Development economics

Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example, through health and education and workplace conditions, whether through public or private channels.^[1]

Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level.^[2] This may involve restructuring market incentives or using mathematical methods like inter-temporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods.^[3]

Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans.^[4] Also unlike many other fields of economics, there is "no consensus" on what students should know.^[5] Different approaches may consider the factors that contribute to economic convergence or non-convergence across households, regions, and countries.^[6]

Theories of development economics

Mercantilism

Main article: Mercantilism

The earliest ancient Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, Scholasticism the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development. The 16th and 17th century School of Salamanca, credited as the earliest modern school of economics, likewise did not address development specifically.

Major European nations in the 17th and 18th century all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th century development of physiocrats in France and classical economics in Britain. Mercantilism held that a nation's prosperity depended on its supply of capital, represented by bullion (gold, silver, and trade value) held by the state. It emphasised the maintenance of a high positive trade balance (maximising exports and minimising imports) as a means of accumulating this bullion. To achieve a positive trade balance, protectionist measures such as tariffs and subsidies to home industries were advocated. Mercantilist development theory also advocated colonialism.

Theorists most associated with mercantilism include Philipp Wilhelm von Hornick, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy.^[7] In France, mercantilist policy is most associated with 17th century finance minister Jean-Baptiste Colbert, whose policies proved influential in later American development.

Mercantilist ideas continue in the theories of economic nationalism and neomercantilism.

Economic nationalism

Alexander Hamilton, credited as Father of the National System.

Main article: Economic nationalism

Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein (customs union) in Germany. A significant difference from mercantilism was the deemphasis on colonies, in favor of a focus on domestic production.

The names most associated with 19th century economic nationalism are the American Alexander Hamilton, the German-American Friedrich List, and the American Henry Clay. Hamilton's 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, and drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert. List's 1841 Das Nationale System der Politischen Ökonomie (translated into English as The National System of Political Economy), which emphasized stages of growth, proved influential in the US and Germany, and nationalist policies were pursued by politician Henry Clay, and later by Abraham Lincoln, under the influence of economist Henry Charles Carey.

Forms of economic nationalism and neomercantilism have also been key in Japan's development in the 19th and 20th centuries, and the more recent development of the Four Asian Tigers (Hong Kong, South Korea, Taiwan, and Singapore), and, most significantly, China.

Post-WWII theories

See also: Industrial development and Ragnar Nurkse's Balanced Growth Theory

The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II.^[8] The key authors are Paul Rosenstein-Rodan,^[9] Kurt Mandelbaum,^[10] Ragnar Nurkse,^[11] and Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia, Africa and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis^[12] was an analysis of not only economic growth but also structural transformation.^[13]

Linear-stages-of-growth model

An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List. This theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, thus, development.^[4] The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption"^[14] Simple versions of the Harrod–Domar model provide a mathematical illustration of the argument that improved capital investment leads to greater economic growth.^[4]

Such theories have been criticized for not recognizing that, while necessary, capital accumulation is not a sufficient condition for development. That is to say that this early and simplistic theory failed to account for political, social and institutional obstacles to development. Furthermore, this theory was developed in the early years of the Cold War and was largely derived from the successes of the Marshall Plan. This has led to the major criticism that the theory assumes that the conditions found in developing countries are the same as those found in post-WWII Europe.^[4]

Structural-change theory

Structural-change theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a "more modern, more urbanized, and more industrially diverse manufacturing and service economy." There are two major forms of structural-change theory; W. Lewis' two-sector surplus model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector, and Hollis Chenery's patterns of development approach, which holds that different countries become wealthy via different trajectories. The pattern that a particular country will follow, in this framework, depends on its size and resources, and potentially other factors including its current income level and comparative advantages relative to other nations.^[15][16] Empirical analysis in this framework studies the "sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth." ^[4]

Structural-change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country. The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach has been criticized for lacking a theoretical framework.^{[4][citation needed]}

International dependence theory

International dependence theories gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in international development. Unlike earlier theories, international dependence theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal. These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position. There are three different, major formulations of international dependence theory; neocolonial dependence theory, the false-paradigm model and the dualistic-dependence model. The first formulation of international dependence theory, neocolonial dependence theory has its origins in Marxism and views the failure of many developing nations to undergo successful development as being the result of the historical development of the international capitalist system.^[4]

