Economic development is the process by which simple, low-income national economies are transformed into modern industrial economies.
Although the term is sometimes used synonymously with economic growth, it is generally used to describe a change in a country’s economy that involves both qualitative and quantitative improvements. The theory of economic development — how primitive and poor economies can evolve into sophisticated and relatively prosperous economies — is of fundamental importance to underdeveloped countries, and it is generally in this context that questions of economic development are discussed.
Economic development first became a major concern after World War II. When the era of European colonialism ended, many former colonies and other countries with low living standards came to be called underdeveloped countries, to contrast their economies with those of developed economies, which were understood as Canada, the United States, Western Europe, the most of the Eastern European countries, the then Soviet Union, Japan, South Africa, Australia and New Zealand. As the standard of living in most poor countries began to rise in the following decades, they were renamed developing countries.
There is no universally accepted definition of what a developing country is; there is also no one of what constitutes the process of economic development. Developing countries are generally classified on the basis of per capita income, and it is generally thought that economic development occurs as per capita income increases. The per capita income of a country (which is almost synonymous with per capita output) is the best available measure of the value of available goods and services, per person, to society per year. Although there are several problems of measuring both the level of per capita income and its growth rate, these two indicators are the best available to provide estimates of the level of economic well-being within a country and of its economic growth.
Limitations for measuring economic development
It is good to consider some of the statistical and conceptual difficulties of using the conventional underdevelopment criterion before analyzing the causes of underdevelopment. The statistical difficulties are well known. For starters, there are the uncomfortable borderline cases. Even if the analysis is limited to underdeveloped and developing countries in Asia, Africa, and Latin America, there are oil-rich countries that have per capita incomes much higher than the rest, but are otherwise underdeveloped in their overall economic characteristics.. Second, there are a number of technical difficulties that make the per capita income of many underdeveloped countries (expressed in terms of an international currency, such as the US dollar) a very crude measure of their real per capita income. These difficulties include the deficiency of basic population and national income statistics, the inadequacy of the official exchange rates at which national income in terms of the respective national currencies becomes the common denominator of the US dollar, and problems of estimate of the exchange rate, value of non-monetary components of real income in underdeveloped countries. Finally,
Although difficulties with income measures are well established, per capita income measures correlate reasonably well with other measures of economic well-being, such as life expectancy, infant mortality rates, and literacy rates.
Other indicators, such as nutritional status and the per capita availability of hospital beds, doctors and teachers, are also closely related to per capita income levels. While a difference of, say, 10 percent in per capita income between two countries would not necessarily be considered indicative of a difference in living standards between them, the actual differences observed are of a much greater magnitude. India’s per capita income, for example, was estimated at $ 270 in 1985. By contrast, Brazil’s was estimated at $ 1,640 and Italy’s at $ 6,520.While economists have cited a number of reasons why the implication that Italy’s standard of living was 24 times that of India might be skewed upward, no one would doubt that Italy’s standard of living was significantly higher. higher than Brazil’s, which in turn was higher than India’s by a wide margin.
Even so, more up-to-date measures such as income per purchasing power parity per capita, a new measure also called GDP per purchasing power parity, become more faithful to reality than GDP per capita alone, for example, a person with 500 dollars in the Inida could buy the same thing that a person with 1,500 dollars buys in the United States. Thus, their standard of living and economic development, although in many ways uneven, can be seen as something closer if more precise measurements are used.
The interpretation of a low level of per capita income as a poverty index in a material sense can be accepted with two caveats. First, the material standard of living does not depend on per capita income as such but on per capita consumption. The two measures (income and consumption per capita) can differ considerably when a large proportion of national income is diverted from consumption for other purposes; for example, through a forced savings policy. Second, the poverty of a country is more accurately reflected in the representative standard of living of the great mass of its population. This can be well below the simple arithmetic average of per capita income or consumption when national income is very unevenly distributed and there is a large gap in the standard of living between rich and poor.
Definition of developing country
The usual definition of a developing country is that adopted by the World Bank: “Low-income developing countries” in 1985 were defined as those with per capita incomes less than $ 400; “Middle-income developing countries” were defined as those with per capita incomes between $ 400 and $ 4,000. Certainly, countries with the same per capita income may not look alike: some countries may derive much of their income from capital-intensive ventures, such as oil extraction, while other countries with similar per capita income may have sources. more numerous and more productive of their labor to compensate for the absence of wealth in resources. Kuwait, for example, was estimated to have a per capita income of $ 14,480 in 1985, but 50 percent of that income came from oil. In most respects, Kuwait’s economic and social indicators were well below what other countries with similar per capita incomes had achieved. Centrally planned economies are also generally considered as a separate class, although China and North Korea are universally considered developing countries, both economies are actually very different.
