ECONOMIC + DEVELOPMENT
ers’ income, health, and lifespans.
Economics
 is a branch of Social Science that deals with the s
tudy of the allocation of limited resources for p
roduction, distribution, and consumption of goods
and services to satisfy the unlimited needs and
wants of people.
 Economics is the study of choice.
Since resources are limited, we are compelled to
make decision.
Development is the process expanding human free
dom. It is “the enhancement of freedoms that allow p
eople to lead lives that they have reason to live”. Hen
ce “development requires the removal of major sourc
es unfreedom: poverty as well as tyranny, poor econo
mic opportunities as well as systematic social depriva
tion, neglect of public facilities as well as intolerance
or overactivity of repressive states”. –Prof. Amartya
Sen 1998
WHAT IS ECONOMIC DEVELOPMENT? DEF
INITION AND INDICATORS
AND EXAMPLES
SOME DEFINITIONS:
 Economic Development refers to economic gro
wth accompanied by changes in output distributio
n and economic structure. (Nafziger)
 Economic Development is the process by which
emerging economies become advanced econom
ies. In other words, the process by which countrie
s with low living standards become nations with
high living standards. Economic development als
o refers to the process by which the overall heal
th, well-being, and academic level the general
population improves. (market businessnews.co
m).
During the development, there is a population shift fr
om agriculture to industry, and then to services.
A longer average life expectancy, for example, is on
e of the results of economic development. Improved
productivity, higher literacy rates, and better publ
ic education, are also consequences.
Put simply, economic development is all about impr
oving living standards. ‘Improved living standards’
1
refers to higher levels of education and literacy, work
 Economic Development is “the process in which
an economy grows or changes and becomes more
advanced, especially when both economic and s
ocial conditions are improved.” (The Cambridg
e Dictionary).
 Economic development is “ the process by whic
h a nation improves the economic, political, and
social well-being of its people.” (Wikipedia).
INDICATORS AND EXAMPLES OF ECONOMI
C DEVELOPMENT
 Steady accumulation of physical and human c
apital
 Change in consumer demands
 Increased urbanization
 Constant power supply
 Improved transport and communication netwo
rks
 Shift from agriculture to industrial production
 Demographic transition
 Decline in family size
ECONOMIC DEVELOPMENT VS. ECONOMIC
GROWTH
Growth and Development
A major goal of poor countries is economic develop
ment or economic growth. The two terms are not iden
tical. Growth may be necessary but not sufficient f
or development. Although the terms economic devel
opment and economic growth cover similar concepts,
they are not the same.
Economic Growth
Economic Growth is all about expanding GDP, i.e.,
making the size of the economy bigger. GDP stands
for Gross Domestic Product. GDP is the sum of all ec
onomic activity in a nation over a specific period. It i
s the net value of all the products and services that
an economy produces.
Economic development, on the other hand, is the gr
owth of the standard of living of a nation’s people fr
om a low-income (poor) economy to a high-income
(rich) economy. When the local quality of life is imp
roved, there is more economic development.
Economic development looks at how the citizens of
a country are affected. Apart from their living stand
ards, it also looks at the freedom they have to enjoy
those living standards.
Economic development takes into account the followi
ng information:
 Average life expectancy, i.e., how long peopl
e people’s lifespans are.
 Education standards.
 Literacy rates, i.e., what percentage of the pop
ulation can read.
 Environmental standards.
 Availability of housing, plus the quality of ho
using.
 Access to healthcare. This takes into account t
he number of doctors per thousand people, ac
cess to affordable medicine, etc.
 Income per capita.
Growth is not enough
Economic growth is a crucial condition for developm
