Economic Development

The field of development economics is concerned with the causes of underdevelopment and with policies that may accelerate the rate of growth of per capita income. While these two concerns are related to each other, it is possible to devise policies that are likely to accelerate growth (through, for example, an analysis of the experiences of other developing countries) without fully understanding the causes of underdevelopment.
Studies of both the causes of underdevelopment and of policies and actions that may accelerate development are undertaken for a variety of reasons. There are those who are concerned with the developing countries on humanitarian grounds; that is, with the problem of helping the people of these countries to attain certain minimum material standards of living in terms of such factors as food, clothing, shelter, and nutrition. For them, low per capita income is the measure of the problem of poverty in a material sense. The aim of economic development is to improve the material standards of living by raising the absolute level of per capita incomes. Raising per capita incomes is also a stated objective of policy of the governments of all developing countries. For policymakers and economists attempting to achieve their governments’ objectives, therefore, an understanding of economic development, especially in its policy dimensions, is important. Finally, there are those who are concerned with economic development either because they believe it is what people in developing countries want or because they believe that political stability can be assured only with satisfactory rates of economic growth. These motives are not mutually exclusive. Since World War II many industrial countries have extended foreign aid to developing countries for a combination of humanitarian and political reasons.
Those who are concerned with political stability tend to see the low per capita incomes of the developing countries in relative terms; that is, in relation to the high per capita incomes of the developed countries. For them, even if a developing country is able to improve its material standards of living through a rise in the level of its per capita income, it may still be faced with the more intractable subjective problem of the discontent created by the widening gap in the relative levels between itself and the richer countries. (This effect arises simply from the operation of the arithmetic of growth on the large initial gap between the income levels of the developed and the underdeveloped countries. As an example, an underdeveloped country with a per capita income of $100 and a developed country with a per capita income of $1,000 may be considered. The initial gap in their incomes is $900. Let the incomes in both countries grow at 5 percent. After one year, the income of the underdeveloped country is $105, and the income of the developed country is $1,050. The gap has widened to $945. The income of the underdeveloped country would have to grow by 50 percent to maintain the same absolute gap of $900.) Although there was once in development economics a debate as to whether raising living standards or reducing the relative gap in living standards was the true desideratum of policy, experience during the 1960–80 period convinced most observers that developing countries could, with appropriate policies, achieve sufficiently high rates of growth both to raise their living standards fairly rapidly and to begin closing the gap.
The impact of discontent
Although concern over the question of a subjective sense of discontent among the underdeveloped and developing countries has waxed and waned, it has never wholly disappeared. The underdeveloped countries’ sense of dissatisfaction and grievance arises not only from measurable differences in national incomes but also from the less easily measurable factors, such as their reaction against the colonial past and their complex drives to raise their national prestige and achieve equality in the broadest sense with the developed countries. Thus, it is not uncommon to find their governments using a considerable proportion of their resources in prestige projects, ranging from steel mills, hydroelectric dams, universities, and defense expenditure to international athletics. These symbols of modernization may contribute a nationally shared satisfaction and pride but may or may not contribute to an increase in the measurable national income. Second, it is possible to argue that in many cases the internal gap in incomes within individual underdeveloped countries may be a more potent source of the subjective level of discontent than the international gap in income. Faster economic growth may help to reduce the internal economic disparities in a less painful way, but it must be remembered that faster economic growth also tends to introduce greater disruption and the need for making bigger readjustments in previous ways of life and may thus increase the subjective sense of frustration and discontent. Finally, it is difficult to establish that the subjective problem of discontent will bear a simple and direct relationship to the size of the international gap in incomes. Some of the apparently most discontented countries are to be found in Latin America, where the per capita incomes are generally higher than in Asia and Africa. A skeptic can turn the whole approach to a reductio ad absurdum by pointing out that even the developed countries with their high and rising levels of per capita income have not been able to solve the subjective problem of discontent and frustration among various sections of their population.
Two conclusions may be drawn from the above points. First, the subjective problem of discontent in the underdeveloped countries is a genuine and important problem in international relations. But economic policy acting on measurable economic magnitudes can play only a small part in the solution of what essentially is a problem in international politics. Second, for the narrower purpose of economic policy there is no choice but to fall back on the interpretation of the low per capita incomes of the underdeveloped countries as an index of their poverty in a material sense. This can be defended by explicitly adopting the humanitarian value judgment that the underdeveloped countries ought to give priority to improving the material standards of living of the mass of their people. But, even if this value judgment is not accepted, the conventional measure of economic development in terms of a rise in per capita income still retains its usefulness. The governments of the underdeveloped countries may wish to pursue other, nonmaterial goals, but they could make clearer decisions if they knew the economic cost of their decisions. The most significant measure of this economic cost can be expressed in terms of the foregone opportunity to raise the level of per capita income.
Shortage of savings:
Given the broad relationship between capital accumulation and economic growth established in growth theory, it was plausible for growth theorists and development economists to argue that the developing countries were held back mainly by a shortage in the supply of capital. These countries were then saving only 5–7 percent of their total product, and it was manifest (and it remains true) that satisfactory growth cannot be supported by so low a level of investment. It was therefore thought that raising the savings ratio to 10–12 percent was the central problem for developing countries. Early development policy therefore focused on raising resources for investment. Steps toward this end were highly successful in most developing countries, and savings ratios rose to the 15–25 percent range. However, growth rates failed even to approximate the savings rates, and theorists were forced to search for other explanations of differences in growth rates.

The central problem of countries with low per capita output is that they have not as yet succeeded in making use of their potential economic opportunities. To do so, they must achieve an efficient allocation of the available resources and provide incentives for resource accumulation. But efficient allocation of resources is not merely a matter of the formal optimum conditions of economic theory. It requires the building up of an effective institutional and organizational framework to carry out the allocation of resources. In the private sector this requires the development of a well-articulated market system that embraces the markets for final products and the markets for factors of production. In the public sector the development of the organizational framework requires improvements in the administrative machinery of the government, especially in its fiscal machinery.
In the setting of the developing countries, one is concerned not only with the once for all problem of efficient allocation of resources but also with improving the capacity of these countries to make a more effective use of their resources over a period of time. That is to say, one is concerned not only with the static problem of the efficient allocation of given resources with the given organizational framework but also with dynamic problems of improving the capability of this framework. From this point of view, there is no conflict, as some have maintained, between the static, or the short-run, considerations and the dynamic, or long-run, considerations. The two sets of requirements move in the same direction.

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