OVERVIEW OF ECONOMIC DEVELOPMENT

Prepared by Dr. Botor

What is economic development?

Economic Development is the creation of wealth from which community benefits are realized. It is more than a jobs
program, it's an investment in growing your economy and enhancing the prosperity and quality of life for all residents.

IEDC defines the term as a program, group of policies, or activity that seeks to improve the economic well-being and
quality of life for a community, by creating and/or retaining jobs that facilitate growth and provide a stable tax base.

Typically, economic development can be described in terms of objectives. These are most commonly described as the
creation of jobs and wealth, and the improvement of quality of life.

Economic development is a concerted effort on the part of the responsible governing body in a city or county to
influence the direction of private sector investment toward opportunities that can lead to sustained economic growth.
Sustained economic growth can provide sufficient incomes for the local labor force, profitable business opportunities for
employers and tax revenues for maintaining an infrastructure to support this continued growth. There is no alternative
to private sector investment as the engine for economic growth, but there are many initiatives that you can support to
encourage investments where the community feels they are needed the most.

Economic development is a process of targeted activities and programs that work to improve the economic wellbeing
and quality of life of a community by building local wealth, diversifying the economy, creating and retaining jobs, and
building the local tax base.

It is important to know that economic development is not community development. Community development is a
process for making a community a better place to live and work. Economic development is purely and simply the
creation of wealth in which community benefits are created.
There are only three approaches used to enhance local economic development. They are:

Business Retention and Expansion - enhancing existing businesses

Business Expansion - attracting new business
Business Start-ups - encouraging the growth of new businesses

Economic development usually takes three forms:

•Business attraction
•Business retention and expansion
•Business creation

All three forms of economic development aim to create new primary jobs that pay more than the prevailing wage,
increase the amount of income coming into the community from outside its market area, and create greater capital
investment in the community. The strategy is to achieve this in a number of diversified industries.

It involves not only jobs, but other more narrowly focused issues like availability of housing, health care, good schools,
parks, higher education, and everything in between. In short, anything that makes your community more attractive and
livable fits under the umbrella of economic development. It also means taking care of businesses that already exist. Why
does economic development cast such a wide shadow? It’s because creating a job in a community isn’t as simple as
saying, “Howdy, we’ve got some cheap land over here and awfully low taxes.” It’s about creating a vibrant community in
which people want to live and work. Economic development in this context is holistic. It doesn’t separate out the job
from the community. Both have their place

Economic development should not be an isolated activity taking place within the borders of a jurisdiction. It is an activity
which is regional or county-wide, and sometimes even broader. Successful economic development activities are carried
out through partnerships with other governments, associate development organizations, and local business groups such
as the chamber of commerce. Economic development is better described than defined. Economic development as job
creation, job retention, job training programs, public and private capital investments, and business and community
capacity-building to allow the business or community to do the job themselves.

It is the process of improving a community’s well-being through job creation, business growth, and income growth, as
well as through improvements to the wider social and natural environment that strengthen the economy.

It is the process of creating and sustaining wealth.

The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak,
contraction, and trough. During the expansion phase, the economy experiences relatively rapid growth, interest rates
tend to be low, production increases, and inflationary pressures build.

Indicators of development. The extent to which a country has developed may be assessed by considering a range of
narrow and broad indicators, including per capita income, life expectancy, education, and the extent of poverty.

Economic development

Economic Development Concepts and Issues

Development?

 What is the meaning of growth if it is not translated into the lives of people? – UNDP Human Development
Report 1995
 Development can be seen as a process of expanding the real freedoms that people enjoy. - Amarya Sen, Nobel
Laureate in Economics.
 Our primary goal in development must be reduce the disparities across and within countries. The key
development challenge of our time is the challenges of inclusion. - James D. Wolfensohn, Former President,
World Bank
 For a poor person everything is terrible – illness, humiliation, shame. We are cripples; we are afraid of
everything; we depend on everyone. No one needs us. We are like garbage that everyone wants to get rid of. - A
blind woman from Moldova

Meaning of Development

Development is not purely an economic phenomenon but rather a multi-dimensional process involving reorganization
and reorientation of entire economic and social system.

