 THEDIFFERENCESBETWEENTHECONCEPTOFECONOMI

C
DEVELOPMENTANDECONOMI CGROWTH

PREPAREDBYYAKUBUPETER

I
NTRODUCTI
ON

Thes t
udyofec onomicdev el
opmenti soneoft henewes t,mos texcit
ing,andmos t
chall
engingbranchesoft hebr oaderdi sci
pli
nesofec onomi csandpol i
ti
caleconomy .
Althoughonec ouldcl
aimt hatAdam Smi t
hwast hef i
rst“devel
opmentec onomist”and
thathi sWealt
hofNat ions ,publ i
shedi n1776,wast hefirs
tt r
eati
seonec onomic
development,the systemat ics tudyoft he problemsand pr oces
sesofec onomic
developmentinAf ri
ca,Asia,andLat inAmer i
c ahasemer gedonlyov erthepas tfi
ve
decadesors o.Althoughdev el
opmentec onomi csoftendr awsonr elevantpri
ncipl
es
andc onceptsf
rom otherbr anchesofec onomi csineitheras t
andardormodi fi
edform,
fort hemos tpartitisaf ieldofs tudyt hatisr apidlyevolvi
ngi t
sowndi sti
ncti
ve
analyti
calandmethodologicalident i
ty

WHATDOWEMEANBYDEVELOPMENT
Thet erm developmentmaymeandi fferentt hingst odif
ferentpeople,itisimportant
thatwehav es omewor ki
ngdef i
niti
onorc oreper specti
veoni tsmeani ng.Wi t
hout
suchaper spec ti
veands omeagr eedmeas urementc rit
eria,wewoul dbeunabl et o
determinewhi chc ountrywasac tual
lydev elopingandwhi chwasnot .Dev el
opment
l
ooks ata wi derr ange ofs tat
isti
cst han j ustGDP perc apit
a.Dev elopmenti s
concerned with how peopl e are actuallyaf fected.Itlooksatt heirac tuall
iving
standardsandt hefreedom theyhavet oenj oyagoods tandardofli
ving
TRADI
TIONALMEASURESFORDEVELOPMENT
Instric
tlyec onomict er
ms ,devel
opmenthast radit
ionall
ymeantac hiev
ings us t
ained
rat
esofgr owthofinc omeperc apit
atoenableanat iont oexpanditsoutputatar ate
fast
ert hanthegr owt hrat
eofi tspopul
ati
on.Lev el
sandr at
esofgr owthof“ real”per
capi
t agrossnat i
onalincome( GNI)(
monetarygrowthofGNIperc apit
ami nust herate
ofi nfl
at i
on)ar et hen used to measuret he ov eral
lec onomi c well
-being ofa
population—how muc hofr ealgoodsands er
vicesisav ail
abletotheav eragec iti
zen

1
f
orc
ons
umpt
ionandi
nves
tment
.
Economicdevelopmentinthepasthasals
obeent ypi
cal
lyseenint ermsoftheplanned
al
terati
onoft hestruc
tureofproducti
onandempl oyments othatagr i
cul
ture’
ss hare
ofbot h dec
li
nesand t hatofthemanuf act
uring and s
ervic
ei ndus
tri
esincreases.
Developments tr
ategi
eshav etheref
oreus uall
yf ocus
ed on r apidindustr
ial
iz
at i
on,
of
tenatt heexpenseofagri
cul
tureandruraldevelopment.
Withfewex cepti
ons,suchasindev el
opmentpol i
cyc i
rcl
esinthe1970s,development
wasunt i
lrecentlynearl
yalwaysseenasanec onomicphenomenoni nwhichrapi dgains
i
nov erallandperc apit
aGNIgr owt hwouldeit
her“ t
rickl
edown”t othemas sesi nthe
for
m ofj obsandot herec onomi
coppor tuni
ti
esorc reatethenecess
aryconditi
onsf or
thewiderdi stri
buti
onoft heec onomicands oci
albenef i
tsofgrowth.Problemsof
povert
y ,discri
minati
on,unempl oyment,andi nc
omedi str
ibut
ionwereofs ec ondary
i
mpor tancet o“ getti
ng thegrowt hjob done.”Indeed,t heemphas i
sisof ten on
i
ncreasedout put,measuredbygr ossdomesti
cproduc t(GDP).
ButDev elopmentmus tt herefor ebec onc eived ofasamul ti
dimens i
onalpr ocess
i
nvolv i
ng maj or changes i ns ocials truc tures,popul ar at t
itudes,and nat i
onal
i
nstitutions ,as wellas t he ac celerati
on ofec onomi c growth,t he r educti
on of
i
nequal ity,andt heer
adic ati
onofpov erty.Dev elopment ,initsessenc e,mus trepresent
thewhol egamutofc hangebywhi c
hanent i
res oci
alsystem,t unedt ot hediverse
basi
cneedsand ev olving as pi
rationsofi ndiv i
dualsand s oc i
algr oupswi t
hint hat
syst
em,mov esawayfrom ac onditionofl ifewi del ypercei
vedasuns ati
sfac t
orytowar d
asit
uat ionorc ondi
ti
onofl if
er egardedasmat eriall
yands piri
tuall
ybet ter.Noonehas
i
dent i
fiedt hehumangoal sofec onomi cdev elopmentaswel lasAmar ty
aSen,per haps
theleadi ngt hi
nkeront hemeani ngofdev el
opment .
Amar
tyaSen’
s“Capabi
li
ty”Appr
oach
Thev i
ewthatincomeandweal tharenotendsinthemselvesbutinst
rumentsforother
purposesgoesbac katleastasfarasAris
tot
le.AmartyaSen,the1998Nobell aur
eate
i
nec onomics,ar
guest hatthe“c
apabili
tytof
unc t
ion”i
swhatr eal
lymatter
sfors t
atus
asapoorornonpoorper son.AsSenputi t,“Economicgrowt hcannotbes ensi
bly
tr
eatedasanendi nitself
.Devel
opmenthast obemor econcernedwithenhancingthe
l
ivesweleadandt hefreedomsweenj oy.
”
Sent hendef inescapabili
ti
esas“ thefreedom thatapersonhasint ermsoft hec hoice
off unc ti
onings,giv en his personalf eat
ures (c
onversi
on ofc haract
erist i
csi nto
functi
oni ngs)andhi sc ommandov ercommodi ti
es.”Sen’
sper specti
vehel psex plain
whydev elopmentec onomi st
shav eplaceds omuchemphas isonheal thandeduc ation
and mor er ecentl
y on s oci
ali ncl
usion and empower ment,and hav er ef erred t o
countrieswi t
hhi ghlevel
sofi ncomebutpoorheal thandeduc ati
ons tandardsasc ases
of“ growt h withoutdev elopment .
”Reali ncome isessenti
al,butt oc onv ertt he
2
characteris
ticsofc ommodi ti
esi ntof uncti
oni ngs ,in mos ti mport
antc ases,surely
requir
esheal thandeduc ati
onaswel lasi ncome.Ther oleofhealthandeduc ati
on
rangesf rom somethings obas icast henut ri
tionaladv ant agesandgr eaterpersonal
energyt hatar epossiblewhenonel i
v esfreeofc er
tainpar asi
testot heex panded
abil
itytoappr ec
iat
et her i
chnessofhumanl ifet hatc omeswi thabr oadanddeep
education.Peopl elivi
ng i n poverty are often depr ived—at ti
mes deliberat
ely—of
capabil
iti
est omakes ubstanti
vec hoicesandt ot akev aluableacti
ons,andof tenthe
behavioroft hepoorcanbeunder stoodi nt
hatl ight.
ForSen,human“ wel
l-
being”meansbeingwell
,inthebasicsenseofbei nghealthy
,
wellnouri
shed,wellc
lothed,l
it
erat
e,andlong-
li
vedandmor ebroadly,beingableto
takeparti
nt hel
ifeofthec ommunity
,bei
ngmobile,andhavi
ngfreedom ofc hoi
cein
whatonec anbecomeandc ando.
Thr
eeCor
eVal
uesofDevel
opment
Isitpos sible,t hen,todef i
neorbr oadl yc onceptualiz
ewhatwemeanwhenwet alk
aboutdev elopmentast hes ustai
nedel ev ationofanent ir
es oc i
etyands ocialsystem
towar da“ bet ter”or“mor ehumane”l i
fe?Whatc ons ti
tutest hegoodl i
feisaques tion
asol dasphi los ophy,onet hatmus tbeper i
odicall
yr eevaluatedandans wer edaf r
eshi n
thec hangi ngenv ir
onmentofwor lds oc i
et y.Theappr opr i
ateans werfordev el
opi ng
nationst odayi snotnec es s
aril
yt hes ameasi twoul dhav ebeeni npr evi
ousdec ades.
Butatl eas tt hreebas i
cc omponent sorc orev al
uess erv easac onc eptualbas isand
prac ti
calgui del ineforunder standingt hei nnermeani ngofdev elopment .Thes ec ore
values —s us t
enanc e,self-esteem,andf reedom—r epresentc ommongoal ss oughtby
allindivi
dual sands oci
eties.Theyr el
atet of undament alhumanneedst hatf i
ndt heir
expr essi
oni nal mostallsoc i
etiesandc ulturesatal ltimes .Letust hereforeex ami ne
eachi nt urn.
1.
Sus
tenance:TheAbi
li
tyt
oMeetBas
icNeeds
Allpeopl ehav ecertainbasicneedswi t
houtwhi chl i
fewoul dbei mpos s
ible.Thes elife-
sustainingbas ichumanneedsi nc
ludefood,s helter,heal
th,andpr ot ect
ion.Whenany
of t hes e is absent or i n c r
iti
cal
lys horts upply,a c ondition of “ absol ute
under development ”ex i
sts.Abas icfunctionofal leconomi cactivity,ther efore,ist o
provideasmanypeopl easpos si
blewitht hemeansofov ercomingt hehel plessnes s
andmi seryarisi
ngf rom al ackoff ood,s helt
er,heal t
h,andpr otec ti
on.Tot hisex tent,
we may c lai
m t hat ec onomi c devel
opment i s a nec essar
yc ondition f or t he
i
mpr ov ementi nt he qualit y oflif
et hati sdev elopment .Wi thouts us tained and
continuousec onomi cpr ogr essatt hei ndividualaswel last hes oci
etall ev el
,t he
real
izationoft hehumanpot enti
alwoul dnotbepos si
ble.Onec learlyhast o“ hav e
enoughi nor dertobemor e.”Risi
ngperc apitaincomes ,theel i
mi nationofabs ol ute
pover ty,gr eater empl oyment oppor tuniti
es ,and l essening i ncome i nequalities

