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Economic Development

Page history last edited by Brian D Butler 10 years, 5 months ago

Table of Contents


related pages:  emerging markets Rise of purchasing power in emerging markets ,   Bolsa Familia  and microcreditMicrofinance



Economic Development:


Why is it that some regions of the world are more economically developed than others?   What are the historical causes?  What can be done going forward to spur growth in certain regions?  Is it possible to make a "recipe" for growth... mixing the right economic policies, with the right political and regulatory ones?  Can we learn anything from the history of economic development to prescribe a formula going forward?



Geography & Development


economic development and geography


Why is Economic Development important?


facts:  4 billion out of 6 billion people on the planet are poor.  50% of them (2 billion people) live on less than $1 a day.   Moving these people up the economic pyramid is not just a moral issue, but its also an economic one.  There is a massive potential market of consumers waiting to be tapped.  See our discussion the rising of the middle class in emerging markets for more....








What leads to rapid economic growth?


What can the lessons of Ireland in the 1990's, and the SE Asian "tigers" teach us about rapid economic development?  Can those lessons be transferred?  In this field of study, Michael Porter's theories of Comparative Advantage are often quoted.  But, how does a place go out and get that advantage?  How do they attract the "right kind" of FDI investment?


Robert Barro's 1997 classic Determinants of Economic Growth has a number of interesting analyses on what drives prosperity. Most pertinent for my current research (see an earlier blog) are his findings on growth and democracy. These are mixed.



1.  Entrepreneurship as the key to development

We at Kookyplan strongly believe that the key to economic development is entrepreneurship.  But in order to have a strong entrepreneurial base, there are some cultural elements that need to be discussed.   read more and contribute to our discussion:  entrepreneurship and economic development



2.  Exports and trade as the key to economic development

see our discussion on Development issues  Also:  Exports as the key to peace:"no two countries with a McDonalds have ever gone to war agains each other" 



3.  Market-oriented policies. 

This is somewhere that a government can help.  Make you policies business-friendly.  Encourage private ownership (gives incentive to improve).  Encourage trade, competition.  see Washington consensus



4.  Tourism and economic development

For many developing nations, there is a direct link between the development of tourism and economic development.  Plances such as the North East of Brazil, which is the poorest region of the country, but is blessed with beautiful landscapes, the potential for tourism is immense. 



5.  Private Equity and Economic Development

 One of the major trends in 2008 is the massive movement toward private equity and economic development







Recommended Resources:



The "commanding heights" here http://www.pbs.org/wgbh/commandingheights/




CFR's new Development Channel showcases debates on and approaches to economic development, including topics such as food security, foreign aid, global health, education, and more. With commentary and analysis by CFR scholars Terra Lawson-Remer and Isobel Coleman, as well as guest posts, this site serves as a forum for multiple voices on complex issues regarding opportunity and exclusion in the global economy. Encourage students to check the channel regularly and respond to posts with their own opinions and analysis.  Join the Conversation »






Market potential index - which emerging market should you consider for starting a business?





"You started your business, you exploited the opportunities in your local markets and now, like all entrepreneurs, you are looking for other avenues of growth. In today’s economy, emerging markets are booming and providing many great opportunities for entrepreneurs looking to expand their brand.


However, with so many choices which market is right for your business?

MSU-CIBER has created a resource for small to mid-size companies designed to help solve this dilemma called the Market Potential Index (MPI). The MPI scores the market potential of the 26 countries considered emerging markets by The Economist - all of which are experiencing rapid economic growth and positive social change. The Index uses eight dimensions and takes into consideration size, growth, potential capacity and risk. The index has been published annually since 1995 and has been successfully utilized by many companies and investors to identify sustainably fast growing emerging countries. 


Two well-represented regions in this year's rankings are Asia and Central Europe. Asia is home to the top three countries: Hong Kong, China, and Singapore. These three countries have held the top spots for five years running and have been fueled by exports to developed markets and an emerging middle class. Central Europe also has three countries in the Top 10 including Czech Republic in fifth, Poland in sixth and Hungary in eighth.  Many Central European countries have recently experienced accelerated growth rates and a rising standard of living through the exportation of goods to established European countries, the privatization of state-owned corporations and the introduction laws that encourage new business development.