Development is process of improving the quality of all human lives.

Traditional Economic Meaning of Development

Development is the CAPACITY of the national economy, whose initial economic condition has been more or less static
for a long time, to GENERATE and SUSTAIN an annual increase in its GROSS NATIONAL PRODUCT at rates of 5% to 7%

There is a stress on the industrialization often at the expense of agriculture and rural development.
DEVELOPMENT is seen as an economic phenomenon in which rapid gains in overall growth would either trickle down to
the masses in the form of jobs and other economic opportunities.

New Economic View

DEVELOPMENT is the reduction or elimination of poverty, inequality and unemployment within the context of a
growing economy.

The development of PEOPLE rather than development of things.

The challenge of development is to IMPROVE the quality of life. Especially in the world’s poor countries.

Development means less poverty, cleaner environment, more equal opportunity, greater individual freedom and a
richer cultural life.

“Economic growth cannot be sensibly treated as an end in itself. Development has to be more concerned with
enhancing the lives we lead and the freedoms we enjoy.” Amartya Sen; Development as Freedom; 1998 Nobel Laureate
in Economics

Sen attempts to expand the basic interpretations of freedom by examining five elemental forms of instrumental
freedoms:

 political freedoms,
 economic facilities,
 social opportunities,
 transparency guarantees, and
 protective security.

These freedoms constitute not only the means, but also the ends in development.

Common Characteristics of Developing Nations

 Political instability
 Policy inconsistency
 Low levels of living standards
 Low levels of productivity
 High rates of population growth and dependency burdens
 Resource gap
 High levels of unemployment and underemployment
 Dependence on agricultural production and primary-product exports
 Prevalence of imperfect markets
 Weak institutions

Growth vs Development

Economic growth is the increase of a nation’s real output (GDP).

- Is a quantity based concept - not quality based

- A direct measure of changes in the size of the economy

Economic development is the process by which a nation enhances its standard of living over time.

GDP per capita is considered as a key indicator of Development.

Objectives of Development
  The improvement in the access and distribution of basic necessities
 The improvement of living standards
 The expansion economic and social opportunities

Three Core Values of Development

Sustenance: The Ability to Meet Basic Needs

All the persons have certain basic needs which are necessary for the survival. They consist of food, shelter, health and
protection. If any one of them is missing or in short supply in any economy it would represent the state of under-
development.

Self-Esteem: To Be a Person A second universal component of the good life is a self-esteem, a sense of worth and self-
respect. It means that the other people could not use him for their own ends. It also means that each person should be
given his due respect and due right.

Freedom from Servitude: To Be Able to choose

The third universal value required for economic development is concerned with human freedom. By freedom it means
the emancipation from alienating material conditions of life and from social servitude to nature, ignorance, other
people, misery, institutions and dogmatic beliefs.

Economic Development: How the notion evolved over time

 Economic history of the modern world started with the Industrial Revolution (17th Century)
 Factory-based industrial production came into being
 Markets expanded:
- Division of labour promoted large-scale production.
- Larger surplus led to greater capital formation, investment, production capacity and growth of income.
 The economy transformed gradually
- From a primarily agricultural to an industrial economy
 ArthurLewis’ model of Economic Development
- Mobilize surplus generated by agriculture.
- Use this surplus to set up industry.
- Shift surplus labour from agriculture to newly set up industry.
- This will set in a process of industrialization and income growth.
 The Trickle Down question :
- Does a higher overall income growth rate mean a higher income level for all?
 Experience of countries during the 1960s :
- Most developing countries of Asia, Africa & Latin America experienced income growth along with rising income
inequality
- In most of these countries incidence of absolute poverty increased.
 Simon Kuznets’ hypothesis :
- With rising per capita income, income inequality rises first and then starts declining after a threshold income
level has been crossed.
- Many country experiences corroborated this hypothesis.
 Policy implication of Kuznets’ hypothesis:
- Intervention needed to improve income distribution & alleviate poverty of the population.
 Poverty took up the centre stage of development discussions in late 1970s
 Concept of Absolute Poverty in terms of Food Security & Nutritional Inadequacy evolved
 Along with per capita income & income inequality measure, incidence of poverty became a major development
indicator of the developing countries of the World.
  In mid 1980s, Professor Amartya Sen enunciated a comprehensive notion of Human welfare in terms of his
famous Entitlement, Capabilities & Functioning concepts.
 In brief :