A major difficulty in measuring development in command economies is that prices serve less as indicators of relative scarcity in centrally planned economies and are therefore less reliable as indicators of the per capita availability of goods and services than in market-oriented economies.
On the other hand, estimates of percentage increases in real per capita income are subject to a somewhat smaller margin of error than estimates of income levels. While year-to-year changes in per capita income are strongly influenced by factors such as weather (which affects agricultural production, a large component of income in most developing countries), a country’s terms of trade and other factors, per capita growth rates, capita income over periods of a decade or more is a strong indicator of the rate at which average economic well-being has increased in a country.
Other measures proposed to understand the economic development of a country are the human development index and nominal GDP growth.
On the other hand, the branch of economics dedicated to studying the development of national economies and how they can acquire a greater degree of development over time is known as development economics.
Economic development as a policy objective
Reasons for development
The field of development economics deals with the causes of underdevelopment and with the policies that can accelerate the growth rate of per capita income. While these two concerns are interrelated, it is possible to design policies that are likely to accelerate growth (through, for example, an analysis of the experiences of other developing countries) without fully understanding the causes of underdevelopment.
Studies of both the causes of underdevelopment and the policies and actions that can accelerate development are carried out for a variety of reasons. There are those who care for developing countries on humanitarian grounds; that is, with the problem of helping the people of these countries to reach certain minimum material standards of living in terms of factors such as food, clothing, housing and nutrition. For them, low per capita income is the measure of the poverty problem in a material sense. The objective of economic development is to improve material living standards by increasing the absolute level of per capita income.
Increasing per capita income is also a stated policy goal of the governments of all developing countries. Therefore, for politicians and economists trying to achieve the goals of their governments, it is important to understand economic development, especially in its political dimensions.
Finally, there are those who worry about economic development, either because they believe that it is what people in developing countries want or because they believe that political stability can only be guaranteed with satisfactory rates of economic growth. These reasons are not mutually exclusive. Since World War II, many industrial countries have extended foreign aid to developing countries for a combination of humanitarian and political reasons.
Those concerned with political stability tend to view the low per capita incomes of developing countries in relative terms; that is, relative to the high per capita income of developed countries. For them, even if a developing country is able to improve its material standard of living by increasing the level of its per capita income, it can still face the most insoluble subjective problem of discontent created by the widening gap between its economy. and that of the richest countries. (This effect arises simply from the operation of growth arithmetic on the large initial gap between the income levels of developed and underdeveloped countries. For example, an underdeveloped country with a per capita income of USD 100 and a developed country with a per capita income of USD 1,000. For these countries, the initial gap in their income is USD 900. If we assume that income in both countries will grow by 5 percent. After one year, the income of the underdeveloped country is USD 105 and the income of the developed country is USD 1050. The gap has widened to USD 945. The income of the underdeveloped country would have to grow by 50 percent to maintain the same absolute gap of $ 900.)
Although there was once a debate in development economics about whether raising the standard of living or reducing the relative gap in living standards was the true desire of politics, the experience during the period 1960-1980 convinced most of Observers that developing countries could, with the right policies, achieve growth rates high enough to raise their living standards quickly enough to start closing the income gap. This growth is basically given by national production, and as an example we have China, a country that has increased the goods and services it produces constantly, and although its income level is not so high,
A study of developmental theories
The underdevelopment hypothesis
If underdeveloped countries are simply low-income countries, why call them underdeveloped? In fact, the use of the term underdeveloped is based on a general hypothesis on which the whole subject of development economics is based. According to this hypothesis, the existing differences in per capita income levels between developed and underdeveloped countries cannot be explained solely in terms of differences in natural conditions beyond the control of man and society. In other words, underdeveloped countries are underdeveloped because, in one way or another, they have not yet managed to make the most of their potential for economic growth.. This potential may arise from the underdevelopment of its natural resources, or of its human resources, or from the “technological gap”. More generally, it may arise from the underdevelopment of economic organization and institutions, including the network of the market system and the administrative machinery of government. The general presumption is that the development of this organizational framework would allow an underdeveloped country to make more complete use not only of its internal resources but also of its external economic opportunities, in the form of international trade, foreign investment, and technological and organizational innovations.
Development thinking after World War II
After World War II, several developing countries achieved independence from their former colonial rulers. One of the common assertions of the leaders of the independence movements was that colonialism had been responsible for perpetuating the low standards of living in the colonies.Thus, post-independence economic development became a policy goal not only because of the humanitarian desire to raise living standards, but also because political promises had been made, and it was feared that the lack of progress towards development would be interpreted as a failure of independent governments. Developing countries in Latin America and elsewhere that had not been colonies or that had recently been colonies assumed the analogous belief that the economic domination of the industrial countries had frustrated their development, and they too joined the search for growth. Quick.
