countries of the Arabian peninsula, and some countries in Latin America, notably Argentina and Venezuela.

Table 19.1: Structure of global economic activity (population and gross national income in 2006)

Note: These figures are based on information collected by the World Bank for 209 economies. Very small territories with populations of less than 30,000 are excluded, as are other countries, such as Iraq, North Korea and Somalia, where the political situation or the lack of a functioning government makes data collection impossible. For some countries, especially low-income and small ones, any data is nothing more than an informed estimate. For this reason the figures quoted for gross national income and gross national income per head have been rounded to avoid spurious accuracy.

The 149 countries, which are classified by the World Bank as “middle” or “low” income, between them are home to over 80% of the world’s population, but contribute under a quarter of its economic activity. The countries of sub-Sahara Africa and South Asia account for a mere 4% of global gross national income, spread among a third of the total population.

Making size comparisons is rendered difficult by the problem of purchasing parities. The equivalent of one US dollar will buy much more in a developing country than it will in a developed country. In terms of purchasing power, the national incomes of poorer countries are therefore usually under-stated, relative to those of richer ones.

A fairer comparison of relative size can be made using Purchasing Power Parities (PPPs). These are constructed based upon survey evidence about the prices for a standard "basket” of goods in different countries. Because of quality differences, the non-availability of particular goods in some countries, and the frequent absence of proper market price mechanisms, especially in emerging economies, PPP figures should only be regarded as approximations. The numbers themselves are purely notional, and only have relevance as a means of making comparisons.

Table 19.2: The world’s largest 20 economies(ranked by nominal US dollars $)

Table 19.3: The largest 20 economies(ranked by gross national income expressed as PPPs)

A straight comparison between countries using gross domestic product or similar measures is often highly misleading. Sharp fluctuations in exchange rates can sometimes occur, as in the case of the slump in the value of many Asian currencies during the crisis of 1997 and the weakness of the euro between 1999 and 2002.

While movements in the exchange rate may be a rational reflection of the perceived strengths or weaknesses of the traded goods sector in a particular country, they have little connection with the bulk of economic activity which is not traded internationally.

Because of the fall in the value of the euro in the years after its launch relative to the US dollar, it would seem that European countries became relatively poorer.

This was not necessarily the case, just as Americans are not necessarily becoming any less affluent because the dollar has fallen against other major currencies in the past few years. In order to mitigate this problem, the data shown in Table 19.2 converts figures into dollars using the average exchange rate over a five-year period.

In terms of gross domestic product adjusted for purchasing power parities (Table 19.3) the US still comes out as the largest, but China ranks as the second biggest with a GDP about five times that of the UK. At its present spectacular rate of progress China will overtake the US in PPP terms by about 2010. On a straightforward dollar basis, China ranks as only the fourth largest economy, having recently overtaken the UK.

On a PPP basis, the UK ranks as the world’s sixth largest economy, compared with its fifth place on a straight dollar basis, with the PPP adjustment causing it to be overtaken by India.

PPPs also allow a fairer comparison of living standards. The per capita figures for developing countries are scaled up, while those for countries where price levels are very high, such as Japan and Scandinavia, are scaled back.

On a PPP basis, however, gross national income per head in the US is still nine times higher than in China, and some 40% ahead of the major economies of Western Europe.

The World Bank classifies economies in terms of gross national income (GNI) per head into three broad income groups: high, middle and low.

Using data for 2006, there were 60 ‘High Income’ economies, all of them having a GNI per head of more than US$11,115. There were 96 economies classified as ‘Middle Income’ (with a GNI per head of between $906 and $11,115), and 53 as ‘Low Income’ (with a GNI per head of $905 or less).

It is not only industrialised economies which make it into the high income category. It also includes a number of countries whose economies are not fully developed in the sense that they are heavily reliant on just a few activities.

These countries are generally small in size and include city states, such as Singapore and Hong Kong, oil-rich countries like Kuwait, Qatar and Brunei, and tax havens, such as the Cayman Islands, Bermuda, Liechtenstein and Monaco.

Korea and Taiwan are the only economies with populations of more than 20 million which have made the transition in recent years from middle to high income status through a process of broad-based industrialisation.

This suggests that in larger countries either the process of industrialisation has still not delivered a quantum improvement in living standards to the entire population, or the starting-point was very low (as in the case of India, whose GNI per head in 2006 was still just $820).

