Economic Development and Development Economics

Economic Development

- the process wherein low-income national economies are transformed into modern
industrial economies. It looks at a wider range of statistics than just GDP per capita.

- Economic development is concerned with how people are actually affected. It looks at
their actual living standards and the freedom they have to enjoy a good standard of
living.

Development Economics

- is a branch of economics that focuses on improving fiscal, economic, and social

conditions in developing countries. It considers factors such as health, education,
working conditions, domestic and international policies, and market condition with a
focus on improving conditions in the world's poorest countries.

- It also examines both macroeconomic and microeconomic factors relating to the

structure of developing economies, and domestic and international economic growth.

What is the difference between economic development and development

economics?

Development Economics concerns the theory and practice of how to achieve economic

development, while economic development simply makes a statement that there has
been economic progress.
 Economic Development and Economic Growth

Economic Growth
 The increase in goods and services produced by an economy or nation, for a
specific period of time.
 It may be caused by:
o an improvement in the quality of education;
o increased labor force;
o improvements in technology; or
o in any way if there is a value addition in goods and services which is
produced by every sector of the economy.
 It can be measured as a percentage increase in real gross domestic product.

Characteristics of Modern Economic Growth

 Professor Simon Kuznets Nobel prize winner in 1971 in economics for his
pioneering work in the measurement of economic growth has given six
characteristics of modern economic growth. These are:
1. High rates of per capita output and population growth
2. High rates of increase in total factor of productivity (TFP) i.e. the output per
unit of all inputs.
3. High rates of structural transformation of the economy.
4. High rates of social, political and ideological transformation.
5. Propensity to trade.
6. Limited spread of economic growth.

Economic Development
 Unlike Economic Growth, Economic Development is the process focusing on
both qualitative and quantitative growth of the economy.
 Development is concerned with how people are actually affected.
 It looks at their actual living standards and the freedom they have to enjoy a good
standard of living.
 Quality of living standard is the major indicator of economic development.
 Therefore, an increase in economic development is more necessary for an
economy to achieve the status of a Developed Nation.
 Measuring economic development is not as precise as measuring GDP because
it depends on what factors are included in the measure.
 There are several different measures of economic development, such as the
Human development Index (HDI).
 The HDI measures life expectancy, quality of education, and income.
 Economic Growth vs. Economic Development

(Picture Source: www.educba.com)

SUMMARY
Q: Can Economic Growth be achieved without Economic Development? Which is
which, development first before growth or growth before development?
 Yes, economic growth can be achieved without economic development, because
economic growth only focuses on the increase in goods and services produced
by an economy or nation, for a specific period of time. Unlike economic
development does not have to mind the quality of living standards of the citizens.
 Economic growth first before economic development. It is because economic
growth focuses on the quantitative information (GDP), while economic
development focuses on the quality of living standards, plus the economic growth
itself.

 After examining the above information, we can say that Economic Growth is a
subset of Economic Development.
 Economic Development is a bigger concept than economic growth. Economic
Development uses various indicators to measure the progress in an economy as
a whole, however, Economic growth uses only specific indicators like the gross
domestic product, individual income, etc. for the calculation.
 Economic growth is essential but not the only condition for economic
development.

Brief discussion on ideas and theories of Economic Development

ECONOMIC DEVELOPMENT
The term ‘economic development’ refers to long-term changes in systems of
production and distribution of goods and services affecting human welfare. Economic
development can be described as a program, set of policies, or activities that seek to
build capacity for self-sustaining, long-term economic growth.
Theory is a systematic explanation of interrelationships among economic variables, and
its purpose is to explain causal relationships among these variables.

The Principle Theories of Economic Growth

1. Mercantilism – Wealth of a nation determined by the accumulation of gold and
running trade surplus
2. Classical theory – Adam Smith placed emphasis on the role of increasing returns to
scale (economies of scale/ specialization)
3. Neo-classical Theory – Growth based on supply-side factors such as labour
productivity, size of the workforce, factor inputs.
4. Endogenous Growth Theories – Rate of economic growth strongly influenced by
human capital and rate of technological innovation.
5. Keynesian Demand-Side – Keynes argued that aggregate demand could play a role
in influencing economic growth in the short and medium-term. Though most growth
 theories ignore the role of aggregate demand, some economists argue recessions can
cause hysteresis effects and lower long-term economic growth.
6. Limits to Growth – From an environmental perspective, some argue in the very long-
term economic growth will be constrained by resource degradation and global warming.
This means that economic growth may come to an end – reminiscent of Malthus
theories.
7. The Malthusian Theory of Population – is the theory of exponential population and
arithmetic food supply growth. The theory was proposed by Thomas Robert Malthus. He
believed that a balance between population growth and food supply can be established
through preventive and positive checks.

