The meaning of economic development (ED) has broadened over time with the progress of the study of ED. One can claim that the study of ED may have originated in the writings of Adam Smith or the Classical School of Economics, but the subject as it is known today began only in the 1930s. There is a general agreement that the systematic study of ED focusing on a large number of developing countries (in Africa, Asia, and Latin America) emerged only after World War II. As the understanding of ED as a phenomenon broadened over time, the meaning of ED also changed, gaining in breadth, clarity, and precision. As a result, there have been many views and definitions for ED in the related literature. Researchers have used the term in three different senses. Most of them seem to have used it to refer to a desirable state of a society such as a modern industrial society, while others have used the term to refer to processes of transformation by which such a state is reached over time or to actions undertaken by various local, national, and international actors to improve quality of life in societies at various levels.
Traditionally, prior to the 1970s, the term ED referred to the capacity of an economy to increase and sustain total output or income. This essentially meant what is defined as economic growth today and improvements in such factors affecting economic growth as technology, productivity, and structural changes. Economic growth can be defined as an increase in total real output or real income measured by real gross domestic product (GDP) or real gross national product (GNP). Some references are found in the literature that define economic growth as increases in real GDP per capita or real GNP per capita, rather than real GDP or real GNP. The terms GDP, GNP, GDP per capita, and GNP per capita are described in the next section. However, prior to the 1970s, ED was seen as an economic phenomenon in which economic growth was at the center.
The experience of many developing countries in the 1950s and 1960s clearly indicated that economic growth did not necessarily improve the overall standard of living and general well-being of people in those societies. This led to the understanding that ED is not merely an economic phenomenon and it encompasses a much broader spectrum of factors that represent both economic and noneconomic dimensions. Dudley Seers, for example, argued that ED goes beyond economic factors and includes noneconomic factors such as basic human needs and equity. Further, he argued that economic growth does not necessarily guarantee decreases in poverty, unemployment, or inequality in income distribution. Contributions of Seers and others who emphasized the importance of noneconomic factors gave rise to the much broader view of development that came to be known as Human Needs–Centered Development as opposed to Growth-Centered Development. According to this view, ED implies such noneconomic aspects as equality, democracy, true national independence, high levels of literacy, and education, equal status for women, human security, and sustainable ability to meet future needs, in addition to low levels of poverty and unemployment.
Sen’s Capabilities Approach
In the 1980s and 1990s, dismal growth performance combined with serious problems of poverty and fiscal and external deficits in many developing countries highlighted the fact that ED must be thought of as a multidimensional phenomenon requiring fundamental changes in entire social systems. At present, many believe that Amartya Sen, the Nobel laureate in economics in 1998, is the leading thinker on the meaning of ED. His views on economic development are sometimes referred to as Sen’s capabilities approach. According to this approach, ED has to be about enhancing basic human capabilities and freedoms of people to live the lives they choose to lead. Income is only one factor that affects human capabilities and freedoms, and therefore, ED goes far beyond reducing income poverty. He argued that economic growth is not an end in itself, and that development has to do more with enhancing the lives people lead and the freedoms they enjoy. He further argued that poverty cannot be properly measured by income. In his view, the well-being of people depends on what people can and do make of commodities and not on the characteristics of commodities they consume.
Sen has identified five broad factors apart from income that affect capabilities of people to live the lives they choose to lead. They include (1) personal heterogeneities in such terms as age, gender, and disabilities; (2) environmental diversities such as differences in climate and clothing requirements; (3) variations in social climate in such terms as the crime rates and rates of violence; (4) differences in relational perspectives (i.e., differences in relative deprivation); and (5) distribution within the family (distribution of family resources among family members by gender, age, etc.). In his view, the goal of ED is to enhance capabilities and freedoms enabling people to live the lives they desire.
Other Definitions
As stated earlier, there are many definitions for the term ED in the related literature. There has been no consensus on any particular one of them except for the broad agreement that ED must mean something much broader than economic growth or mere improvements in favorable economic conditions. Many argue that economic growth is necessary but not sufficient for development. Some argue that the emphasis placed on growth is too much and there is no evidence to support that growth increases happiness. And therefore, ED is possible even without economic growth in certain contexts. However, many others (for example Lewis) argue that economic growth is essential for developing countries as a means of increasing choices and advancing human freedoms.
Michael P. Todaro’s definition of development is a good example for the broad view of development that exists today. He defines development in very broad terms as “the sustained elevation of an entire society and social system toward a ‘better’ or more humane life.” He identifies three core values of development: sustenance (being able to meet basic needs), self-esteem (being able to live a life with a sense of worth and self-respect), and freedom from servitude (being able to choose). He also identifies three broad objectives of development: to increase the availability and widen the distribution of basic life-sustaining goods, to raise levels of living, and to expand the range of economic and social choices available to individuals and nations.
