AE12 – Economic Development

Module 1: Introduction to Economic Development

Ian Dave B. Custodio

Instructor
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Lesson 1: Concepts of Economic Development

Learning objectives:
a. Define development
b. Distinguish economic development from economic growth
c. Define development economics
d. Explain the importance of development economics
e. Identify the common features of the underdeveloped countries
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Outline
1.1 What is Development?
1.2 Economic Development vs. Economic Growth
1.3 Economic Development or Development Economics?
1.4 Nature of Development Economics
1.5 Why study Development Economics?
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1.1 What is Development?

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Development
- definition varies by context, people, or organization

- the act or process of growing, progressing, or developing; a fact, event, or

happening, especially one that changes a situation (dictionary.com)

- a process that creates growth, progress, positive change or the addition of

physical, economic, environmental, social and demographic components (Society for
International Development, 2021)
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- the process of improving the quality of all human lives and capabilities by
raising people’s levels of living, self-esteem, and freedom (Todaro, 2012)

- common term: “process”

- development is a process rather than an outcome, it is dynamic that it involves a

change from one state (or condition) to another. Ideally, such change is a “positive”
one.
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1.2 Economic Development vs.

Economic Growth
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Economic Growth vs. Economic Development

Economic Growth is defined as the rise in the money value of goods and services
produced by all the sectors of the economy per head during a particular period. It is a
quantitative measure that shows the increase in the number of commercial
transactions in an economy.

Economic Development is defined as the process of increase in volume of production

along with the improvement in technology, a rise in the level of living, institutional
changes, etc. In short, it is the progress in the socio-economic structure of the
economy.
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Key Differences
- Economic growth is one of the features of economic development.

- Economic growth is an automatic process. Unlike economic development, which is

the outcome of planned and result-oriented activities.

- Economic growth enables an increase in the indicators like GDP, per capita income,
etc. On the other hand, economic development enables improvement in the life
expectancy rate, infant mortality rate, literacy rate, and poverty rates.
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- Economic growth can be measured when there is a positive change in the national
income, whereas economic development can be seen when there is an increase in real
national income.

- Economic growth is a short-term process that takes into account the yearly growth
of the economy. But if we talk about economic development, it is a long-term process.

- Economic Growth results in quantitative changes, but economic development brings

both quantitative and qualitative changes.
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- Economic Growth applies to developed economies to gauge the quality of life, but
as it is an essential condition for development, it applies to developing countries also.
In contrast, economic development applies to developing countries to measure
progress.

- Economic growth can be measured in a particular period. As opposed to economic

development is a continuous process so that it can be seen in the long run.
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Summary of the Differences

Basis for Economic Growth Economic Development
comparison
Scope Increase in the indicators like GDP, per Improvement in life
capita income etc. expectancy rate, infant
mortality rate, literacy rate and
poverty rates.
Term Short term process Long term process
Applicability Developed Economies Developing Economies
Expected changes Quantitative changes Qualitative and quantitative
changes
Process Automatic Manual
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1.3 Economic Development or

Development Economics?
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Economic Development vs. Development Economics

Economic development and development economics may contain the same words,
but they do differ in context.

As defined, economic development is the increase in volume of production along with

the improvement in technology, a rise in the level of living, institutional changes, etc.
In short, it is the progress in the socio-economic structure of the economy.

Development economics is a branch of economics that focuses on improving fiscal,

economic, and social conditions in developing countries.
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Development economics considers factors such as health, education, working

conditions, domestic and international policies, and market conditions with a focus on
improving conditions in the world's poorest countries.

Development economics is also the study of how economies are transformed from
stagnation to growth and from low income to high-income status, and overcome
problems of absolute poverty.
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Economics is all about making smart choices to cope with scarcity.

The most fundamental measurement used to evaluate the success in allocating the
scarce resources is economic growth.
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1.4 Nature of Development

Economics
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The study of 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.

Although one could claim that Adam Smith was the first “development economist”
and that his book “Wealth of Nations”, published in 1776, was the first treatise on
economic development, the systematic study of the problems and processes of
economic development in Africa, Asia, and Latin America has emerged only over the
past five decades or so.
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Traditional economics
- an approach to economics that emphasizes utility, profit maximization, market
efficiency, and determination of equilibrium.

- 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 ever-expanding range of goods and services.

- it assumes economic “rationality” and a purely materialistic, individualistic, self-

interested orientation toward economic decision making.
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Political Economy
- the attempt to merge economic analysis with practical politics—to view economic
activity in its political context.

- 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
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for their own benefit exclusively or for that of the larger population as well.

- concerned with the relationship between politics and economics, with a special
emphasis on the role of power in economic decision making.

Development economics is of greater extent than traditional neoclassical economics

or even political economy.
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Development economics is far concerned with the economic, cultural, and political
requirements for effecting rapid structural and institutional transformations of entire
societies in a manner that will most efficiently bring the fruits of economic progress to
the broadest segments of their populations.

