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Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

Overview

There are significant differences between economic growth and economic development.The term "economic growth" refers to an increase (or growth) in real national income or product expressed usually as per capital income. National income or product itself is commonly expressed in terms of a measure of the aggregate output of the economy called gross national product (GNP). Per capita income then is simply gross national product divided by the population of the country. When the GNP of a nation rises, whatever the means of achieving the outcome, economists refer to it as economic growth.

The term "economic development," on the other hand, implies much more when used in relation to a country or an entire economy. It typically refers to improvements in a variety of indicators, such as literacy rates and life expectancy, and it implies a reduction in poverty.

Critics point out that GDP is a narrow measure of economic welfare that does not take into account important non-economic aspects such as more leisure time, access to health & education, the environment, freedom, or social justice. Economic growth is a necessary but insufficient condition for economic development.

Local development

The term "economic development" is often used in a regional sense as well (e.g., a mayor might say that "we need to promote the economic development of our city"). In this sense, economic development focuses on the recruitment of business operations to a region, assisting in the expansion or retention of business operations within a region or assisting in the start-up of new businesses within a region. (See section 'regional policy' below.)

In addition to economic models, the needs of constituency groups guide economic developers actions. For example, a local economic developer working out of a mayor's office may act towards decreasing unemployment by attracting businesses with large labor needs (call centers). The economic developer working for the chamber of commerce dominated by banks, real estate agents and utilities will recruit manufacturers with large capital investments (steel and chemical plants). The economic developer working for the state manufacturers association will lobby for more workforce training money. The economic developer working for a university will concentrate on business start-ups, specifically those based on intellectual property developed by the university (biotech).

Academic and institutional approaches

Economic development can be seen as a complex multi-dimensional concept involving improvements in human well-being – however defined.

Professor Dudley Seers argues that development is about outcomes, that is, development occurs with the reduction and elimination of poverty, inequality, and unemployment within a growing economy.^{[citation needed]}

Professor Michael Todaro sees three objectives of development:^{[citation needed]}

Producing more ‘life sustaining’ necessities such as food, shelter, and health care and broadening their distribution
Raising standards of living and individual self esteem
Expanding economic and social choice and reducing fear

The UN has developed a widely accepted set of indices to measure development against a mix of composite indicators:^{[citation needed]}

UN’s Human Development Index (HDI) measures a country’s average achievements in three basic dimensions of human development: life expectancy, educational attainment, and adjusted real income ($PPP per person).
UN’s Human Poverty Index (HPI) measures deprivation using the percent of people expected to die before age 40, the percent of illiterate adults, the percent of people without access to health services and safe water and the percent of underweight children under five.

Development economics emerged as a branch of economics because economists after World War II became concerned about the low standard of living in so many countries of Latin America, Africa, and Asia. There are, however, important reservations in making development economics a branch of economics as opposed to the ultimate objective of the study of economics.

The first approaches to development economics assumed that the economies of the less developed countries (LDCs), were so different from the developed countries that basic economics could not explain the behavior of LDC economies. Such approaches produced some interesting and even elegant economic models, but these models failed to explain the patterns of no growth, slow growth, or growth and retrogression found in the LDCs.

Slowly the field swung back towards more acceptance that opportunity cost, supply and demand, and so on apply to the LDCs also. This cleared the ground for better approaches. Traditional economics, however, still couldn't reconcile the weak and failed growth patterns.

What was required to explain poor growth were macro and institutional factors beyond micro concepts of the firm, individual preferences, and endowments. Institutional analysis has been able to explain the poor growth patterns much better than the market failure theories did. However, there is no generally accepted institutional theory of economic development that a large share of development economists agree upon. There is not even agreement on how important institutional factors are.

Models of economic development

The 3 building blocks of most growth models are: (1) the production function, (2) the saving function, and (3) the labor supply function (related to population growth). Together with a saving function, growth rate equals s/ß (s is the saving rate, and β is the capital-output ratio). Assuming that the capital-output ratio is fixed by technology and does not change in the short run, growth rate is solely determined by the saving rate on the basis of whatever is saved will be invested.

Harrod-Domar Model

The Harrod-Domar Model delineates a functional economic relationship in which the growth rate of gross domestic product (g) depends directly on the national saving ratio (s) and inversely on the national capital/output ratio (k) so that it is written as g = s / k. The equation takes its name from a synthesis of analyses of growth process by two economists (Sir Roy Harrod of Britain and Evsey Domar of the USA). The Harrod-Domar model in the early postwar times was commonly used by developing countries in economic planning. With a target growth rate, the required saving rate is known. If the country is not capable of generating that level of saving, a justification or an excuse for borrowing from international agencies can be established. An example in the Asian context is to ascertain the relationship between high growth rates and high saving rates in the cases of Japan and China. It is more difficult to introduce the third building block of a growth model, the labor and population element. In the long run, growth rate is constrained by population growth and also by the rate of technological change.