A set of internationally committed development goals for the early decades of the new millennium has been developed in the United Nations (UN) Millennium Declaration adopted in September 2000. This set, widely known as the Millennium Development Goals (MDGs), includes the following eight goals: (1) eradicate extreme poverty and hunger; (2) achieve universal primary education; (3) promote gender equality and empower women; (4) reduce child mortality; (5) improve material health; (6) combat HIV/AIDS, malaria, and other diseases; (7) ensure environmental sustainability; and (8) develop a global partnership for development. A comprehensive set of targets to achieve each these goals and indicators by which progress can be judged have also been developed. In total, there are 18 such targets and 48 indicators.
Measuring Economic Development
Traditional measures are the national income measures derived from GDP and GNP, which can be considered broadly as measures of economic growth rather than ED. GDP is the total value of all final goods and services produced within the borders of a country during a specified period of time, in general a year. GNP is the value of final goods and services produced by resources belonging to the nation (citizens and permanent residents), both in and out of the country. GNP is the sum of GDP and the net factor income from abroad. Net factor income from abroad is the difference between factor incomes, such as dividends, earned from abroad and factor payments made to foreigners. It can be positive when incomes exceed payments or negative when payments exceed income during the given period. As a result, GNP can be smaller than GDP when the net factor income from abroad is negative. In such cases, GNP may be a better measure of national income than GDP. However, GDP and GNP are measures of both the level of output and the level of income. International organization like the World Bank (International Bank for Reconstruction and Development, [IBRD]) refer to GNP as the Gross National Income (GNI).
The national income measures include real GNP per capita, real GDP per capita, and their annual growth rates (annual percentage changes). Real GDP and real GNP are the GDP and GNP measured at constant prices (prices in a year selected as the base year), respectively. They can be computed by deflating nominal GDP (GDP measured at current prices) and nominal GNP (GNP measured at current prices) by an appropriate price index, such as GDP deflator or Consumer Price Index (CPI). Thus, real GDP and real GNP are the values of GNP adjusted for inflation, respectively. Real GDP per capita and real GNP per capita values are computed by dividing real GDP and real GNP by total population, respectively. These GDP-based per capita measures have been used for measuring national levels of ED and criteria for their comparison over time and across nations.
International Comparisons
For international comparisons, GDP or GNP per capita measured in national currencies of different countries must be expressed in a common currency. Earlier, the standard practice was to convert the national values into U.S. dollar values using official exchange rates. The use of official exchange rates in conversion has been criticized for the fact that official exchange rates in developing countries are not competitive market exchange rates and are thus unrealistic. They are distorted by direct and indirect trade and exchange controls and the existence of multiple exchange rates, including illegal black market exchange rates.
In addition, the rankings of GDP per capita converted using official exchange rates do not necessarily portray the true rankings of per capita incomes in terms of their purchasing power among the countries ranked, because the purchasing power of one dollar differs in different countries due to differences in the prices of goods and services. The method of using Purchasing Power Parity (PPP) exchange rates in conversion takes these differences into account and produces better rankings of international per capita incomes as measures of ED. Estimates of GDP and GNP in terms of PPP are reported in the publications of various agencies of the United Nations, the World Bank, and the International Monetary Fund (IMF), among others. However, one can argue that GNP per capita values thus calculated are still not comparable for reasons such as practical difficulties of measurement and the inclusion of certain goods and services in GDP by some countries but not by others.
Measurement Shortcomings
GDP is considered as the best measure of total output and economic growth, yet it suffers from many shortcomings as a measure of total output. GDP may underestimate total output for various reasons. It includes only the values of market activity (goods and services that are traded in markets) and the values of such nonmarket activity as subsistence farming, and unpaid household production activities are excluded. Developing countries have significantly large informal or subsistence sectors in which a substantial proportion of production is not directed toward markets or traded through barter. The values of some goods and services traded in markets, particularly in rural areas, are also excluded as they are not formally recorded. Some values of market activities such as illegal activities (underground economy) are unreported or underreported to avoid taxes. The value of excluded activities can be estimated, but finding accurate prices for goods and services untraded or traded through barter may be difficult for many reasons. Based on the above mentioned shortcomings, it has been argued that GDP is not an accurate measure of economic growth.
