economic development

economic development

Process whereby simple, low-income national economies are transformed into modern industrial economies. Theories of economic development—the evolution of poor countries dependent on agriculture or resource extraction into prosperous countries with diversified economies—are of critical importance to Third World nations. Economic development projects have typically involved large capital investments in infrastructure (roads, irrigation networks, etc.), industry, education, and financial institutions. More recently, the realization that creating capital-intensive industrial sectors provides only limited employment and can disrupt the rest of the economy has led to smaller-scale economic development programs that aim to utilize the specific resources and natural advantages of developing countries and to avoid disruption of their social and economic structures. Seealso economic growth.

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Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

Overview

There are significant differences between economic growth and economic development. The term "economic growth" refers to the increase (or growth) of a specific measure such as real national income, gross domestic product, or per capita income. National income or product is commonly expressed in terms of a measure of the aggregate value-added output of the domestic economy called gross domestic product (GDP). When the GDP of a nation rises economists refer to it as economic growth.

The term economic development on the other hand, implies much more. It typically refers to improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP is a specific measure of economic welfare that does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice. Economic growth of any specific measure is not a sufficient definition of economic development.

The University of Iowa's Center for International Finance and Development states that:

"'Economic development' or 'development' is a term that economists, politicians, and others have used frequently in the 20th century. The concept, however, has been in existence in the West for centuries. Modernization, Westernization, and especially Industrialization are other terms people have used when discussing economic development. Although no one is sure when the concept originated, most people agree that development is closely bound up with the evolution of capitalism and the demise of feudalism.

Among other things, the contemporary social scientific study of economic development encompasses broad theories of the causes of industrial-economic modernization plus organizational and related aspects of enterprise development in modern societies. It embraces sociological-type research relating to business organization and enterprise development from a historical and comparative perspective; specific processes of the evolution (growth, modernization) of markets and management-employee relations; and culturally related cross-national similarities and differences in patterns of industrial organization in contemporary Western societies. On the subject of the nature and causes of the considerable variations that exist in levels of industrial-economic growth and performance internationally, it seeks answers to such questions as: "Why are levels of direct foreign investment and labour productivity significantly higher in some countries than in others?

Local development

The term "economic development" is often used in a regional sense as well (e.g., a mayor might say that "we need to promote the economic development of our city"). In this sense, economic development focuses on the recruitment of business operations to a region, assisting in the expansion or retention of business operations within a region or assisting in the start-up of new businesses within a region. (See section 'regional policy' below.)

In addition to economic models, the needs of constituency groups guide economic developers actions. For example, a local economic developer working out of a mayor's office may act towards decreasing unemployment by attracting businesses with large labor needs (call centers). The economic developer working for the chamber of commerce dominated by banks, real estate agents and utilities will recruit manufacturers with large capital investments (steel and chemical plants). The economic developer working for the state manufacturers association will lobby for more workforce training money. The economic developer working for a university will concentrate on business start-ups, specifically those based on intellectual property developed by the university (biotech).

In its broadest sense, economic development encompasses three major areas:

  1. Policies that governments undertake to meet broad economic objectives such as price stability, high employment, expanded tax base, and sustainable growth. Such efforts include monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.
  2. Policies and programs to provide infrastructure and services such as highways, parks, affordable housing, crime prevention, and K-12 education.
  3. Policies and programs explicitly directed at job creation and retention through specific efforts in business finance, marketing, neighborhood development, small business development, business retention and expansion, technology transfer and real estate development. These policies may be directed by central government . This third category is a primary focus of economic development professionals.



Economic development is the movement of the resoucres withing the ppc curve. Economic development can be seen as a complex multi-dimensional concept involving improvements in human well-being – however defined.

Professor Dudley Seers argues that development is about outcomes, that is, development occurs with the reduction and elimination of poverty, inequality, and unemployment within a growing economy.

Professor Michael Todaro sees three objectives of development:

  • Producing more ‘life sustaining’ necessities such as food, shelter, and health care and broadening their distribution
  • Raising standards of living and individual self esteem
  • Expanding economic and social choice and reducing fear

The UN has developed a widely accepted set of indices to measure development against a mix of composite indicators:

  • UN’s Human Development Index (HDI) measures a country’s average achievements in three basic dimensions of human development: life expectancy, educational attainment, and adjusted real income ($PPP per person).
  • UN’s Human Poverty Index (HPI) measures deprivation using the percent of people expected to die before age 40, the percent of illiterate adults, the percent of people without access to health services and safe water and the percent of underweight children under five.