Neoclassical theory

First gaining prominence with the rise of several conservative governments in the developed world during the 1980s, neoclassical theories represent a radical shift away from International Dependence Theories. Neoclassical theories argue that governments should not intervene in the economy; in other words, these theories are claiming that an unobstructed free market is the best means of inducing rapid and successful development. Competitive free markets unrestrained by excessive government regulation are seen as being able to naturally ensure that the allocation of resources occurs with the greatest efficiency possible and the economic growth is raised and stabilized.^{[4][citation needed]}

It is important to note that there are several different approaches within the realm of neoclassical theory, each with subtle, but important, differences in their views regarding the extent to which the market should be left unregulated. These different takes on neoclassical theory are the free market approach, public-choice theory, and the market-friendly approach. Of the three, both the free-market approach and public-choice theory contend that the market should be totally free, meaning that any intervention by the government is necessarily bad. Public-choice theory is arguably the more radical of the two with its view, closely associated with libertarianism, that governments themselves are rarely good and therefore should be as minimal as possible.^[4]

Academic economists have given varied policy advice to governments of developing countries. See for example, Economy of Chile (Arnold Harberger), Economic history of Taiwan (Sho-Chieh Tsiang). Anne Krueger noted in 1996 that success and failure of policy recommendations worldwide had not consistently been incorporated into prevailing academic writings on trade and development.^[4]

The market-friendly approach, unlike the other two, is a more recent development and is often associated with the World Bank. This approach still advocates free markets but recognizes that there are many imperfections in the markets of many developing nations and thus argues that some government intervention is an effective means of fixing such imperfections ^[4]

Topics of research

Development economics also includes topics such as Third world debt, and the functions of such organisations as the International Monetary Fund and World Bank. In fact, the majority of development economists are employed by, do consulting with, or receive funding from institutions like the IMF and the World Bank.^[17] Many such economists are interested in ways of promoting stable and sustainable growth in poor countries and areas, by promoting domestic self reliance and education in some of the lowest income countries in the world. Where economic issues merge with social and political ones, it is referred to as development studies.

Growth indicator controversy

Per capita Gross Domestic Product (GDP per head) is used by many developmental economists as an approximation of general national well-being. However, these measures are criticized as not measuring economic growth well enough, especially in countries where there is much economic activity that is not part of measured financial transactions (such as housekeeping and self-homebuilding), or where funding is not available for accurate measurements to be made publicly available for other economists to use in their studies (including private and institutional fraud, in some countries).

Even though per-capita GDP as measured can make economic well-being appear smaller than it really is in some developing countries, the discrepancy could be still bigger in a developed country where people may perform outside of financial transactions an even higher-value service than housekeeping or homebuilding as gifts or in their own households, such as counseling, lifestyle coaching, a more valuable home décor service, and time management. Even free choice can be considered to add value to lifestyles without necessarily increasing the financial transaction amounts.

More recent theories of Human Development have begun to see beyond purely financial measures of development, for example with measures such as medical care available, education, equality, and political freedom. One measure used is the Genuine Progress Indicator, which relates strongly to theories of distributive justice. Actual knowledge about what creates growth is largely unproven; however recent advances in econometrics and more accurate measurements in many countries is creating new knowledge by compensating for the effects of variables to determine probable causes out of merely correlational statistics.

Recent developments

See also: Fair trade

The most prominent contemporary development economist is perhaps the Nobel laureate, Amartya Sen.

Recent theories revolve around questions about what variables or inputs correlate or affect economic growth the most: elementary, secondary, or higher education, government policy stability, tariffs and subsidies, fair court systems, available infrastructure, availability of medical care, prenatal care and clean water, ease of entry and exit into trade, and equality of income distribution (for example, as indicated by the Gini coefficient), and how to advise governments about macroeconomic policies, which include all policies that affect the economy. Education enables countries to adapt the latest technology and creates an environment for new innovations.