New Economic Growth Theories

1. Endogenous Growth Models developed by Paul Romer and Robert Lucas
emphasized the increasing of both capital and labour activity. Place greater emphasis
on human capital.
2. Unified Growth Theory by Oded Galor shows combination of different elements of
economic growth.

Determinants of Economic Development - Economic Factors and Non-Economic

Factors

Determinants of Economic
Development

Economic Factors in Economic Non-Economic Factors in Economic

Development Development

1.Capital Formation Human Resources

Technical Know-How and General

Natural Resources Education

Marketable Surplus of Political Freedom

Agriculture
Social Organization
Conditions in Foreign
Trade Corruption

Economic System
Desire to Develop
 Economic Factors in Economic Development

1. Natural Resources
-Among the natural resources, the land area and the quality of the soil, forest
wealth, good river system, minerals and oil-resources, good and bracing climate, etc.,
are included. For economic growth, the existence of natural resources in abundance is
essential. A country deficient in natural resources may not be in a position to develop
rapidly.

2. Conditions in Foreign Trade

-Foreign trade has proved to be beneficial to countries which have been able to set-
up industries in a relatively short period. These countries sooner or later captured
international markets for their industrial products.

3. Marketable Surplus of Agriculture

-It is important that the marketable surplus of agriculture will increase. The
importance of the marketable surplus in a developing economy emanates from the fact
that the urban industrial population subsists on it. With the development of an economy,
the ratio of the urban population increases and increasing demands are made on
agriculture for food grains.

4. Capital Formation
-The strategic role of capital in raising the level of production has traditionally been
acknowledged in economics. It is now universally admitted that a country which wants
to accelerate the pace of growth, has no choice but to save a high ratio-of its income,
with the objective of raising the level of investment. Economists rightly assert that lack
of capital is the principal obstacle to growth and no developmental plan will succeed
unless adequate supply of capital is forthcoming.

5. Economic System
-The economic system and the historical setting of a country also decide the
development prospects of a great extent. There was a time when a country could have
a laissez fair economy, wherein governments are less involved in the economy, yet face
no difficulty in making economic growth or progress because it provides individuals with
the greatest incentive to create wealth.
 Non-Economic Factors in Economic Development

1. Human Resources
-Development is possible only when a country can manage to use its manpower
properly. Man provides labour power for production and if in a country labour is efficient
and skilled, it’s capacity to contribute to growth will decidedly be high.

2. Technical Know-How and General Education

-Joseph Alois Schumpeter, an Austrian political economist, was deeply
impressed by the innovations done by the entrepreneurs. He attributed much of the
capitalist development to this role of the entrepreneurial class. Still greater attention has
to be given to Research and Development for further advancement.
-Robert M. Solow observed between years 1909 and 1949, United States work
force has been more productive due in large part to the effects of education.

3. Political Freedom
- The under-development of India, Pakistan, Bangladesh, Sri Lanka, Malaysia, Kenya
and a few other countries, which were in the past British colonies, was linked with the
development of England. England recklessly exploited them and appropriated a large
portion of their economic surplus.

-Dadabhai Naoroji has also candidly explained in his classic work ‘Poverty and Un-
British Rule in India’ that the drain of wealth from India under the British was the major
cause of the increase in poverty in India during that period, which in turn arrested the
economic development of the country.

4. Social Organization
- Mass participation in development programs is a pre-condition for accelerating
the growth process. However, people show interest in the development activity only
when they feel that the fruits of growth will be fairly distributed. Experiences from a
number of countries suggest that whenever the defective social organization allows
some elite groups to appropriate the benefits of growth, the general mass of people
develop apathy towards State’s development programs.

5. Corruption
- Corruption is rampant in developing countries at various levels and it operates
as a negative factor in their growth process. Until and unless these countries root-out
corruption in their administrative system, it is most natural that the capitalists, traders
and other powerful economic classes will continue to exploit national resources in their
personal interests.

6. Desire to Develop
- The pace of economic growth in any country depends to a great extent on
people’s desire to develop. If in some country level of consciousness is low and the
general mass of people has accepted poverty as its fate, then there will be little hope for
development.
 Measures of Economic Development and Growth

 A country’s level of development is based on how far it has grown economically,

technologically, and the quality of life people typically have. Several measures and methods
are used to ascertain a country’s level of economic development and growth.
 There is a need to measure economic development and growth because this shows the
increase or decrease in the economic output of an economy. Also, this can be used to
compare the economic and financial standing of different countries.