Development economics emerged as a branch of economics because economists after World War II became concerned about the low standard of living in so many countries of Latin America, Africa, and Asia. There are, however, important reservations in making development economics a branch of economics as opposed to the ultimate objective of the study of economics.

The first approaches to development economics assumed that the economies of the least developed countries (LDCs), were so different from the developed countries that basic economics could not explain the behavior of LDC economies. Such approaches produced some interesting and even elegant economic models, but these models failed to explain the patterns of no growth, slow growth, or growth and retrogression found in the LDCs.

Slowly the field swung back towards more acceptance that opportunity cost, supply and demand, and so on apply to the LDCs also. This cleared the ground for better approaches. Traditional economics, however, still couldn't reconcile the weak and failed growth patterns.

What was required to explain poor growth were macro and institutional factors beyond micro concepts of the firm, individual preferences, and endowments. Institutional analysis has been able to explain the poor growth patterns much better than the market failure theories did. However, there is no generally accepted institutional theory of economic development that a large share of development economists agree upon. There is not even agreement on how important institutional factors are.''

Models of economic development

The 3 building blocks of most growth models are: (1) the production function, (2) the saving function, and (3) the labor supply function (related to population growth). Together with a saving function, growth rate equals s/β (s is the saving rate, and β is the capital-output ratio). Assuming that the capital-output ratio is fixed by technology and does not change in the short run, growth rate is solely determined by the saving rate on the basis of whatever is saved will be invested.

Harrod-Domar Model

The Harrod-Domar Model delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends positively on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written as g = s / k. The equation takes its name from a synthesis of analysis of growth by the British economist Sir Roy F. Harrod and the Polish-American economist Evsey Domar. The Harrod-Domar model in the early postwar times was commonly used by developing countries in economic planning. With a target growth rate, and information on the capital output ratio, the required saving rate can be calculated.

Exogenous growth model

The exogenous growth model (or neoclassical growth model) of Robert Solow and others places emphasis on the role of technological change. Unlike the Harrod-Domar model, the saving rate will only determine the level of income but not the rate of growth. The sources-of-growth measurement obtained from this model highlights the relative importance of capital accumulation (as in the Harrod-Domar model) and technological change (as in the Neoclassical model) in economic growth. The original Solow (1957) study showed that technological change accounted for almost 90 percent of U.S. economic growth in the late 19th and early 20th centuries. Empirical studies on developing countries have shown different results (see Chen, E.K.Y.1979 Hyper-growth in Asian Economies).

Also see, Krugman (1994), who maintained that economic growth in East Asia was based on perspiration (use of more inputs) and not on inspiration (innovations) (Krugman, P., 1994 The Myth of Asia’s Miracle, Foreign Affairs, 73).

Even so, in our postindustrial economy, economic development, including in emerging countries is now more and more based on innovation and knowledge. Creating business clusters is one of the strategies used. One well known example is Bangalore in India, where the software industry has been encouraged by government support including Software Technology Parks.

Surplus labor

The Lewis-Ranis-Fei (LRF) Model of Surplus Labor is an economic development model and not an economic growth model. Economic models such as Big Push, Unbalanced Growth, Take-off, and so forth, are only partial theories of economic growth that address specific issues. LRF takes the peculiar economic situation in developing countries into account: unemployment and underemployment of resources (especially labor) and the dualistic economic structure (modern vs. traditional sectors). This model is a classical model because it uses the classical assumption of subsistence wage.

Here it is understood that the development process is triggered by the transfer of surplus labor in the traditional sector (e.g. agriculture) to the modern sector in which some significant economic activities have already begun. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the excess supply of labor from the traditional sector. The profits and hence investment in the modern sector will continue to rise and fuel further economic growth in the modern sector. This process will continue until the surplus labor in the traditional sector is used up, a situation in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than subsistence wage.

The existence of surplus labor gives rise to continuous capital accumulation in the modern sector because (a) investment would not be eroded by rising wages as workers are continued to be paid subsistence wage, and (b) the average agricultural surplus (AAS) in the traditional sector will be channeled to the modern sector for even more supply of capital (e.g., new taxes imposed by the government or savings placed in banks by people in the traditional sector). In the LRF model, saving and investment are driving forces of economic development. This is in line with the Harrod-Domar model but in the context of less-developed countries. The importance of technological change would be reduced to enhancing productivity in the modern sector for even greater profitability and promoting productivity in the traditional sector so that more labor would be available for transfer.

Regional policy

In its broadest sense, policies of economic development encompass three major areas:

  • Governments undertaking to meet broad economic objectives such as price stability, high employment, and sustainable growth. Such efforts include monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.
  • Programs that provide infrastructure and services such as highways, parks, affordable housing, crime prevention, and K-12 education.
  • Job creation and retention through specific efforts in business finance, marketing, neighborhood development, small business development, business retention and expansion, technology transfer, and real estate development. This third category is a primary focus of economic development professionals.