3
t
her
efor
econs
tit
utet
henec
ess
arybutnott
hes
uff
ici
entc
ondi
ti
onsf
ordev
elopment
.
2.Sel
f-Es
teem:ToBeaPer
son
As econduni ver salc omponentoft hegoodl if
ei sself
-esteem—as ens eofwor thand
self
-res pec t,ofnotbei ngus edasat oolbyot hersfortheirownends .Allpeopl esand
societi
ess eeks omebas icfor m ofs elf
-es t
eem,al thought heymayc allitaut hent ic
ity,
i
dent i
ty ,di gnity ,res pect,honor ,orr ecogni ti
on.Thenat ureandf orm oft hiss elf
-
esteem mayv ar yf rom s ocietyt os oci
etyandf r
om c ul
turetoc ul
tur e.Howev er,with
thepr olifer at i
onoft he“ moder nizi
ngv alues ”ofdev el
opednat i
ons,manys oc i
etiesin
developi ngc ount riest hathav ehadapr ofounds enseoft hei
rownwor ths uf ferf r
om
seri
ous c ultur alc onfus i
on when t hey c ome i nc ontact wi
th ec onomi c all
y and
technol ogi cal l
yadv anc eds oc i
eties.Thi
si sbec ausenat i
onalprosperityhasbec omean
almos tuni v er salmeas ureofwor th.Duetot hes i
gnif
icanceattac
hedt omat er ialvalues
i
ndev elopednat ions ,wor thines sandes teem ar enowaday sinc r
eas inglyc onf erred
onlyonc ount riest hatpos sessec onomicweal thandt echnologi
calpower —t hos ethat
have“ dev el oped. ”AsDeni sGoul etputi t,“ Devel
opmenti slegitimized asagoal
becaus ei ti sani mpor t
ant ,perhapsev enani ndispensable,wayofgai ninges teem. ”
3.Fr
eedom f
rom Ser
vit
ude:ToBeAbl
etoChoos
e
At hi rdandf inaluni vers alv aluet hatwes ugges ts houl dc ons titutet hemeani ngof
dev elopmenti st hec onc eptofhumanf r eedom.Fr eedom her ei st obeunder s toodi n
thes ens eofemanc ipat i
onf rom al i
enat ingmat eri
alc ondi t
ionsofl i
f eandf rom s oc i
al
serv i
tudet onat ure,ot herpeopl e,mi ser y ,oppr es si
vei nstitut i
ons ,anddogmat i
cbel ief s
,
espec i
allyt hatpov ertyi spr edes tinat i
on.Fr eedom i nv olvesanex pandedr angeof
choi cesf ors oc ieti
esandt heirmember st oget herwi thami ni miz at ionofex t er nal
cons traint sint hepur suitofs omes oc ialgoalwec alldev elopment .Amar tyaSenwr i
t es
of“ dev el
opmentasf reedom. ”W.Ar t hurLewi ss tress edt her elat i
ons hipbet ween
economi cgr owt handf reedom f rom s er v itudewhenhec onc l
udedt hat“ t
headv ant age
ofec onomi cgr owt hi snott hatweal thi nc reas eshappi nes s,butt hati ti ncreas est he
rangeofhumanc hoi ce.”23Weal thc anenabl epeopl et ogai ngr eat erc ont rolov er
natur eandt hephy sicalenv ironment( e.g. ,t hrought hepr oduc ti
onoff ood,c lot hing,
ands helter)t hant heywoul dhav ei ft heyr emai nedpoor .I tal sogi vest hem t he
freedom t oc hoos egr eat erl eisure,t ohav emor egoodsands erv i
c es ,ort odenyt he
i
mpor tanc eoft hesemat erialwant sandc hoos et oliveal ifeofs pirit
ualc ontempl at i
on.
Thec onc eptofhumanf reedom al soenc ompas s
esv ar i
ousc omponent sofpol itical
freedom,i ncludi ngper sonals ec urity,t her uleofl aw,f reedom ofex pr es si
on,pol itical
part i
c i
pat ion,andequal ityofoppor tuni ty .24Al thoughat tempt st or ankc ountrieswi th
freedom i ndex eshav epr ovedhi ghlyc ont roversial,
25s tudiesdor ev ealt hats ome
count ri
est hathav eac hiev edhi ghec onomi cgr owt hr atesorhi ghi nc omes ,s uc has
China,Mal ays i
a,SaudiAr abia,andSi ngapor e,hav enotac hievedasmuc honhuman
freedom c ri
teria.
4
TheThr
eeObj
ect
ivesofDevel
opment
Wemayc oncl
udet hatdev el
opmenti sbothaphysicalreal
ityandas tat
eofmi ndin
whichsoci
etyhas ,throughs omec ombinati
onofs oci
al,economic,andins
tit
utional
proces
ses
,s ecur
ed t he meansf orobtai
ning abetterlife.Whateverthe speci
fic
componentsoft hisbet t
erli
f e,devel
opmentinallsoci
et i
esmus thaveatleastthe
fol
lowi
ngthreeobjectives:
1.Toinc
r eas
et heavail
abi
li
tyandwidenthedi
str
ibut
ionofbas
icl
if
e-s
ust
aini
nggoods
suchasfood,shelt
er,heal
th,andpr
otect
ion
2.Toraiselevelsofli
ving,inc
ludi
ng,i
nadditiontohigherincomes,t
heprov i
sionof
morejobs,bettereducati
on,andgreat
eratt
ent i
ontocult
uralandhumanvalues,allof
whic
hwi l
ls er
venotonl yt oenhancemater
ialwell
bei
ngbutal sotogener
ategr eater
i
ndivi
dualandnat i
onalself
-est
eem
3.Toex pandtherangeofec onomi candsoci
alchoic
esavail
abl
etoindi
vidual
sand
nati
onsbyf r
eei
ngthem from serv
itudeanddependencenotonlyi
nrel
ati
ont oother
peopleandnati
on-
statesbutal
sotot hefor
cesofi
gnoranceandhumanmisery
Mi
ll
enni
um Devel
opmentGoal
s(MDGs
)
As etofei ghtgoal sadopt edbyt heUni tedNat ionsi n2000:t oer adic
at eextreme
povertyandhunger ;achi
eveuni versalpr
imaryeduc ati
on;pr omotegenderequal i
tyand
empowerwomen;r educechildmor tali
ty;improvemat ernalhealth;combatHI V/AIDS,
malaria,andot herdiseases;ensureenv i
ronment alsustai
nabili
ty;anddev elopagl obal
partnershi
pf ordevelopment .Thegoal sareassignedspec i
fictar
get stobeac hievedby
2015.Appr opriatel
y ,thefirstMDG addr ess
est hepr oblem ofex tremepov ert
yand
hunger .The two t argetsf orthi sgoalar e mor e modes t:tor educ e byhal ft he
propor t
ionofpeopl elivi
ngonl es sthan$1adayandt or educebyhal fthepr oportion
ofpeopl ewhos uf
ferfrom hunger .
WHATI
SECONOMI
CDEVELOPMENT
Sen’s( 1999)i nt
ernationalwor k, nev erpr ovide a pr ec i
s e defini
tion,c ons i
ders
developmentt obet hes t
rengt heningofaut onomyands ubs tantivefreedoms ,whi ch
all
ow i ndi vi
dualstof ull
ypar t
ic i
pat einec onomi clif
e.Henc e,ec onomi cdev elopment
occurswheni ndi
vidualagent shav et heoppor tunitytodev elopt hec apaciti
est hat
all
owt hem t oac ti
velyengageandc ontri
but etot heec onomy .Int heaggr egate,this
shouldl owert ransactionc ost
sandi ncreases oci
almobi li
ty .Rathert hanbeingr educ ed
toas tat icfactorinapr oducti
onpr ocess,indivi
dualsbec omet heagent sofc hangei n
thepr oc essofec onomi cdevelopment :theyhav ethef r
eedom t or eali
zetheirpot enti
al.
Thegr eat erthenumberofi ndividualsabl etopar tic
ipat eint heec onomyandt he
society,t hegreatertheoppor t unit
yf ornewi deast ocirculateandbeputi ntoac ti
on.