The cause of limited growth and divergence in economic growth lies in the high rate of acceleration of technological change by a small number of developed countries. These countries' acceleration of technology was due to increased incentive structures for mass education which in turn created a framework for the population to create and adapt new innovations and methods. Furthermore, the content of their education was composed of secular schooling that resulted in higher productivity levels and modern economic growth.

Researchers at the Overseas Development Institute also highlight the importance of using economic growth to improve the human condition, raising people out of poverty and achieving the Millennium Development Goals.^[18] Despite research showing almost no relation between growth and the achievement of the goals 2 to 7 and statistics showing that during periods of growth poverty levels in some cases have actually risen (e.g. Uganda grew by 2.5% annually between 2000–2003, yet poverty levels rose by 3.8%), researchers at the ODI suggest growth is necessary, but that it must be equitable.^[18] This concept of inclusive growth is shared even by key world leaders such as Secretary General Ban Ki-Moon, who emphasises that:

"Sustained and equitable growth based on dynamic structural economic change is necessary for making substantial progress in reducing poverty. It also enables faster progress towards the other Millennium Development Goals. While economic growth is necessary, it is not sufficient for progress on reducing poverty."^[18]

Researchers at the ODI thus emphasise the need to ensure social protection is extended to allow universal access and that active policy measures are introduced to encourage the private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups.^[18]

Prominent development economists

• Daron Acemoglu, professor of economics at the Massachusetts Institute of Technology, and 2005 Clark Medal winner.
• Philippe Aghion, professor of economics at Harvard University, co-authored textbook in economic growth, forwarded Schumpeterian growth, and established creative destruction theories mathematically with Peter Howitt (economist).
• Sabina Alkire, Head of the Oxford Poverty and Human Development Initiative, University of Oxford.
• Jagdish Bhagwati, a frequent commentator on international trade and noted supporter of free trade
• Pranab Bardhan, professor of economics at the University of California, Berkeley, author of texts in both trade and development economics, and editor of the Journal of Development Economics from 1985-2003.
• Peter Thomas Bauer, professor of economics at the London School of Economics, author of Dissent on Development.
• Abhijit Banerjee, professor of economics at the Massachusetts Institute of Technology.
• Kaushik Basu, professor of economics at Cornell University and author of Analytical Development Economics.
• David E. Bloom
• Ha-Joon Chang, author of Kicking Away the Ladder and Bad Samaritans; Rich Nations, Poor Policies and the Threat to the Developing World which use historical evidence to critique neoliberal development economics.
• Paul Collier, author of The Bottom Billion which attempts to tie together a series of traps to explain the self-fulfilling nature of poverty at the lower end of the development scale.
• Esther Duflo, professor of economics at the Massachusetts Institute of Technology, 2009 MacArthur Fellow, 2010 Clark Medal winner, advocate for field experiments.
• William Easterly, author of The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics description and review and White Man's Burden: How the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good (description and preview).
• Celso Furtado, Brazilian structuralist economist.
• Oded Galor, Israeli-American economist at Brown University; editor-in-chief of the Journal of Economic Growth, the principal journal in economic growth. Developer of the unified growth theory, the newest alternative to theories of endogenous growth.
• Peter Howitt (economist), Canadian economist at Brown University; past president of the Canadian Economics Association, introduced the concept of Schumpeterian growth and established creative destruction theory mathematically with Philippe Aghion.
• W. Arthur Lewis, with T. W. Schultz, winner of the 1979 Nobel Prize in Economics for work in development economics.
• Justin Yifu Lin, the current Chief Economist at the World Bank and has a prominent role in economic development policy^{[dubious – discuss]}
• Raúl Prebisch, founding Secretary General of the United Nations Conference on Trade and Development and influential dependency theorist
• Lant Pritchett, professor at Harvard University's Kennedy School of Government, and has held several prominent research positions at the World Bank.
• Dani Rodrik, professor at Harvard University's Kennedy School of Government, has written extensively on globalization.
• Walt Whitman Rostow, modernization theorist, author of The Stages of Economic Growth: A Non-communist Manifesto
• Jeffrey Sachs, author of The End of Poverty: Economic Possibilities of Our Time (preview) and Common Wealth: Economics for a Crowded Planet
• Amartya Sen, Nobel Prize winner, author of Development as Freedom.
• Hans Singer, who dealt with how unequal terms of trade disproportionately affect producers of primary products. His thesis, combined with the work of Raúl Prebisch, form the basis for dependency theory
• Hernando de Soto Polar, proponent of property rights in the developing world, author of The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
• Frances Stewart, current president of the Human Development and Capability Association.
• Joseph Stiglitz, Nobel Prize winner and former chief economist at the World Bank.
• Lance Taylor is the Arnhold Professor of International Cooperation and Development and Director of the Center for Economic Policy Analysis at the New School, NY. He has published widely in the areas of macroeconomics, development economics, and economic theory. His most recent book is Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the Mainstream (Harvard University Press, 2003). In addition to these activities, he has been a visiting scholar or policy adviser in more than 25 countries, including Chile, Brazil, Mexico, Nicaragua, Cuba, Russia, Egypt, Tanzania, Zimbabwe, South Africa, Pakistan, India, and Thailand.
• Erik Thorbecke, a co-originator of Foster-Greer-Thorbecke poverty measure who also played a significant role in the development and popularization of Social Accounting Matrix.
• Robert M. Townsend, professor at MIT known for his Thai Project, a model for many other applied and theoretical projects in economic development.
• Mahbub ul Haq, creator of the Human Development Report
• David N.Weil, American economist known for his economics growth textbook and his reinterpretation of Malthus.
• Muhammed Yunus, Nobel Prize winner and founder of the Grameen Bank

