Development Economics - Meaning, Theories, Importance (2024)

Development Economics Definition

Development economics refers to the analysis of challenges and opportunities in transforming an emerging economy into a developed one. Its purpose is to help developing nations identify and overcome hurdles in economic growth, such as poverty, inequality, and market failure.

The economic analysis of a low-income country seeks to improve its fiscal, economic, and social situations. It explores several strategies and theories to develop and implement policies to put the economy on the path of development. Besides focusing on the economic growth of a developing economy, it addresses problems in the healthcare, education, and employment sectors through industrial and social infrastructure development.

• Development economics means studying economic aspects of a low-income country, such as healthcare, education, labor conditions, and market changes.
• It further analyzes ways to improve fiscal, economic, and social conditions allowing an emerging economy to become a developed economy.
• It also helps developing countries identify and overcome hurdles in economic growth, such as poverty, inequality, and market failure.
• Development economists focus on developing methods and policies for the economic development of a poor economy. They analyze population growth, structural transformations and provide ways to achieve sustainable development.

Understanding Development Economics

Development economics is critical to understanding how improving national and international policies of a developing nation, encompassing social and industrial infrastructure development, can boost its overall economy. Healthcare, education, and labor sectors coupled with market conditions get the most attention in the economic development process. However, these micro and macroeconomic policies may vary due to social, cultural, and economic frameworks.

It can be studied from economic and social perspectives, taking into account factors that stifle economic progress, such as population growth, globalization, and international trade. The structural transformation of a less developed economy requires applying theories and practices in its best interests. It may, for instance, aim to promote technological innovation, improve fiscal and social conditions, re-structure market incentives, etc. As a result, the standard of life will improve, and poverty will alleviate in society.

The promotion of sustainable development in underdeveloped nations is one of the development economics topics. As a result, they seek financial aid from industrialized countries for various industrial and infrastructure initiatives. However, the world’s 83 least-developed economies experienced a significant reduction in this foreign aid in2020due to the COVID-19 pandemic crisis.

According to the World Investment Report 2021 from the United Nations Conference on Trade and Development, this decline stands at over $35 billion. In addition, foreign direct investment fell to $1 trillion. Agriculture, food, education, and healthcare have been the most severely impacted industries.

Importance Of Development Economics

As stated already, it provides policymakers with an opportunity to analyze economic challenges faced by developing countries. This analysis primarily considers economic indicators like the gross domestic product, supply and demand, and market competition.

Besides micro and macroeconomics, it focuses on household and individual economics. Other essential functions of it include:

• Analyze the rate of population increase, affecting the economic development
• Examine the structural transformation and implement fiscal policies accordingly
• Assess factors like education, healthcare, and employment conditions
• Promote international trade (import and export) among world nations
• Develop ways to achieve sustainable development
• Evaluate an economy, fix problems in it, and predict economic development
• Understand the economic effects of pandemics and natural disasters

Theories Of Development Economics

#1 - Mercantilism

Also known as commercialism, it is an economic policy adopted by many European nations between the 16th and 18th centuries. It heavily relied on colonialism, where colonies were not allowed to trade with foreign countries. The policy required mother countries to maximize exports over imports, to increase their gold and precious metals reserves.

The ability of these economies to maintain a positive trade balance or surplus strengthened their economic, military, and political power. Aside from regulating international trade, the overall trade system imposed tariffs, offered subsidies, created monopolies, and reduced trade deficits.

#2 - Economic Nationalism

Economic nationalism is another development economics theory popularized in the 19th century, requiring the state to intervene in the market mechanism. It supported imposing high tariffs on the goods imported and other regulations on the movement of labor and capital to generate capital and stimulate economic growth. Economic populism and patriotism are two ways to describe it. It was similar to mercantilism in many aspects but differed in the less dependency on colonies.

The theory was against the idea of globalization. Also, economists questioned the benefits of free trade and supported the concept of protectionism. Protectionism is the economic policy restricting imports to protect domestic industries from international competition. The 19th-century U.S. economy driven by industrialization is a perfect example of economic nationalism.

#3 - Linear Stages Of Growth Model

The linear stages of the growth model are one of the oldest and the most traditional theories. It took inspiration from the Marshall Plan, the U.S. financial aid to revive European economies post-World War II. It focused on capital accumulation and industrialization to promote economic growth and development.

Two popular linear stage models are American economist Walt Whitman Rostow’s Stages of Growth Model and the Harrod-Domar Growth Model proposed by English economist Roy F. Harrods and Russian-American economist Evsey Domar. While the former suggests a five-stage economic transition from developing to developed, the latter says that a country's economic growth is dependent on its citizens' savings and investments.

#4 - Structural-Change Theory

This development economics theory and practice refer to the overall transformation of underdeveloped economies. It considers the utilization of labor and other resources by low-income countries to spur manufacturing and industrial activities. Economists use this model to explain the transition of agrarian economies into industrialized economies.

Changes in economic structures impact the way industries and markets operate. As a result, it brings out economic development. The industrial revolution and globalization of world nations are typical examples of it.

#5 - International Dependence Theory

As the name suggests, this theory proposed the increasing dependence of developing countries on developed countries in the 1970s. It claimed that poor economies' economic and political stability is dependent on the transfer of their resources to wealthier countries. Their role involved providing raw materials, cheap labor, and markets for producing expensive manufactured goods in industrialized economies.

Frequently Asked Questions (FAQs)

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