In economics,economic development (oreconomic and social development) is the process by which the economicwell-being andquality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives.
The term has been used frequently in the 20th and 21st centuries, but the concept has existed in the West for far longer.[1] "Modernization", "Globalization", and especially "Industrialization" are other terms often used while discussing economic development. Historically, economic development policies focused on industrialization andinfrastructure; since the 1960s, it has increasingly focused onpoverty reduction.[1]
Whereas economic development is apolicy intervention aiming to improve the well-being of people,economic growth is a phenomenon of marketproductivity and increases inGDP; economistAmartya Sen describes economic growth as but "one aspect of the process of economic development".
The precise definition of economic development has been contested: while economists in the 20th century viewed development primarily in terms ofeconomic growth,sociologists instead emphasized broader processes of change andmodernization.[2] Development and urban studies scholar Karl Seidman summarizes economic development as "a process of creating and utilizing physical, human, financial, and social assets to generate improved and broadly shared economic well-being and quality of life for a community or region".[3] Daphne Greenwood and Richard Holt distinguish economic development from economic growth on the basis that economic development is a "broadly based and sustainable increase in the overallstandard of living for individuals within a community", and measures of growth such asper capita income do not necessarily correlate with improvements in quality of life.[4] TheUnited Nations Development Programme in 1997 defined development as increasing people‟s choices. Choices depend on the people in question and their nation. The UNDP indicates four chief factors in development, especially human development, which are empowerment, equity, productivity, and sustainability.[5]
Mansell and Wehn state that economic development has been understood by non-practitioners since theWorld War II to involve economic growth, namely the increases inper capita income, and (if currently absent) the attainment of a standard of living equivalent to that ofindustrialized countries.[6][7] Economic development can also be considered as a static theory that documents the state of an economy at a certain place. According toSchumpeter and Backhaus (2003), the changes in this equilibrium state documented in economic theory can only be caused by intervening factors coming from the outside.[8]
Economic development originated in thepost-war period of reconstruction initiated by the United States. In 1949, during his inaugural speech, PresidentHarry Truman identified the development of undeveloped areas as a priority for the West:
There have been several major phases ofdevelopment theory since 1945.Alexander Gerschenkron argued that the less developed the country is at the outset of economic development (relative to others), the more likely certain conditions are to occur. Hence, all countries do not progress similarly.[9] From the 1940s to the 1960s the state played a large role in promoting industrialization in developing countries, following the idea ofmodernization theory. This period was followed by a brief period of basic needs development focusing onhuman capital development and redistribution in the 1970s.Neoliberalism emerged in the 1980s pushing an agenda of free trade and removal ofimport substitution industrialization policies.
In economics, the study of economic development was born out of an extension to traditional economics that focused entirely on thenational product, or the aggregate output of goods and services. Economic development was concerned with the expansion of people'sentitlements and their corresponding capabilities, such asmorbidity,nourishment,literacy,education, and othersocio-economic indicators.[10] Borne out of the backdrop ofKeynesian economics (advocating government intervention), andneoclassical economics (stressing reduced intervention), with the rise of high-growth countries (Singapore,South Korea,Hong Kong) and planned governments (Argentina,Chile,Sudan,Uganda), economic development and more generally development economics emerged amidst these mid-20th century theoretical interpretations of how economies prosper.[11] Also, economistAlbert O. Hirschman, a major contributor todevelopment economics, asserted that economic development grew to concentrate on thepoor regions of the world, primarily inAfrica,Asia andLatin America yet on the outpouring of fundamental ideas and models.[12]
It has also been argued, notably by Asian and European proponents ofinfrastructure-based development, that systematic, long-term government investments intransportation,housing,education, andhealthcare are necessary to ensure sustainable economic growth in emerging countries.
During Robert McNamara's 13 years at the World Bank, he introduced key changes, most notably, shifting the Bank's economic development policies toward targeted poverty reduction.[1] Before his tenure at the World Bank, poverty did not receive substantial attention as part of international and national economic development; the focus of development had been on industrialization and infrastructure.[1] Poverty also came to be redefined as a condition faced by people rather than countries.[1] According to Martha Finnemore, the World Bank under McNamara's tenure "sold" states poverty reduction "through a mixture of persuasion and coercion."[1]
The development of a country has been associated with different concepts but generally encompasses economic growth through higher productivity,[13] political systems that represents the preferences of its citizens as accurately as possible,[14][15] the extension of rights to all social groups and the opportunities to get them[16] and proper functionalities of the institutions and the organizations that engages in more technical and complex tasks (i.e. raise taxes and deliver public services).[17][18] These processes describe the State's capabilities to manage its economy, polity, society and public administration.[19] Generally, economic development policies attempt to solve issues in those topics.