- Welfare / Well being derives from consumption (of goods & services)

- Access to consumption requires Entitlement (in terms of purchasing power for procuring goods & services for
consumption)

 Capabilities (defined in terms of health, access to education, Knowledge & information) helps converting
consumption into welfare i.e command over commodities
 Lack of entitlement / capabilities is defined to be violation of proper Functioning

Development puzzle

 Growth without Development

- High level income
- Poor health and education standard
- High inequality
 The World Bank (2005) : “different policies can yield the same result, and the same policy can yield different
results, depending on country institutional contexts and underlying growth strategies .”
 There is no single set of policies that can be guaranteed to ignite sustained growth. Nations that have succeeded
at this tremendously important task have faced different sets of obstacles and have adopted varying policies.
 It seems harder than ever to identify the keys to growth. For every example, there is a counter-example. The
current nostrum of one size doesn’t fit all is not itself a big idea, but a way of expressing the absence of any big
ideas.

Development is fragile and unpredictable

 Brazil and Cote d’Ivoire were success stories of 1960- 80, China and India were definitely NOT
 China and India are success stories 1980-2007, Brazil and Cote d’Ivoire definitely NOT
 Different answers that have disappointed: investment, education, health, privatization, structural adjustment,
population control, foreign aid.
 No consensus among development economists about how to achieve development

Freedom from foreign control

 Growth under colonialism was poor, growth has been much higher since independence in most countries
 Growth under foreign aid/structural adjustment is poor
 Most successful examples of growth are homegrown : China, India, Vietnam, Turkey, Chile, Singapore, Taiwan,
South Korea, Mauritius.
 Each society figured out its own unique path to accommodate dynamic individuals. Not told what to do by
international organizations or invading armies.

Democracy and development

 The impact of Democracy and Development is mixed. This is a “Chicken and egg problem”.
 Experiences from East Asian Countries (China, S Korea, Japan, Singapore, Malaysia), India Latin America and
African nations.
 Empirical results for in 1980s and later show that multiparty democratic states have better economic policies
than autocratic ones.

Classification of countries by World Bank

Countries are divided in the following income groups (based on GNI 2011):
  Low income : $1,025 or less
 Lower middle income : $1,026 to $4,035
 Upper middle income : $4,036 to $12,475
 High income : $12,476 or more

In late 1980s, Professor Mahbub Ul Haq, under the auspices of UNDP concretized & implemented Human Development
as a measurable concept.

As a core concept, Human Development encompasses three basic dimensions :

1. Income 2. Health 3. Literacy

Features of HDI

 Scale 0 to 1
 Indicators :
- Longevity – as measured by Life expectancy in birth
- Knowledge – as measured by a weighted average of adult literacy (two-third) and mean years average
of schooling (one third)
- Standard of living- as measured by real per capita GDP adjusted for Purchasing power parity (PPP)

United Nations’ Millennium Development Goals (MDG)

1. Eradicate Extreme Hunger and Poverty

2. Achieve Universal Primary Education
3. Promote Gender Equality and Empower Women
4. Reduce Child Mortality
5. Improve Maternal Health
6. Combat HIV/AIDS, Malaria and other diseases
7. Ensure Environmental Stability
8. Develop a Global Partnership for Development

In 1987 Brundtland report “Our Common Future” defined sustainable development as development that ‘meets the
needs of the present generation without compromising the ability of future generations to meet their needs’ (WCED
1987).