ent. However, just growth is not enough because it
cannot guarantee development. Amartya Kumar Se
n, an Indian economist and philosopher, who receive
d the Nobel Memorial Prize in Economic Sciences, o
nce said:
“Economic development is about creating freedom f
or people and removing obstacles to greater freedo
m. Greater freedom enables people to choose their o
wn destiny.”
“Obstacles to freedom, and hence to development, in
clude poverty, lack of economic opportunities, corrup
tion, poor governance, lack of education and lack of
health.”
Measuring Economic Development
One way to measure economic development is huma
n development. Human development is very importan
t, and includes the health of the people and their educ
ation. This usually goes together with economic grow
th. As people in a country become healthier and get b
etter education, they also usually get richer, because
healthy, educated workers are more productive (bette
r at making things), and richer workers can afford hea
lth and education. The Human Development Index
looks at how long people live , how well people re
ad , how many people go to school, and how much
money people make.
2
Economists also look at the rate of growth, which is
how fast a country gets richer.
Factors that Increase Productivity (and Growth)
1. Institutions. Provides incentives for innovat
ion and production.
2. Government. Play an important part in the de
velopment of nation’s economy.
3. International Trade. Increasing increase to i
nternational trade can provide markets for the
goods produced by less-developed countries.
Also increase productivity by increasing the a
ccess to capital resources.
How do we know if economic development is work
ing?
There are hundreds of ways to measure things for the
hundreds of different economic development objectiv
es that communities may have. We can measure man
y of the above things through:
1. Improvements in average income of families
2. Local unemployment rates
3. Standardized testing and literacy results in chi
ldren
4. Leisure time and changes in life expectancy, o
r hospital stays
ECONOMIC DEVELOPMENT GOALS
( https://penpoin.com/economic-development )
Development is more than just talking about increasi
ng income or increasing the economy’s number of go
ods and services. It is not only about growing the ec
onomy but also how that growth benefits citizens.
Development takes into account inclusive welfare, b
etter standards of living for all citizens. It’s also ab
out building capacity and resilience in a fast-changi
ng and unpredictable world.
Some of the goals of economic development:
 Increase the availability of goods and services.
It talks about production and how to expand the d
istribution of essential life-sustaining goods such
as food and drink, shelter, education, health, and
protection.
 Increase per capita income. Income is one way t
o become more prosperous. Also, better educatio
n and the provision of more jobs are other import
 ant goals. Development must also place more sig
nificant attention on cultural and human values. S Capital Spending by business
o, prosperity here does not only take the material Spending on purchases of fixed assets and unsold sto
dimension but also immaterial. ck by private business.
 Promote the freedom to make responsible econ
omic and social choices. Individuals and nations Net Exports
must be free from slavery, ignorance, and misery. Represents the country’s Balance of Trade (BoT) co
mputed as Exports minus Imports (E-
Economic development is typically associated with i M)
mprovements in a variety of areas or indicators (such
as literacy rates, life expectancy and poverty rates), th Two Categories of GDP
at may be causes of economic development rather tha 1. Real GDP – economic output after inflation is
n consequences of specific economic development pr factored.
ograms. 2. Nominal GDP – output does not take inflation
into account.
For examples, health and education improvements ha
ve been closely related to economic growth, but the c Recession. GDP growth rate is negative for two con
ausality with economic development may not be obvi secutive quarters or more.
ous.