It also focuses on the mechanisms that keep families, regions, and even entire nations
in poverty traps, in which past poverty causes future poverty, and on the most
effective strategies for breaking out of these traps.
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1.5 Why study Development

Economics?
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Some of the reasons for studying development economics

- Gain perspective of what is development.

- Know the historical record of economic progress in the now developed world and
comparing/contrasting it to the new developing countries.

- Understand economic institutions, and how do they shape problems of

underdevelopment and prospects for successful development.

- Determine the extremes between the rich and poor.

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- Sources of national and international economic growth, who benefits from such, and
why do some countries make rapid progress while many others remain poor.

- Most influential theories of development and if are they compatible. Also, if

underdevelopment an internally (domestically) or externally (internationally) induced
phenomenon?

- Constraints most hold back accelerated growth, depending on local conditions.

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- How can improvements in the role and status of women have an especially
beneficial impact on development prospects.

- Causes of extreme poverty, and what policies have been most effective for
improving the lives of the poorest of the poor.

- Does rapid population growth threaten the economic progress of developing

nations? Do large families make economic sense in an environment of widespread
poverty and financial insecurity?
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- Why is there so much unemployment and underemployment in the developing

world, especially in the cities, and why do people continue to migrate to the cities
from rural areas even when their chances of finding a conventional job are very slim

- Wealthier societies are also healthier ones because they have more resources for
improving nutrition and health care. But does better health also help spur successful
development?

- What is the impact of poor public health on the prospects for development, and
what is needed to address these problems?
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How the other half of the world live?

The majority of the earth’s nearly 8 billion people, are much less fortunate.

- they may have inadequate food and shelter

- their health is often poor
- they may not know how to read or write, they may be unemployed
- their prospects for a better life are uncertain

Over 40% of the world’s population lives on less than $2 per day, part of a condition
of absolute poverty.
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Absolute Poverty
- a situation of being unable to meet the minimum levels of income, food, clothing,
healthcare, shelter, and other essentials.

Subsistence Economy
- an economy in which production is mainly for personal consumption and the
standard of living yields little more than basic necessities of life—food, shelter, and
clothing.
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Common Features of the Underdeveloped Countries

1. Low per Capita Income: The level of per capita income is very low in
underdeveloped countries.

2. Poor Level of Living: The vast majority of people in underdeveloped nations lie
under the conditions of poverty, malnutrition, disease, illiteracy, etc. Even basic
necessities of life such as minimum food clothing and shelter are not easily accessible
to the poor masses.
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3. High Rate of Growth of Population: Population growth in underdeveloped

countries neutralizes economic growth. High population implies greater consumption
expenditure and lower investments in productive activities and slows down the
economic development.

4. Highly Unequal Income Distribution: The income inequality between the rich and
the poor people within the underdeveloped countries is also very high.
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5. Prevalence of Mass Poverty: Low level of per capita income combined with high
degree of inequalities in its distribution leads to widespread poverty in
underdeveloped countries.

6. Low Levels of Productivity: The Productivity level (i.e. output produced per person)
tends to be very low in an underdeveloped country which is mainly due to :
a. inefficient workforce which itself is a consequence of poverty, ill health and lack of
education
b. Low work culture
c. Low use of capita in the form of machinery and equipment.
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7. Low Rate of Capital Formation: The saving rate in an underdeveloped country is

quite low and rate of capital formation is also is very slow.

8. Technological Backwardness: In most of the sectors, an underdeveloped economy

the techniques of production employed are generally obsolete mainly due to low
saving rate.

9. High Level of Unemployment: Unemployment levels are very high in under-

developed countries mainly due to lack of capital and low level of development in
various economic sectors, these countries aren’t able to absorb the rising labor supply.
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10. Low Social Indicators of Development: The under-developed countries have

very low social indicators such as low literacy rate, high infant mortality rate, low
expectancy of life, etc. as compared to the developed countries.
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Most developed countries: https://www.worlddata.info/alliances/nato.php

Developing countries: https://www.worlddata.info/developing-countries.php

Least developed countries: https://www.worlddata.info/least-developed-countries.php

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Most developed countries: https://www.worlddata.info/alliances/nato.php

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Developing countries: https://www.worlddata.info/developing-countries.php

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Least developed countries: https://www.worlddata.info/least-developed-countries.php

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References:
Society for International Development .(2021). Retrieved from https://sid-israel.org/en/what-is-development/
Todaro, M. P., Smith, S. C. (2012). Economic Development 11th Edition. Addison-Wesley
https://www.dictionary.com/browse/development
https://keydifferences.com/difference-between-economic-growth-and-economic-development.html
 THANK YOU!
Ian Dave B. Custodio, LPT, MSc
Part-time Instructor
Western Leyte College
E-mail: iandave.custodio@wlcormoc.edu.ph
Website: iandavecustodio.github.io
Telephone (Office): (053) 563 7064 local 1121
Western Leyte College
College of Accountancy and Business
A. Bonifacio St., Ormoc City, Leyte
E-mail: info@wlcormoc.edu.ph
Website: wlcormoc.edu.ph
Telephone: (053) 561 5310 / 255-8549