Exogenous growth model

The exogenous growth model (or neoclassical growth model) of Robert Solow and others places emphasis on the role of technological change. Unlike the Harrod-Domar model, the saving rate will only determine the level of income but not the rate of growth. The sources-of-growth measurement obtained from this model highlights the relative importance of capital accumulation (as in the Harrod-Domar model) and technological change (as in the Neoclassical model) in economic growth. The original Solow (1957) study showed that technological change accounted for almost 90 percent of U.S. economic growth in the late 19th and early 20th centuries. Empirical studies on developing countries have shown different results (see Chen, E.K.Y.1979 Hyper-growth in Asian Economies).

Also see, Krugman (1994), who maintained that economic growth in East Asia was based on perspiration (use of more inputs) and not on inspiration (innovations) (Krugman, P., 1994 The Myth of Asia’s Miracle, Foreign Affairs, 73).

Even so, in our postindustrial economy, economic development, including in emerging countries is now more and more based on innovation and knowledge. Creating business clusters is one of the strategies used. One well known example is Bangalore in India, where the software industry has been encouraged by government support including Software Technology Parks.

Surplus labor

The Lewis-Ranis-Fei (LRF) Model of Surplus Labor is an economic development model and not an economic growth model. Economic models such as Big Push, Unbalanced Growth, Take-off, and so forth, are only partial theories of economic growth that address specific issues. LRF takes the peculiar economic situation in developing countries into account: unemployment and underemployment of resources (especially labor) and the dualistic economic structure (modern vs. traditional sectors). This model is a classical model because it uses the classical assumption of subsistence wage.

Here it is understood that the development process is triggered by the transfer of surplus labor in the traditional sector to the modern sector in which some significant economic activities have already begun. The modern sector entrepreneurs can continue to pay the transferred workers a subsistence wage because of the unlimited supply of labor from the traditional sector. The profits and hence investment in the modern sector will continue to rise and fuel further economic growth in the modern sector. This process will continue until the surplus labor in the traditional sector is used up, a situation in which the workers in the traditional sector would also be paid in accordance with their marginal product rather than subsistence wage.

The existence of surplus labor gives rise to continuous capital accumulation in the modern sector because (a) investment would not be eroded by rising wages as workers are continued to be paid subsistence wage, and (b) the average agricultural surplus (AAS) in the traditional sector will be channeled to the modern sector for even more supply of capital (e.g., new taxes imposed by the government or savings placed in banks by people in the traditional sector). In the LRF model, saving and investment are driving forces of economic development. This is in line with the Harrod-Domar model but in the context of less-developed countries. The importance of technological change would be reduced to enhancing productivity in the modern sector for even greater profitability and promoting productivity in the traditional sector so that more labor would be available for transfer.

Harris-Todaro model

The Harris-Todaro (H-T) model of rural-urban migration is usually studied in the context of employment and unemployment in developing countries. In the H-T model, the purpose is to explain the serious urban unemployment problem in developing countries. The applicability of this model depends on the development stage and economic success in the developing country. The distinctive concept in the H-T model is that the rate of migration flow is determined by the difference between expected urban wages (not actual) and rural wages. The H-T model is applicable to less successful developing countries or to countries at the earlier stages of development. The policy implications are different from those of the LRF model. One implication in the H-T model is that job creation in the urban sector worsens the situation because more rural migration would thus be induced. In this context, China's policy of rural development and rural industrialization to deal with urban unemployment provides an example.

Regional policy

In its broadest sense, policies of economic development encompass three major areas:

Governments undertaking to meet broad economic objectives such as price stability, high employment, and sustainable growth. Such efforts include monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.
Programs that provide infrastructure and services such as highways, parks, affordable housing, crime prevention, and K-12 education.
Job creation and retention through specific efforts in business finance, marketing, neighborhood development, small business development, business retention and expansion, technology transfer, and real estate development. This third category is a primary focus of economic development professionals.

Economic developers

Economic development, which is thus essentially economics on a social level, has evolved into a professional industry of highly specialized practitioners. The practitioners have two key roles: one is to provide leadership in policy-making, and the other is to administer policy, programs, and projects. Economic development practitioners generally work in public offices on the state, regional, or municipal level, or in public-private partnerships organizations that are may be partially funded by local, regional, state, or federal tax money. These economic development organizations (EDOs) function as individual entities and in some cases as departments of local governments. Their role is to seek out new economic opportunities and retain their existing business wealth.

Numerous other organizations whose primary function is not economic development work in partnership with economic developers. They include the news media, foundations, utilities, schools, health care providers, faith-based organizations, and colleges, universities, and other education or research institutions.

Job creation, economic output, and increase in taxable basis are the most common measurement tools. When considering measurement, too much emphasis has been placed on economic developers for "not creating jobs." However, the reality is that economic developers do not typically create jobs, but facilitate the process for existing businesses and start-ups to do so. Therefore, the economic developer must make sure that there are sufficient economic development programs in place to assist the businesses achieve their goals. Those types of programs are usually policy-created and can be local, regional, statewide and national in nature.

Institutions

References

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