COMMON CHARACTERISTICS/FEATURES O Gross National Product (GNP)

F DEVELOPING ECONOMIES
Measures the value of goods and services produced
1. Low per capita real income by a country’s citizen domestically and abroad. (T
2. High population growth rate his was abandoned by the US in 1991 as most countri
3. High rates of unemployment es are using GDP).
4. Dependence on primary sector
5. Dependence on exports of primary commoditi Computation of Per Capita Income:
es
Per Capita Income = National Income or GNP
LOW PER CAPITA REAL INCOME ------------------------------
It means the average person doesn’t earn enough Population of the Country
money to invest.
HIGH POPULATION GROWTH RATE/SIZE
Gross Domestic Products (GDP)
Measure the value of finished goods and services p 1. Lack of family planning options
roduced within a country. It is composed of private 2. Lack of sex education
consumption or consumer spending, government spe 3. Believe that more children could result in a h
nding, capital spending by business and net exports. igher labor force for the family to earn incom
e
 GDP per capita is gross domestic product divid
ed by midyear population. GDP is the sum of g
ross value added by all resident producers in t
he economy plus any product taxes and minus
any subsidizes not included in the value of the HIGH RATE OF UNEMPLOYMENT
products. 1. Unemployment. Labor force that is seeking e
Consumption mployment but cannot find it. (Age 16 and
The value of the consumption of goods and service over)
s acquired and consumed by thecountry’s househo 2. Underemployment. Employed at less than ful
ld. (This account for the largest part of the GDP). l-time/underpaid/jobs inadequate with respe
ct to training.
Government Spending
All consumptions, investments, and payments made b DEPENDENCE ON PRIMARY SECTOR
y the government for current use.
3
Almost 75 percent of the population of low-income c
ountries is rurally-based.
(As more income level rise, the structure of demand c
hanges, which leads to a rise in the manufacturing sec
tor and then the service sector).
DEPENDENCE ON EXPORTS OF PRIMARY C
OMMODITIES
Significant portion of output originates from primary
sectors, a large portion of exports is also from the pri
mary sector.
DEFINING POVERTY
What is Poverty?
 Poverty is about not having enough money to me
et basic needs including food, clothing and shelte
r.
 World Bank Organizations: “Poverty is hunger.
Poverty is lack of shelter. Poverty is sick and not
being able to see a doctor. Poverty is not having a
ccess to school and not knowing how to read. Pov
erty is not having a job, is fear for the future, livin
g one day at a time.
A universal theme reflected in these seven quotes is t
hat poverty is more than lack of income – it is inhe
rently multidimensional, as is Economic Developm
ent.
Escaping Poverty
People
Lies in rising levels of income.
Countries
 Increasing the amount of output (per person) that
their economy produces.
 In short, economic growth enables countries to es
cape poverty
WHY ARE SOME COUNTRIES RICH AND OT
HERS POOR?
Differences in the economic growth rate of nations of
ten come down to differences in inputs (factors of pro
duction) and differences in total factors productivity
(TFP) – the productivity of labor and capital resource
s.
4
Higher productivity promotes faster economic gro
wth, and faster growth allows a nation to escape p
overty.
ECONOMIC DEVELOPMENT VERSUS DEVE
LOPMENT ECONOMIC
Development economics is a field of economics that
examines economic development. Development econ
omics is an academic discipline. This is the theory,
study and research of economic data pertaining to de
velopment.
Economic development is the physical manifestatio
n of progress and change in an economy. This is w
here the discipline would get its data. For example, G
ross Domestic Product (GDP) and GDP per capita are
both metrics of economic development.
In summary, development economics is a topic of st
udy, economic development is a physical process. T
he goal or target of Development Economics is Econ
omic Development.
WELFARE ECONOMICS
Welfare economics is that branch of economics, wh
ich primarily deals with taking of poverty, famine a
nd distribution of wealth in an economy. This is al
so called Development Economics. The central focus
of welfare economics is to assess how well things ar
e going for the members of the society. If certain th
ings have gone terribly bad in some situation, it is
necessary to explain why things have gone wrong.
Prof. Amartya Sen was awarded the Nobel Prize in
Economics in 1998 in recognition of his contribution
s to welfare economics. Prof. Sen gained
recognition for his studies of the 1974 famine in Ba
ngladesh. His work has challenged the common view
that food shortage is the major cause of famine.
In the words of Prof. Sen, famines can occur even w
hen the food supply is high but people cannot buy
the food because they don’t have money. There has
never been a famine in a democratic country because
leaders of those nations are spurred into action by p
olitics and free media. In undemocratic countries, the
rulers are unaffected by famine and there is no one t
o hold them accountable, even when millions die.
Welfare economics takes care of what managerial ec
onomics tends to ignore. In other words, the growth f
or an economic growth with societal upliftment is co
unterproductive. In times of crisis, what comes to the
rescue of people is their won literacy, public health fa
cilities, a system of food distribution, stable democra
cy, social safety, (that is, systems or policies that take
care of people when things go wrong for one.

