Economic development

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Economic development is the increase in the standard of living of a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy.^[1][2] Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people.^[3]

Overview

Gonçalo L Fonsesca at the New School for Social Research defines economic development as "the analysis of the economic development of nations."^[4]

The University of Iowa's Center for International Finance and Development states that:

"'Economic development' or 'development' is a term that economists, politicians, and others have used frequently in the 20th century. The concept, however, has been in existence in the West for centuries. Modernization, Westernization, and especially Industrialization are other terms people have used when discussing economic development. Although no one is sure when the concept originated, most people agree that development is closely bound up with the evolution of capitalism and the demise of feudalism."^[5]

The study of economic development by social scientists encompasses theories of the causes of industrial-economic modernization, plus organizational and related aspects of enterprise development in modern societies. It embraces sociological research on business organization and enterprise development from a historical and comparative perspective; specific processes of the evolution (growth, modernization) of markets and management-employee relations; and culturally related cross-national similarities and differences in patterns of industrial organization in contemporary Western societies. On the subject of the nature and causes of the considerable variations that exist in levels of industrial-economic growth and performance internationally, it seeks answers to such questions as: "Why are levels of direct foreign investment and labour productivity significantly higher in some countries than in others?"^[6]

Mansell and Wehn state that development has been understood since the second World War to involve economic growth, increases in per capita income, and attainment of a standard of living equivalent to that of industrialized countries.^[7][8]

Economy Development can also be considered as a static theory that documents the state of economy at a certain time. According to Schumpeter (2003)^[9] the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.

Economic growth versus economic development

Economic development refers to social and technological progress. It implies a change in the way goods and services are produced, not merely an increase in production achieved using the old methods of production on a wider scale. Economic growth implies only an increase in quantitative output; it may or may not involve development. Economic growth is often measured by rate of change of gross domestic product (eg., percent GDP increase per year.)^[10] Gross domestic product is the aggregate value-added by the economic activity within a country's borders.

Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic wellbeing have been proposed (more).

A country's economic development is related to its human development, which encompasses, among other things, health and education.

Intensive versus extensive growth

A closely related idea is the difference between extensive and intensive economic growth. Extensive growth is growth achieved by using more resources (land, labour and capital). Intensive growth is growth achieved by using a given amount of resources more efficiently (productively). Intensive growth requires development.

Does growth create development?

Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialised countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health.

According to Ranis (2000)^[11], we view economic growth to human development as a two-way relationship. Moreover, Ranis suggested that the first chain consist of economic growth benefiting human development with GNP. Namely, GNP increases human development by expenditure from families, government and organizations such as NGOs. With the increase in economic growth, families and individuals will likely increase expenditures with the increased in incomes, which leads to increase in human development. Further, with the increased in expenditures, health, education tend to increases in the country and later will contribute to economic growth.

In addition to increasing private incomes, economic growth also generate additional resources that can be used to improve social services (such as healthcare, safe drinking water etc...). By generating additional resources for social services, unequal income distribution will be limited as such social services are distributed equally across each community; benefiting each individual. Thus, increasing living standards for the public.^[12]

To summarize, as noted in Anand’s article (1993)^[13], we can view the relationship between human development and economic development in three different explanations. First, increase in average income leading to improved in health and nutrition (known as Capability Expansion through Economic Growth). Second, it is believed that social outcomes can only be improved by reducing income poverty (known as Capability Expansion through Poverty Reduction). Thirdly, (known as Capability Expansion through Social Services), defines the improvement of social outcomes with essential services such as education, health care, and clean drinking water.

Models of economic development

The 3 building blocks of most growth models are: (1) the production function, (2) the saving function, and (3) the labor supply function (related to population growth). Together with a saving function, growth rate equals s/β (s is the saving rate, and β is the capital-output ratio). Assuming that the capital-output ratio is fixed by technology and does not change in the short run, growth rate is solely determined by the saving rate on the basis of whatever is saved will be invested.

Harrod–Domar model

The Harrod–Domar model delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends positively on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written as g = s / k. The equation takes its name from a synthesis of analysis of growth by the British economist Sir Roy F. Harrod and the Polish-American economist Evsey Domar. The Harrod–Domar model in the early postwar times was commonly used by developing countries in economic planning. With a target growth rate, and information on the capital output ratio, the required saving rate can be calculated.