In this early period, when theorizing about development and about policies to achieve development, the assumption was accepted that the policies of the industrialized countries were to blame for the poverty of the developing countries. Memories of the Great Depression, when the terms of trade of developing countries deteriorated markedly, producing sharp declines in per capita income, haunted many policymakers. Finally, even in developed countries, the Keynesian legacy placed great importance on investment.
In this milieu, a “shortage of capital” was thought to be the cause of underdevelopment. It follows that the policy should aim for an accelerated rate of investment. Since most countries with low per capita income were also highly agricultural (and imported most of the manufactured goods consumed domestically), accelerated investment in industrialization and the development of manufacturing industries was thought to supplant imports through ‘import substitution’ it was the path to development. In addition, there was a fundamental mistrust in the markets, so the government was assigned an important role in the allocation of investments. Distrust in the markets spread especially to the international economy.
The experience with development changed the perception of the process and the policies that affected it in important ways, rendering many ideas obsolete along the way. However, there are important elements of truth in some of the ideas above, and it is important to understand the underlying thinking.
Growth economics and development economics
Development economics can be contrasted with another branch of study, called growth economics, which deals with the study of long-term equilibrium or steady-state growth trajectories of economically developed countries, which have long overcome the problem. starting development.
Growth theory assumes the existence of a fully developed modern capitalist economy with a sufficient supply of entrepreneurs who respond to a well-articulated system of economic incentives to drive the growth mechanism. It generally focuses on macroeconomic relationships, in particular the ratio of savings to total output and the aggregate capital-output ratio (that is, the number of units of additional capital required to produce an additional unit of output). Mathematically, this can be expressed (using the Harrod-Domar growth equation) as follows: the growth of total output (g) will be equal to the saving ratio (s) divided by the capital ratio- product (k); that is, g = s / k.
Therefore, suppose that 12 percent of total production is saved annually and that three units of capital are required to produce an additional unit of production: then the growth rate of production is 12/3% = 4% per year. This result is obtained from the basic assumption that whatever is saved will automatically be invested and converted into an increase in production based on a given capital-production ratio. Since a certain proportion of this increase in production will be saved and invested on the same basis, a continuous process of growth is maintained.
Growth theory, particularly the Harrod-Domar growth equation, has frequently been applied or misapplied to economic planning in a developing country. The planner starts with a desired growth rate of perhaps 4 percent. Assuming a fixed global capital-output ratio of, say, 3, it is then stated that the developing country will be able to achieve this target growth rate if it can increase its savings to 3 × 4 percent = 12 percent of its total output. The weakness of this type of exercise arises from the assumption of a fixed global capital-output ratio, which dispenses with all vital problems that affect the developing country’s ability to absorb capital and invest its savings productively. These problems include the central problem of efficiently allocating available savings between alternative investment opportunities and the associated organizational and institutional problems of fostering the growth of a sufficient supply of entrepreneurs; the provision of appropriate economic incentives through a market system that correctly reflects the relative scarcity of products and factors of production; and the construction of an organizational framework that can effectively implement investment decisions in both the public and private sectors. These problems, which generally affect the capital absorption capacity of the developing country and a host of other inputs, constitute the core of development economics. Development economics is necessary precisely because the growth economics assumptions, based on the existence of a fully developed and well-functioning modern capitalist economy, do not apply.
Developing and underdeveloped countries are a very diverse collection of countries. They differ widely in area, population density, and natural resources. They are also at different stages in the development of financial and market institutions and an effective administrative framework. These differences are enough to warn against broad generalizations about the causes of underdevelopment and the ubiquitous theoretical models of economic development. But when development economics first came to prominence in the 1950s, there were powerful intellectual and political forces pushing the subject toward general theoretical models of development and underdevelopment. First,many writers who popularized the subject were frankly motivated by the desire to persuade developed countries to give more economic aid to underdeveloped countries, for reasons ranging from humanitarian considerations to considerations of cold war strategy. Second, there was the reaction of the newly independent underdeveloped countries against their past ‘colonial economic pattern’, which they identified with free trade and primary production for the export market. These countries were eager to accept general theories of economic development that provided a rationalization for their deep-seated desire for rapid industrialization. Third, there was a parallel backlash, at the academic level, against older economic theory, with its emphasis on the efficient allocation of scarce resources and the search for new and “dynamic” approaches to economic development.
Modern theses of economic development
More recently, the theories of economic development acquired new vitality with the theses of Amartya Sen, who postulated the human development index, which measures specific aspects such as the standard of living and satisfaction of people in a given economy, as a truly novel measure. to measure development, as well as the close relationship between political freedom, transparency guarantees and economic development. More recently economists like Esther Duflo and Michael Kremer have advanced in development theories emphasizing the need for targeted public policy incentives that address various individual behaviors that perpetuate underdevelopment, these theses won their proponents the 2019 Nobel Prize in economics.