See also

Sustainable development portal

• Demographic economics
• Dependency theory
• Development studies
• Development wave
• Social development
• Important publications in development economics
• Sustainable development
• Economic development
• Right-financing
• International development
• UN Human Development Index
• Gini coefficient
• Lorenz curve
• Harrod–Domar model
• Debt relief
• Arthur Lewis (economist)
• Walt Whitman Rostow
• Human security
• Kaldor's growth laws
• The Poverty of "Development Economics"

References

1. ^ Bell, Clive (1987). "development economics," The New Palgrave: A Dictionary of Economics, v. 1, pp. 818, 825.
2. ^ Arndt, H.W. (1981). "Economic Development: A Semantic History," Economic Development and Cultural Change, 29(3), p p. 457-466. Chicago: The Chicago University Press.
3. ^ Bell, Clive (1987). "development economics," The New Palgrave: A Dictionary of Economics, v. 1, p. 825.
4. ^ ^{a b c d e f g h i j k} Todaro, Michael and Stephen Smith. Economic Development. 9th ed. Addison-Wesley series in economics, 2006
5. ^ Meier, Gerald M. and James E. Rauch. Leading Issues in Economic Development. 8th ed. Oxford University Press, 2005
6. ^ Ray, Debraj (2008). "development economics." The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
7. ^ Ekelund, Robert B., Jr. and Hébert, Robert F. (1997). A History of Economic Theory and Method (4th ed.). Waveland Press [Long Grove, Illinois]. pp. 40–41. ISBN 1-57766-381-0. 
8. ^ Meier, G.M. and Seers, D. (Eds) (1984). Pioneers in Development. New York: Oxford University Press for the World Bank. Review extract.
9. ^ Rosenstein-Rodan, P. "Problems of Industrialization in Eastern and South Eastern Europe." Economic Journal 53 (1943).
10. ^ Mandelbaum (Martin), K. (1945). The Industrialisation of Backward Areas. Oxford: Basil Blackwell. Second Edition, (1955).
11. ^ Nurkse, Ragnar (1953) Problems of Capital Formation in Underdeveloped Countries, Oxford: Basil Blackwell
12. ^ Lewis, W.A. (1954). Economic Development with Unlimited Supplies of Labour. The Manchester School, XXII(2),, pp. 139–191. Reprint.
13. ^ Bardhan, Pranab K. and Christopher Udry (2000) Development Microeconomics, Oxford
14. ^ Rostow, W.W. The Five Stages of Growth. Development and Underdevelopment: The Political Economy of Global Inequality. 3rd ed. pp. 123-131. Eds. Seligson, Mitchell and John Passe-Smith. Boulder, CO: Lynne Rienner Publishers, 2003.
15. ^ Chenery, H.B. (1960). "Patterns of Industrial Growth," The American Economic Review, 50(4), pp. 624-654. American Economic Association.
16. ^ Chenery, H.B. and Taylor, L. (1968). "Development Patterns: Among Countries and Over Time," The Review of Economics and Statistics, 50(4), pp. 391-416. Cambridge: MIT Press.
17. ^ Klein, Daniel B and DiCola, Therese. "Institutional Ties of Journal of Development Economics Authors and Editors". (August 2004) [1]
18. ^ ^{a b c d} Claire Melamed, Kate Higgins and Andy Sumner (2010) Economic growth and the MDGs Overseas Development Institute

