ECONOMIC DEVELOPMENT

the process whereby simple, low-income national economies are transformed into modern industrial economies. Although the term is sometimes used as a synonym for economic growth, generally it is employed to describe a change in a country's economy involving qualitative as well as quantitative improvements. The theory of economic developmenthow primitive and poor economies can evolve into sophisticated and relatively prosperous onesis of critical importance to underdeveloped countries, and it is usually in this context that the issues of economic development are discussed. As is the case with many concepts in economics, there is no clear-cut agreement on what constitutes underdevelopment. In broad terms, however, it is generally accepted that the level of national per capita income is a good indicator of a country's prosperity and, therefore, of the level of its economic development. There are, however, very significant differences among developing countries that make it difficult to draw broad general conclusions about the reasons for their underdevelopment and the most effective methods of transforming their economies. Some generalizations, nevertheless, are necessary to illustrate basic principles. As a rule, theories of economic development assume that existing differences in income levels between the developed and underdeveloped nations are not primarily the result of conditions outside man's control (e.g., natural resources, climate, etc.). It follows from this that all countries have the potential to attain developed status. The task, then, of development economics is to determine how this potential can best be realized. This, in turn, involves the study of the principal causes and symptoms of underdevelopment. Despite the wide differences among developing countries, they share a number of characteristics. In most underdeveloped countries, primary (agricultural or extractive) production accounts for a very large proportion of national income, and, not infrequently, a disproportionate share is taken by one or two products. The level and range of secondary industrial activities tend to be very low and marked by poor technological development. Most of these countries have large quantities of surplus labour, considerable unemployment or underemployment, and fairly high rates of population growth. Another common feature is inadequate infrastructurepoor road and transportation networks, lack of sufficient irrigation, etc. Equally important are the underdevelopment of human resources in terms of skills and education and the weakness of economic and financial institutions. Development policies followed by developed and underdeveloped nations alike since World War II have largely concentrated on changing these conditions by injecting missing elements into the economies in question. The most visible manifestation of this approach was the building of whole new industrial sectors in the belief that this would not only reduce underdeveloped countries' dependence on a limited number of primary products but would also raise their technological resources and incomes. Since domestic capital resources were generally inadequate for such large industrialization programs, large amounts of foreign funds were introduced in the form of either foreign investment or governmental loans or grants. As a result, many developing countries have seen considerable industrial development since the 1950s. Large sums of domestic and foreign capital were also injected into infrastructural development, and considerable attention was devoted to programs designed to increase the number and quality of skilled and trained personnel. At the same time, developed countries came under considerable pressure to take steps to make the world trading system more helpful to developing countries; such steps included measures to lessen fluctuations in the prices of a number of primary commodities and to provide preferential treatment for exports of manufactured goods from the newly established industries of developing economies. Although there is little doubt that these policies have assisted economic growth, the overall results are generally regarded as disappointing. The initial emphasis on industrialization often led to the development of sophisticated manufacturing plants that could not be operated efficiently for lack of trained personnel or a sufficiently large and reliable domestic or export market. Furthermore, because such industries are capital- rather than labour-intensive, they did not have a significant employment-creating effect. Another consequence was that, by diverting resources into large-scale industrial projects (and also into such prestige infrastructural developments as superhighways and large airports), the more traditional areas of the economy, on which a large majority of the people depended, were starved for funds and saw little development. Crash programs in education not infrequently resulted in large numbers of highly qualified persons whom the economy could not absorb at an appropriate level. Another serious and continuing problem has been the failure to reduce high rates of population growth. In sum, although the non-oil-exporting developing countries recorded reasonably good growth in national income during the 1970s, rapid population growth reduced growth in per capital income to a very modest level. At the same time, many developing countries continued to face serious structural imbalances in their economies accompanied by high unemployment, balance of payment deficits, and a growing level of foreign indebtedness. It is now generally accepted that the attempt to reproduce the structure of developed economies in underdeveloped countries by means of large capital investment programs is not the most efficient means of achieving development. In fact, there is a growing consensus that rather less ambitious plans (in both size and technological content) aimed at exploiting the specific resources and natural advantages enjoyed by developing countries can lead to a faster and socially much less disruptive economic development. the process whereby simple, low-income national economies are transformed into modern industrial economies. Although the term is sometimes used as a synonym for economic growth, generally it is employed to describe a change in a country's economy involving qualitative as well as quantitative improvements. The theory of economic developmenthow primitive and poor economies can evolve into sophisticated and relatively prosperous onesis of critical importance to underdeveloped countries, and it is usually in this context that the issues of economic development are discussed. Economic development first became a major concern after World War II. As the era of European colonialism ended, many former colonies and other countries with low living standards came to be termed underdeveloped countries, to contrast their economies with those of the developed countries, which were understood to be Canada, the United States, those of western Europe, most eastern European countries, the then Soviet Union, Japan, South Africa, Australia, and