MODULE ECO DEV

ECONOMIC DEVELOPMENT

2 PETER 3:18

“But grow in grace, and in the knowledge of our lord and Saviour Jesus Christ. To
him be glory both now and forever.”

INTRODUCTION
This module examines differences between developing and industrial market economies. After
comparing conditions across nations such as health and nutrition, birth rates, and the role of
women—as well as their implications for economic growth—the chapter moves to the role of
productivity in a nation’s economic vitality. The importance, and problems, of international trade
to developing countries is discussed, along with the benefits and problems associated with foreign
aid.

OUTLINE
I. Worlds Apart
• Output per capita, or the amount an economy produces per capita, compares living
standards across nations.
• The World Bank classifies countries by gross national income (GNI), the market
value of all goods and services produced by resources supplied by the countries’
residents and firms, regardless of the location of the resources.
• Using GNI per capita, the World Bank sorts countries around the world into high-
income economies, middle-income economies, and low-income economies.

A. Developing and Industrial Economies

• Developing Countries: Low and middle-income economies
• Industrial Market Countries: High-income economies

B. Health and Nutrition:

Differences in stages of development among countries are reflected in a number
of ways besides per capita income.
• Malnutrition: A primary factor in more than half of the deaths of children
under five in low-income countries.
• Infant Mortality: Child mortality rates are much greater in low-income
countries than in high-income countries.

C. High Birth Rates: The birth rate is one of the clearest ways of distinguishing
between industrial and developing countries.

D. Women in Developing Countries:

Poverty is greater among women than men, particularly women who head
households.
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II. Productivity: Key to Development

A. Low Labor Productivity: Labor productivity, measured in terms of output per

worker, is by definition low in low-income countries.

B. Technology and Education: If knowledge is lacking, resources may not be used

efficiently; and people may be less receptive to new ideas and methods.

C. Inefficient Use of Labor: Unemployment and underemployment reflect

inefficient uses of labor.
• Underemployment: Occurs when skilled workers are employed in low-skill
jobs or when people are working less than they would like.

D. Natural Resources: An abundant supply of a natural resource is not in itself

enough to create a modern industrial economy.

E. Financial Institutions: Some developing countries’ central banks finance public

outlays by printing money, so high and unpredictable inflation discourages saving
and hurts development.

F. Capital Infrastructure: Production and exchange depend on a reliable

infrastructure of transportation, communication, sanitation, and electricity.

G. Entrepreneurship: Unless a country has entrepreneurs who are able to bring

together resources and take the risk of profit or loss, development may never get
off the ground.

H. Rules of the Game: The most elusive ingredients for development are the formal
and informal institutions that promote production and exchange: the laws,
customs, conventions, and other institutional elements that sustain an economy.
• Social Capital: Consists of shared values and trust that promotes cooperation
in the economy.
• Privatization: The process of turning public enterprises into private
enterprises.

I. Income Distribution Within Countries

The share of national income going to the poorest fifth of the population was less
evenly distributed in middle-income countries than in high- or low-income
countries.

III. International Trade and Development

A. Trade Problems for Developing Countries: About half of merchandise exports

from low-income countries consist of raw materials whose prices fluctuate more
widely than the prices of finished goods. Trade deficits in developing countries
often cause restrictions on imports of capital goods needed to promote long-term
growth and productivity.
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B. Migration and the Brain Drain: Often the best and brightest professionals, such
as doctors, nurses, and engineers migrate to developed countries.

C. Import Substitution Versus Export Promotion

• Import Substitution: Domestic manufacturers now make products that have
previously been imported.
• Export Promotion: Concentrates on producing for the export market.

D. Trade Liberalization and Special Interests: Gains from economic development

are widespread, but beneficiaries do not recognize their potential gains. Losers
tend to be concentrated and know quite well the sources of their losses, so
government often lacks the political will and support to remove impediments to
development.

IV. Foreign Aid and Economic Development

A. Foreign Aid: Any international transfer made on concessional (i.e., especially

favorable) terms for the purposes of promoting economic development.