• Development Economics through the Decades: A Critical Look at 30 Years of the World Development Report World Bank Publications, Washington DC (2009), ISBN 978-0-8213-7255-5
• The Complete World Development Report, 1978-2009 (Single User DVD): 30th Anniversary Edition World Bank Publications, Washington DC (2009), ISBN 978-0-8213-7270-8
• Behrman , J.R. (2001). "Development, Economics of," International Encyclopedia of the Social & Behavioral Sciences, pp. 3566–3574 Abstract.
• Clive Bell (1987). "Development economics," The New Palgrave: A Dictionary of Economics, v. 1, pp. 818–26.
• Easterly, William (2002), Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, The MIT Press
• Ben Fine and Jomo K.S. (eds, 2005), The New Development Economics: Post Washington Consensus Neoliberal Thinking, Zed Books
• Peter Griffiths (2003), The Economist's Tale: A Consultant Encounters Hunger and the World Bank, Zed Books
• K.S. Jomo (2005), Pioneers of Development Economics: Great Economists on Development, Zed Books - the contributions of economists such as Marshall and Keynes, not normally considered development economists
• Gerald M. Meier (2005), Biography of a Subject: An Evolution of Development Economics, Oxford University Press
• Gerald M. Meier, Dudley Seers [editors] (1984), Pioneers in Development, World Bank ([2])
• Dwight H. Perkins, Steven Radelet, Donald R. Snodgrass, Malcolm Gillis and Michael Roemer (2001). Economics of Development, 5th edition, New York: W. W. Norton.
• Jeffrey D. Sachs (2005), The End of Poverty: Economic Possibilities for Our Time, Penguin Books
• George Mavrotas and Anthony Shorrocks (eds, 2007), Advancing Development: Core Themes in Global Development, Palgrave Macmillan
• Debraj Ray (1998). Development Economics, Princeton University Press, . Other editions: Spanish, Antoni Bosch. 2002 Chinese edition, Beijing University Press. 2002, Indian edition, Oxford, 1998. Description,table of contents, and excerpt, ch. 1.
• World Institute for Development Economics Research Publications/Discussion Papers
• The Center for Global Development
• Smith, Charles; Rees, Gareth (1998). Economic Development, 2nd edition. Basingstoke: Macmillan. ISBN 0333722280. 
• Arno Tausch (1993; in collaboration with Fred Prager) 'Towards a Socio-Liberal Theory of World Development'. Basingstoke and New York: Macmillan/St. Martin's Press
• Arno Tausch (2007, Editor, with Almas Heshmati)., 'Roadmap to Bangalore? Globalization, the EU's Lisbon Process and the Structures of Global Inequality' Hauppauge, N.Y.: Nova Science Publishers (for info: https://www.novapublishers.com/catalog/).
• Michael Todaro and Stephen C. Smith, Economic Development, 10th Ed., Addison-Wesley, 2008. Description.
• Handbook of Development Economics, Elsevier. Description and table of contents:

Hollis B. Chenery and T. N. Srinivasan, eds. (1988, 1989). Vol. 1 and 2

Jere Behrman and T.N. Srinivasan, eds. (1995). Vol 3A and 3B

T. Paul Schultz and John Straus, eds. (2008). Vol 4

Dani Rodrik and Mark R. Rosenzweig, eds. (2009). Vol 5

External links

• Development Economics and Economic Development A list of resources on development economics
• Technology in emerging economies, The Economist