For the economist, a theory is a systematic

explanation of interrelationships among economic
variables, and its purpose is to explain causal
relationships among these variables. Usually, a
theory is used not only to understand the world better
but also to provide a basis for policy. In any event,
theorists cannot consider all the factors influencing
economic growth in a single theory. They must
determine which variables are crucial and which are
irrelevant. However, reality is so complicated that a
simple model may omit critical variables in the real
world (Kindleberger and
Herrick 1977:40). And although complex
mathematical models can handle a large number of
5
variables, they have not been very successful in
explaining economic development, especially in the
third world.
CLASSIC THEORIES OF ECONOMIC
DEVELOPMENT: FOUR APPROACHES
I. The Linear Stage-of-Growth Model
 Heavily inspired by the Marshall Plan of the
United States which was used to rehabilitate
Europe’s economy after the Post-World War 2
crisis.
 It was an attempt by economists to come up with
a suitable concept as to how underdeveloped
countries of Asia, Africa and Latin America can
transform their agrarian economy into an
industrialized one.
 Rostow’s Stages of Growth Model
 Formulated by American economist Walt
Whitman Rostow
 Rostow asserts in his model that the transition
into development occurs in a series of stages:
1. The Traditional Society
 Mostly a backward society with no access
to science and technology where most of
its resources are dedicated to agricultural
use. Agricultural productivity is mostly at
subsistence level.
2. Preparatory Stage
 There is an expansion in output which
extends beyond agricultural produce to
manufacture goods.
 There is more knowledge surrounding the
use of technology in various sectors of the
economy.
 Lower level of market specialization.
3. Take-off Stage
 Revolutionary changes occur in both
agriculture and industry to attain self-
sustaining economic growth.
 There is greater urbanization and rise in
human capital accumulation.
6
4. Drive to Maturity
 This stage takes place after a long period
of time. The population involved in
agriculture
 Over-all income per capita increases
 Savings and investments can
automatically sustain economic growth.
5. Stage of Mass Consumption
 At this stage, a country’s demand shifts
from food, clothing and other basic
necessities to demand for luxuries
 To satisfy these needs, new industries
involve themselves in mass production to
match consumption.
 Harrod-Domar Growth Model
 Use to explain an economy’s growth rate in
terms of the level of savings and productivity of
capitals.
 The model shows how sufficient investment
through savings can accelerate growth.
 Model makes use of a Capital-Output Ratio
(COR)
- If the COR is low, a country can produce
more with little capital
- If high, more capital is required for
production and value of output is less.
- Formula: K/Y = COR
where K = capital stock
Y = output
II. Structural Change Model
 Demonstrate how a country’s economy transform
from the subsistence level which is concerned
with agricultural produce for personal
consumption to a modern industrial economy
with greater output for worldwide
consumption.
 Two Sectors Surplus Labor Theoretical Model
(W. Arthur Lewis)
 Overpopulated rural sector with zero
marginal labor productivity
 - Withdrawal of the excess supply of labor will
not result in a loss of output
 Highly urbanized and industrial manufacturing
and service economy (high productivity industrial
sector)
- Excess labor migrates to urbanized area
- Transfer of labor from traditional to modern;
growth of product output.
 Pattern of Demand Analysis (Hollis B. Chenery)
Pattern of Demand Theory
Defines economic development as a set of
interrelated changes in the structure of an
underdeveloped economy that are required for its
transformation from an agricultural economy into an
industrial economy for continued growth in
addition to accumulation of capital both human
and physical.
Pattern of Demand Analysis:
1. Shift from agricultural to industrial
production.
2. Steady accumulation of physical and human
capital.
3. Change in consumer demand from basic
necessities to diverse manufacturing of goods.
4. Growth of cities and urban industries.
5. Decline in family size and overall production.
6. International trade, creating market for its
exports.
III. International-Dependence Revolution
 Gained support because of disenchantment with
Stages and Structural-Change Models
 Developing countries caught in a dependence and
dominant relationship with rich countries because
of institutional, political and economic rigidities –
difficulty for poor nations to self-reliant and
independent.
Four Key Arguments
1. Different sets of conditions coexist: rich and
poor, modern and traditional (Lewis model),
elites and masses, powerful industrialized nations
and impoverished peasant societies.
2. Chronic co-existence (not temporary) of wealth
and poverty will not be rectified in time.
7
3. Degrees of superiority or inferiority show no
signs of diminishing and instead increases.
4. Superior element does little to pull up or “trickle
down” to the inferior element, may even push it
down.
 Neo-Colonial Dependence Model
 Indirect outgrowth of Marxist thinking.
 Underdevelopment as a result of historic