5
EconomicDevelopmentisdefi
nedastheexpans
ionofc apac
iti
est hatcontr
ibut
eto
the adv
ancementofs oci
etythr
ough the r
eal
izat
ion ofindivi
duals’
,fir
ms ’
,and
communiti
es’potent
ial
.Or
EconomicDev elopmenti sthe sustained i
ncreasei
nr ealperc apit
aincome,and
measuresofthedi s
tri
butionofincomeandweal t
haswellasinc
reasesini
ndicat
orsof
qual
ityofl
if
e,rangingfrom li
feexpectancytocrimest
ati
sti
cstoenvironment
alquali
ty.
Economicdevelopmentf ocus
esont hemi cr
oeconomicsofgrowth.
Fr
om t hi
sstandpoi
nt,economicdevelopmentdif
fersfr
om growthi ntermsofaf oc
us
onabr oadersetofmet r
icsthataremoreimmedi at
elyreal
iz
ed.AlthoughSen’swork
wasrootedinthecontextofsomeoft heworld’
spoorestcountri
es,thi
sdefi
nit
ionand
cr
iter
iaareequal
lyr
elevanttothefullr
angeofeconomies—bot hnati
onalandregi
onal.
Economic dev el
opmentthusdependson t he expansi
on ofhuman c apit
ali nits
broadestsense,sucht
hatindi
vi
dualscanmoreful
lypart
icipat
eintheeconomi c,s
ocial
,
andc ul
tur
alpat t
ernsofbehavi
orthatencour
ageini
tiat
ive,engagement,cooperati
on,
andc ompetit
ion.
Economi
cdevel
opment,acc
ordi
ngtoSc humpet
er(
1961)
,invol
vestransf
err
ingcapi
tal
fr
om est
abl
is
hedmet hodsofproduc
tiontonew,i
nnovati
ve,producti
vi
ty-
enhanci
ng
methods
.
Sc humpet er’sc onc eptual i
zationwasf ocusedonunder s t
andi ngt heor igi
nsoft he
bus i
nes sc yc l
eandt hec ondi tionst hatgav eris et onew oppor tuniti
est hatpr opelled
theec onomyf orwar dt oahi gherec onomi cgr owt htrajec t
or y.Schumpet erdi s cusses
theemer genc eofs y
st emsofc ompl ement aryc apabi l
iti
est hatdev elopar oundkey
radicalinnov ati
onst oc reateec onomi cgr owth.Forex ampl e,thei ndus trialrev olution
wasdr iv
eni npar tbyc hangesi nt hemeansofpr oductioni nt het exti
lesi ndus try ;
t hese
changesgener atedav ari
etyofs oc ialandec onomi cef fec tsthatt henex tendedt o
otherc ompl ement arys ectors ,and di ffused t hroughoutt heec onomy .Dur ing t he
i
ndus tr i
alrev olut i
on,t hef act orybec amet heuni tofpr oduc ti
on,mov ingpeopl eof f
farmsandi nt oc it
iesandr equi redc loc ksandac countings ystemst or egul atewor king
hour s.Ther esultwasas ustainedi nc reaseint hes tandar dofl i
ving,al beitnotwi t hout
certain adj us tment c os t
s.I n Sc humpet er’
sv i
ew,ec onomi c dev elopment i sa
fundament alt rans format ion ofan ec onomy .Thi si ncludesal tering t he i ndus t
rial
structure,t heeduc ati
onaland oc c upat i
onalc haract
eris ti
c soft hepopul ation,and
i
ndeedt heent ires oc i
alandi ns tit
utionalf abric
.
Thus ,to add t ot hedefini
ti
on,EconomicDevelopmenti sthemeanst o achi
eve
sustained inc
r eas
esi n pros
peri
tyand qual i
tyoflif
er eali
zed t
hrough i
nnovati
on,
l
ower edt ransacti
onc osts
,andtheut i
li
zati
onofc apabi
li
tiestowardtheresponsi
ble
produc ti
onanddi ffus
ionofgoodsands er
vices.

6
Economi stsc oncludet hatt hedev elopmentofhi gh-qual i
tyins ti
tutionsist hemaj or
factorbehi ndec onomi cgr owt h(Rodr i
ketal .,2004) .Lipset( 1959)ar guest hatt he
effi
cienc yofapol iticaljuris
di ct
ion’ssoc ialandec onomi cinstit
utionsdef inesec onomi c
development .Instituti
onsar ether ulesoft hegame,enf orcementmec hanisms ,ort he
accepteds tandardofbehav iorinas ociety(Os tr
om,1986) .Instit
ut i
onsoper atewi th
specifi
cr ulesandpr ocedur est hatlowert ransacti
onc os tsandi ns pireconfidenc eby
certi
fying t he r ange of pot enti
alout comes .High- qualityi ns t
itut
ions s upport
produc ti
v eac ti
vit
iesandenc ouragec apitalac
c umulation,s ki
llacqui si
ti
on,inv ent i
on,
andt ec hnologyt ransfer( Nor thandThomas ,1973) .Ros enber gandBi r
dzell( 1987)
highli
ghthow t hedev elopmentofi ns tituti
onsc onduc i
vet oc apitali
s m wasadr i
ving
forceinHowt heWes tGr ewRi ch.
Two poi
nts aboutinst
itut
ions ar
erel
evantt
osol
idi
fyi
ng ourunder
standi
ng of
economi
cdevelopment
.
First,thereisnos ingl
ei nsti
tuti
on,s uc
hast helegalsyst
em orpr opertyr i
ghtsthat
suppor ts ec
onomi c development .Whatmat t
ersi s an underl
yi
ng c apabili
ty and
orientati
on oft he socialand ec onomicor ganizat
ion ofa s oci
ety,es peci
all
yt he
capac i
tyt oinsti
llconfi
denc ei nthef uture.Formalandev en i
nformali nsti
tut
ions
create predict
abili
ty and or der that al
low indivi
duals and busines
s es to make
i
nv estmentdec i
sions.
Second,i nstitutionsar eendogenous —t hati s,theyar et hepr oductofhi s tory ,cul t
ur e,
and hi s toricalac cident s.Institut i
onsev olv ei n unex pec ted andi diosy nc raticway s.
Howev erdes irable,i tismos tlynotpos siblet ot r
ans plantor ganizationsors etsof
i
nc ent iveswhol esalef rom wher et heyor iginat et ootherc ontextswher et heyappear
to be needed.I ns tead,or gani zationsand i ncentivesneed t of low f rom ex i
sting
i
ns tit
ut ionalar rangement s.Engagi ngi n ec onomi cdev elopmentmeansbui ldingor
augment i
ngex isti
ngi ns ti
tuti
onst hatar ec r
iticaltopr ogr ess.Givingpr imac yt ot he
mar kethi dest hef actthatmar ket swoul dbev er yprimitivewi t
houtgov er nment .When
gov ernmentwor kswel l,thepr ivates ec torbenef itsthr oughgr eaterpr oduc tivi
t yand
effi
c i
entus eofr es ourc es.Gov ernmental somi tigatesr iskt hroughar elat i
v elys table
and pr edictabl es ystem of l aws and money .Gov er nment pr ov i
des r ules and
i
nc ent ives —t he c ondi tions underwhi c h moder n mar ket sar e ev en pos sible,and
enabl est hepr ivates ectort or eal i
zeit spot ent i
al.Mor ebr oadly,gov ernmentpr ov ides
fors oc ialorderandpr edictabilityi nc ont ractsanddai l
yl ife.Thedi fficultbal anc ef or
thegov ernmentt os trikei st o pr ov idef ort her eali
z ation ofpot ent ialwhi l
enot
reduc ingi ncent i
vesi nt hepr ivat es ector .
Economicdevel
opmentrequir
esef fecti
veinstit
uti
onsgroundedinnormsofopennes
s,
tol
erancef
orris
k,appr
eciat
ionf ordiver
sit
y ,andconf
idenceinthereal
iz
ati
onof
mutualgai
nforthepubl
icandt hepr i
vatesec t
or.

