Chapter 1: Introduction to Economic Development
Description
This section explores the problems, issues and situations that lead to the evolution and
economic thought from the classical views to the modern insights- economic development. With
a prelude to the major problems and prospects for broad-based economic development, paying special
attention to the plight of the half or more of the world’s population for whom low levels of living are a
fact of life.
Learning Objective:
After completing the module, the students are expected to:
1. Establish better understanding of the development of economic thoughts and views;
2. Understand the concepts covering discipline of economic development;
3. Identify the Common Characteristics of Less Developed Countries (LDCs); and
4. Identify the Common Characteristics of More Developed Countries (MDCs).
Duration:
Week 2 – week 3
A. Reasons for studying development economics
The study of economic development is one of the newest, most exciting, and most challenging
branches of the broader disciplines of economics and political economy.
Traditional economics is concerned primarily with the efficient, least- cost allocation of scarce
productive resources and with the optimal growth of these resources over time so as to produce an everexpanding range of goods and services. By traditional economics we simply mean neoclassical economics
taught in history of economic thought. Traditional neoclassical economics deals with an advanced
capitalist world of perfect markets; consumer sovereignty; automatic price adjustments; decision made
on the basis of marginal, private- profit, and utility calculations; and equilibrium outcomes in all product
and resource markets. It assumes economic “rationality” and a purely materialistic, individualistic, selfinterested orientation toward economic decision-making.
Political economy goes beyond traditional economics to study, among other things, the social and
institutional processes through which certain groups of economic and political elites influence the
allocation of scarce productive resources now and in the future, either for their own benefit exclusively
or for that of the larger population as well. Political economy is therefore concerned with the relationship
between politics and economies, with a special emphasis on the role of power in economic decisionmaking.
Development Economics has an even greater scope. In addition to being concerned with the efficient
allocation of existing scarce (or idle) productive resources and with their sustained growth over time, it
must also deal with the economic, social, political, and institutional mechanisms, both public and private,
necessary to bring about rapid and large- scale improvements in levels of living for the people of Africa,
Asia, Latin America, and the formerly socialist transition economies.
Unlike the more developed countries (MDCs), in less developed countries (LDCs), most commodity
and resource markets are highly imperfect, consumers and producers have limited information, major
structural changes are taking place in both the society and the economy, the potential for multiple
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equilibria rather than a single equilibrium are common, and disequilibrium situations often prevail (prices
do not equate supply and demand).
Because of the heterogeneity of the developing world and the complexity of the development
process, development economics must be eclectic, attempting to combine relevant concepts and theories
from traditional economic analysis along with new models and broader multidiscip0linary approaches
derived from studying the historical and contemporary development experience of Africa, Asia and Latin
America. Development economics is a field on the crest of a breaking wave, with new theories and new
data constantly emerging.
a. Three Core Values of Development
Is it possible, then to define or broadly conceptualize what we mean when we talk about
development as the sustained elevation of an entire society and social system towards a better or more
humane life? What constitutes the good life is a question as old as philosophy, one that must be
periodically re-evaluated and answered afresh in the changing environment of world society. The
appropriate answer for developing nations today is not necessarily the same as it would have been in
previous decades. But at least three basic components or core values serve as a conceptual basis and
practical guidelines for understanding the inner meaning of development.
1. Sustenance: The ability to meet basic needs. All people have
certain basic needs without which life would be impossible. These
life- sustaining basic human needs include food, shelter, health, and
protection.
2. Self- esteem: To be a person. A second universal component of
the good life is self- esteem- a sense of worth and self- respect, of
not being used as a tool by others for their own ends.
3. Freedom from Servitude: To be able to choose. A third and final universal value that we suggest should
constitute the meaning of development is the concept of human
freedom. Freedom here is to be understood in the sense of
emancipation from alienating material conditions of life and from social
servitude to nature, other people, misery, oppressive, institutions, and
dogmatic beliefs, especially that poverty is predestination. The concept
of human freedom should also encompass various components of
political freedom, including, but not limited to, personal security, the
rule of law, freedom of expression, political participation, and equality
of opportunity.
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b. The Central Role of Women to the fulfillment of Economic development
Globally, women tend to be poorer than men. They are also more deprived in health and
education and in freedoms in all its forms. Moreover, women have primary responsibility for child rearing,
and the resources that they are able to bring to this task will determine whether the cycle of transmission
of poverty from generation to generation will be broken.
c. The three objectives of Development
We may conclude that development is both a physical reality and a state of mind in which society
has, through some combination of social, economic, and institutional processes, secured the means for
obtaining a better life. Whatever the specific components of this better life, development in all societies
must have at least the following three objectives:
1. To increase the availability and widen the distribution of basic life- sustaining goods such as
food, shelter, health, and protection.
2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs,
better education, and greater attention to cultural and human values, all of which will serve
not only to enhance material well- being but also to generate greater individual and national
self- esteem.