Egypt has been in the news recently for its government overthrow and is therefore a great case study for the MPI. In this year's rankings, Egypt ranked particularly high in growth (7th) and capacity (6th) and relatively low in risk (21st) and freedom (22nd). Overall, one could interpret this country to have a relatively high market potential, but the index calls into question its risk and freedom. The protests demanding greater democracy could drastically increase their freedom rankings if Egypt is able to translate its new government into a more open economy. Egypt currently ranks 16th overall and would be a great place to research more thoroughly if conditions improve. 


If your business is looking to expand abroad, make sure you are well informed and start your learning process with the MPI and globalEDGE’s Diagnostic Tools.


Most recent year:  http://globalEDGE.msu.edu/resourceDesk/mpi/

Past years:  20092008, 2007, 2005, 2004, 2003, 2002, 2001, 2000, 1998, 1997, 1996


see related pages from GloboTrends:  emerging markets  and  marketing opportunities in emerging markets  and Investing in emerging stock markets  and Private equity and venture capital in Emerging Markets  and Rise of purchasing power in emerging markets and International IQ



Measuring economic development:

what policies are the best?  the new field of randomized evaluations seeks to use scientific methods to figure that out.  See our discussion on randomised evaluations here




Politics and development:

 One theory often discussed in development talks is:

are authoritarian governments better at fast-economic development






Money Issues:


Financial Stability.


One main key to attracting capital to developing nations is the ability of the nations leaders to tame fears of inflation.    This can best be achieved by having an independent central bank (that is not subjected to the whims of politicians) that can engage in active "inflation targeting"  (rather than price controls). 


for related discussion, see our pages on:  Washington consensus



Attracting investment


FDI (and to a lesser extent, portfolio investment) is essential for developing nations.   Why do Multinational companies and investors look to developing nations as places to invest?   The most important reason is low wages.   What are some of the other ways to attract capital?  (note that the advantage of low wages is NOT sustainable, not even for China).


1.   cheap labor

2.   good, reliable infrastructure (roads, ports, electricity, communications)

3.   low taxes:  see our discusson on tax havens

4.   favorable trade policy (low barriers to trade)


see more: attracting FDI investments to your location   ,   choosing the right location for FDI  ,   Washington consensus, and Criticisms of the Washington Consensus







Economic Development issues in the Emerging Economies:

   see:  emerging markets




Challenges to overcome:


But, some of the challenges for development are improving the health care system, levels of literacy, eliminating hunger, and finding local capital to work with.



Different types of resources

The four elements in development


Human Resources

  • Population Explosion: Population grows so rapidly that incomes remain at subsistence levels.
  • Human Capital: developing countries must also be concerned with the quality of their human resources.
  • Specific programs:Control disease and improve health and nutrition & Improve education, reduce illiteracy, and train workers


Natural Resources;

  • land and minerals


Capital Formation:

  • A modern economy requires a vast array of capital goods.
  • Countries must abstain from current consumption to engage in fruitful roundabout production.
  • When you are poor to begin with, reducing current consumption to provide for future consumption seems impossible.
  • In many developing countries, the single most pressing problem is too little savings. Particularly in the poorest regions, urgent current consumption competes with investment for scarce resources, The result is too little investment in the productive capital so indispensable for rapid economic progress.


Technological Change and Innovations

  • Developing countries have one major advantage:
  • They can hope to benefit by relying on the technological progress of more advanced nations.
  • Imitating Technology is a real possibility.  Copy to progress (you don't have to invent it yourself, so theoretically, you should be able to progress faster).
  • Limiting factor:  patents, and intellectual property rights of developed nations (hot issue)
  • see more:  Entrepreneurship and Innovation






Theories:  development models



Neoclassical growth model


To understand how capital accumulation and technological change affect the economy, we must understand the neoclassical model of economic growth.  This model serves as the basic tool for understanding the growth process in advanced countries and has been applied in empirical studies of the sources of economic growth.


Basic Assumptions


The model describes an economy in which a single homogeneous output is produced by two types of inputs (capital and labor); labor growth is assumed to be a given; we assume that the economy is competitive and always operates at full employment, so we can analyze the growth of potential output.


Major new ingredients: capital and technological change.



Capital deepening occurs when the stock of capital grows more rapidly than the labor force. In the absence of technological change, capital deepening will produce a growth of output per worker, of the marginal product of labor, and of real wages; it also will lead to diminishing returns on capital and therefore to a decline in the rate of return on capital.