Economic developers

Economic development, which is thus essentially economics on a social level, has evolved into a professional industry of highly specialized practitioners. The practitioners have two key roles: one is to provide leadership in policy-making, and the other is to administer policy, programs, and projects. Economic development practitioners generally work in public offices on the state, regional, or municipal level, or in public-private partnerships organizations that may be partially funded by local, regional, state, or federal tax money. These economic development organizations (EDOs) function as individual entities and in some cases as departments of local governments. Their role is to seek out new economic opportunities and retain their existing business wealth.

There are numerous other organizations whose primary function is not economic development work in partnership with economic developers. They include the news media, foundations, utilities, schools, health care providers, faith-based organizations, and colleges, universities, and other education or research institutions.

With more than 20,000 professional economic developers employed world wide in this highly specialized industry, the International Economic Development Council [IEDC] headquartered in Washington, D.C. is a non-profit organization dedicated to helping economic developers do their job more effectively and raising the profile of the profession. With over 4,500 members across the US and internationally, serving exclusively the economic development community. Membership represents the entire range of the profession ranging from regional, state, local, rural, urban, and international economic development organizations, as well as chambers of commerce, technology development agencies, utility companies, educational institutions, consultants and redevelopment authorities. Many individual states also have associations comprising economic development professionals and they work closely with IEDC.

There is intense competition between communities, states, and nations for new economic development projects in today's globalized world, and the struggle to attract and retain business is further intensified by the use of many variations of economic incentives to the potential business. IEDC places significant attention on the various activities undertaken by economic development organizations to help them compete and sustain vibrant communities.

Additionally, the use of community profiling tools and database templates to measure community assets versus other communities is also an important aspect of economic development. Job creation, economic output, and increase in taxable basis are the most common measurement tools. When considering measurement, too much emphasis has been placed on economic developers for "not creating jobs." However, the reality is that economic developers do not typically create jobs, but facilitate the process for existing businesses and start-ups to do so. Therefore, the economic developer must make sure that there are sufficient economic development programs in place to assist the businesses achieve their goals. Those types of programs are usually policy-created and can be local, regional, statewide and national in nature.

Development by GDP

North America, even though one of the slowest growing continents, has stable growth. Most of the faster growing economies are in the Caribbean.

South America has a Boom and Bust growth with high followed by recession growth, most notable in Brazil, however growth has been stabilizing and the whole continent is growing.

Africa has seen the fastest growing but also the slowest growing/declining. From the oil fields which made Angola the 3rd fastest growing country in the world, to Zimbabwe the slowest growing and declining country in the world. Oil in Africa has created 'wealth spots' were a few countries have exceeded their neighbors in wealth. Out of the 10 fastest growing countries in the world, 3 were African. Some countries have in the past been the fastest growing in the world. Equatorial Guinea reached 75% growth in 2004 because of oil reserves.

Europe has one of the most stable growth. After the fall of the Soviet Union, there was a period of economic decline in Eastern Europe over the 1990s, followed by recovery in the 2000s. The region is now experiencing growth, particularly in those countries that have recently joined the European Union. If the Caucasus were included, Europe would be one of the fastest growing continents in the world. Most countries are growing at a medium speed however many smaller countries exceed 7% and grow exceptionally faster than their neighbors. Out of the 10 fastest growing countries in the world, 1 is in Europe.

Overall in the 20th century Asia was seen as the area with most growth, however in the 21st century, most of this has been dominated by China, but some spots of growth are starting to appear in East and even South Asia. Most nations with high populations have seen high growth especially. Out of the 10 fastest growing countries 3 were directly in Asia. And 3 indirectly or partially.

OMG Meanwhile Oceania has seen moderate growth. The only exceptional growth in Oceania has been on Vanuatu.

Some countries have negative growth, most often due to ongoing wars or hyperinflation. These countries include Palestinean territories, Zimbabwe, Fiji and Chad.

See also

Institutions

References

  • Malcolm Gilles, Dwight H. Perkins. Michael Roemer, Donald R. Snodgrass, Economics of development, New York/London 1996.
  • Todaro, Michael P., Economic Development, Harlow (UK) 19976. ISBN 0582302579.

Lester, Nina, "Assessing Economic Development Incentives: Central Texas City: Managers Perspectives" (2005). Applied Research Projects. Texas State University. Paper 6. http://ecommons.txstate.edu/arp/6

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