Economic Development

Economic development, the process whereby simple, low-income national economies are
transformed into modern industrial economies. Although the term is sometimes used as a
synonym for economic growth, generally it is employed to describe a change in a country’s
economy involving qualitative as well as quantitative improvements. The theory of economic
development—how primitive and poor economies can evolve into sophisticated and relatively
prosperous ones—is of critical importance to underdeveloped countries, and it is usually in this
context that the issues of economic development are discussed.
Economic development first became a major concern after World War II. As the era of European
colonialism ended, many former colonies and other countries with low living standards came to
be termed underdeveloped countries, to contrast their economies with those of the developed
countries, which were understood to be Canada, the United States, those of western Europe,
most eastern European countries, the then Soviet Union, Japan, South Africa, Australia, and
New Zealand. As living standards in most poor countries began to rise in subsequent decades,
they were renamed the developing countries.
There is no universally accepted definition of what a developing country is; neither is there one
of what constitutes the process of economic development. Developing countries are usually
categorized by a per capita income criterion, and economic development is usually thought to
occur as per capita incomes rise. A country’s per capita income (which is almost synonymous
with per capita output) is the best available measure of the value of the goods and services
available, per person, to the society per year. Although there are a number of problems of
measurement of both the level of per capita income and its rate of growth, these two indicators
are the best available to provide estimates of the level of economic well-being within a country
and of its economic growth.
It is well to consider some of the statistical and conceptual difficulties of using the conventional
criterion of underdevelopment before analyzing the causes of underdevelopment. The statistical
difficulties are well known. To begin with, there are the awkward borderline cases. Even if
analysis is confined to the underdeveloped and developing countries in Asia, Africa, and Latin
America, there are rich oil countries that have per capita incomes well above the rest but that
are otherwise underdeveloped in their general economic characteristics. Second, there are a
number of technical difficulties that make the per capita incomes of many underdeveloped
countries (expressed in terms of an international currency, such as the U.S. dollar) a very crude
measure of their per capita real income. These difficulties include the defectiveness of the basic
national income and population statistics, the inappropriateness of the official exchange rates at
which the national incomes in terms of the respective domestic currencies are converted into
the common denominator of the U.S. dollar, and the problems of estimating the value of the
noncash components of real incomes in the underdeveloped countries. Finally, there are
conceptual problems in interpreting the meaning of the international differences in the per capita
income levels.
Although the difficulties with income measures are well established, measures of per capita
income correlate reasonably well with other measures of economic well-being, such as life
expectancy, infant mortality rates, and literacy rates. Other indicators, such as nutritional status
and the per capita availability of hospital beds, physicians, and teachers, are also closely related
to per capita income levels. While a difference of, say, 10 percent in per capita incomes
between two countries would not be regarded as necessarily indicative of a difference in living
standards between them, actual observed differences are of a much larger magnitude. India’s
per capita income, for example, was estimated at $270 in 1985. In contrast, Brazil’s was
estimated to be $1,640, and Italy’s was $6,520. While economists have cited a number of
reasons why the implication that Italy’s living standard was 24 times greater than India’s might
be biased upward, no one would doubt that the Italian living standard was significantly higher
than that of Brazil, which in turn was higher than India’s by a wide margin.
The interpretation of a low per capita income level as an index of poverty in a material sense
may be accepted with two qualifications. First, the level of material living depends not on per
capita income as such but on per capita consumption. The two may differ considerably when a
large proportion of the national income is diverted from consumption to other purposes; for
example, through a policy of forced saving. Second, the poverty of a country is more faithfully
reflected by the representative standard of living of the great mass of its people. This may be
well below the simple arithmetic average of per capita income or consumption when national
income is very unequally distributed and there is a wide gap in the standard of living between
the rich and the poor.
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The usual definition of a developing country is that adopted by the World Bank: “low-income
developing countries” in 1985 were defined as those with per capita incomes below $400;
“middle-income developing countries” were defined as those with per capita incomes between
$400 and $4,000. To be sure, countries with the same per capita income may not otherwise
resemble one another: some countries may derive much of their incomes from capital-intensive
enterprises, such as the extraction of oil, whereas other countries with similar per capita
incomes may have more numerous and more productive uses of their labour force to
compensate for the absence of wealth in resources. Kuwait, for example, was estimated to have
a per capita income of $14,480 in 1985, but 50 percent of that income originated from oil. In
most regards, Kuwait’s economic and social indicators fell well below what other countries with
similar per capita incomes had achieved. Centrally planned economies are also generally
regarded as a separate class, although China and North Korea are universally considered
developing countries. A major difficulty is that prices serve less as indicators of relative scarcity
in centrally planned economies and hence are less reliable as indicators of the per capita
availability of goods and services than in market-oriented economies.
Estimates of percentage increases in real per capita income are subject to a somewhat smaller
margin of error than are estimates of income levels. While year-to-year changes in per capita
income are heavily influenced by such factors as weather (which affects agricultural output, a
large component of income in most developing countries), a country’s terms of trade, and other
factors, growth rates of per capita income over periods of a decade or more are strongly
indicative of the rate at which average economic well-being has increased in a country.

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Economic development, the process whereby simple, low-income national economies are

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