Technological change – which increases output produced for a given bundle of inputs – is a crucial ingredient in the growth of nations. The new growth theory seeks to uncover the processes which generate technological change.

This approach emphasizes that technological change is an output that is subject to severe market failures because technology is a public good that is expensive to produce but cheap to produce.


Governments increasingly seek to provide strong intellectual property rights for those who develop new technologies.




Recent models of economic growth


At one extreme is free market absolutism, which holds that the best government is the least government.


At the other extreme is complete communism, with the government operating a collectivized economic order in which the first person singular hardly exist.






Alternative strategies for growth and development:


1. The Asian managed market approach:

South Korea, Taiwan, Singapore, and other countries of East Asia have devised their own brands of economics that combine strong government oversight with powerful market forces.


• Investment rates: Followed the classic recipe of high investment rate to ensure that their economies benefited from the latest technology and could build up the necessary infrastructure.

• Macroeconomic fundamentals: Had a steady hand on macroeconomic policies, keeping inflation low and saving rates high. They invested heavily in human capital as well as in physical capital and promote more education. The financial systems were managed to ensure monetary stability and a sound currency.

• Outward orientation: Often keeping their exchange rates undervaluated to promote exports, encouraging exports with fiscal incentives, and pursuing technological advance by adopting best practice techniques of high income countries.



2. Socialism:

Socialist governments operating in a democratic framework expanded the welfare state, nationalized industries, and planned their economies, however, these countries moved back toward a free market framework with extensive deregulation and privatization.


• Government ownership of productive resources: They believed that the role of private property should be reduced. Enthusiasm for nationalization has ebbed in most advanced democracies.

• Planning: They insist that a planning mechanism is needed to coordinate different sectors. Planners have emphasized subsidies to promote the rapid development of high technology industries (Industrial policies).

• Redistribution of income: Inherited wealth and the highest incomes are to be reduced by the militant use of government taxing powers.

• Peaceful and democratic evolution: Socialist often advocate the peaceful and gradual extension of government ownership – evolution by ballot rather than revolution by bullet.



3. Soviet style communism:

The state owned all the land and most of the capital, set wages and most prices, and directed the microeconomic operation of the economy.


Communism offered both a theoretical critique of Western capitalism and a seemingly workable strategy for economic development.


Marx saw capitalism as inevitably leading to socialism, in Marx’s world, technological advances enable capitalists to replace workers with machinery as a means of earning greater profits. But this increasing accumulation of capital has two contradictory consequences: As the supply of available capital increases, the rate of profit of capital falls. At the same time, with fewer jobs, the unemployment rate raises and wages falls.


In Marx’s terms the reserve army of the unemployed would grow, and the working class would become increasingly immiserized (working conditions would deteriorate and workers would grow progressively alienated form their jobs).


As profits decline and investment opportunities at home become exhausted, the ruling capitalist classes resort to imperialism.



Among the major obstacles on the road to reform are the following:


• Price reform and free market pricing: Prices of both inputs and outputs were often far below market clearing levels. The first step in most countries was to allow supply and demand to set prices.

• Hard budget constraints: Enterprises in command economies operated with soft budget constrains (operating losses are covered by subsidies and do not lead to bankruptcy) In a market economy firms must be fiscally responsible.

• Privatization: In market economies, output is primarily produced in private firms. Moving to the market required that the actual decision about buying, selling, pricing, producing, borrowing, and lending be made by private agents.

• Other reforms: Transition to the market required setting up the legal framework for a market, establishing a modern banking system, breaking up the pervasive monopolies, tightening monetary and fiscal policy in order to prevent runaway inflation, ,and opening up the economy to international competition.

• Sequencing of the transition: The most difficult issue in moving the market was where to begin.





Other development theories:


1.  Northern, colder countries developed faster out of necessity:


According to people who believe this theory, it is primarily a result of bad weather that Northern countries developed faster than warmer ones.  If you knew that you would freeze to death in the winter if you didn't plan ahead and have your winter supplies ready, then the theory states that you will work harder and plan better... and that activity will spur economic development.  So, countries such as Norway, Sweden, Great Britain, Canada, etc.... they have a bigger incentive to work hard and plan ahead than do countries along the equator (or even southern European countries such as Italy or Spain).   The theory states that its easier to be lazy in countries where the water is warm, the weather is pleasant, and food is abundant all year long.



