IB/Group 3/Economics/Economic Development/Introduction

Defining growth and development
Development is a multidimensional qualitative concept that refers to an improvement in living standards in an economy encompassing material consumption, education and health, as well as environmental concerns. Development involves poverty reduction, increased employment opportunities for the individual and a more equitable distribution of income.

Development focuses attention on the individual and on the three dimension of well-being, which are:


 *  health : the ability to live a long and healthy life,
 *  education : the ability to read, write, and acquire knowledge, and
 *  income : command over the income needed for a decent life.

The term sustainable development focuses attention on intergenerational equity along with environmental, social, and economic issues. A widely accepted definition is: "development which meets the needs of the present without compromising the ability for future generations to meet their own needs." A development process is typically considered unsustainable when insufficient attention is paid to the environmental consequences as well as to the resulting changes in the distribution of income. Ignoring these dimensions threatens to reverse any progress made.

Economic growth, on the other hand, is a purely quantitative concept. Growth refers to increases in the real GDP (total output) of an economy through time. Growth and development are related by at the same time very different. Growth does not necessarily imply development. A country may grow without any development objective being achieved. The United Nations Development Programme has described four types of growth to avoid, defined as:


 * jobless, where employment opportunities for the poor do not expand,
 * ruthless, where income inequality widens,
 * futureless, where natural resources are wasted and the impact of the environment is neglected, and
 * voiceless, where individual empowerment lags behind.

On the other hand, development typically necessitates growth. Even though some limited improvement in living standards may be achieved without any growth taking place, long-term progress on the development front requires that developing countries grow.

Sources of long-term growth
A useful way of remembering the sources of growth is to realise that output may grow if all of the following conditions apply:


 * the amount of available resources increase
 * the quality of available resources increase
 * the available technology improves
 * the framework within which economic activity takes place (referred to as the institutional framework) improves

Growth may take place as a result of the following factors:


 * More or improved natural resources (land) becomes available. This usually implies either the discovery of new mineral or oil deposits or the improvement of existing land. Irrigation, fertilisation and improved land management may all improve the quality of existing land and contribute to growth. An increase in the natural capital may lead to growth. Remember, though, that many poor countries rich in natural resources have grown spectacularly while several rich countries with abundant natural resources have miserably failed to grow.
 * There is investment in physical capital. New factories, machinery and equipment increase the physical stock of capital. As a result, labour productivity (defined as output per worker) increases. Also, increased public investments in infrastructure such as roads, ports, communications, power supplies, water, and sanitation facilitate and also lower the cost of economic activity.
 * The labour force growth. A larger labour force means more manpower while a larger population increases the demand side of domestic markets. However, a larger labour force may not be able to find productive employment. In addition, short-term growth may result from better utilisation of existing idle human (and other) resources.
 * Investment in human resources can be exert a most powerful effect on growth as it has a direct positive effect on labour productivity. Improving health services and increasing the stock of human capital, defined as the experience, skills, and education embodied in the labour force of a country, are considered the best policy choices to achieve growth and development.
 * Technological progress is a very influential determinant of growth. If labour is the relatively abundant resource then labour-saving technologies where high output levels are achieved with the same quantity of labour are considered 'inappropriate' as this leads to the UNDP's category of jobless growth. Employing the 'appropriate' technology (which relies on the relatively abundant factor) to accelerate the growth and development process is a highly complex issue, especially if environmental considerations are included.
 * An institutional framework conducive of growth and development is devised. The institutional framework of a country refers to the set of rules and laws, norms, and conventions within which economic activity is conducted. There is no unique set of institutions that singularly promotes growth. However, some institutions have worked better than others. Attempts to transplant a template of westernised institutions into developing countries may not prove fruitful.

Characteristics of developing countries
Developing countries in our world are many and diverse. Their initial conditions, geography, climate, history, political systems, institutions and available resources vary significantly. This means that the list of characteristics that follows does not apply to all developing countries, or to the same extent for them all. It is very dangerous to generalise as there are huge differences in these characteristics between developing countries and within each one.

Per capital real income levels
Extremely low per capita real income levels characterise many developing countries. Low per capita real income levels result in low saving and so low investments. Low investments in natural, human and physical capital lead to low productivity gains and so low incomes, creating a vicious circle of poverty that extends across generations and which may require some kind of intervention.

The degree of income inequality is generally greater in developing than in developed economies. Income distribution is often highly unequal, with the top quintile (20%) of people often receiving 10 to 50 times more than the bottom 40%.

The percentage of people in absolute poverty, defined as the specific minimum income needed to satisfy the basic physical needs to assure 'continued survival,' is also high in developing countries. Interestingly enough, there is recent research showing that often an increase in income will not lead to more food purchased. These may be households at or even below poverty line who will instead choose to spend any extra income earned on a television or a cell phone.

In addition, as a result of very low per capita income levels, larger segments of the population suffer from ill health, malnutrition and debilitation diseases and infant mortality rates are also very high. Remember that there are significant variations both between and within developing countries.

Population growth and/or size
Many developing economies are still characterised by high population growth rates or, if the population growth rates are not very high, the size of their population may be very high. This may be the result of high birth rates (fertility) coupled with a reduction in death rates (mortality) because of improved health conditions. A major implication of high birth rates is that children under the age of 15 often make up almost one half of the total population. This means that the active labour force has to support almost twice as many children as it typically does in richer countries. In some developing countries a large proportion of the population is attracted to cities (urban centres) where most economic activity takes place in the informal sector (that is, where it is neither officially referested nor regulated).

Unemployment and underemployment
High unemployment is a common feature of most developing countries. Unemployment, especially in urban areas, may affect 10-20% of the labour force. On the other hand, the underemployed include those working less than they would like to as well as those who have near zero contribution to total output. In rural areas unemployment suffers from large seasonal variations. Unemployment is a much more complex problem in developing countries and the necessary policy approaches go beyond traditional demand-side or pro-market supply-side prescriptions.

Dependence on the primary sector
Agriculture in developing countries contributes around 30% of GDP compared to less than 2% in high-income countries. AS per capital income levels rise the structure of demand changes, leading first to a rise in manufacturing and then to a rise in services. The share of services in high-income countries is around 70% of GDP. Of course, there are variations in the structure of output within each income group.

Dependence on exports of primary commodities
Since a significant proportion of output in low-income countries originates frm the primary sector, primary commodities often also form the basis of their exports to other nations. Some countries may even depend on exporting a single non-oil primary commodity.

The Millennium Development Goals
In 2000, world leaders promised to improve living standards in developing world by achieving eight UN millennium development goals by 2015. These goals encompass education, health, gender and the environment and are stated as follows:


 * eradicate extreme poverty and hunger
 * achieve universal primary education
 * promote gender equality and empower women
 * reduce child mortality
 * improve maternal health,
 * combat HIV/AIDS, malaria, and other diseases
 * ensure environmental sustainability
 * develop a global partnership for development

Progress has been made on several issues but for very many countries and regions these goals remain out of reach. The best way to monitor up-to-date progress on each of these goals is to visit the MGD website. The World Development Report also includes useful information on the MDGs.

Bear in mind that one important drawback of these goals is that they overlook inequality and process freedoms. In addition, according to the World Bank, climate change and conflict may compromise the efforts to improve standards of living and to achieve these goals.