Economic development is typically associated with improvements in a variety of areas or indicators (such asliteracy rates,life expectancy, andpoverty rates), that may be the causes of economic development rather than the consequences of specific economic development programs. For example, health and education improvements have been closely related to economic growth, but the causality with economic development may not be obvious. In any case, it is important to not expect that particular economic development programs be able to fix many problems at once as that would establish unsurmountable goals that are highly unlikely to be achieved. Any development policy should have targeted goals and a gradual approach should be to avoid those goals being burdensome which has been termed by Prittchet,Woolcock and Andrews as 'premature load bearing'.[19]
The State's capabilities, most often, limits the economic development goals of countries. For example, if a nation has minimum capacity to carry out basic functions, such as security and policing, or core service deliveries, it is unlikely that a program, that aims to foster a free-trade zone (special economic zones) or distribute vaccinations to vulnerable populations, can accomplish their goals. This has been overlooked by multiple international organizations, aid programs and even participating governments who attempt to carry out the 'best practices' from other places in a carbon-copy manner with Insignificant achievements. This isomorphic mimicry –adopting organizational forms that have been successful elsewhere– hide institutional dysfunctions without any solutions contributes countries stuck in 'capability traps' where the country does not meets its development goals.[19] An example of this can be seen through some of the criticisms of foreign aid and its success rate at helping countries develop.[citation needed]
Beyond the incentive compatibility problems that can happen to foreign aid donations –that foreign aid granting countries continue to give it to countries with little results of economic growth[20] but with corrupt leaders that are aligned with the granting countries' geopolitical interests and agenda[21] –there are problems of fiscal fragility associated to receiving an important amount of government revenues through foreign aid. Governments that can raise a significant amount of revenue from this source are less accountable to their citizens (they are more autonomous) as they have less pressure to legitimately use those resources.[22] Just as it has been documented for countries with an abundant supply of natural resources such as oil,[23] countries whose government budget consists largely of foreign aid donations and not regular taxes are less likely to have incentives to develop effective public institutions.[22] This in turn can undermine the country's efforts to develop.
In its broadest sense, policies of economic development encompass three major areas:
Contractionary monetary policy is a tool used by central banks to slow down a country's economic growth. An example would be raising interest rates to decrease lending. In the United States, the use of contractionary monetary policy has increased women's unemployment.[25] Seguino and Heintz uses a panel dataset for each 50 states with unemployment, labor force participation by race, and annual labor market statistics. In addition, for contractionary monetary policy, they utilize the federal funds rate, the short-term interest rates charged to banks. Seguino and Heintz Seguino concludes that the impact of a one percentage point increase in the federal funds rate relative to white and black women's unemployment is 0.015 and 0.043, respectively[26]
One growing understanding in economic development is the promotion ofregional clusters and a thrivingmetropolitan economy. In today's global landscape, location is vitally important and becomes a key incompetitive advantage.[citation needed]
International trade and exchange rates are key issues in economic development. Currencies are often either under-valued orover-valued, resulting in trade surpluses or deficits. Furthermore, the growth of globalization has linked economic development with trends on international trade and participation inglobal value chains (GVCs) and international financial markets. The last financial crisis had a huge effect on economies in developing countries. Economist Jayati Ghosh states that it is necessary to make financial support systems in developing countries more resilient by providing a variety offinancial institutions. This could also add to financial security for small-scale producers.[27]
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Economic development has evolved into a professional industry of highly specialized practitioners. The practitioners have two key roles: one is to provide leadership inpolicy-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 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 that 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.
There are various types of macroeconomic and sociocultural indicators or "metrics" used byeconomists andgeographers to assess the relative economic advancement of a given region or nation. TheWorld Bank's "World Development Indicators" are compiled annually from officially recognized international sources and include national, regional and global estimates.[28]
GDP per capita is gross domestic product divided by mid-year population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidizes not included in the value of the products.[29] It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources.Median income is related toreal gross national income per capita andincome distribution.
Europeandevelopment economists have argued that the existence of modern transportation networks- such ashigh-speed rail infrastructure constitutes a significant indicator of a country's economic advancement: this perspective is illustrated notably through theBasic Rail Transportation Infrastructure Index (known as BRTI Index)[30] and related models such as the (Modified) Rail Transportation Infrastructure Index (RTI).[31]
In an effort to create an indicator that would help measuregender equality, the United Nations has created two measures: theGender-Related Development Index (GDI) and theGender Empowerment Measure (GEM). These indicators were first introduced in the 1995 UNDP Human Development Report.[32]
Other factors include theinflation rate,investment level andnational debt, birth and death rates,life expectancy,morbidity, education levels (measured throughliteracy andnumeracy rates),housing,social services likehospitals,health facilities, clean and safedrinking water, schools (measured by the distance learners must travel to reach them), ability to use hardinfrastructure (railways, roads, ports, airports, harbours, etc.), andtelecommunications and other soft infrastructure like theInternet.[5]
The Gender Empowerment Measure (GEM) focuses on aggregating various indicators that focus on capturing the economic, political, and professional gains made by women. The GEM is composed of just three variables: income earning power, share in professional and managerial jobs, and share of parliamentary seats.[33]
The Gender Development Index (GDI) measures the gender gap in human development achievements. It takes the disparity between men and women into account through three variables, health, knowledge, and living standards.[34]
