Economic Development

What It Means

Economic development refers to the transformation of a simple, low-income national economy into a more sophisticated one in which citizens’ incomes rise. The term “economic development” is often used, in everyday conversation, as a synonym for “economic growth,” but economists draw a clear distinction between the two. Whereas economic growth refers to a simple increase in the quantity of goods and services produced in an economy, economic development describes a wide range of interconnected, qualitative changes at the structural level of the economy. The process of economic development involves changes in economic inputs (the resources, such as land, raw materials, equipment, and labor, that are used to produce goods and services), in the technologies used to combine these inputs in the production process, and in economic outputs (the final products produced by the economy).

Undeveloped economies tend to be predominantly agricultural, consisting of workers who act directly on the natural world with only minimal help from tools and technology. Development usually proceeds as businesses accumulate capital (equipment and machines that aid in production, as well as the skills that workers acquire through education and training). New equipment allows workers to increase their efficiency and to produce larger quantities of goods, and new labor skills develop in combination with the use of the new equipment, changing the nature of the labor force. Incomes rise, and people who have more money to spend begin demanding more and different products. The economy adapts to these new tastes, spurring the growth of new industries. Over time, as these structural changes occur, the economy shifts away from agriculture and into industrial production, and it begins to be considered a developed, rather than a developing, economy.

When Did It Begin

The economic development of Western Europe began roughly in the sixteenth century and proceeded gradually over the course of several centuries. Industrialization increased rapidly there in the early nineteenth century, and the latter part of that century saw the expansion and development of the economies of Eastern Europe, Australia, New Zealand, South Africa, Canada, and the United States. Russia’s economic development came primarily in the twentieth century.

Economic development became a more pressing concern when, after World War II, the colonial era (during which European countries and Japan conquered and ruled over foreign lands in Asia, Africa, and elsewhere) came to an end. Once ruling governments withdrew from their colonies, new countries were established, and most of these countries had undeveloped economies. Questions about how best to encourage economic development in these poor countries have been a central concern of many economists and government leaders since that time.

More Detailed Information

The most common measure that economists use to judge a country’s economic development is gross domestic product (GDP) per capita. Gross domestic product is a calculation of the monetary value of all goods and services produced by a nation’s economy, and GDP per capita is an estimate of each citizen’s share of GDP. Economists determine GDP per capita by dividing GDP by the size of a country’s population. According to their GDP per capita, countries are commonly classified as less-developed countries (often referred to as LDCs), developing countries, or developed countries. Among developed countries, those that have developed only recently are classified as newly industrialized countries (NICs).

GDP per capita does not, however, fully capture the degree to which a country has developed. For instance, the economies of the oil-producing island nation of Bahrain and the newly industrialized country South Korea both grew rapidly in the latter part of the twentieth century, and today the two countries boast similar GDPs per capita (of roughly $20,000 in 2007), but most of Bahrain’s wealth is produced by a single industry—oil—and the nation’s citizens do not fully participate in this industry. Instead, multinational corporations headquartered primarily in the United States and Europe locate their own employees in Bahrain to conduct the process of finding, extracting, and bringing the oil to consumers, most of whom, again, live in the United States, Europe, and other developed nations. Though the oil industry generates income for Bahrain’s government and its people, the economy has not otherwise industrialized or transformed at the structural level, so that the fortunes of the oil industry and the fortunes of the country’s economy are essentially inseparable. South Korea, by contrast, has both grown and shifted from an agricultural to an industrial economy. Workers have increasingly left rural areas and moved into cities to find the new jobs produced by a developing economy, and the economy as a whole is on a solid footing in a way that Bahrain’s is not. The incomes of South Korea’s citizens are growing, and there is real potential for them to keep growing. A broad range of the population shares in the benefits produced by economic development.