7
whatec
onomi
cdev
elopmentwi
lll
ookat
:

 Reali ncomeperhead–GDPperc api t

a
 Lev elsofl iter
ac yandeduc ations tandar ds
 Lev elsofheal thcar ee.g.numberofdoc tor sper1000popul ation
 Qual i
tyandav ailabili
tyofhous ing
 Lev elsofenv ironment als tandar ds
 Lifeex pec tanc y.
Abs olut ePover ty.Dopeopl ehav es uffi
c i
entr esourcestomai ntainaheal thydietand
bas i
csofl ifesuchass helter?Ec onomi cgr owt hmaybees sent i
altoenabl ehi gher
i
nc omesf orpeopl etobeabl et obuymor ef ood.Howev er ,economi cgr owt hdoes n’t
nec essarilyimpr ov eev er yone’sl i
v i
ngs tandar ds .Economi cgr owt hc oul dby passthe
poor ests ec ti
onsofs ocietybec auset heydon’ thav etheabi l
it
yt ot akepar t.Akeyi s
sue
i
swhet hert hebenef itsofec onomi cgr owt har eequitablydi stri
but edamongs t
differentgr oupsofs oc iety.
Educat i
ons tandar ds.e. g.li
ter acyr ates.Ec onomi cgr owthmayenabl emor emoneyt o
bes pentoneduc at i
on.Howev er,ther eisnoguar anteet hatt hepr oc eedsofgr owth
willbeus edt oimpr ov eeduc at ions tandar ds.Ther eisoftenaweakc orrelation
bet weenGDPandl i
terac yrates .
Envi r
onment alst andar ds .Economi cgr owt hc anac tuall
yhar mt heenv ironmentand
peopl e’slivingst andar ds .Forex ampl e,hi gherout putcoul dc aus emor epol lut
ion.If
highergr owt hinv olvesc utti
ngdownf or es ts–t hiscouldhav eadv ers eenv ironmental
cons equenc esinl ong- ter m.
Trans por t/I nfras tr
uct ur eEc onomi cdev elopmentwoul dr equireimpr ovement si
n
i
nf rastruct ureandt rans port.Thi smaybei mpor tantforr egionswhi chmaybec utoff
fr
om t hemai nar easofec onomi cgr owt h.

Meas
uresofeconomi
cdevel
opment

Measuri
ngeconomicdevel
opmenti
snotaspr
eci
seasmeas
uri
ngGDPbec
aus
eit
dependsonwhatfact
orsarei
ncl
udedi
nthemeasur
e.

Therear
eseveraldi
ffer
entmeas
uresofec
onomi
cdev
elopment
,suc
hast
heHuman
devel
opmentindex(HDI)

Humandevel
opmenti
ndex(
HDI
)

8
TheHDIcombi nes :
1.Lif
eEx pec tancyI
ndex.Averageli
feex
pec
tanc
ycompar
edt
oagl
obalex
pec
ted
li
feexpec tancy.
2.EducationI ndex
1.meany earsofschooli
ng
2.ex pec t
edy earsofschooli
ng
3.IncomeI ndex( GNIatPPP)

Whati sEconomi cGrowth?

Economi cgrowt hisanincreas einthepr oducti
onofec onomi cgoodsands er
vic
es ,
compar edf r
om oneper i
odoft imetoanot her.I
tc anbemeas uredinnomi nalorreal
(adjustedf orinfl
ati
on)terms .Tradi
tional l
y,aggregateec onomi cgrowthismeas uredin
termsofgr ossnat i
onalproduc t(GNP)orgr ossdomes t
icproduc t(
GDP),alt
hough
alternativ
emet ri
csaresomet imesus ed.0rIns i
mpl es
tter ms,ec onomi
cgr owthrefers
toani nc r
eas einaggregatepr oductioni nanec onomy .

KEYPOI
TS

 Economi
cgr
owt
hisani
ncr
eas
eint
hepr
oduc
tionofgoodsands
erv
icesi
nan
economy.
 Incr
easesi
ncapi
talgoods
,laborf
orc
e,t
echnol
ogy
,andhumanc
api
talc
anal
l

9
 contr
ibutetoeconomicgrowth.
 Economicgr owt
hiscommonlymeasuredi
ntermsoftheinc
reas
einaggregat
ed
marketvalueofaddi
ti
onalgoodsands
ervi
cesproduc
ed,usi
ngesti
matessuch
asGDP.

Fact
orsaf
fect
ingeconomi
cgr
owt
hindevel
opi
ngcount
ries

 Lev
elsofi
nfr
astr
ucture–e.
g.t
ranspor
tandcommunic
ation
 Lev
elsofc
orrupt
ion,e.
gwhatperc
entageoft
axrat
esareactual
lyc
oll
ect
edand
s
pentonpubl
ics
erv
ices
.
 Educ
ati
onals
tandar
dsandl
abourpr
oduc
tiv
ity
.Bas
icl
evel
sofl
it
erac
yand
educati
onc andet erminet heproducti
vit
yoft hewor kforc
e.
 Levelsofinwar di nvestment.Forexample,Chinahasi nvestedinmanyAfric
an
countri
est ohel pex portrawmat eri
als
,thatitseconomyneeds .
 Labourmobi li
ty.Islabourabletomov efrom relat
ivelyunproducti
veagri
cul
tur
e
tomor epr oduc ti
v emanuf act
uri
ng?
 Theflowoff oreignaidandi nvestment.Targetedaid,canhelpimpr ov
e
i
nfrastructureandl i
vi
ngs tandards.
 Levelofs avingsandi nvestment.Highersavingscanf undmor einvest
ment,
helpi
ng
economi cgr owth.

Economi
cgr
owt
hwi
thoutdevel
opment

Iti
spossibl
etohaveeconomi
cgrowthwi
thoutdev
elopment
.i.
e.aninc
reas
einGDP,
butmos tpeopl
edon’
tseeanyac
tuali
mprovement
sinli
vi
ngstandar
ds.Thi
scoul
d
occurdueto:

1.Economi cgr owt hmayonl ybenef itasmall% oft hepopul ati

on.Forex ampl e,i
f
ac ount rypr oduc esmor eoil,itwillseeani ncreaseinGDP.Howev er,i
ti s
pos sible,t hatt hisoilisonl yownedbyonef i
rm,andt heref ore,theaver age
wor kerdoes n’treal l
ybenef it.
2.Cor rupt i
on.Ac ount rymays eehi gherGDP,butt hebenef itsofgr owthmaybe
syphonedi nt ot hebankac c ountsofpol i
t i
cians
3.Env ironment alpr oblems.Pr oduc ingtoxicc hemicalswillleadt oani ncreas ein
realGDP.Howev er,withoutpr operr egulation,i
tc analsol eadt oenv i
ronment al
andheal thpr obl ems .Thisisanex ampleofwher egr owt hleadst oadec li
nei n
l
ivings t andar dsf ormany .
4.Conges tion.Ec onomi cgrowt hc anc auseani ncreaseinc onges t
ion.Thi smeans
peopl ewi l
ls pendl ongerint raffi
cj ams.GDPmayi nc r
easebutt heyhav elower
l
ivings t andar dsbec auset heys pendmor et imeint raff
icjams .
5.Produc tionnotc ons umed. Ifas tate-ownedi ndust r
yinc r
eas esout put,thisis
reflectedi nani nc reaseinGDP.Howev er,iftheout putisnotus edbyany one

10
 thenitcausesnoac t
uali
ncreas
einli
vingstandards
.
6.Mili
tar
ys pendi
ng.Ac ountr
ymayincreaseGDPbys pendi
ngmoreonmil
it
ary
goods.Howev er
,ifthi
sisattheex
pens eofhealt
hc areandeduc
ati
oni
tcanlead
tolowerlivi
ngstandards
.

