Economic Development

Ever wonder what distinguishes a developed country from a developing country? Or what causes countries to become developed? Economic development is a multidimensional economic tool that tells us a lot about an economy and country. In addition, the focus of economic development exists on all levels within a country: locally, regionally, by state or province and, of course, nationally. Keep reading to see how this multidimensional tool that is found at all levels of the country, works!

Economic Development Meaning

What does the term 'economic development' mean? The word development indicates growth, progress or change. Economic development, if you have guessed it right, also refers to the same, but in regards to economics.

Often times economic development is used in reference to the development of developing and underdeveloped countries, however, it can also be used for developed countries as well. The reason for this is that all economies should work toward improving the standard of living, increasing real income, life expectancy, quality and availability of education and healthcare and reducing poverty for the members of the country.

Economic Development Process

Walt Rostow, a renowned American economist, developed a linear spectrum that showcased the different stages which exist in economic development process. He suggested that every country exists on some level on the spectrum and then transitions upward in each stage throughout the economic development process.

The five stages in Rostow's economic development process are:¹

1. Traditional Society
2. Preconditions to Take-off
3. Take-off
4. Drive to Maturity
5. Age of High Mass consumption

Figure 1 below shows an overview of the five stages of the Rostow model:

Figure 1. Rostow model overview, StudySmarter Originals

Traditional Society

In traditional society stage, Rostow suggested that the economy is based on agriculture and there is no scientific or technological intervention. Labor is distributed over the various different roles that would be required for the agriculture industry. For example, most people's jobs in this stage of economic development would be focused on farming, planting, raising and harvesting crops. In addition, due to the lack of technological advancements, these roles become fixated and long-term as they are time-consuming, which also leads to them being passed down to future generations. In this stage, the economy is focused more locally and regionally.

Preconditions to Take-off

Moving into the preconditions to take-off stage, the economy shifts from locally and regionally to national and international as a result of the availability of education. Exposure through education instills hope for progress in society which then results in changes in practice. For example, an economy in this stage will develop and use manufacturing for its output. This will not only result in more efficiency and an increase in output, but also stimulate more profit.

Take-off

Economies in the take-off stage have been introduced to industrialization. Now the economy is headed towards sustained economic growth. Although the economic growth is for a short period of time, a resulting benefit of the economic growth experienced in this stage is that it allows economies to self-sustain. The economy in this stage is characterized by specialization in key industries and these key industries will then be the driving factor of the experienced economic growth.

Drive to Maturity

In drive to maturity stage, economies are transitioning from a few key industries to more integrated and varying industries. As a result of the transition, economies require a skilled workforce. In addition, technology takes the forefront with investments being focused on research and development, all leading towards economic growth. The drive to maturity stage takes place over a long period of time but the benefits of this stage, such as a rise in the standard of living, make the length of time for the development worth it.

Age of High Mass consumption

Economic Development Indicators

There are economic development indicators which are quantitative measures that are used to distinguish a developed country from a developing country.

To start off, let's define a developed and developing country.

Economic indicators

The economic indicators for economic development are:

• Real GDP per capita
• Unemployment rate
• Inflation
• National Debt
• Trade Balance

Real GDP per capita

The gross domestic product per capita is an indicator that provides insights into the level of aggregate output produced by an economy which also equates to the aggregate national income. The formula for real GDP per capita is:

$RealGDPpercapita=\frac{RealGDP}{PopulationofCountry}$

Developed countries have a higher GDP per capita as they tend to have a smaller population and a higher real GDP due to greater access to technology and investment. Whereas developing countries have a lower GDP per capita as they have a greater population and lower real GDP due to limited technology and investment available.

Unemployment rate

The unemployment rate is an indicator that provides insights regarding the unemployed individuals in the labor force who are actively looking for employment. The formula to calculate the unemployment rate is:

$Unemploymentrate=\left[\frac{UnemployedIndividuals}{LaborForce}\right]x100$

Developed countries have a lower unemployment rate than developing countries due to various factors such as access to education and training, size of the population, stability and opportunities in the job market, and the existence and quality of social welfare programs, to name a few.

Inflation

Inflation is an indicator that provides insights into the changes in the price of goods and services as a percentage of an increase in the cost of living. It also provides insight into the purchasing power of the economy's currency. Higher inflation is indicative of lower purchasing power of the currency, in other words, fewer goods and services can be purchased for the same dollar value. The formula to calculate inflation is:

$Inflationrate=\left[\frac{(T-B)}{B}\right]x100$

Where:

• Inflation rate is measured by Consumer price index (CPI). The consumer price index is a tool which is used to measure the changes in the weighted average prices of a represented basket of goods and services.
• Target year (T) is the CPI of the current year or the CPI of the year being compared to the base year
• Base year (B) is the CPI for the year to which the current year CPI is being compared to

Developing countries have a higher inflation rate than developed countries due to various factors such as volatile exchange rates alongside an unstable central bank to manage monetary policy. In addition, higher inflation rates in developing countries are due to rapid economic growth which creates a chain reaction of increased disposable income, increases in demand and as a result an increase in prices.

National Debt

The national debt of a country is an indicator which provides insights into the net accumulation of the borrowing of the government from domestic and foreign lenders. Developed countries have a lower national debt vs. developing countries due to various factors, the main one being, that developing countries need the capital to stimulate economic growth and tend to borrow from developed countries. In addition, the national debt can be difficult to pay off over time due to it accumulating from one generation to another.

Trade Balance

The trade balance of a country is an indicator which provides insights into the net exports of a country. Developing countries have greater net exports as they export more goods than developed countries as means of economic growth.

Human Development Index

The human development index is the most used indicator for economic development. It takes into account three dimensions for economic development:

1. Standard of living - measured by income per capita
2. Education - measured through literacy rate
3. Longevity- measured through average life expectancy and infant mortality

Levels of poverty

The level of the country's population living below the poverty line determines the level of economic development of the country. Developing countries have higher levels of poverty due to greater population size and lower standards of living.

Literacy rate & Education

The literacy rate of a country is the percentage of the population that can read and write. There is a positive correlation between higher literacy rates and economic development. Access to education provides insights into the percentage of the population that has obtained primary, secondary, and tertiary education. An educated population can contribute to the economic development of an economy.

Average life expectancy

The average life expectancy indicator provides insights into an estimated age a person can expect to live. Developed countries have a higher life expectancy due to their existing and increasing economic development in comparison to developing countries.

Infant mortality rate

The infant mortality rate provides insights into the probability of a child dying before the age of one. Developing countries have a higher infant mortality rate due to the higher level of poverty, and lower access to healthcare.

Economic Development and Economic Growth

Economic development and economic growth may often go hand in hand, but that is not always the case. They are in essence different.

Economic development focuses on the standard of living, it is inclusive of both qualitative and quantitative measures. The goal of economic development is to foster an economy where its members not only benefit from wealth but also from education, health and prosperity, allowing economic development to be a multidimensional economic tool.

In contrast, economic growth focuses on the increase in the output produced by an economy from one period to another. Economic growth solely considers opportunities to stimulate growth within an economy to increase real GDP.

Economic Development Examples

Here are some examples of economic development in some of the different sectors of the economy:

• Financial - establishing a stabilized central bank system that can implement and monitor monetary policies will result in economic development.
• Healthcare - healthcare reform, accessibility to healthcare services and facilities to all members of the economy will result in economic development.
• Education and training - funding and access to public education and training services, especially for the minority and low-income population will result in economic development.
• Transportation & Infrastructure - building or repairing highways, bridges, and roads, alongside the acceptability of public transportation services will result in economic development.