Economic Development Essay

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.


  1. Tim Allen and Alan Thomas, eds., Poverty and Development  into the 21st Century  (Oxford  University Press, 2000);
  2. Hollis B. Chenery and T. N. Srinivasan, eds., Handbook of Development Economics (Elsevier, 1989);
  3. Ramón López and  Michael  Toman,  Economic Development and Environmental Sustainability: New Policy Options (Oxford  University Press, 2006);
  4. Bill McKibben, Deep Economy: The Wealth of Communities and the Durable Future (Times Books, 2007);
  5. Wayne Nafziger, Economic Development  (Cambridge  University Press, 2006);
  6. 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);
  7. Dwight H. Perkins, Steven Radelet, and David L. Lindauer, Economics of Development (W. W. Norton, 2006);
  8. Walt W. Rostow, The Stages of Economic Growth: Non-Communist Manifesto (Cambridge  University  Press, 1960);
  9. Dudley Seers, “The Meaning of Development,” in Development  Theory: Four Critical Studies, D. Lehmann, ed. (Frank Cass, 1969, 1979);
  10. Amartya Sen, Development as Freedom (Knopf, 1999);
  11. Robert Solow, “A Contribution to the Theory of Economic Growth,” Quarterly  Journal  of  Economics  (v.70, 1956);
  12. Michael P. Todaro and Stephen C. Smith, Economic Development (Pearson, Addison-Wesley, 2006);
  13. United Nations Development Program, Human Development Report, 2003 (Oxford University Press, 2003);
  14. World Bank, World Development Report, 2006 (Oxford University Press, 2006).

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