Development Economics – Understanding economic development

Economic growth refers to increases in output and incomes over time, often measured on a per capita basis. Economic development refers to a process that leads to improved standards of living for a population as a whole.

Economic development can be defined as a process where increases in real per capita output and incomes are accompanied by improvements in standards of living of the population and reductions in poverty, increased access to goods and services that satisfy basic needs (including food, shelter, health care, education, sanitation and others), increasing employment opportunities and reduction of unemployment, and reductions of serious inequalities in incomes and wealth.

Human development is a process of expanding human freedoms: the freedom to satisfy hunger; to be adequately fed; to be free of preventable illnesses; to have adequate clothing and shelter; to have access to clean water and sanitation; to be able to read, write and receive an appropriate education; to be knowledgeable; to be able to find work; to enjoy legal protection; to participate in social and political life; and, in general, to have the freedom to develop one's potential and lead a full and productive life.

1. Increases in the quantity of physical capital 2. Increases in the quantity of human capital 3. Development and use of new appropriate technologies 4. Institutional changes

Physical capital is an important source of growth because it makes possible increases in labour productivity (output per unit of labour input). It is especially important in developing countries, which tend to have relatively limited amounts of capital in relation to their large supplies of labour. This means that labour productivity tends to be low relative to what we find in economically more developed countries.

Human capital is also a very important source of growth because of its contribution to increasing the productivity of labour. In developing countries it acquires a special significance because there are large portions of populations in many countries that have relatively low levels of educational attainment, and also low levels of health. This means that there is a huge scope for increasing the amount of human capital, and this can make a very significant difference to productivity, employment opportunities, output growth and development prospects.

New technology contributes to improving the quality of physical capital. While new technology in general contributes to economic growth, in developing countries it is especially important to consider the appropriateness of new technologies to local conditions. There are many technologies developed and used in economically advanced countries that are not well- suited to the conditions of less developed ones. More developed and less developed often differ from each other not only with respect to economic factors, and also climatic, ecological and geographical conditions, and this sometimes means that countries require technologies that are well-suited to their particular local conditions.

There are many economic, legal and social institutions that influence economic growth. In many economically less developed countries, there is a need to have a well-functioning legal system that provides effective enforcement of laws, an efficient, fair and transparent tax system, and broad access by the population to credit; institutions that protect against corruption. Many developing countries are making great efforts to build strong market economies, yet a market system cannot function well without well-developed institutions such as these.

The reasons behind the better performance of resource-poor countries can be found in their earlier diversification into manufacturing and their earlier industrialisation. Their inability to rely on the production and export of commodities made them turn early on toward labour-intensive manufacturing, together with investments in human capital and appropriate technologies. Resource-rich countries, on the other hand, became heavily dependent on production and export of primary commodities, which often led to short-term volatility of export revenues, long-term deteriorating terms of trade, poor fiscal performance, the need to resort to external borrowing and hence the accumulation of large debts, and balance of payments difficulties.

Economic growth can occur without economic development. Some economic development is possible in the absence of rapid growth, if appropriate policies are followed to provide access to basic social services for the poor. An economy that does not experience growth can still achieve some economic development, by reallocating its resources such that it cuts back on industrial production and increases merit goods production Growing output per capita translates into higher incomes and an improved ability to provide the goods and services needed by the population. However, economic growth does not guarantee that economic development will occur.

1. Including low levels of GDP per capita 2. High levels of poverty 3. Relatively large agricultural sectors 4. Large urban informal sectors 5. High birth rates 6. Low levels of health and education 7. Low levels of productivity 8. Dual economies

The 'World Bank country classification' classifies countries as economically more or less developed according to GNI levels. By definition, according to the World Bank, economically less developed countries are those with GNI per capita levels below a certain level.

All countries in the world have poverty. However, almost all of extreme poverty (living on less than $1.25 per day) and most of moderate poverty (living on less than $2.00 per day) are concentrated in less developed countries.

Economically less developed economies have large agricultural sectors (and large primary sectors generally). Relatively low income elasticities of demand for agricultural products play a role in reducing the relative size of the agriculture sector as countries grow and develop, while agriculture increasingly becomes replaced by industry and services. The lower the level of per capita GNI, the larger the contribution of the agricultural sector.

A formal sector refers to the part of an economy that is registered and legally regulated; an informal sector by definition lies outside the formal economy, and refers to economic activities that are unregistered and legally unregulated. Informal sectors exist everywhere in the world, but are much more important in developing countries. The term urban informal sector refers to the unregistered urban sector in developing countries, and the vast range of activities of a large and growing share of the urban population as a way of survival. This range of activities includes everything from barbers, cobblers, carpenters, tricycle and pedicab drivers, garbage collectors and small shop owners and street vendors. The term 'informal sector' has a far broader and different meaning in developing countries, it has to do with work that can make all the difference between physical survival and starvation for individuals and their family. The informal sector is responsible for a large and rising share of urban employment. In developing countries, one-half to three-quarters of total non- agricultural employment is in the informal sector. Moreover, employment in the informal sector is growing more rapidly than employment in the formal sector, especially during times of economic recession. As firms in the formal sector cut back on employment, all those who lose their jobs are forced to seek work in the informal sector.

The informal sector poses many problems: no worker protection; workers are vulnerable to exploitation; environmental dangers and health hazards in slums with no basic services like water sanitation and sewerage; no access to credit for workers; limited possibilities for education and training, and many more.

Seen as an opportunity for increased employment opportunities in countries that cannot create enough formal sector jobs. To take advantage of these opportunities, governments must adopt policies to assist the informal sector, such as access to credit to allow businesses to be set up or expanded; training and education for activities important in the informal sector; provision of necessary infrastructure (water, sanitation, etc.); and improved access to health services and education. Such measures would promote the creation of new jobs and improved standards of living for informal sector workers.