Economi
cdevel
opments
houl
dnotbeconf
usedwi
theconomi
cgr
owt
h
As curr
ent
ly def
ined,the term economic devel
opmenti s often c
onf
lated wit
h
devel
opmentand growth,whi c
h addst oconfusi
on in both poli
cyand academi
c
debat
es.Acar
efulcont
rastbetweenthetwo,however,i
sinst
ructi
ve.
Economi cgr owthhasas tr
ongt heoreticalgroundingandi seas i
lyquantifi
edasan
i
nc r
eas einaggregateout put.I
ntheor i
zingec onomicgrowth,Ri cardoetal.(1819),and
l
aterSol ow (1956)andmanyot hersc onceptuali
zeanec onomyasamac hinet hat
produc eseconomi coutputasaf unct i
onofi nputssuchasl abor,land,andequi pment .
Outputc ani
nc r
easeeitherwhenweaddmor einputsoruset echnologyori nnov ation
i
n or dert o enhancet heef fi
ci
enc ywi th which wet ransform inputsi nt
o out put s
.
Subsequent l
y,gr owth oc curs when out put incr
eases.I n par t because of t his
str
aight f
orwardness,ec onomicgr owthdomi natesthedebat e,wi thitsemphas ison
i
nc r
eas esinpopulati
on,empl oyment ,ortotaloutput,despi
tet hefactthatinc r
easesi n
anyoral lofthesec ouldbeas s
oc i
atedwi thbot himpr ov
ement sand/ordec li
nesi n
prosper i
tyandqualit
yofl if
e.
RobertLucas(1988:13)qui
ps,“we thi
nk of(economi
c)growth and (economic)
devel
opmentasdi st
inc
tfiel
ds,wit
h growththeorydefi
ned asthose aspectsof
economi
cgr owt
hwehav esomeunders
tandi
ngof,anddevel
opmentdefi
nedast hos
e
wedon’t
.”
Economi cgrowt hmeansani ncreasei nrealnat ionali ncome/nat ionalout put .
Economi cdevelopmentmeansani mpr ovementi nt hequal i
tyofl i
feandl iving
standards,e.
g.meas uresofl it
eracy,lif
e-ex pectanc yandheal thc ar e.
Economi cgrowt hi seas il
yquant i
fi
edandmeas ured,whi leec onomi cdev elopmenti s
mor e quali
tati
ve and “ has meantal lt hings t o al lmen and women” .Ec onomi c
developmenti sf ocus edon qual it
yi mpr ov ement s ,riskmi t
igat i
on,i nnov ation,and
entrepreneurs
hipt hatpl acet he ec onomy ofa hi ghergr owt ht r
ajec tory.Whi le
economi cgrowthi st i
edt omac r
oec onomi cc ondi t
ionsandaf unc tionofmar ketforc
es,
economi cdevelopmentr epresentst hec ondi t
ionst hatdet ermi net hemi croeconomi c
functioni
ngoft heec onomy ,affect
ingbot ht hequal it
yofi nput sandt heoppor t
unity
setf orfir
ms .Ec onomi cdev el
opmenti sas soc i
atedwi t
hi nstitut i
ons,s ocialcapital
,
l
aborandc api
talmobi l
it
y ,andinc omeandweal thequi ty(Fager ber getal.,2014) .
By focus
ing on the mic
roec
onomic f
oundati
on of t
he economy, economic
dev
elopmentoff
ersper
hapsthebest
,andmay betheonl
y,pol
icypres
cri
ptionfor

11
sust ai
nableec onomi cgrowt h.Economi cdev elopmenti spr edicated on l ong- t
erm
i
nv es t
ment sint hegener ati
on,dissemination,andabs orpt i
onofnewi deas ,aswel las
i
nfr astructure.Ec onomi c devel
opment r equi res collecti
v e acti
on and l arge- s
cale
i
nv es t
ment swi thlongt imehor i
zons.Infras tructurepr ojects,atraditionalc oncernof
economi cdev elopment,now ex tendt ot hedi gitalr
eal m.Thes tandar dofl iteracyis
expandedatat imewhenl aborforcepar ticipat i
onr equiresabac helor’sdegr eewi th
theex pectationofc onti
nuedl i
feti
meeduc ationandt raining.Economi cdev elopment
i
spr edicatedonc ooperati
onbet weent hepubl i
cs ectorandpr i
vateent erpri
se,buti s
definedbyc ondi t
ionsestabli
shedbygov ernmentandpubl i
cinvestment s .Thoughi tis
certainlypos si
blet ohav egrowthwi thoutdev elopmenti nthes hortorev enmedi um
term,ec onomi cdev el
opmentc r
eatest hec ondi ti
onst hatenabl el ong- runec onomi c
growt h.
Thecont
extofeconomi
cdevel
opment
Schumpet
er’
satt
enti
ont
oinnov
ationandentr
epreneur
shipprov
edaheadofitsti
me;
theseconcer
ns now l
iecenter st
age in poli
cy dis
cuss
ions about ec
onomic
devel
opment.
Ent repreneur saretheagent sofc hangeinanec onomyandt hes our ceofi ncreased
produc ti
vity—t hoseactorswhor ecognizeoppor tunityandgar nerr esourcest oc r
eate
value.Innov ati
onandent repreneur shiparet wosidesoft hes amec oi
n:Ent repreneur s
i
dent ifyoppor tunit
yandi nnov ate,whi l
einnov ationist hec ommer c
ialrealizati
onof
valuef r
om anewi deaori nventionf r
om anent repreneur.Innov ationmayr esultinnew
produc tsintroducedt othemar ket,newpr oduct
ionpr oces ses,ornewor ganizati
onal
forms .Whi l
er adic
alnewbr eakthr oughadv anceshol dourimagi nati
on,t herear emany
mor emundanei ndustri
esandi nc rementalf ormsofi nnov ationt hatar ewithi nreach
andt hatr elyondi ff
erentt ypesofknowl edge.Suc c
essfulfirmsof t
enar iseinunus ual
l
oc ati
ons ,servingunantici
pat edc ustomerneedsi nunex pec tedway s.
Innovat ioni sas ocialac ti
v i
tythatr equiresami xofi ndividual swi t
hdi ffer ents kill
st o
collaboratet oc r
eatev al
ue.Rat hert handi str
ibuteduni f
orml yt hr ought i
meandac ross
geogr aphics pace,i nnov ation tendst oc l
usterbot ht empor al
lyand s pat i
al l
y .Thi s
createsc ycl
esofboom andbus t,c ausingdi srupt i
onf orpeopl ewhomov et of oll
ow
oppor tunity,aswel last hemanywhor emai n.Oneoft her eas onswhyr egi ons ,andi n
part i
cular,citi
es,hav emov edt ot hec ent erofat tentioni st hati nv entor sheav il
yr ely
on l ocali nformation orknowl edge i n gener at i
ng nov elpr oduc ts orpr oc esses.
Obs erving t hatmuc hindus tr
ialknow- how def iesf ormalc apt uret hr ough mar ket
transact i
ons ,Mar shall( 1890)i sf amous l
ynot ed t o hav es aid,“ thes ec retsoft he
i
ndus t
ryar eint heai r.”Des pi
t etheI nt ernetandadv anc esi nt eleconf erenc i
ngand
communi cati
ons,thepr oc essofi nnov ations t
il
lr equiresdebat ingi deas ,unpr edi ctable
epiphani es,andc hanc eenc ount ers.Innov ati
oni ses sentiallyunpr edictabl e—r oot edi n
thec reatives par
kst hatmakeushumanandt hes erendipityt hatmakesl i
fei nt eres ti
ng.
12
Innovationandentrepreneur
shiprequir
eeconomi
cagent st
oventureint
ounc hart
ered
domai nsandt esttheli
mitsoftheircapabi
li
ti
est
or eal
iz
epotent
ialrewards.Ev enthe
mos tac compl
ishedventurecapi
tali
nvestor
sandstockanal
yst
smakebadi nvestments
from timet ot
ime.
Rat
ional
eforgover
nmenti
nves
tmenti
neconomi
cdevel
opment
Capac itybui ldi
ngr equi r
esgov ernmenti nv es t
ment :t hereiss i
mpl ynoot herent i
tythat
hass oc iet
albenef itasi tsmai n obj ectiv eand i sabl et oc ommandt her esources
requiredt ohav es ignifi
canti mpac t.Gov er nmenti sav ehicl
ef orc ol
lect i
veac ti
on:an
agentf orwhom t hepr i
ncipalisi tsc iti
z ensandt hebus i
nes seswi thini tsbor ders
.
Whi l
et henot -f or-profitandev enf or -
pr of i
ts ectorhast akenov ermanyf unc ti
ons
previous l
yal l
oc atedt ogov ernment( Sal amon,2002) ,theres ul
t soft hispr i
vati
zation
aremi x ed.Gov ernmenti sthepr inc ipali nc l
us i
vev ehic
lef oror gani z
ing ec onomi c
,
social,and c i
vicl if
e.I nc ontras t,mar ket s arec oncerned wi tht rans acti
onsand
coordi nat i
ngac tivitythroughpr ices .Thei nvisi
blehandwor ksont hel ogict hatfirms
attemptt omax imi z
epr ofitsors har ehol derv al
ue,whi l
ewor kerss eekt omax imize
theirwages .Ther esultistheallt oof ami li
arr acet ol owerc ostst hroughr elocati
onor
thede- s ki
ll
ingoft helaborf orcet ol owerwages .Thi smar ketl ogicdoesnotac count
forthepot entiallongert er
m benef itst of irmsi fs kill
edwor kerss ugges tnewpr oduct
i
mpr ovement s.Mor eoverHenr yFor d’ sepi phanyt hatifhepai dhi swor kersagood
wage,t heyc ouldaf fordtobuyhi sc ars .
Wi t
hamor enuanc edunder standi ngoft henat ureofi nnov ati
onandent r
epr eneur s
hi p,
thec as eforgov ernmenti nvolv ementi ss tronger( Fel dmanandKel l
y,2003) .Att he
pointwhent echnol ogyhast hegr eates tpot entialforc r
eatingnew i ndus tries,t he
frontiersar e poor l
y def ined and t he c hanc esoff ail
ure are high.Compl ex new
technol ogiesr equirec ol
labor ationandi nformat ions har i
ng;howev er,theupf rontc os t
ofes tabli
shingR&Dpar tner shipsandmaki ngt hem wor kpr oductiv
elyisadi sinc entiv e
tot hepr iv
at es ectordes pitet hehi ghpot entialtoc reatenewi ndustri
es,asev i
denc ed
byphar mac eut i
calmanuf acturer s’f
oc usonbl oc kbusterl i
festyl
edr ugsori ncrement al
changesi nc urrentdr ugsi nor dert okeept hem underpat ent.Thepr ofi
tmot i
vef avor s
shor t-
term ac ti
vit
ywi thl argemar ketpot ential
— nott hemos ti mportants oc i
et al
conc erns.Bas edons hort- r
unpr ofi
tmot i
veal one,muc hofpot enti
alROImaybel ef t
ont het able.
Theobj
ect
iveofgover
nmenti
nves
tmenti
neconomi
cdevel
opment
Forthepr ivat
es ect
or ,t
heobj ecti
vesar
ec learlydefi
nedaspr of
itmax i
mi z
ati
onand
organizat
ionalsurv
ival.Forgov ernment
,art i
culat
ingav is
ionandmeet i
ngas etof
broadobj ecti
vesismor edi f
ficul
tasar es
ultofc ompeti
ngi nt
eres
t s
,t heneedt o
considerdivers
eper spect
ives
,andt hei
nabili
tyt odives
tmandat edbutunpr of
itabl
e
ands omet i
mesunpopul aracti
v i
ti
es.Int
heabs enceofanac c
eptedc onsensusvisi
on