As measures of ED, real GDP per capita and real GNP per capita have also been widely considered as indicators of the standard of living and general wellbeing of people in a country. Standard of living and general well-being depend not only on the availability of goods and services brought about by economic growth but also on their quality and many other economic and noneconomic factors such as the composition and distribution of total output, changes in the rates of crime and violence, environmental quality, and changes in the number of hours of leisure, etc. GDP ignores the negative effects of economic growth such as environmental degradation, pollution, and congestion. It also ignores the qualitative changes in produced goods and services over time. Any changes in the quantity and quality of leisure enjoyed by people are also not incorporated into GDP. As a result, real GDP per capita and real GNP per capita cannot be considered as accurate indicators of standard of living or general well-being of the people.
Recently, attempts have been made to refine GDP statistics to eliminate some of these shortcomings. For example, measures called Green GDP and Net Economic Welfare (NEW) have been developed to take into account the negative effects of economic growth such as environmental degradation and crime. Notwithstanding their shortcomings, real GDP per capita and real GNP per capita have been found to be correlated with many other economic and noneconomic indicators, such as rates of literacy, mortality rates, and rates of educational attainment. And therefore, they are still widely regarded as important comprehensive measures of standard of living, general wellbeing, and ED.
Alternative Measurements
Realization of many shortcomings of national income measures, and the understanding that ED is a much broader phenomenon than economic growth, led to the search for alternative and complementary indictors such as social indicators of development identified by the United Nations Research Institute on Social Development in 1970. In the mid-1970s, Morris David Morris developed the Physical Quality of Life Index (PQLI), which summarizes infant mortality, life expectancy at age one, and basic literacy on a zero to 100 scale. International rankings based on PQLI differed from the rankings based on GNP per capita as some high income countries (for example, Middle East oil-producing countries) ranked low in terms PQLI and some low-income countries (for example, Sri Lanka) ranked high in terms of PQLI. However, the practice of assigning equal weights to the three indicators included in PQLI in calculations has been cited as a shortcoming of the measure.
Many believe that the Human Development Index (HDI) developed by the UN Development Program (UNDP) to be the most comprehensive measure of ED developed so far. HDI is a composite index that combines three important dimensions of human development: living a long and healthy life (measured by life expectancy), knowledge (measured by adult literacy and enrollment at the primary, secondary, and tertiary level), and standard of living (measured by per capita income adjusted for purchasing power differences). The index, which was developed in 1990 and subsequently refined, taking criticisms into account, ranks countries on a scale of 0 (lowest human development) to 1 (highest human development). Rankings of different countries have been reported by UNDP in its annual Human Development Reports since 1990.
At present, the countries with an HDI below 0.5 are included in the category of “low human development” and the countries with an HDI of 0.8 or greater are included in the category of “high human development.” The rest of the countries ranked belonged to the category of “medium human development.” UNDP itself acknowledges that HDI is not in any sense a comprehensive measure of human development, because it does not include, for example, such important indicators as gender or income inequality, human rights, and political freedoms. Yet, it provides a broadened prism for viewing human progress and the complex relationship between income and wellbeing. However, recently UNDP has developed other indexes such as the Human Poverty Index for Developing Countries (HPI-1), the Human Poverty Index for Selected OECD Countries (HPI-2), the Gender Related Development Index (GDI), and the Gender Empowerment Measure (GEM).
The fact that ED is a complex multidimensional phenomenon makes it impossible to develop a single comprehensive measure that can fully capture both quantitative and qualitative changes in all of the economic and noneconomic dimensions of ED. All of the measures that have been developed so far have their strengths and shortcomings as well. Therefore, measurement of ED does necessarily require use of many complementary indictors representing all of the economic, social, political, cultural, and other dimensions of social welfare. Information about such indicators can be found in annual reports of several international organizations such as the United Nations, World Bank, and the IMF.
Models of Linear Stages of Growth
As mentioned earlier, there are disagreements among researchers about the origin of ED thought. For some, it dates back to Adam Smith’s The Wealth of Nations (1776). For others, it began in the 1930s. Many agree, however, that the systematic study of ED began only after World War II. During this period, many models and theories have been developed to explain the process of ED and factors affecting the process. These theories can be categorized in many ways. Broadly, four major views dominate the post–World War II literature on ED. They are the models of linear stages of growth, models of structural change, models of international dependence, and neoclassical models of market fundamentalism.
Models of linear stages of growth viewed faster economic growth as ED, and the process of development as a series of successive stages of economic growth. Savings and capital formation are the crucial determinants of economic growth. For example, according to Rostow’s stages of growth theory, a country passes through five stages of ED:
- Traditional society: Subsistence activity dominates the economy. Production of output is mainly for producers’ consumption and not for sale. Direct exchange (barter) is the most widely practiced form of trade. Traditional agriculture that depends on labor-intensive technology is the most important sector.