evolution of unequal international capitalist
system of rich country-poor country
relationship.
 Regardless if intentional, nations are under
unequal power relationship between the
center and the periphery.
 Small elite ruling class (landlords, military
rulers, merchants, public official, etc.) to
perpetuate the international capitalist system
of inequality.
 The elite serve or are rewarded by
international special-interest power group tied
by allegiance or funding to wealthy capitalist
countries.
 Elite’s viewpoints inhibit genuine
reforms/efforts and may lead to even lower
levels of living and perpetuation of
underdevelopment.
 Internal-induced against internal constraints.
 False-Paradigm Model
 Less radical
 Underdevelopment as a result of faulty and
inappropriate advice by well-meaning
through uninformed or biased advisers
from developed countries’ agencies and
organization.
 Inappropriate policies merely serving vested
interest of existing power groups (domestic
and international)
 Intellectuals, economists, civil servants
trained in alien and “irrelevant” western
concepts.
 Dualistic-Development Thesis
 Dualism refers to divergence between the rich
and poor nations; rich and poor people on
various levels.
 The interrelationship between the superior
and inferior elements are such that the
existence of the superior elements actually
serve to push down the inferior elements (let
alone “trickle down”.
 The concept that in interrelations, the
superior elements do little or nothing to
pull up the inferior elements, and may push
them down.
IV. Neo-Classical, Free Market
Counterrevolution
 Challenges Stalist models in favor of free
markets, public choice and market-friendly
approaches.
 Developed Nations: favored supply-side
macroeconomic policies, rational expectation
themes and privatization of public
corporations.
 Developing Countries: freer markets and
dismantling of public ownership, stalist
planning and government regulations.
Context
 Emerged in the 1980s during the political
ascendency of conservative government of the
US, Canada, Britain and West Germany.
 Neoclassicists on the Board of powerful
international agencies World Bank, and
International Monetary Fund as influence of
International Labor Organization, United Nation
Development Program and United Nations
Conference on Trade and Development eroded.
Arguments
 Underdevelopment resulted from poor
resource allocation because of incorrect pricing
policies and state intervention (corruption,
inefficiency, lack of incentives, etc.).
 State intervention slows economic growth.
 Neoliberals: Economic efficiency and growth
will be stimulated by free markets, privatizing
8
state enterprises, export expansions and
eliminating government regulations and price
distortions.
 Allow “magic of the market place” and “invisible
hands” to guide resource allocation and
stimulate economic development.
ADAM SMITH’S THEORY OF ECONOMIC DE
VELOPMENT
(https://www.economicsdiscussion.net/economic-dev
elopment/theories-economic-development/adam-smit
hs-theory-of-economic-development-economics)
Adam Smith is known as father of economics.
Ideas about economic development was obtained
from his well-known book, “An Enquiry into the
Nature and Causes of Wealth of Nations” (1976)
which has tremendously influenced the thinking
about economic growth and development.
Adam Smith laid stress on individual freedom in
conducting their economic affairs without any
obstructions and restrictions by the Government. He
advocated free trade among nations of the world and
urged that all restrictions on foreign trade should be
removed to promote international specialization so as
to increase the incomes of the nations.
Aspects of Adam Smith’s Theory:
The crucial aspects of development theory as
propounded by Adam Smith are – (1) division of
labor and (2) capital accumulation. Productivity of
labors increases through division of labor. The two
factors that facilitate the use of more division of labor
are capital accumulation and size of market. These
factors are explained below in detail.
1. Division of Labor
A very important contribution made by Adam Smith
to the analysis of the factors that bring about
expansion of output is the division of labor. His
treatment of this aspect of production is classic. He
pointed out that there was a natural tendency among
human beings “to truck, barter, and exchange one
thing for another.” Among the benefits of division
of labor he refers to increase in dexterity, saving in
time, and invention of better machines and
appliances. But Adam Smith points out that the
degree of division of labor is limited by the extent of
the market. Division of labor is profitable only if
there is adequate market for the goods produced.
He, thus, emphasized the expansion of international
trade, which widens market for goods.
of labor along with the use of large capital stock. In
the absence of adequate demand, only a little degree
of division of labor or specialization can be used and
a good deal of capital stock is likely to remain
underutilized. It is in this context that he advocated
for free international trade which leads to the increase
in the extent of market for goods and makes their
production on a large scale profitable and induces the
capitalist class to accumulate more capital.