13
forgover
nment,i
tistooeasyt
ogi v
eint
oc ompet
ingshor
t-t
erm demandsorbec
ome
diver
tedtoser
veot herpur
poses.Anar
tic
ulat
edvis
ionforgovernmentiscr
uci
alt
o
fol
lowaneff
ecti
velong-r
uncours
e.
From as oci
etalpointofv iew,increasinginquali
tyofli
fe,whichincludeslong-ter
m
prosperi
ty,ist he ul
timate benc hmar k ofeconomic devel
opmentf ordemoc rati
c
governments.Prosperi
tyandqual ityofl i
fear
eoftensynonymouswi tht heconceptof
thegoodl i
fe,whichenc ompas s
esas enseofmateri
alc
omf ortaswellasps y
c hol
ogic
al
sati
sfac
tionandheal t
h( Lane,1994).
Ec onomi cdev el
opmenti st hemeanst oac hievet heobj ec t
iveofhighqual i
tyofl i
fe
andpr osperi
ty.Thenot ionbehi ndgreaterpros perityandbet terquali
tyofl ifeisthat
they ar e earned by wor king har d and r eal i
zing pot enti
al.Empl oyersr eward
profess i
onals uccessandi nnov ati
venesswithhi gherwagesormor epres t
igiousjobs,
whicht hent r
ans l
atesintohi gherincome.Butunder lyi
ngt hisideali
sther eal i
tythat
i
ndi v
idual sareeduc atedandpr eparedf orgainfulempl oy ment ,andthathi gh-quali
ty
j
obs ar e avail
able,wi th oppor tuni
ties f
oradv ancement .Reac hi
ng t hi
s obj ect
ive
requirest hepubl icandpr ivates ectorwor kt oget herfort heirmutualgai nandt he
greatergoodofs oci
ety.
Prosperit
yandhi ghqual ityofl ifear elaudablel ong- term goal s.Mor einter medi ate
reali
zedoutcomes ,howev er,maybeus edt omeas uremor et angiblepr ogress ,suchas ,
thequal i
tyandquant i
tyofj obsc reated,theear ni ngsandweal thofi ndividuals,t he
typesofnewi nnov ativegoodsands ervi
cesintroduc edt ot hemar ket,andi nves tment s
madeandt hegr owt handex port
ingoff i
rms .Thes ei ntermedi ateout comesar eonl y
reali
zed thr
ough t he actionsoft he privates ec torand r equi r
et hatf irmshav e
i
nc enti
vestot aker iskandar eactivel
yengagedi nt hepr oduc ti
onanddi stri
but i
onof
goodsands erv i
ces.Ec onomi cdev el
opmentr equiresef fectiv
ei nstituti
onsgr oundedi n
normsofopennes s,t ol
eranc eforrisk,appreciati
onf ordiversity,andc onfidenc eint he
reali
zat
ionofmut ualgai nf ort hepubl icandt hepr i
vates ector.Thes ear et hei deal
goalsf orabet t
erf unctioning economy .Ther es ul
tofec onomi cdev elopmenti s
greaterprosperit
yandhi gherqual i
tyofl i
fe,butt hisisr ealiz
edt hroughi nc reasesi n
fourdimensionsofc apacityoutcomes :
Communi t
ycapacit
y:Thephysi
cal
,soci
al,andenv i
ronmentalass
etsthatinf
luencethe
contextforeconomicdevel
opment;Fi
rm andi ndustr
ycapacit
y:Theassetsrel
evantto
fi
rmsandi ndust
ry,inc
ludi
ngworkfor
ce,f ac
il
iti
esandequi pment,organiz
ation,and
supplychain;
Entrepreneur
ialcapaci
ty:Thepot
enti
alforgener
ati
ngnewsmallbus
inesses
,incl
udi
ng
aris
k- t
akingcultur
e,networks
,andaccesstofi
nanci
alc
api
talandaskil
ledworkfor
ce;
and,
I
nnovat
ive i
nfr
ast
ruct
ure:Thec
apac
ityt
osuppor
tnew pr
oduc
ts,pr
oces
ses
,and
14
organi
zati
ons,i
ntermsoff aci
li
ti
es,s
upportserv
ices,andwi
ll
ingnes
stot
aker
isks
.
Thesecapaci
ti
esar
eover
lappingandmutual
lyr
einforc
ing.
Thec apac it
iespr ov i
deadi agnos i
soft hepr ospectsforf uturepr osper i
tyandec onomi c
well-
being.Theyi ndicatewher ec apac i
tyiss trongori ncreasingandhi ghli
ghtwher e
additi
onali nv esti
gat i
oni sr equir
edt ounder st
andr oadbl oc ks
,s tumbl ingbl oc
ks,and
i
nformat i
on gaps .Meas urementofc hangesi n ar egion’sc apac i
ti
es —thati s
,t he
quant i
fi
c ati
onofs peci
ficat tr
ibutesas sociatedwi ththes ec apac it
iesc aptureprogress
i
nbui l
dingr es ourcesas sociatedwi thgener ati
ngas tream ofout c omes ,suchasj obs
and ear nings ,ov ert i
me:i fc apac i
tiesar ei ncreasi
ng,t hen ec onomi cdev el
opment
fol
lows .I fc apacitiesareunder dev eloped,t hengov ernmenti st heent it
yt hatc an
providet hepr ogramsandpol ici
est omov et owardec onomi cdev elopment .
Cl
ass
ict
heor
iesofEconomi
cDev
elopment
The c
lass
ic post
–Worl
d War I
Ili
ter
ature on ec
onomic devel
opment has been
domi
natedbyfourmaj
orands
ometi
mesc ompeti
ngstr
andsofthought
:
(
1)t
hel
inear
-st
ages
-of
-gr
owt
hmodel
,
(
2)t
heor
iesandpat
ter
nsofs
truc
tur
alc
hange
(
3)t
hei
nter
nat
ional
-dependenc
erev
olut
ion,and
(4)the neoc
las
sic
al,f
ree-marketc
ounter
rev
olut
ion.Inr ecenty
ear
s,an ec
lec
tic
appr
oachhasemergedthatdr
awsonalloft
hesecl
assi
ctheori
es.
Theoristsofthe1950sand1960sv iewedtheproc essofdev elopmentasas eri
esof
successivest
agesofec onomicgrowt hthr
oughwhi c hallcountri
esmus tpas
s.Itwas
pri
mar i
lyanec onomict heoryofdevelopmenti
nwhi cht heri
ghtquantit
yandmi xtur
e
ofs aving,investment,and f orei
gn aid were allt hatwas nec ess
aryt o enabl
e
developingnationstopr oceedalonganec onomicgr owthpat hthathadhistor
ical
ly
been f oll
owed by t he mor e dev el
oped countries.Dev elopment thus became
synonymouswi thrapid,aggregat
eec onomicgr
owt h.
1.
Stages
-of
-gr
owt
hmodelofdevel
opment
The mos tinfluent
ialand outs
poken adv oc
ateofthes tages-
of-growth modelof
developmentwast heAmer i
canec onomichist
ori
anWal tW.Ros tow.Ac cordingt
o
Ros t
ow,t hetransi
tionfr
om underdevelopmenttodevel
opmentc anbedes c
ribedi
n
termsofas er
iesofs t
epsorstagesthroughwhichal
lcountri
esmus tproceed.Thes
e
stagesare:
t
hetradi
ti
onals
oci
ety
,theprecondi
ti
onsfort
ake-
offi
ntoself
-sus
t ai
ninggr
owt
h,t
he
t
ake-
off,t
hedri
vet
omat ur
ity
,andtheageofhi
ghmassconsumption.
Thes
est
agesar
enotmer
elydes
cri
pti
ve.Theyar
enotmer
elyawayofgener
ali
zi
ng
15
cert
ainfact
ualobs
ervati
onsaboutthes equenceofdevelopmentofmoder nsoc
ieti
es.
Theyhaveaninnerlogi
candc ont
inui
ty....Theyc onst
itut
e,i
nt heend,bothatheory
abouteconomicgr
owt handamor egeneral,i
fsti
llhi
ghlypart
ial
,theor
yaboutmodern
his
toryasawhole
2.Str uct ural
- changet heor yf oc usesont hemec hanis m bywhi chunder developed
economi est rans formt heirdomes ti
ceconomi cs t
ructuresfrom aheav yemphas i
son
tradi
tionals ubs istenceagr i
cultur eto amor emoder n,mor eur banized,and mor e
i
ndus triallydi vers e manuf acturing and s ervice economy .Itempl oy
st he toolsof
neoclass i
c alpr i
ce and r esource al l
ocation t heory and moder n ec onomet r
icst o
describehowt histransformat ionpr ocesst akesplace.Twowel l-
knownr epresentati
ve
exampl es oft he s tructural
- c
hange appr oac h aret he “two-sectors urplus l
abor ”
theoreticalmodelofW.Ar thurLewi sandt he“ patt
er nsofdev elopment ”empi r
ical
analy
s isofHol lisB.Chener yandhi scoauthor s.
Thehy pothesi
sthatundevelopmentisduet ounder ut
il
iz
ationofresour
cesarisi
ng
from st
ructur
alorins
tit
uti
onalfactor
st hathav
et hei
ror i
ginsinbothdomesticand
i
nt er
nati
onaldual
ism.Developmentt heref
orerequir
esmor ethan j
ustacc
elerat
ed
capit
alfor
mat i
on.
Str
ucturaltr
ansformati
onThepr oces
soft rans
forminganec onomyi nsuc
hawayt hat
thecontri
butiontonati
onali
ncomebyt hemanuf ac
turi
ngs ectorevent