Countries are often classified into three main groups:

1. High-income Economies (HICs) - may be classified as either developed or developing,

since several institutions take factors other than high per capita income into account when
classifying countries as "developed" or "advanced economies".

2. Newly Emerging Economies (NEEs) - are rapidly growing and volatile economies. They
promise huge potential for growth but also pose significant political, monetary, and social risks.
3. Low-income Economies (LICs) - may be classified as either developing nations, or least-
developed countries.

List of the most commonly used measures of economic development:

1. Gross National Product (GNP) per capital - is the total market value of all final goods
and services produced by a country in one year. It is a measure of economic activity, or how
much is produced in a country. The more that a country produces per person , the more
"developed" it is assumed to be.
 2. Gross Domestic Product (GDP) - is the total monetary or market value of all the finished
goods and services produced within a country's borders in a specific time period (either annually
or quarterly). Basically, it provides an economic snapshot of a country, used to estimate the size
of an economy and growth rate.

3. Population Growth - is the increase in the number of individuals in a population. In

general, poorer countries have more rapid rates of population growth.

4. Occupational Structure of the Labor Force - refers to the aggregate distribution of

occupations in society, classified according to skill level, economic function, or social status. As
countries develop the occupational structure of the labor force changes.
 5. Urbanization - is the percentage of a country's population who live in urban areas. As
countries develop, urbanization increases.

6. Consumption per Capita - is the yearly use of goods and services by each person,
derived by dividing the quantity of goods and services used by the total population. The richer a
country is, the more its citizens consume.

7. Infrastructure - is defined as the foundations of a society: urban centers, transport

networks, communications, energy distribution systems, farms, factories, mines, and such
facilities as schools, hospitals, postal services, and police and armed forces.
 8. Social Conditions - involves the social conditions of a country. It includes the following:
 Literacy Rate - is the proportion of a specified population that meets the definition of
literacy.
 Life Expectancy - tells us the average age of death in a population. It is the key metric for
assessing population health.
 Health Care - is concerned with issues related to efficiency, effectiveness, value, and
behavior in the production and consumption of health and health care.
 Caloric Intake - economic growth may increase total calorie intake, reducing problems to
hunger and malnutrition.
 Infant Mortality - is the number of resident newborns in a specified geographic area
(country, state, county, etc.) dying under one year of age.

Recent Data on Economic and Social Indicators

Economic Indicators

1. Gross National Product (GNP)

The Gross National Product (GNP) of the Philippines for 2019 was $415.75B, a
5.18% increase from 2018. Relatively, the GNP for 2018 was $395.27B, a 6.42%
increase from 2017.

2. Gross Domestic Product (GDP)

 The Gross Domestic Product of the Philippines for 2019 was $376.80B, a 8.64%
increase from 2018. Relatively, the GDP for 2018 was $346.84B, a 5.59% increase
from 2017.
 The GDP growth rate for 2019 was 6.04%, a 0.3% decline from 2018. Relatively,
the GDP growth rate for 2018 was 6.34%, a 0.59% decline from 2017.
3. Population Growth
The current population of Philippines in 2020 is 109,581,078, a 1.35% increase from
2019. The population of Philippines in 2019 was 108,116,615, a 1.37% increase from
2018.

4. Labor Force
Philippines unemployment rate for 2019 was 2.15%, a 0.19% decline from 2018.
Relatively, its unemployment rate for 2018 was 2.34%, a 0.21% decline from 2017.

5. Urbanization
In 2019, 47.15% of the Philippines' total population lived in urban areas and cities,
which is 0.24% higher than the urban population rate in 2018.

6. Consumption per capita

An increase of consumption raises GDP by the same amount, other things equal.
Moreover, since current GDP is an important determinant of consumption, the
increase of income will be followed by a further rise in consumption.

7. Infrastructure
The Philippine government has allocated 24% of its proposed 4.1 trillion-peso
(US$80 billion) 2020 budget to infrastructure – 12% higher than the previous year.
 Social Indicators

 Literacy Rate
The literacy rate of the Philippines for 2015 was 98.18%, a 1.78% increase from
2013. Relatively, the literacy rate for 2013 was 96.40%, a 0.98% increase from 2008.

 Life Expectancy
The current life expectancy for Philippines in 2020 is 71.28 years, a 0.18% increase
from 2019. Relatively, the life expectancy in 2019 was 71.16 years, a 0.18% increase
from 2018.

 Infant Mortality
The current infant mortality rate for Philippines in 2020 is 18.815 deaths per 1000
live births, a 2.2% decline from 2019. Relatively, the infant mortality rate in 2019 was
19.239 deaths per 1000 live births, a 2.16% decline from 2018.
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