3. To expand the range of economic and social choices available to individuals and nations by
freeing them from servitude and dependence not only in relation to other people and nationstates but also to the forces of ignorance and human misery.
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B. Structures and Characteristics of Developing Nations
It is risky to try to generalize too much about the 160 member countries of the United Nations that
constitute the developing world. While most of LDCs are poor in money terms they are diverse in culture,
size and economic conditions, and social and political structure. We attempt to provide an overview of
the most structural differences and the most common set of problems that define the LDCs' state of
underdevelopment.
a. The Diverse Structures of LDCs
It is important to consider the following major components that can show the structural
diversity of LDCs.
1. The Size of the country (population, area, and Income) The physical size of the country, the
size of its population, and its level of national income per capita are important determinants of
its economic potential and major factors differentiating one developing nation from another.
Large size usually presents advantages of:
a. Diverse resource endowment.
b. Large potential markets.
c. Lesser dependence on foreign sources of materials and products.
But it also creates problems of:
a. Administrative Control.
b. National Cohesion.
c. Regional Imbalances.
By contrast, small countries have problems of:
a. Limited markets
b. Shortage of skills
c. Scarce physical resources
d. Weak bargaining power
e. Little prospects of significant economic self-reliance.
There is no necessary relationship between a country’s size, its level of per capita income,
and the degree of equity in the distribution of its national income.
2. Historical Background Most LDCs were, at one time or another, colonies of Western European
countries. The economic structures of these nations, as well as their educational and social
institutions, have typically been modeled on those of their former colonial rules. African and
Asian nations that recently gained their independence have different political, social, and
institutional structure than Latin American Countries who gained their independence earlier and
which have similar economic, social, and cultural institutions and face similar problems. Countries
that were colonized by British have different political and legal structures than those colonized by
French.
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3. Physical and Human Resources A country’s potential for economic growth is generally
influenced by its endowments of physical resources (land, minerals, and other raw materials) and
human resources (number of people and their level of skills and knowledge).
However, high mineral wealth is no guarantee of development success (wars,
dictatorship, political instability, social strife) Geography and climate can also play an important
role in the success or failure of development efforts (for example, in general, coastal economies
do better than land-locked economies) With regards to human resource endowments, not only
are the numbers of people and their skill levels are important, but also are: their cultural outlooks;
attitude toward work; access to information; willingness to innovate; desire for selfimprovement; and administrative skills.
The nature and character of a country's human resources are important determinants of
its economic structure and these clearly differ from one region to another.
4. Ethnic and Religious Composition Acceleration of ethnic (e.g., former Yugoslavia, Sri Lanka),
tribal (e.g., Somalia, DR of Congo), and religious (e.g., former Yugoslavia, Russia, India), and
sectarian (e.g., Iraq) conflicts lead to political instability. The greater the ethnic and religion
diversity of a country, the more likely it is that there will be internal strife and political instability.
It is not surprising that some of the most successful recent development experiences have
occurred in culturally homogeneous societies (e.g. South Korea, Taiwan, Singapore and Hong
Kong.)
Over half of the LDCs have recently experienced some form of interethnic or religious
conflicts. Ethnic and religious diversity need not necessarily lead to instability. It may lead to
successful economic growth, such as in Malaysia.
The point is that the ethnic and religious composition of a developing nation and whether
or not that diversity leads to conflict or cooperation can be important determinants of the success
or failure of development efforts.
5. Relative Importance of the Public and Private Sectors Most LDCs have mixed economic
systems, featuring both public and private ownership and use of resources. The division between
the two and their relative importance are mostly a function of historical and political
circumstances. Thus, in general, Latin American and Southeast Asian nations have larger private
sectors than South Asian and African nations.
The degree of foreign ownership in the private sector is another important variable to
consider when differentiating among LDCs. A large foreign-owned private sector usually creates
economic and political opportunities as well as problems not found in countries where foreign
investors are less prevalent.
Recent trend in LDCs is to have smaller public sector and larger private sector
(privatization). Economic Policies are also different. Countries with large public sector have direct
government investment projects, and large rural works programs. Countries with large private
sector have special tax allowance to encourage private sector investment.
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The degree of corruption differs widely across developing countries and may influence
both the size of public sector and the design of privatization programs. The role played by civil
society and NGOs in recent years is so vivid and have often been able to make better progress in
addressing problem of development such as poverty alleviation and expanding social inclusion in
many developing nations.
6. Industrial Structure Though rapidly urbanizing, most LDCs are agrarian in economic, social
and cultural outlook. Farming is not merely an occupation but a way of life for most people in
Asia, Africa, and Latin America. Nevertheless, there are great differences between LDCS in the
structure of agrarian systems and patterns of land ownership.
The contrast among the industrial structures of LDCs is striking. Latin American countries
possess more advanced industrial sectors but from 1980 until now many Asian countries like
Taiwan, South Korea, Singapore, China, India, and Malaysia greatly accelerated the growth of their
manufacturing output. Africa still lags behind.