uall
ys ur
pas
ses
thecontri
butionbyt heagri
cul
turalsector
.Mor egeneral
ly
,amaj oral
terat
ioninthe
i
ndustri
alcompos i
ti
onofanyeconomy .
Lewistwo-sectormodeli satheoryofdevel
opmenti
nwhichs urpl
usl aborfr
om the
tradi
ti
onalagricul
tur
als ect
orist r
ansfer
red t
othe moder
ni ndus t
rialsect
or,the
growthofwhi c
habs orbsthesurpl
uslabor
,promot
esi
ndustr
ial
izati
on,ands t
imulat
es
sustai
neddevelopment.
Surpl
usl abourTheex cesssupplyofl
aboroverandabovet
hequanti
tydemandedat
the going free-marketwage r at
e.Inthe Lewistwo-
sect
ormodelofec onomic
devel
opment ,s urpl
uslaborr ef
erstothepor t
ion oft
herurall
aborfor
cewhos e
marginalproducti
v i
tyi
szeroornegati
ve.
Producti
on f
uncti
on isa t
echnol
ogi
calorengi neer
ing r
elat
ions
hip bet
ween t
he
quanti
tyofagoodproduc
edandthequant
ityofi
nputsrequi
redtoproducei
t.
AverageproductTotaloutputorproductdiv
ided bytot
alfact
ori nput(e.
g.,the
aver
ageproductofl
aborisequalt
ototalout
putdivi
dedbythetotalamountoflabor
usedtopr
oduc et
hatoutput
).
Margi
nalpr
oductThei ncreaseintot
alout
putresul
ti
ngfrom theus eofoneadditi
onal
uni
tofav ariabl
ef ac
torofpr oducti
on(suchaslabororc apital
).IntheLewistwo
sec
tormodel,sur
pluslaborisdefi
nedasworker
swhos emarginalproduc
tiszer
o.
16
3TheI
nter
nat
ional
-DependenceRevol
uti
on
Dur ing t he 1970s,i nt
ernati
onal-dependenc e model s gai ned inc reasing support,
espec iall
y among dev el
oping-country intell
ectuals, as a r es ult of gr owing
disenc hantmentwi thbotht hestagesands tructur
al-changemodel s.Whi lethi
stheory
toal argedegr eewentoutoff avordur i
ngt he1980sand1990s ,ver si
onsofi thave
enjoy edar esurgenceint het wenty-fi
rstcenturyass omeofi tsv iewshav ebeen
adopt ed,al bei
ti nmodi fi
edf or
m,byt heoristsandl eader soft heant igl
obali
zati
on
mov ement .Essenti
all
y,i
nternati
onal-dependencemodel sv i
ewdev elopingc ountri
esas
bes et by i ns
tit
utional
, poli
tical
, and ec onomi cr igiditi
es, bot h domes tic and
i
nter nat i
onal,andc aughtupi nadependenc eanddomi nancer elationshipwithr i
ch
count ries.Wi t
hint hisgeneralapproac h ar
et hreemaj ors t
reamsoft hought:the
neoc olonialdependenc e model ,the f al
se-paradigm model ,and t he dualis
tic
-
dev elopmentt hesis.
Neocolonial dependence model A model whos e main propos i
ti
on is t hat
underdevelopmentex i
stsi
ndevelopi
ngc ount
riesbecaus
eofc ontinui
ngex pl
oit
ative
economic,pol it
ical
,and cul
tur
alpol i
ci
es off ormerc ol
oni
alr uler
st owardl ess
devel
opedc ount
ries
.
Fals
e- paradigm modelThe pr oposi
tion thatdevelopi
ng c ountri
eshav efailed to
develop bec aus
et heirdevel opments trat
egies(usual
lygiven t othem byWes tern
economi sts)havebeenbas edonani ncorr
ectmodelofdev elopment ,onethat,for
exampl e,overst
res
s edcapit
alac cumulati
onormar ketli
beral
izationwithoutgi
vingdue
considerati
ont oneededs ocialandinsti
tuti
onalchange.
Duali
sm Thec oex
istenceoftwosit
uationsorphenomena(onedes i
rableandtheother
not)thataremutuallyexcl
usi
vetodi f
ferentgr
oupsofs oc
iety—forexample,ext
reme
pover
t y and aff
luence,moder n and t r
adi
ti
onaleconomi csec t
ors,growth and
st
agnation,andhighereducat
ionamongaf ewamidl
arge-scal
eil
li
terac
y
4TheNeocl
ass
ical
,Fr
ee-
Mar
ketCount
erRevol
uti
on
Int he1980s ,thepol iti
calascendanc yofc ons erv ativegov ernment sint heUni ted
States ,Canada,Br i
tain,andWes tGer manyc amewi thaneoc lassi
calc ounterrev ol
ut i
on
i
nec onomi ctheor yandpol i
c y
.I ndev elopednat i
ons ,thisc ounterrevoluti
onf avor ed
suppl y-si
de mac roec onomic pol i
cies ,r at ional ex pectat
ions t heor ies
, and t he
pri
v at i
zati
onofpubl i
cc orpor
ations.Indev elopi ngc ount ri
es,itcall
edf orf r
eermar kets
andt hedismant l
ingofpubl i
cowner s hip,s tat i
stpl anni ng,andgov ernmentr egul ati
on
ofec onomicact i
viti
es .Neocl
as si
cis
tsobt ainedc ont roll
ingv otesont heboar dsoft he
wor ld’stwomos tpower fuli
nternationalf inanc i
alagenc i
es—t heWor l
dBankandt he
Internat i
onalMonet aryFund.I nc onj unctionandwi ththes imultaneouser os i
onof
i
nfluenc eofor ganizat i
onss uchast heI nter nat i
onalLaborOr gani zat
ion( ILO) ,t he
Uni t
edNat i
onsDev elopmentPr ogram ( UNDP) ,andt heUni t
edNat i
onsConf er enc eon
17
TradeandDevelopment(UNCTAD),whic
hmor eful
lyrepr
esenttheviewsofdel
egates
fr
om dev el
opi
ng count
ries
,itwasi nev
itabl
ethattheneoc onser
vati
ve,fr
eemarket
chall
engetothei nt
ervent
ioni
stargumentsofdependencet heori
stswouldgather
moment um.
Thec ent r
alar gumentoft heneoc l
as si
calc ount errev olutioni st hatunder dev elopment
resul t
sf rom poorr esour ceal loc ationduet oi nc orrec tpr ic i
ngpol iciesandt oomuc h
statei ntervent ionbyov erlyac tiv edev el
opi ng- nat iongov ernment s .Rat her ,t hel eadi ng
wr i
ter soft hec ount errevolut i
ons c hool,i nc ludi ngLor dPet erBauer ,DeepakLal ,Ian
Litt
le,Har r
yJ ohns on,Bel aBal as sa,J agdi shBhagwat i,andAnneKr ueger ,ar guedt hati t
i
st hi sv erys tat ei ntervent i
oni nec onomi cac tiv it
yt hats lowst hepac eofec onomi c
growt h.Theneol iberalsar guet hatbyper mi ttingc ompet itivef reemar ket st of lour i
s h,
privatizing st ate- owned ent er pr i
ses ,pr omot ing f ree t rade and ex por tex pans i
on,
welc omi ng inv es t
or sf rom dev eloped c ount ries ,and el imi nat ing t he pl et hor a of
gov ernmentr egul ationsandpr ic edi stortionsi nf actor ,pr oduc t,andf inanc ialmar ket s,
bothec onomi cef f
iciencyandec onomi cgr owt hwi llbes ti
mul ated.Cont rar yt ot he
clai
msoft hedependenc et heor is ts,theneoc l
as sicalc ount errev olut ionar i
esar guet hat
thedev elopingwor l
di sunder dev elopednotbec aus eoft hepr edat or yac tiv iti
esoft he
dev elopedwor ldandt hei nter nat ionalagenc i
est hati tcont rolsbutr atherbec aus eof
theheav yhandoft hes tateandt hec or rupt ion,i nef f
ic i
enc y ,andl ac kofec onomi c
i
nc ent ivest hatper meat et heec onomi esofdev eloping nat ions .Whati sneeded,
ther efore,isnotar efor m oft hei nternat ionalec onomi cs y stem,ar est ruc tur ingof
dual is
t i
c dev elopi ng ec onomi es ,an i nc reas ei nf oreign ai d,at t
empt st oc ontr ol
popul at i
ongr owt h,oramor eef f
ec tiv
edev elopmentpl anni ngs yst em.Rat her ,i ti s
simpl yamat t erofpr omot ingf reemar ket sandl aissez -faireec onomi cswi thi nt he
cont ex tofper mi ssivegov ernment st hatal lowt he“ magi coft hemar ket plac e”andt he
“i
nv isiblehand”ofmar ketpr icest ogui der es our c eal locat i
onands timul at eec onomi c
dev elopment .Theypoi ntbot ht ot hes uc ces sofec onomi esl ikeSout hKor ea,Tai wan,
andSi ngapor eas“ freemar ket ”ex ampl es( although,aswes hal ls eel at er ,t hes eAs ian
Tiger sar efarf rom t hel aissez- faireneoc ons er vat i
v epr ot ot ype)andt ot hef ailur esof
thepubl ic-
inter v entionistec onomi esofAf ricaandLat i
nAmer i
c a.