New Zealand. As living standards in most poor countries began to rise in subsequent decades, they were renamed the developing countries. There is no universally accepted definition of what a developing country is; neither is there one of what constitutes the process of economic development. Developing countries are usually categorized by a per capita income criterion, and economic development is usually thought to occur as per capita incomes rise. A country's per capita income (which is almost synonymous with per capita output) is the best available measure of the value of the goods and services available, per person, to the society per year. Although there are a number of problems of measurement of both the level of per capita income and its rate of growth, these two indicators are the best available to provide estimates of the level of economic well-being within a country and of its economic growth. It is well to consider some of the statistical and conceptual difficulties of using the conventional criterion of underdevelopment before analyzing the causes of underdevelopment. The statistical difficulties are well known. To begin with, there are the awkward borderline cases. Even if analysis is confined to the underdeveloped and developing countries in Asia, Africa, and Latin America, there are rich oil countries that have per capita incomes well above the rest but that are otherwise underdeveloped in their general economic characteristics. Second, there are a number of technical difficulties that make the per capita incomes of many underdeveloped countries (expressed in terms of an international currency, such as the U.S. dollar) a very crude measure of their per capita real income. These difficulties include the defectiveness of the basic national income and population statistics, the inappropriateness of the official exchange rates at which the national incomes in terms of the respective domestic currencies are converted into the common denominator of the U.S. dollar, and the problems of estimating the value of the noncash components of real incomes in the underdeveloped countries. Finally, there are conceptual problems in interpreting the meaning of the international differences in the per capita income levels. Although the difficulties with income measures are well established, measures of per capita income correlate reasonably well with other measures of economic well-being, such as life expectancy, infant mortality rates, and literacy rates. Other indicators, such as nutritional status and the per capita availability of hospital beds, physicians, and teachers, are also closely related to per capita income levels. While a difference of, say, 10 percent in per capita incomes between two countries would not be regarded as necessarily indicative of a difference in living standards between them, actual observed differences are of a much larger magnitude. India's per capita income, for example, was estimated at $270 in 1985. In contrast, Brazil's was estimated to be $1,640, and Italy's was $6,520. While economists have cited a number of reasons why the implication that Italy's living standard was 24 times greater than India's might be biased upward, no one would doubt that the Italian living standard was significantly higher than that of Brazil, which in turn was higher than India's by a wide margin. The interpretation of a low per capita income level as an index of poverty in a material sense may be accepted with two qualifications. First, the level of material living depends not on per capita income as such but on per capita consumption. The two may differ considerably when a large proportion of the national income is diverted from consumption to other purposes; for example, through a policy of forced saving. Second, the poverty of a country is more faithfully reflected by the representative standard of living of the great mass of its people. This may be well below the simple arithmetic average of per capita income or consumption when national income is very unequally distributed and there is a wide gap in the standard of living between the rich and the poor. The usual definition of a developing country is that adopted by the World Bank: low-income developing countries in 1985 were defined as those with per capita incomes below $400; middle-income developing countries were defined as those with per capita incomes between $400 and $4,000. To be sure, countries with the same per capita income may not otherwise resemble one another: some countries may derive much of their incomes from capital-intensive enterprises, such as the extraction of oil, whereas other countries with similar per capita incomes may have more numerous and more productive uses of their labour force to compensate for the absence of wealth in resources. Kuwait, for example, was estimated to have a per capita income of $14,480 in 1985, but 50 percent of that income originated from oil. In most regards, Kuwait's economic and social indicators fell well below what other countries with similar per capita incomes had achieved. Centrally planned economies are also generally regarded as a separate class, although China and North Korea are universally considered developing countries. A major difficulty is that prices serve less as indicators of relative scarcity in centrally planned economies and hence are less reliable as indicators of the per capita availability of goods and services than in market-oriented economies. Estimates of percentage increases in real per capita income are subject to a somewhat smaller margin of error than are estimates of income levels. While year-to-year changes in per capita income are heavily influenced by such factors as weather (which affects agricultural output, a large component of income in most developing countries), a country's terms of trade, and other factors, growth rates of per capita income over periods of a decade or more are strongly indicative of the rate at which average economic well-being has increased in a country. Additional reading The statistics of national incomes and rates of growth are supplied in the World Development Report 1987 (1987), published for the World Bank. Conceptual problems of national income measurement are discussed in Simon Kuznets, Modern Economic Growth: Rate, Structure and Spread (1966); and Gerald M. Meier, Leading Issues in Economic Development, 4th ed. (1984). For specific problems of developing countries, see H. Myint, The Economics of the Developing Countries, 5th ed. (1980); Ian M.D. Little, Economic Development: Theory, Policy, and International Relations (1982); Martin Fransman (ed.), Machinery and Economic Development (1986); and Graham Bird, International Financial Policy and Economic Development: A Disaggregated Approach (1987). The role of foreign exchange is studied in Anne O. Krueger (ed.), Trade and Employment in Developing Countries, 3 vol. (198183). For a good exposition of growth economics, see Robert M. Solow, Growth Theory, enl. ed. (1988); John Hicks, Capital and Growth (1965, reissued 1972); and John Woronoff, Asia's Miracle Economies (1986). Hla Myint Anne O. Krueger