ECONOMIC DEVELOPMENT

Economic development is a broader concept than economic growth. Development reflects

social and economic progress and requires economic growth. Growth is a vital and necessary
condition for development, but it is not a sufficient condition as it cannot guarantee
development.

Besides improved living standards, it also involves reducing poverty, expanding the range
of economic and social choices, and increasing freedom and self-esteem. As an economy
develops the economic welfare of its population increases. At first, the availability of basic
sustaining products increases. Then consumption levels rise beyond those needed for
survival, and people have more choice of what to consume, where to live and where to work.
In short, economic development is an improvement in economic welfare.

Measures of economic development

A common way to measure development is real GDP per head. This does measure an
important aspect of development, material living standards, but it does not measure all
aspects of development. A wider measure is the Human Development Index (HDI). HDI
varies between value 0 to 1. An index of:

 Less than 0.550 indicates low development

 0.550-0.699 medium development
 0.700-0.799 high development
 Above 0.800 very high development

Causes of differences in economic development between countries

 Differences in incomes per head

Economic development tends to be lower in countries with low real GDP per head. In such
countries, some people may struggle to afford a good standard of living. However, this does
not mean that all the people in such countries are poor.

 Differences in savings due to differences in income per head

Poor people cannot afford to save and so the savings ratio of a country where the average
income is low, is likely to be low. If savings are low, there will be a lack of finance for
investment.
  Differences in investment

Countries with low value of capital goods per worker will be likely to have low income per
head.

 Differences in population growth

In countries with high population growth there will be a high dependency ratio, with a high
proportion of children being dependent on a small proportion of workers. This means that
some of the resources which could have been used to improve the quality of life of the
current population, have to be used to support the extra members of the population.

 Differences in education and health care

A lack of access to, or poor quality of, education and healthcare will reduce the quality of
peoples’ lives and will result in low levels of productivity.

 Differences in size of the primary, secondary and tertiary sectors

Economic growth and the quality of people’s working conditions tend to be lower the greater
the proportion of workers in the primary sector. Underemployment can be high in the
agriculture. For instance, 10 persons may be doing the work of 6. This lowers productivity.

 Differences in the concentration on a narrow range of exports (most of which are

primary products)

Countries that export a narrow range of products can be adversely affected by a large
decrease in demand or decrease in supply. The demand for manufactured goods and services
tend to increase more than the demand for primary products as income increases.

 Differences in productivity

Countries with a low output per worker hour will tend to have low income per head and so
may have, for instance, lower education and lower health care.

The under-development trap

Countries can be subject to under-development trap or the vicious circle of poverty. This is
the problem that a country with low incomes has a low saving rate. This means that most of
their resources are used to produce consume goods. The lack of capital goods keep
productivity and income low.
Reasons to achieve economic development

Governments pursue economic development because they want higher real GDP, higher
living standards for their citizens and expansion of the range of economic and social choices.

For economic development to be achieved, it is important that all people should have access
to higher living standards. For this to occur, it is important that the distribution of income
does not become too uneven and poverty is reduced.

Expanding the range of economic and social choices, increasing freedom and self-esteem
includes increasing access to education, healthcare and participation in the political process.
This should improve the quality of people’s lives and enhance future economic performance.

The impacts of differences in economic development between countries

Countries develop at different rates at different times. These differences have implications for
both of them and other countries.

Economies with relatively low economic development may face a number of difficulties in
seeking to improve their economic performance and living standards. These include:

 High growth of population

A high birth rate can result in resources being used, for instance, to feed and educate
children. These could instead have been used to increase the country’s productive potential
and living standards.

 High levels of international debt

Many poor countries have borrowed heavily in the past. In some cases, a large proportion of
the country’s income is taken up in repaying on foreign loans. Therefore, it cannot be spend
on education, healthcare and investment. So the opportunity cost of repaying the debt may be
economic development.

 Lack of investment in human capital and capital goods

Lack of expenditure on education, training and capital goods holds back increases in
productivity, introduction of new technology and international competitiveness.

 Emigration of key workers

Doctors, nurses, teachers, managers and other key workers may seek better-paid employment
abroad.

 Trade restrictions on their products

Tariffs, other restrictions and foreign government subsidies on their own products, make it
difficult for developing countries to sell their products at home and abroad.

 Unbalanced economies

Certain markets may be under-developed such as the financial sector. A lack of a developed
financial sector is likely to discourage saving and investment.

Measures to promote economic development

 One strategy towards economic development involves government intervention. This

is called import substitution. This involves the protection of new domestic industries
against foreign competition by government. This is designed to allow the industries to
grow and as they do so, imports can be replaced by domestic products. If successful,
the strategy can increase domestic output, raise employment and improve the country’s
trade in goods and services balance.

However, this strategy in the short term can raise prices and reduce choice and hence lower
economic welfare. Other countries may retaliate and the domestic industries may become
reliant on protection without seeking to increase their efficiency and competitiveness.

 An alternate strategy is to try to promote exports by exposing domestic firms to

market forces, where firms will be forced to become efficient.

However this depends on the firms being able to compete with foreign firms, some of which
may have been established for some time and may be taking advantage of economies of
scale.
 Another strategy is to improve the country’s infrastructure, capital stock, education,
training and healthcare systems.
 MNCs may promote development in their host countries. They can increase
employment and wages, train and educate workers, bring in new technology and
improve infrastructure, for example, by building roads. However, MCNs may deplete
non-renewable resources, cause pollution and put pressure on host governments to
pursue policies which have detrimental effect on development such as reducing health
and safety regulations.
 Foreign aid can increase development. This can be bilateral aid (from one government
to another) or multilateral aid (through international organisations including the United
Nations, World Bank and the International Monetary Fund).