Economic Development & Emerging Economies

Economic Development & Emerging Economies

Economic development goes beyond economic growth (a rise in GDP). It encompasses improvements in living standards, health, education, political freedom, and environmental sustainability. This topic examines why some countries remain poor and what policies can promote development.

Growth vs Development

Economic Growth	Economic Development
Increase in real GDP	Improvement in quality of life
Quantitative	Qualitative
Measured by GDP/GNI	Measured by HDI, life expectancy, literacy, Gini
Necessary but not sufficient for development	Requires growth PLUS equitable distribution, institutional quality, and sustainability

Growth without development: oil-rich states (Saudi Arabia, Equatorial Guinea) may have high GDP per capita but poor human development indicators (gender inequality, limited political freedom, environmental degradation).

Measuring Development

Human Development Index (HDI)

The UNDP's composite measure (0-1 scale):

1. Life expectancy at birth (health)

2. Mean and expected years of schooling (education)

3. GNI per capita (PPP) (standard of living)

Strengths: broader than GDP; allows cross-country comparison; highlights non-income dimensions

Weaknesses: still limited (ignores inequality, political freedom, environment); national averages hide regional disparities; data quality varies

Other Indicators

• MPI (Multidimensional Poverty Index): deprivation in health, education, and living standards at household level
• Gini coefficient: income/wealth inequality
• Gender Inequality Index: reproductive health, empowerment, labour market
• Happy Planet Index: well-being, life expectancy, ecological footprint

Barriers to Development

Economic Barriers

Primary product dependency:

• Many developing countries rely on exporting raw materials (oil, minerals, agricultural goods)
• Prebisch-Singer hypothesis: terms of trade for primary products decline over time relative to manufactured goods
• Price volatility: commodity prices fluctuate sharply → income instability
• Dutch disease: resource boom causes currency appreciation → makes other exports uncompetitive → deindustrialisation
• Limited value-added → low diversification

Savings gap:

• Low incomes → low savings → low investment → low growth (Harrod-Domar model)
• Harrod-Domar: Growth = s/k (savings ratio ÷ capital-output ratio)
• If domestic savings are insufficient, development requires foreign capital (aid, FDI, borrowing)
• Evaluation: model is mechanistic; ignores quality of investment, governance, absorptive capacity

Foreign currency gap:

• Imports exceed exports → current account deficit
• Limited foreign exchange to buy capital goods needed for development
• Dependence on foreign borrowing → debt trap

Capital flight:

• Wealthy individuals and firms move money out of the country → reduces domestic investment
• Often driven by political instability, corruption, or fear of expropriation
• Estimated $1 trillion+ has left Africa since 1980 (Global Financial Integrity)

Political/Institutional Barriers

Corruption:

• Diverts resources from productive use → public services underfunded
• Deters FDI → investors avoid unpredictable environments
• Transparency International's Corruption Perceptions Index shows strong correlation with low development

Weak institutions:

• Lack of property rights → no incentive to invest (Hernando de Soto)
• Poor governance, weak rule of law, political instability
• Acemoglu & Robinson (Why Nations Fail, 2012): inclusive institutions (property rights, democracy, education) vs extractive institutions (elite capture of resources) — the key determinant of long-run development

Conflict:

• War destroys infrastructure, displaces populations, diverts spending to military
• Post-conflict recovery is extremely difficult (Paul Collier, The Bottom Billion)

Social Barriers

Population growth:

• High fertility rates → demographic pressure → difficulty raising GDP per capita
• Demographic transition model: as countries develop, birth rates fall (education, female empowerment, access to contraception)
• But a demographic dividend occurs when the working-age share of the population rises (East Asian experience)

Gender inequality:

• Women's exclusion from education and the labour force reduces human capital and output
• Evidence shows female education has among the highest returns for development (lower fertility, better child health, higher productivity)

Poor health:

• HIV/AIDS, malaria, TB reduce labour productivity and life expectancy
• Healthcare costs absorb resources
• Vicious cycle: poor health → low productivity → low income → poor health

Strategies for Development

1. Trade Liberalisation (Outward-Looking)

• Open up to international trade → access larger markets → comparative advantage → growth
• Success stories: South Korea, Taiwan, Singapore, China — all used export-led growth
• Evaluation: requires competitive industries; may expose infant industries to destructive competition; terms of trade may work against primary exporters; assumes access to rich-country markets (which may be protected)

2. Import Substitution Industrialisation (ISI)

• Protect domestic industries with tariffs and quotas to reduce dependence on imports
• Build up manufacturing behind trade barriers
• Evaluation: worked initially in Latin America (1950s-70s) but led to inefficiency, rent-seeking, and lack of competitiveness; industries never became competitive enough to remove protection; largely abandoned

3. Foreign Direct Investment (FDI)

• TNCs invest in developing countries → bring capital, technology, management skills, employment
• Evaluation: can drive growth (China, Vietnam); but profits repatriated to home country; exploitation risk (low wages, poor conditions); may not develop indigenous capacity; environmental damage; dependent on TNC decisions

4. Foreign Aid

Types:

• Bilateral: government to government
• Multilateral: through international organisations (World Bank, IMF, UN)
• Tied aid: must be spent on donor country's goods/services
• Humanitarian/emergency vs development aid

Arguments FOR:

• Fills savings/foreign exchange gap (Harrod-Domar logic)
• Funds infrastructure, health, education that the market will not provide
• Jeffrey Sachs (The End of Poverty): targeted aid can break poverty traps

Arguments AGAINST:

• Creates dependency and reduces incentive for self-sufficiency
• Corruption: may be captured by elites rather than reaching the poor
• Dutch disease: aid inflows appreciate the currency, harming exports
• Dambisa Moyo (Dead Aid): aid has failed Africa; trade and FDI are better routes
• William Easterly: top-down aid programmes ignore local knowledge and incentives

5. Microfinance

• Small loans to poor entrepreneurs who lack access to formal banking (Grameen Bank, Muhammad Yunus — Nobel Prize 2006)
• Enables self-employment, especially for women
• Evaluation: evidence on impact is mixed; high interest rates in some programmes; may not reach the poorest; small scale relative to the development challenge

6. Institutional Reform

• Property rights: giving the poor legal ownership of land/assets → collateral for loans → investment
• Anti-corruption: transparency, accountability, independent judiciary
• Democratic governance: participatory institutions, free press
• Acemoglu & Robinson argue this is the most fundamental factor

7. Human Capital Investment

• Education (especially female), healthcare, nutrition
• Long-term but essential — no country has developed sustainably without it
• East Asian tigers invested heavily in education and health

Evaluation: Is There a Single Path to Development?

No. Successful development strategies vary by context:

• East Asia: export-led growth + state direction + education investment
• China: gradualist market reforms + FDI attraction + infrastructure
• Botswana: good governance + resource management (diamond revenues invested in education/health)
• Kerala (India): high HDI despite low GDP per capita — prioritised education and health

The key lesson: institutions matter (Acemoglu), context matters, and there is no one-size-fits-all model.

Exam Technique

• Distinguish growth from development explicitly
• Use specific country examples (not generic "developing countries")
• Reference named theorists: Rostow (stages of growth), Harrod-Domar, Lewis (dual-sector), Sachs vs Moyo (aid debate), Acemoglu & Robinson (institutions)
• Evaluate each strategy — there is no single correct answer
• In 25-mark essays, consider whether internal or external factors are more important for development
• Consider the environmental sustainability of development strategies