In spite of common problems, development strategies may vary from one county to the
next, depending on the nature, structure, and the degree of interdependence among its primary
(agriculture, forestry, and fishing), secondary (manufacturing), and tertiary (commerce, finance,
transport, and services) sectors.
7. External Dependence: Economic, Political and Cultural The degree to which a country is
dependent on foreign economic, social and political forces is related to its size, resource
endowment and political history. For most LDCs, this dependence is substantial. Most small
nations are highly dependent on foreign investment and trade with the developed world. In some
cases, this dependence touch almost every facet of life such as: trade, system of education and
governance, values, culture, pattern of consumption, attitude toward life and work.
A country’s ability to chart its own economic and social destiny is significantly affected by
its degree of dependence on these and other external forces.
8. Political Structure, Power and Interest Groups Development does not depend only on
economic policies, but also on political structure and interests and allegiances of ruling elite.
These factors typically determine what strategies are possible and where the main roadblocks to
effective economic and social change may lie.
Most LDCs are ruled directly or indirectly by small and powerful elite to a greater extent
than the developed nations are. Effective social and economic change requires either the support
of elite groups or diminishing the power of these elite groups. Development will often be
impossible without changes in the social, political, legal, and economic institutions of a nation.
C. Common Characteristics of LDCs
From the previous discussion about the diverse structure of LDCs we may get the idea that it is
sometime risky to generalize too much about such a diverse set of nations that are called LDCs.
Nevertheless, common economic features of developing economies allow us to view them in a broadly
similar framework. We will try to identify these similarities and provide illustrative data to demonstrate
their importance; we can classify these common characteristics into seven broad categories:
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1. Low Levels of Living. In LDCs, general levels of living tend to be very low for the majority of
people. This is true not only in relation to their counterparts in rich nations but often also in
relation to small elite groups within their own societies. These low levels of living are manifested
quantitatively and qualitatively in the form of low incomes (poverty), inadequate housing, poor
health, limited or no education, high infant mortality, low life and work expectancies and in many
cases a general sense of malaise and hopelessness.
• Absolute poverty refers to the number of people who are unable to command sufficient
resources to satisfy the basic physical needs of food, clothing, and shelter in order to ensure
continues survival. They are counted as the total number living below a specified minimum level
of income known as international poverty line.
• Health: Many people in LDCs fight a constant battle against malnutrition, diseases, and
ill health.
• There are different indicators of health levels in any country such as:
1. Life expectancy averaged only 50 years in the least developed countries, compared
to 64 years in the LDCs and 78 in the DCs.
2. Infant mortality rates (# of children who die before their first birthday out of every
1000 live births) average about 96 in the least developed countries, compared to 64
in other LDCs and 8 in DCs.
3. 766 million people in poor countries are without access to health services.
4. Malnutrition and poor health in the developing world are perhaps a matter of poverty
than of food production. 158 million children under age of 5 are malnourished.
5. Almost one billion do not have access to safe drinking water. which leads to diseases
such as cholera and typhoid
6. 2.4 billion Live without sanitation facilities.
 Education:
1. In most LDCs, education takes the largest share of the government budget but literacy
levels remain strikingly low compared with the developed nations
2. Literacy rates average only 45% of the population among the least developed nations.
3. Around half billion children dropped out of schools.
4. Education of children who do attend school regularly is often irrelevant to the
development needs of the nation in which they live.
2. Low Level of Productivity: In addition to low levels of living, LDCs are characterized by relatively
low levels of labor productivity (output per worker). Production depends not only on inputs and
technology but also on managerial skills, access to information, worker motivation, and
institutional flexibility.
Low levels of labor productivity in LDCs can be explained by the absence or lack of
appropriate physical capital or experienced management.
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3. High rates of population growth and depending burdens: World population is almost 6.5
billion people. More than the LDCs and less than live in the more developed nations. Both birth
and death rates are strikingly different between the two groups of countries.
4. High and rising level of unemployment and underemployment: One of the major factors
contributing to the low levels of living in LDCs is the relatively inadequate or inefficient of labor
in comparison with the developed nations. Underutilization of labor is manifested in two
forms:
a. Underemployment: people who are working less than they could
b. Unemployment: people who are able and often eager to work but for whom no suitable
jobs are available. Almost, 35% (on the average) of labor force in LDCs is underutilized.
Unemployment in population is 15-24 high.
5. Prevalence of imperfect markets and incomplete information: In many LDCs, legal,
institutional, and cultural foundations are either absent or externally weak. Information is limited
and costly to obtain which usually leads to misallocation of goods, finances and resources.
6. Dependence and vulnerability in international relations.
References:
Economic Development Twelfth Edition Michael P. Todaro (New York University) &
Stephen C. Smith (The George Washington University) Economic Development
Economic Development - PDF Drive
Images:
All from Google
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