2.  Catholic vs Protestant development theories


Something about the Protestant work ethic vs. the Catholic culture of shame.   I'm not sure about this one, but its mentioned here just because its often referenced (and discredited) in development discussions.  The theory states that its the Protestant ideals about salvation through hard work that propelled nations such as Germany and England into the forefront, but the hierarchical Catholic church in places like Spain, Italy, and Latin America that held development back (for a while). 



3.  Hierarchy vs  "

4.   Culture of complaining vs  Culture of acceptance

5.   Common law vs. Civil Law

6.  Culture of failure vs. Fear of failure

7.   entrepreneurship

8.  Export oriented growth vs.  Import substitution model







development of local economies (US, Europe)



Economic Development in Miami


Economic Development in Miami




Beyond Cheap labor


Macroeconomic interrelations shift periodically, and a competitive advantage in one location may become a disadvantage over time. This could happen if there are changes in exchange rates, if there are local inflationary pressures, if there are raw material shortages, or if there are changes in government policies. When a country develops, it will lose comparative advantage in wages, and needs to move up the value chain (as was described in “Beyond Cheap Labor”). There is a direct relationship between GDP per person and wages per hour, so even China will someday loose its comparative advantage as the worlds cheap labor market as its GDP per person rises over time. A country need to manage the transition from competing on low cost labor to more value added products and services. It was interesting that the book “Driving Growth” placed such high value on a country’s ability to develop a competitive local service market as a means for improving the standard of living. This focus on developing the market for local services is essential for unlocking productivity growth that will drive competitive advantage in many other areas.


Growth Models:


export-oriented industrialization vs. import-substitution industrialization:


It is interesting that both models were ultimately trying to achieve the same objective: encourage national economic development and to build up their economies to avoid poverty. Both regions were aware of the “two faces of development”. On one hand they were attracted to the promise of less poverty, better health, longer lives and greater international status. But at the same time, both regions were aware of the threat of dependence and were repulsed by the high cost of development, the potential loss of culture and independence.


Asia vs. Latin America


The two regions were heavily influenced by the world around them. In East Asia, the “tigers” saw the amazing economic transformation that Japan had undergone post WWII, and they were determined to follow a similar model. In much of Latin America, they were more influenced by their historical connections with Europe, and they looked to France and even Russia as influencers.


The Asian countries were ultimately better able to jump out of poverty and make the faster transition to economic development. A big part of this leap was that they were less afraid of the repulsive “face” of development, and they embraced the attractive face with more enthusiasm. The Asian countries tried to take more advantage of the opportunities that were presented by the international markets and they tried to maximize the benefits of modernization. In order to minimize the risks of the “ugly face”, the Asian markets typically relied on a very strong state intervention to protect their home markets. In general, the Asian politicians were willing to risk dependency and went after the benefits of development. They tried to limit that risk with a strong state. They were influenced by a mix of liberal and mercantilist perspectives.


The Latin American countries were more concerned about the threat of dependency than the Asian ones were. In general, they saw the international market forces as a threat, and they attempted to wall off their markets and develop internally. Brazil is a very good example of a country that thought they could use the Import substitution model as a means for growth. This had its root in the 1950s when influential scholars were critical of the “comparative advantage” theory of the division of labor, and produced the “dependency critique”. This led to a feeling that culturally and economically, Latin America needed to avoid dependency and needed to self-develop their own markets and manufacturing base. The goal was to produce “home grown” industries and technologies.


In a way, both the Asian and the Latin American experience were very similar in the beginning. Both wanted to get away from just exporting raw materials and importing finished goods. They were both concerned about the foreign exchange drain of being just a primary goods exporter and a finished goods importer. They both wanted to develop their manufacturing base and to develop economically. What is interesting is that the second stage of development is where the Asian and the Latin American strategies diverged.

The Asian strategy has been branded the “export-oriented industrialization” because their main focus was to build up a manufacturing base with the express intent on exporting their products to the world markets. The Latin American strategy, on the other hand, has been called “import-substitution industrialization” because their main focus was to build up their local manufacturing base with the intent on servicing their home markets. While the Asians sought to build advanced machinery to export to the world, the Latin Americans sought to build products to service their local markets.