Policies for economic development
Depending on its approach, each government can design various policies to promote the economic development of its nation. It can choose to promote industrialization through import substitution, greater participation in international trade through free trade agreements that target the development of specific industries in which it is considered that there is a comparative advantage of special potential, as well as policies to help families so that they can access higher levels of consumption, employment policies, policies to combat crime, investments in science and technology that favor the improvement of competitiveness, deregulations to facilitate trade international and local, tax cuts to specific industries to be supported, construction of infrastructure to facilitate the transport of goods and people, commitments to price stability in cooperation with central banks to limit inflation and provide a greater business stability, training programs for the local workforce so that it can adapt to the emerging market and the new skills required,taking advantage of international aid in programs for economic growth, strengthening or control of the birth rate to adjust the benefits of the demographic bonus, among others.
All these policies may be evaluated in the light of indicators such as the Gini index, the GDP per capita and nominal, the GDP by purchasing power parity, the development index related to gender, the human development index, among others.
Objectives of economic development
The economic policies promoted by governments that seek to underpin their economic development have the following objectives:
Improve the living standards of the general population in areas such as health, education, consumption and access to better and greater opportunities. These objectives could be broken down as follows:
Decrease in the infant mortality rate.
Decrease in malnutrition and obesity rates.
Increase in life expectancy.
Decreasing the prevalence of preventable diseases and developing novel scientific responses to combat diseases that still have no cure.
Increase in literacy rates,
Increase in the number of people who complete their school processes and access higher education,
Reduction of unemployment and creation of quality jobs in areas that require greater technical and cognitive skills.
Increase in per capita income of citizens.
Greater access for women to the labor market on equal terms with men.
Decrease in crime and violence rates,
Increase in participation in international trade,
Greater participation in technological and scientific innovation on a global scale,
Family access to decent housing and essential basic services (internet, gas, electricity, water, garbage collection) at affordable prices.
Characteristics of economic development
Economies that have reached a high degree of economic development are characterized by:
1.High income in its GDP per capita.
2. A high index of human development.
3. A widely developed service sector.
4. Great amount of technological and scientific advances.
5. High investment in infrastructure.
There is no single path through which nations can access economic development, although there may be sets of common policies that help and promote such development, especially those that correspond to scientific and technological innovation, infrastructure development and development. incentives for citizens to change their behaviors. Recently (New Keynesian) economists have emphasized reforms in fiscal policy so that the various layers of the population share equitably and fairly the burdens of sustaining the state and the public services it provides. However, these policies have been debated from various positions as counterproductive,
Several of the aspects that continue to limit economic development the most are corruption and tax evasion, which deprive governments of the necessary resources to carry out social investments and of incentives that can result in economic benefits for society. International organizations such as the OECD, the United Nations, and the various multilateral regional forums continue to work on proposals to mitigate these phenomena that constitute a drag on the economy.
Since the 2000s, governments, multiple NGOs, economists from various schools of thought have emphasized two additional aspects that limit economic development, on the one hand there is tax inequality, which is believed to generate excess savings. (or lack of investment) by large corporations, which stop investing in the production of tangible assets and take their money to assets considered safer, such as investment funds, government bonds or share buybacks, This excess saving generates a deceleration of growth in the production of goods and services and therefore a fall in the living standards of the population as a whole.
A second aspect that has been consolidated as an element that hinders economic development is environmental pollution, which generates various negative externalities such as droughts that affect crops, forest fires that require the intervention of the state and fire organizations to be extinguished, particles in the air that lead to the development of respiratory and cardiovascular diseases (which overload public health systems), environmental disasters that result in great costs for the economy, limitations to productivity due to phenomena such as heat or cold waves, as well such as interruptions in work activity due to sudden environmental disasters, water shortages, among others.
Increasingly, governments are becoming aware of the imperative need to combat these pernicious elements that limit the development of their nations, although much remains to be done and not all (especially corrupt politicians, tax-dodging companies and polluting companies). ) are doing their part to remedy developmental limiting situations.
As a final element that limits development, we have fortuitous contingencies, such as non-human-induced natural disasters, epidemics such as coronavirus, malaria and others, which are presented as challenges from the natural environment to growth and development. economic development. Faced with this aspect, it is necessary for societies to develop adaptation and mitigation processes, through the implementation of public policies aimed at transforming behaviors, as well as promoting scientific innovation that can limit the negative aspects of these contingencies.
In summary, we can say that economic development is the aspiration of every healthy society, although the elements that favor it are not always configured in a complete way or although there are persistent great obstacles to achieving it. Overcoming these obstacles is a joint task of responsible government policy, NGOs, churches, civil society and private institutions that promote their own private profit and that at the same time promote their own corporate social responsibility along this path.