Exogenous growth model

The exogenous growth model (or neoclassical growth model) of Robert Solow and others places emphasis on the role of technological change. Unlike the Harrod-Domar model, the saving rate will only determine the level of income but not the rate of growth. The sources-of-growth measurement obtained from this model highlights the relative importance of capital accumulation (as in the Harrod–Domar model) and technological change (as in the Neoclassical model) in economic growth. The original Solow (1957) study showed that technological change accounted for almost 90 percent of U.S. economic growth in the late 19th and early 20th centuries. Empirical studies on developing countries have shown different results (see Chen, E.K.Y.1979 Hyper-growth in Asian Economies).

Also see, Krugman (1994), who maintained that economic growth in East Asia was based on perspiration (use of more inputs) and not on inspiration (innovations) (Krugman, P., 1994 The Myth of Asia’s Miracle, Foreign Affairs, 73).

Even so, in our postindustrial economy, economic development, including in emerging countries is now more and more based on innovation and knowledge. Creating business clusters is one of the strategies used. One well known example is Bangalore in India, where the software industry has been encouraged by government support including Software Technology Parks.

However, when looking at the growth rate put forward from the neoclassical growth model, it seems to suggest that countries with same characteristics and technology will eventually converge to the same rate of growth. However, one should know that the knowledge presented in countries that promotes technological advancement is not stationary. Meaning that knowledge are linked to individual and not to the country.

According to Lucas Jr (1988)^[14] to compensate the movment of knowledge, we should implement factors such as labour factor to predict immigration flow. With labour movement coming into factor, we can then predict the flow of knowledge which can then successfully lead to increase in technology.

Information-led development

Information-led development (ILD) most commonly refers to a development strategy whereby a developing country makes as a primary economic policy focus the creation and development of a national information technology (IT) sector with the express aim of relying on this sector as an engine of growth. Notable examples of such countries are India and the Philippines.

More recently, a new formulation of ILD has emerged. With origins in community economic development in the United States, the new ILD model describes the use of data to generate actionable information or information solutions to development challenges. Examples of this include the inclusion of non-financial payment obligations in consumer credit files, also known as alternative data, and the use of this information in underwriting, as a means to reduce financial exclusion in the United States, where an estimated 54 million Americans are shut out of mainstream credit access as there is insufficient information about them in their credit files to be scored by a credit scoring model. This variant of ILD was pioneered by PERC, a non-profit policy research organization and development intermediary headquartered in Chapel Hill, North Carolina^[15] . Other US-based organizations, including Social Compact^[16] and the Local Initiatives Support Corporation^[17], employ variants of ILD, but none has applied this internationally except for PERC.

This development model is gaining traction in emerging markets such as Colombia and South Africa, where the data is being used to reduce financial exclusion and facilitate credit access as a means to build wealth and form assets. It is also attracting increasing attention from development agencies, including USAID, the International Finance Corporation, the World Bank Group, and the Consultative Group to Assist the Poor.

Measuring Economic Development

GDP

World map showing GDP real growth rates for 2008.

North America, even though one of the slowest growing continents, has stable growth. Most of the faster growing economies are in the Caribbean.

South America has a Boom and Bust growth with high followed by recession growth, most notable in Brazil, however growth has been stabilizing and the whole continent is growing.

Africa has seen the fastest growing but also the slowest growing/declining. From the oil fields which made Angola the 3rd fastest growing country in the world, to Zimbabwe the slowest growing and declining country in the world. Oil in Africa has created 'wealth spots' were a few countries have exceeded their neighbors in wealth. Out of the 10 fastest growing countries in the world, 3 were African. Some countries have in the past been the fastest growing in the world. Equatorial Guinea reached 75% growth in 2004 because of oil reserves.

Europe has one of the most stable growth rates. After the fall of the Soviet Union, there was a period of economic decline in Eastern Europe over the 1990s, followed by recovery in the 2000s. The region is now experiencing growth, particularly in those countries that have recently joined the European Union. If the Caucasus were included, Europe would be one of the fastest growing continents in the world. Most countries are growing at a medium speed; however, many smaller countries exceed 7% and grow exceptionally faster than their neighbors. Out of the 10 fastest growing countries in the world, only 1 is in Europe.

Overall in the 20th century Asia was seen as the area with most growth; however, in the 21st century, most of this has been dominated by China. Some spots of growth are starting to appear in East and even South Asia. Most nations with high populations have seen high growth especially. Out of the 10 fastest growing countries 3 were directly in Asia, and 3 indirectly or partially.

Meanwhile Oceania has seen moderate growth. The only exceptional growth in Oceania has been on Vanuatu.