- Pre-conditions for take-off: A stage of transition characterized by increased specialization that generates surpluses for trading, emergence of economic infrastructure such as transport in support of trade, emergence of entrepreneurs, considerable growth of income, savings, and investment. External trade also occurs, concentrating on primary products.
- Take-off: A stage of increased industrialization that is characterized by rising industrial employment as workers switch from the agricultural sector to the manufacturing sector. Growth, however, is not widespread and concentrated in a few regions and a few (one or two) manufacturing industries. The rate of investment exceeds 10 percent of total income. New political and social institutions evolve in support of the industrialization and economic transition taking place. Higher levels of investment lead to increased incomes which, in turn, generate higher levels of savings for further investment required for self-sustaining growth.
- Drive to maturity: A stage of increased diversification of economy in terms of the structures of output and employment, technological innovations, and investment opportunities. The dependence on imports decreases as a result of output growth.
- Age of high mass consumption: The highest stage of development in which the economy is geared toward mass consumption. As a result, the industries producing consumer durable goods flourish and the tertiary (service sector) becomes increasingly dominant.
Walt Rostow’s model emphasizes the importance of preconditions and substantial increases in investment (domestic or foreign) in capital for achieving a successful stage of take-off. However, many development economists argue that Rostow’s model has only limited applicability to developing countries for various reasons. The fact that the model was developed by generalizing the experience of the developed West limits the model’s applicability to a large number of developing countries which are diverse in many ways and different from the comparable historical stages of the developed countries. Some argue that the model does not explain in sufficient detail the nature of the preconditions for growth. It has also been pointed out that in practice policy makers are unable to clearly identify various stages as they merge together. The fact that the model is clearly a model of growth rather than a model of development also limits its applicability.
Roy Harrod (1939) and Evsey Domar (1946) developed the Harrod-Domar Model in the 1940s mainly to explain the relationship between growth and unemployment in developed countries. It has been extensively used to investigate the relationship between growth and capital requirements in developing countries. Also known as the AK model, the Harrod-Domar model uses a simple production function, with constant returns to scale, in which output linearly depends on capital (i.e., the level of output is always a constant times the capital stock). According to the model, economic growth rate (g) depends on the national savings ratio (s) and the capital-output ratio (k) or the productivity of capita (i.e., g=s/k).
This model highlights the necessity of generating more savings and investments for faster economic growth. One can argue that higher savings and productive investments are necessary but not sufficient for economic growth or development in developing countries. The model ignores the role of technology and other social, political, and institutional factors. The assumptions of fixed capital-to-output, capital-to-labor, and labor-to-output limit the applicability of the model to only very short periods of time.
Influenced by the Marshall Plan and the Cold War, the model fails to recognize the crucial differences between developing countries and the developed countries.
Models Of Structural Change
Models of structural change gained popularity in the 1960s and 1970s. These models viewed ED essentially as a process of structural transformation from a traditional subsistence economy to a more diverse modern industrial economy. The surplus labor theory developed by Sir Arthur Lewis and later extended by John Fei and Gustav Ranis, and the empirical studies that focused on the patterns of structural changes in developing countries, are among the best known examples for models of structural changes.
The Lewis model (1954) assumes a dual economy with a traditional agriculture sector and a modern industrial sector. The traditional sector is characterized by low levels of productivity, savings, income, and a surplus of labor. The modern offers relatively higher wages that help attract surplus labor from the traditional sector without causing any loss of output in that sector. The progress of the modern sector depends directly on investment and capital formation in that sector. The growth in the modern sector generates demand and also provides funds for investment. Higher incomes generated by the modern sector trickle down throughout the economy. Based on the empirical experiences of developing countries, the model has been criticized mainly for its assumptions such as the existence of surplus labor in agriculture while there is full employment in the industrial sector, the existence of constant demand for labor from the industrial sector, the existence of constant real wages in the industrial sector until the surplus labor is completely exhausted, and the existence of diminishing returns in the industrial sector.
Models Of International Dependence
Models of international dependence became very popular in the 1970s. Some of them have their origins in developing countries. The names of Raul Prebisch, Paul Baran, Andre Gunder Frank, Samir Amin, and Arghiri Emmanuel are closely associated with this class of theories. These models viewed a set of international and domestic institutional, political, and economic rigidities and the dependence on developed countries which dominate international power relations as responsible for underdevelopment in developing countries. The emphasis was placed on the need for terminating political, economic, and cultural dependence of developing countries for their development.