Theneoc
las
sicalcounter
revolutioncanbediv
idedint
ot hr
eec omponentappr
oaches:
thef
ree-
marketappr oach,thepubl i
c-c
hoi
ce(or“new pol
iti
caleconomy”
)approach,
andt
he“market-f
riendl
y”appr oach.
Free-marketanal
ysi
sisatheor
eti
calanal
ysisofthepr
oper
tiesofaneconomicsy
stem
operati
ngwi t
hf r
eemarket
s,oft
enundert heassumpti
onthatanunregul
atedmarket
perfor
msbet tert
hanonewithgover
nmentr egul
ati
on.

18
Publi
c-choi
cet heor
y(new pol
it
icalec
onomyapproach)Thetheor
yt hats
elf
-interes
t
gui
des allindivi
dualbehavi
orand t hatgov
ernments ar
eineff
ici
entand c orr
upt
becausepeopleusegover
nmentt opursuet
hei
rownagendas.
Marketf ai
lur
e A mar ket
’sinabil
ityt o deli
veritstheor
eti
calbenefi
tsdue tothe
exi
stenceofmar ketimperfecti
onss uchasmonopol ypower,lackoffact
ormobil
ity
,
si
gnifi
cantex t
ernal
it
ies,orl ack ofknowl edge.Marketfai
lur
e oft
en provi
desthe
j
usti
ficat
ionforgovernmentinterventi
ont oalt
ertheworki
ngofthefreemarket
.
Market
-fri
endlyapproachThenot i
onhi st
oric
all
ypromul
gatedbytheWorldBankt hat
suc
cessfuldevelopmentpoli
cyr equiresgovernmentstoc r
eatean env
ironmenti n
whichmarketscanoperateef
fic
ient l
yandt oint
erv
eneonlysel
ecti
vel
yintheeconomy
i
nareaswheret hemarketisi
neff
icient.

Concl
usi
on
Wedef ineeconomicdevelopmentasac ti
vi
t i
esthatexpandc apacit
iestor eali
zethe
potentialofindi
vi
dual
s,fir
ms ,orcommuni tieswhoc ontri
butetotheadv ancementof
soc
iet yt hrough t
he responsible production of goods and s ervi
ces .Ec onomic
developmentaddr ess
est he functi
oning oft he mi
croeconomicsoft he ec onomy.
Withoutec onomicdevelopment ,economicgr owthislimited.Theul t
imat er esul
tof

19
economi cdevel
opmenti sgreaterprosperit
yandhi gherqualit
yofli
fe;however,these
goalsc an only be reali
zed through s ustai
ned innovati
on,ac t
ivi
ti
es that lower
tr
ansactioncoststhr
oughr esponsi
v eregulati
on,betteri
nfrastr
uct
ure,andincreased
educat
ionandoppor tuniti
esformor efrui
tfulexchange.Onlybyappreci
ati
ngther ole
ofgover nmentasav ehicleforc ol
lect
iveac ti
on,andnots implyac or
rect
iveagainst
marketfail
ure,c
anweens ureoureconomi cf ut
ure.
Thelogicofeconomi cdev el
opmentr equir escertai
nc apaci
ti
esthatrequir
ec ollec
tive
acti
ont hroughgov ernment.Forgov ernmentt obeef f
ecti
veinc r
eati
ngec onomi c
development,t
her eisaneedf orper f
or manc eandi mpactmeasurements yst
emst hat
areablet oprovidedec i
si
ons upportf ors tr
ategicinvestment
s,toas sesspr ogress
madei nt hecatalyt
iccapac i
tybuildi
ngf uncti
on,andt oassessthelimitat
ionsand
barri
ersthatpr
eventt heutil
iz
ationofc apac i
tythatgovernmentinves
tment sbuild.

20