One of the key reasons why the Asian model has been so successful is that because they focused on producing goods and services for the world markets, they had to continuously focus on improving the quality of their goods and they had to continuously seek ways to become more efficient and produce at a lower cost. The Latin Americans on the other hand, but just focusing on their local markets, they sought to protect themselves from global competition. As a result of not facing global pressures of quality and price, many of their industries fell behind in technology and in business practices.


The Latin American “walled-off” markets were much smaller than the ones faced by the Asian companies. Instead of trying to sell to the whole world, the Brazilian companies just tried to sell their products to other Brazilians. The problem is that countries such as Brazil had large portions of their population as very poor, so there was a tendency of the companies to just focus on the relatively small population of consumers that could afford to buy their products. With a small relative market size, the companies inside of the import-substitution economies became complacent.


The Asian development story is actually quite interesting. They had a very strong influence by the government in choosing winners and losers and re-organizing the national economy to help promote export oriented growth. They would choose an industry where they thought that they would have a comparative advantage, and then they would protect those national companies with import barriers. They would also invest heavily in education and in technology to try and create a comparative advantage relative to other companies in other parts of the world. They focused at first on consumer goods, but later expanded into heavy industries such as petrochemicals, and automobile production (for world wide consumption, not just for their local markets). In order to pull off this economic “miracle”, the Asian governments encouraged a high level of national savings and investment. The governments also helped establish private banks to ensure the free flow of capital. They removed import barriers on essential raw materials essentially lifting all barriers to FDI. By investing in high levels of education and job training, the Asian governments attempted to increase productivity relative to other countries.


The part of the Asian “miracle” that doesn’t get talked about as frequently is that countries such as South Korea and Taiwan were some of the largest recipients of US aid. Even until today, S Korea benefits largely from the US military presence in the region. But during their development, these countries were seen as strategically important in combating communism and therefore theUSA looked the other way at some of the more questionable tactics that they employed in order to develop. South Korea, for example, went through a military coup in the 1960s and then later repressed all forms of labor unionization. In today’s world, the US turning the blind eye to this kind of behavior would not be tolerated in the world press. Also, the US poured billions of dollars into these economies, but at the same time, they allowed them to impose high import tariffs on US made goods. This kind of double standard…allowing them to export with not barriers but putting high import barriers on our products…this was tolerated because these countries met other IPE objectives of the US at the time.


Also, it is important to note that Taiwan and Singapore and Hong Kong are all very small nation-states with a relatively short history as primary goods producers. This is in stark contrast to a country like Brazil who has a massive farming and agricultural base and has traditionally been a primary exporter of raw materials. The book points out that it was easier said than done as Latin America tried to get away from relying on primary good exports.


In general, I think governments should study both of these experiences carefully because they both hold some of the keys to economic development. From the Asian experience, we can clearly see that it is better to keep an eye on the international markets and that you should try and compete globally. By allowing your products to compete internationally you will expose yourself to international pressures to innovate and improve. Also, the Asian countries taught us that strong mercantilist policies can be very useful for helping a country develop. While it may not be beneficial for all countries in the world to act like economic nationalists, it is clear that if the rest of the world is acting liberal, and if you find it possible to behave as a mercantilist, then you will have an advantage in developing. In some of these Asian examples, they took advantage of other global IPE concerns (spread of communism) and used the chance to develop their economies.


From the Latin American experience I think we learn a lot about what not to do. But, while the book may have been a bit critical of the import-substitution policies of Latin America, I am left to wonder if it really was all that bad of a thing. Take a country like Brazil for example; I actually think the ISI model worked quite well in getting foreign automobile companies to invest in local manufacturing facilities inside of Brazil. Before the ISI policies were put in place, the foreign auto industries that wanted access to Brazil’s huge internal market were able to just import them from abroad. With the implementation of ISI policies (high import duties), these same companies were forced to set up local manufacturing plants. Over the past 30 years, those same plants have modernized and now produce some of the most sophisticated engines anywhere. Back in the 1970-80’s, Brazil decided to be self-reliant on ethanol rather than gasoline for automobiles. Now, today, Brazil is the world leader in Ethanol cars.




see related pages from GloboTrends:  emerging markets  and  marketing opportunities in emerging markets  and Investing in emerging stock markets  and Private equity and venture capital in Emerging Markets  and Rise of purchasing power in emerging markets andInternational IQ



economic development,  emerging markets  ,  Rise of purchasing power in emerging markets ,   Bolsa Familia  and microcredit , Microfinance




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