B. Does Foreign Aid Promote Economic Development?

Foreign aid may raise the standard of living in some developing countries, but it
has not necessarily increased the ability to become self-supporting at that higher
standard of living.

C. Do Economies Converge?
A theory predicting that the standard of living in economies around the world will
grow more similar over time, with poor countries eventually catching up with
richer ones.

V. Conclusion
Because no single theory of economic development has become widely accepted, this
chapter has been more descriptive than theoretical. We can readily identify the features
that distinguish developing from industrial economies. Education is key to development.
A physical infrastructure of transportation and communication systems and utilities is
needed to link economic participants. And trusted financial institutions help link savers
and borrowers. A country needs entrepreneurs with the vision to move the economy for-
ward. Finally, the most elusive ingredients are the laws, manners, customs and ways of
doing business that nurture economic development.

SUMMARY
Developing countries are distinguished by low output per capita, poor health and nutrition, high
fertility rates, high infant mortality rates, poor education, and saving rates that are usually too low
to finance sufficient investment in human and physical capital.
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Worker productivity is low in developing countries because the stocks of human and physical
capital are low, technological advances are not widely diffused throughout the economy,
entrepreneurship is scarce, firms are poorly run, financial markets are not well developed, some
talented professionals migrate to high-income countries, formal and informal institutions do not
provide sufficient incentives for market activity, and governments may serve the interests of the
group in power rather than the public interest.

The key to a rising standard of living is increased productivity. To foster productivity, developing
nations must stimulate investment, support education and training programs, provide sufficient
infrastructure, and foster supportive rules of the game.

Increases in productivity do not occur without prior saving, but low incomes in developing
countries offer less opportunity to save. Even if some higher-income households in poor countries
have the money to save, financial institutions are not well developed, and savings are often sent
abroad where there is a more stable investment climate.

Import substitution is a development strategy that emphasizes domestic production of goods that
were imported. Export promotion concentrates on producing for the export market. Over the years,
export promotion has been more successful than import substitution because it relies on
specialization, comparative advantage, and competition.

Foreign aid has been a mixed blessing for most developing countries. In some cases, that aid has
helped countries build the roads, bridges, schools, and other capital infrastructure necessary for
development. In other cases, foreign aid has simply increased consumption and insulated
government from painful but necessary reforms. Worse still, subsidized food and used clothing
from abroad has undercut domestic production and economic development, particularly in Africa.

Convergence is a theory predicting that the standard of living around the world will grow more
alike as poorer countries catch up with richer ones. Some Asian countries and some transitional
economies that had been poor have caught up with the leaders, and many countries have moved
up from the lower-income category, but some poor countries around the world have failed to close

QUESTIONS FOR REVIEW

1. Why is agricultural productivity in developing countries usually so low?

2. Compare developing and industrial market economies on the basis of each of the following
general economic characteristics, and relate the differences to the process of development:
a. Diversity of the industrial base
b. Child mortality rates
c. Educational level of the labor force

3. Why is the birth rate in low-income countries higher than in high income countries?

4. Among the problems that hinder growth in developing economies are poor infrastructure, lack
of financial institutions and a sound money supply, a low saving rate, poor capital base, and lack
of foreign exchange. Explain how these problems are interconnected.

5. How has privatization contribute to productivity?

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6. What are the arguments for using real per capita income to compare living standards between
countries? What weakness does this measure have?

7. (Foreign Aid and Economic Development) Foreign aid, if it is to be successful in enhancing

economic development, must lead to a more productive economy. Describe some of the problems
in achieving such an objective through foreign aid.

8. From the perspective of citizens in a developing country, what are some of the benefits and
drawbacks of international trade?

9. It is widely recognized that foreign aid that promotes productivity in developing economies is
superior to merely shipping consumer goods like food and clothing to these countries. Yet the
latter is the approach frequently taken. Why do you think this is the case?

10. Explain the convergence theory. Under what circumstances is economic convergence less likely
to occur?
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References
McEachern, W. (2017). Microeconomics: A Contemporary Introduction Eleventh Edition. Cengage
Learning Asia Pte Ltd.