Some countries have negative growth, most often due to ongoing wars or hyperinflation. These countries include Palestinean territories, Zimbabwe, Fiji and Chad.

Regional policy

In its broadest sense, policies of economic development encompass three major areas:

• Governments undertaking to meet broad economic objectives such as price stability, high employment, and sustainable growth. Such efforts include monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.
• Programs that provide infrastructure and services such as highways, parks, affordable housing, crime prevention, and K–12 education.
• Job creation and retention through specific efforts in business finance, marketing, neighborhood development, small business development, business retention and expansion, technology transfer, and real estate development. This third category is a primary focus of economic development professionals.

Economic developers

Economic development, which is thus essentially economics on a social level, has evolved into a professional industry of highly specialized practitioners. The practitioners have two key roles: one is to provide leadership in policy-making, and the other is to administer policy, programs, and projects. Economic development practitioners generally work in public offices on the state, regional, or municipal level, or in public-private partnerships organizations that may be partially funded by local, regional, state, or federal tax money. These economic development organizations (EDOs) function as individual entities and in some cases as departments of local governments. Their role is to seek out new economic opportunities and retain their existing business wealth.

There are numerous other organizations whose primary function is not economic development work in partnership with economic developers. They include the news media, foundations, utilities, schools, health care providers, faith-based organizations, and colleges, universities, and other education or research institutions.

With more than 20,000 professional economic developers employed world wide in this highly specialized industry, the International Economic Development Council [IEDC] [3] headquartered in Washington, D.C. is a non-profit organization dedicated to helping economic developers do their job more effectively and raising the profile of the profession. With over 4,500 members across the US and internationally, serving exclusively the economic development community. Membership represents the entire range of the profession ranging from regional, state, local, rural, urban, and international economic development organizations, as well as chambers of commerce, technology development agencies, utility companies, educational institutions, consultants and redevelopment authorities. Many individual states also have associations comprising economic development professionals and they work closely with IEDC.

There is intense competition between communities, states, and nations for new economic development projects in today's globalized world, and the struggle to attract and retain business is further intensified by the use of many variations of economic incentives to the potential business such as; tax incentives, help with investment capital, donated land and many others. IEDC places significant attention on the various activities undertaken by economic development organizations to help them compete and sustain vibrant communities.

Additionally, the use of community profiling tools and database templates to measure community assets versus other communities is also an important aspect of economic development. Job creation, economic output, and increase in taxable basis are the most common measurement tools. When considering measurement, too much emphasis has been placed on economic developers for "not creating jobs." However, the reality is that economic developers do not typically create jobs, but facilitate the process for existing businesses and start-ups to do so. Therefore, the economic developer must make sure that there are sufficient economic development programs in place to assist the businesses achieve their goals. Those types of programs are usually policy-created and can be local, regional, statewide and national in nature.

See also

Sustainable development portal

• Development theory

• Ecological economics
• Education Index
• Development economics
• Development geography
• Development aid
• Inclusive business
• Developmental state
• Development wave
• Important publications in economic development
• Growth theory and Development theory
• Dual Sector Model
• Economic Development Corporation
• Managing for development results
• Globalization and Health
• Trade facilitation
• Urban bias
• Clawbacks in economic development
• Farmshoring
• Sweatshops

Institutions

• International Development Association
• European Bank for Reconstruction and Development
• United Nations Development Programme

References

This article includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations where appropriate. (August 2007)

• Malcolm Gilles, Dwight H. Perkins. Michael Roemer, Donald R. Snodgrass, Economics of development, Norton 1996. Table of Coontents.
• Dwight H. Perkins, Steven Radelet, and David L. Lindauer, Economics of Development 6th ed. Norton 1996. Table of Contents.
• Smith, Charles; Rees, Gareth (1998). Economic Development, 2nd edition. Basingstoke: Macmillan. ISBN 0333722280. 
• Michael P. Todaro and Stephen C. Smith (2009}. Economic Development. Addison–Wesley, 10th ed., Table of contents link from Amazon.com.
• Lester, Nina, "Assessing Economic Development Incentives: Central Texas City: Managers Perspectives" (2005). Applied Research Projects. Texas State University. Paper 6.

External links

• The Dragon and the Elephant: Agricultural and Rural Reforms in China and India Edited by Ashok Gulati and Shenggen Fan (2007), Johns Hopkins University Press
• Economic Development at the Open Directory Project
• Development Economics at the Open Directory Project
• Economic development, Encyclopædia Britannica