One of the most significant contributions to 2. Accumulation of Capital:

economics by Adam Smith was to introduce the idea
of increasing returns caused by division of labor. He
thought the gain from by division of labor or
specialization was a basic feature of social economy
otherwise everyone, like Robinson Crusoe, will
produce everything they want for themselves. Thus,
Thirlwall writes, “It is the notion of increasing
returns, based on division of labor that lay at the
heart of Adam Smith’s optimistic vision of economic
progress as a self-generating process, in contrast to
later classical economists who believed that
economies would end up in a stationary state owing
to diminishing returns in agriculture.”
Given the crucial significance of increasing returns
based on division of labor, productivity of labor rises
with the increase in the size of market. Along with
division of labor it is acceleration of investment or
capital accumulation that leads to the increase in
growth of output and living standards of people. It is
worth noting that Adam Smith expressed the view
that industry generally permitted greater scope for
division of labor or specialization than agriculture
and, therefore, in rich developed countries
industrialization had taken place to a greater extent.
As a means of economic development, Adam Smith
gave an important place to saving and
accumulation of capital. To quote his words,
“Capitalists are increased by parsimony and
diminished by prodigality and misconduct parsimony
and not industry is the immediate cause of the
increase of capital. Industry indeed provides the
subject which parsimony accumulates. But whatever
industry might acquire, if parsimony did not save
and store up, the capital would never be greater.”
Here is a clear guideline and suggestion to the
developing countries. Their greatest obstacle to
economic development is the deficiency of capital. In
this respect they are caught up in a vicious circle of
poverty
VICIOUS CIRCLE OF POVERTY

Another important related notion put forward by

Adam Smith was that division of labor is limited by
the size of market’. If the extent of market is small, it
will not be profitable to produce on a large scale
which requires introducing a higher degree of
division of labor or specialization.

This is because if size of market for a good (i.e., the

magnitude of demand for it) is quite small, it will not
be profitable to introduce a higher degree of division
9
 Savings are low because incomes of the people are small due
Productivity of people is low because the capital stock is small
Capital stock is to the because
small their lowsavings
productivity
of the people are small

Figure 1. Vicious Circle of Poverty

Productivity of people is low because the capital

stock is small; capital stock is small because
savings of the people are small and savings are low
because incomes of the people are small due to the
their low productivity. The way out of the vicious
circle, according to Smith, is capitalist class that
saves most of their profits and invest in capital
accumulation for accelerating economic growth.
Thus, according to Adam Smith, saving of the
society is increased by ‘parsimony’ (i.e., habit of
frugality) of the capitalists. In fact, Adam Smith
assumed that capitalist class behaves in such a
manner and save a very large proportion of their
profits.

Besides, capital accumulation, according to Smith,

facilitates a greater degree of division of labor
which causes productivity of labor to rise. Without
capital accumulation the extent of division of labor
cannot be increased much. Increase in capital
formation leads to the production of different types of
specialized equipment which are operated by
different classes of workers who are skilled and
specialized in various tasks. Thus, capital
accumulation along with division of labor leads to the
increase in industrial output and employment.

10