Broadly, this class of models includes three different models: neocolonial dependence model (exploitation of developing countries (the periphery) by developed countries (the center) is largely responsible for underdevelopment in the periphery, false paradigm model (faulty and inappropriate advice from the experts representing the interests of the developed countries is responsible for underdevelopment), and dualistic-dependence model (existence of dual societies and persistence of widening gap between the rich and the poor at national and international levels are responsible for underdevelopment). Models of international dependence have been criticized for failing to offer clear insights into how countries initiate and sustain development. The experience of some developing countries shows that their policy prescriptions such as import substitution have not produced expected favorable outcomes for development.
The Neoclassical Models
The neoclassical models of market fundamentalism gained popularity as models of ED during the 1980s and 1990s. Their emergence has been identified closely with the neoclassical (or neoliberal) counterrevolution in economic theory. The economists like I. M. D. Little, Harry G. Johnson, Bela Balassa, and Deepak Lal are among the leading thinkers in this class of models. According to these models, market imperfections and distortions created largely by excessive government involvement and regulations that result in inefficient allocation of resources are responsible for underdevelopment in developing countries. Economic liberalization, privatization and downsizing the government, deregulation of markets, and promoting free trade and foreign direct investment are seen as crucial for efficient allocation of resources and economic development.
Three different variants can be found among the neoclassical models: free-market analysis (which assumes that markets in developing countries are efficient and effective in resource allocation and the effect of existing imperfections are negligible), new political economy approach (or public-choice theory which argue that the actions of politicians, governments, bureaucrats, and citizens driven solely by self-interest result in misallocation of resources), and market-friendly approach (which recognizes the existence of certain market imperfections in developing countries and that governments have a responsibility to play certain roles in a market friendly manner).
The traditional neoclassical growth models grew out of the Harrod-Domar model and the Solow neoclassical growth model. Robert Solow uses an aggregate production function model in which the level of output depends on the capital stock, labor, and technology. The Solow model assumes diminishing returns for both capital and labor inputs. Technology is assumed to be exogenously determined. According to the traditional neoclassical growth models, economic growth depends on the quantity and quality of labor, capital, and technology. They argue that capital inflows from developed countries make it possible for open economies to grow faster than regulated closed economies. Therefore, economic liberalization and deregulation are favorable for ED.
These policy prescriptions were widely adopted by a large number of developing countries during the 1980s and the 1990s, paving the way for an increased international integration of their economies. However, there has been strong opposition to the adoption of neoclassical policy prescriptions both in national and international levels. Neoclassical models have been criticized for using assumptions that are unrealistic in the context of developing countries, such as the existence of competitive markets. They are also criticized for failing to recognize social, economic, institutional, and cultural differences between developing countries and developed countries on the one hand and the differences among developing countries themselves on the other.
Many influential models, which are considered as modern models of development and underdevelopment, have been developed since the late 1980s. Among them are the models of endogenous growth, such as Paul Romer’s model of endogenous growth, Michael Kremer’s O-ring model, and many other models which differ from classical models to offer better explanations for the current states of ED in developing countries. For some of these models, the reader is referred to Todaro’s popular text book on ED.
Bibliography:
- Tim Allen and Alan Thomas, eds., Poverty and Development into the 21st Century (Oxford University Press, 2000);
- Hollis B. Chenery and T. N. Srinivasan, eds., Handbook of Development Economics (Elsevier, 1989);
- Ramón López and Michael Toman, Economic Development and Environmental Sustainability: New Policy Options (Oxford University Press, 2006);
- Bill McKibben, Deep Economy: The Wealth of Communities and the Durable Future (Times Books, 2007);
- Wayne Nafziger, Economic Development (Cambridge University Press, 2006);
- Thomas Odamtten and Jeremy Millard, “Learning From Others within the Landscape of ‘Transitional Economies’ and the Challenge in ICT Development for African Countries,” AI and Society (v.23/1, January 2009);
- Dwight H. Perkins, Steven Radelet, and David L. Lindauer, Economics of Development (W. W. Norton, 2006);
- Walt W. Rostow, The Stages of Economic Growth: Non-Communist Manifesto (Cambridge University Press, 1960);
- Dudley Seers, “The Meaning of Development,” in Development Theory: Four Critical Studies, D. Lehmann, ed. (Frank Cass, 1969, 1979);
- Amartya Sen, Development as Freedom (Knopf, 1999);
- Robert Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics (v.70, 1956);
- Michael P. Todaro and Stephen C. Smith, Economic Development (Pearson, Addison-Wesley, 2006);
- United Nations Development Program, Human Development Report, 2003 (Oxford University Press, 2003);
- World Bank, World Development Report, 2006 (Oxford University Press, 2006).
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