South Korea is not the only country to have developed a solid economy since the mid-twentieth century. Other success stories include the economies of Taiwan, Singapore, and Hong Kong, all of which are today considered NICs. At the other end of the spectrum, however, are the many countries of Asia, Africa, and Latin America that have failed to develop significantly since gaining independence from their colonial rulers. The question of how to spur development in such countries is one upon which more than profits and business opportunities depend. Since economic development usually corresponds with increases in quality of life (for example, better health care, education, and public services), the lives and futures of billions of people are at stake.

Though economic opinion is divided about strategies for development, most people agree that two basic ingredients often necessary for a country to transform its economy are the accumulation of capital and access to modern science and technology.

In the decades immediately following World War II, capital accumulation was believed to be the fundamental, if not the only, ingredient necessary for economic development. Capital can be broken down into non-human and human capital. Non-human capital includes buildings, machines, equipment, and other materials that allow for increased productivity. Human capital consists of the education and specialized training of individuals that allows companies to increase their productivity. Development strategies for LDCs during the 1950s and 1960s usually called for massive injections of foreign aid (money contributions) and investment that would allow for the accumulation of capital. It was believed that economic development would proceed naturally from this starting point. This did not turn out to be the case in many countries, however. While capital accumulation is no longer considered the supreme determinant of economic development, it is generally agreed that, if a country does not reinvest a significant portion of its income in capital, it cannot continue to develop over the long term.

Capital was not the sole or even the primary driver of the enormous and rapid development of the U.S. economy in the late nineteenth and the twentieth century. Many economists point to technology as the key ingredient in U.S. development. Indeed, the growth and structural change of the U.S. economy would have been inconceivable without the monumental advances in modern science made during that time. As the laws of physics, chemistry, and biology (among other fields) were applied to the production of goods and services, countless new economic possibilities emerged. While LDCs today have access to the discoveries of the past, they do not always have the capability to convert this knowledge into product innovations that will allow for economic growth and change.

Economists agree, moreover, that government policies are one of the most important factors influencing an economy’s course. Political stability is, naturally, one of the necessary preconditions for industrialization. Until the population and businesses in a country can be sure that they can safely pursue their economic goals, development is not possible. But stability alone is not enough. If a government does not actively promote economic development, then it will likely hinder industrialization. This occurred in Cuba in the mid-to-late-twentieth century, where the country’s socialist leader Fidel Castro promoted social goals over economic goals. This also often occurs in societies ruled by an elite group that benefits from a lack of economic development. European nations typically governed their colonies with the intent of benefiting the businesses and citizens of the ruling country, making no serious effort at economic development that would have benefited their colonies’ native populations.

Recent Trends

Among developing nations at the end of the twentieth century and the beginning of the twenty-first, China and India stood out in the minds of most economists and business analysts. Both countries are enormous in both geographic size and population, and the economies of both were growing at a torrid pace in the 1990s and in the early years of the new millennium. Experts commonly predicted that the countries would, within a few decades, surpass in size all national economies in the world except that of the United States.

China and India were following very different paths toward development, however. China excelled at heavy industrial production, which it bolstered with good infrastructure (roads, ports, and utilities) and large amounts of foreign investment. India, meanwhile, specialized in products and services less reliant on tangible assets, such as software, biotechnology, and advertising. China, as a socialist country (a country in which social goals centrally influence economic policy), exerted much greater government control over businesses and investors. Though government participation in the economy had allowed for the large capital investments necessary for heavy industrial production and for the effective infrastructure that supported those producers, some economists wondered whether government control of the economy might ultimately hinder China’s growth. India’s government, on the other hand, had since the 1990s taken an essentially hands-off approach to the economy. This had allowed for growth comparable to China’s even in the absence of infrastructure and without significant amounts of foreign investment.

Which one of the two courses would ultimately prove the most fruitful strategy for economic development was a matter of debate in the early twenty-first century. Few people, on the other hand, doubted that China and India would continue to develop, or that both would eventually rival the top economies in the world.