In many cases, these countries still exhibit the characteristics of a “dual” economy, with a market-based developed economy co-existing alongside a large residue of subsistence agriculture.

It is the classic situation of six-lane motorways, smart hotels and office blocks, and spacious air-conditioned malls full of designer label shops, in close proximity to shanty towns and abject poverty.

After more than a century of industrialisation no country from South America yet makes it into the World Bank’s high income category.

All too often the process of development has been interrupted by political instability and economic crises, with the region being home to some of history’s most spectacular economic crises, the most recent being the meltdown of the Argentine economy at the end of 2001.

In terms of gross national income per head, even when measured in terms of purchasing power parities, Argentina now ranks 64th, and Brazil only 86th. Argentina is often used by economists to illustrate the concept of ‘arrested development’, a term applied to those economies whose development process has stalled.

Right at the bottom of the World Bank’s GNI per head rankings, are ten countries from Africa. They have a GNI per head which ranges from $260 in Niger, right down to just $100 in Burundi.

In most cases, these countries have a history of civil strife and poor governance. In the cases of Somalia and Zimbabwe, the situation is so bad that any attempt to collect reliable statistics is pointless.

The descriptions “developed” or “advanced” and “developing” or ‘emerging’ are frequently used, but have no clear meaning.

The World Bank refers to low and middle income economies as developing countries, but stresses that this term does not imply that all of them are undergoing the same development experience, or that all the high income countries have achieved a complete or desirable state of economic development.

Other international organisations, such as the United Nations and the International Monetary Fund (IMF), adopt a different approach. They define advanced economies to be all those in western Europe, plus the US, Canada, Japan, Australia, New Zealand, Israel, Cyprus, and the four Asian newly-industrialised economies (NICs), namely Hong Kong, South Korea, Singapore and Taiwan.

In any case, while GNI per head is an important measure of a country’s prosperity, even allowing for the issue of purchasing power discussed above, it provides an incomplete picture of development or of quality of life.

As countries develop, their industrial structures alter, with capital-intensive activities replacing labour-intensive ones, and with higher living standards reflected in the greater importance of service industries.

Table 19.4: Structure of GDP by broad industry sector (value added at % of gross domestic product)

The key characteristic of the larger industrialised economies in relation to all others is that they have a substantial industrial sector, based largely on manufacturing industries, as well as a large services sector.

The tax haven economies have a big services sector, but little else, while the resource-rich economies have a large industrial sector, but one which is dominated by mineral extraction.

Poorer economies, in general, still have large agricultural sectors, and relatively small contributions from manufacturing and services. The varying economic structures of the world’s major economies and World Bank groupings are detailed in table 19.4.

In the UK, for example, agriculture contributed only 1% to GDP in 2005, with manufacturing accounting for 15% and services for 73%. In the US, manufacturing accounted for only 14% of the economy, while services contributed 77%.

The last 15 years has seen marked shifts in the structure of output in many economies, most notably in those making the transition from a centrally-planned to a market basis.

For the newly-industrialised economies of south-east Asia, the manufacturing sector is still important, accounting typically for more than 30% of GDP, while services tend to contribute only around 50%.

Rising income per head is also associated with improvements in quality of life indicators, such as infant mortality, literacy rates, access to sanitation and life expectancy. In sub-Saharan Africa, for example, life expectancy at birth is only 47 years, and has fallen in the past two decades, partly due to the prevalence of HIV/AIDS. In the same region, 47% of women are still illiterate.

In the high income countries, life expectancy has reached 79 years, and is still increasing. Moreover, it is almost a decade longer than in the upper middle income grouping, which includes countries such as South Korea, Malaysia, Thailand, Argentina and Brazil.

Source: World Bank, 2007 World Development Indicators

But substantial progress has been made in some regions and countries. Only about a third of people in China now have to live on less than $2 a day (a widely-used benchmark for making international comparisons of poverty), as against four fifths of the population in 1984.

In the countries of eastern Europe and central Asia, many of which were once governed by Communist regimes, poverty as measured by the same benchmark, halved from 1993 to 2004.

In south Asia, however, progress has been much slower, despite India’s recent growth spurt. In India itself 80% of people still have to get by on less than $2 a day.

Source: World Bank, 2007 World Development Indicators