Is Development an economic issue?

Our vision and our responsibility are to end extreme poverty in all its forms in the context of
sustainable development and to have in place the building blocks of sustained prosperity for all.
— Report of the High-Level Panel of Eminent Persons on the Post-2015 Development
Agenda, 2013

Two pictures of the developing world compete in the media for the public’s attention. The first is
misery in places like rural Africa or unsanitary and overcrowded urban slums in South Asia. The
second is extraordinary dynamism in places like coastal China. Both pictures convey important
parts of the great development drama. Living conditions are improving significantly in most,
though not all, parts of the globe—if sometimes slowly and unevenly. The cumulative effect is
that economic development has been giving rise to unprecedented global transformations.

Consider the world of 1992, a time when the divide between the rich countries were growing
faster than poor countries; and the dominance of high-income industrialized nations in the global
order was clear-cut. The United States had just won the Cold War, the European Union in the
ascendency, Japan having long period of high economic growth. Yet in 1992, many developing
nations, including Brazil, Russia, India, China, and South Africa (now sometimes grouped by the
media as the “BRICS”), found themselves in precarious conditions if not full-scale crisis. Brazil
— like most of Latin America — was still struggling to emerge from the 1980s’ debt crisis.
Russia was descending into depression after the collapse of its Soviet economy. India was trying
to rebound from its worst economic crisis since independence.

But since 1992, Asia has been growing at an average rate almost triple that of high-income
Western countries, and growth has returned to Africa. Health has improved strongly, with
dramatic declines in child mortality; and the goal of universal primary education is coming into
sight. Poverty has fallen. While about two-fifths of the global population lived in extreme
poverty in 1990, the fraction has fallen to about one-fifth. China and India has seen substantial
reductions in poverty; social programs in Brazil have helped substantially reduce poverty
problems. The enormous growth of innovations such as mobile phones and of availability of
credit for small enterprises have led to benefits and fueled a new optimism. At the same time,
many people who have come out of poverty remain vulnerable, the natural environment is
deteriorating, and national economic growth remains uncertain. Brazil’s economic growth fell
from 7.5% in 2010 to under 1% in 2012. Growth in India, topping 10% for the first time in 2010,
fell to barely a third that level in 2012. Growth in China fell from over 10% in 2010 to below 8%
in 2012. Prospects remain strong in coming years, particularly for middle-income countries; yet
the high volatility of growth is just one hint at the remaining broader development challenges.

What Do We Mean by Development?

Development traditionally meant achieving sustained rates of growth of income per capita to
enable a nation to expand its output at a rate faster than the growth rate of its population. Levels
and rates of growth of “real” per capita gross national income (GNI) are then used to measure the
overall economic well-being of a population — how much of real goods and services is available
to the average citizen for consumption and investment. Development strategies have therefore
usually focused on rapid industrialization, often at the expense of agriculture and rural
development.
During the 1970s, economic development came to be redefined in terms of the reduction or
elimination of poverty, inequality, and unemployment within the context of a growing economy.
A number of developing countries experienced relatively high rates of growth of per capita
income during the 1960s and 1970s but showed little or no improvement or even an actual
decline in employment, equality, and the real incomes of the bottom 40% of their populations.
By the earlier growth definition, these countries were developing; by the newer poverty, equality,
and employment criteria, they were not.
Amartya Sen, the 1998 Nobel laureate in economics, argues that the “capability to function” is
what really matters for status as a poor or nonpoor person. Sen identifies five sources of disparity
between (measured) real incomes and actual advantages: first, personal heterogeneities, such as
those connected with disability, illness, age, or gender; second, environmental diversities, such
as heating and clothing requirements in the cold or infectious diseases in the tropics, or the
impact of pollution; third, variations in social climate, such as the prevalence of crime and
violence, and “social capital”; fourth, distribution within the family — family resources may be
distributed unevenly, as when girls get less medical attention or education than boys do; fifth,
differences in relational perspectives, meaning that some goods are essential because of local
customs and conventions, for example, higher quality clothing (such as leather shoes) in high-
income countries than in low-income countries.

Who are among developing countries?

The most common way to define the developing world is by per capita income. Several
international agencies, including the Organization for Economic Cooperation and Development
(OECD) and the United Nations, offer classifications of countries by their economic status, but
the best-known system is that of the International Bank for Reconstruction and Development
(IBRD), more commonly known as the World Bank. In the World Bank’s classification system,
213 economies with a population of at least 30,000 are ranked by their levels of gross national
income (GNI) per capita. These economies are then classified as low-income countries (LICs),
lower-middle-income countries (LMCs), uppermiddle-income countries (UMCs), high-income
OECD countries, and other high-income countries. (Often, LMCs and UMCs are informally
grouped as the middle-income countries.) With a number of important exceptions, the
developing countries are those with low-, lower-middle, or upper-middle incomes.

High-income countries that have one or two highly developed export sectors but in which
significant parts of the population remain relatively uneducated or in poor health, or social
development is viewed as low for the country’s income level, may be viewed as still developing.
Examples may include oil exporters such as Saudi Arabia and the United Arab Emirates. Upper-
income economies also include some tourism-dependent islands with lingering development
problems, which now face daunting climate change adaptation challenges. Even a few of the
high-income OECD member countries, notably Portugal and Greece, have been viewed as
developing countries at least until recently — a perception that grew again with the ongoing
economic crises (e.g., in October 2013 S&P Dow Jones reclassified Greece from “developed
market” to “emerging market.”). Nevertheless, the characterization of the developing world as
sub-Saharan Africa, North Africa and the Middle East, Asia (except for Japan and, more recently
South Korea and perhaps two or three other high-income economies), Latin America and the
Caribbean, and the “transition” countries of eastern Europe and Central Asia including the
former Soviet Union, remains a useful generalization. In contrast, the developed world
constituting the core of the high-income OECD is largely comprised of the countries of western
Europe, North America, Japan, Australia, and New Zealand.

Is there any new scale of measuring development? The Human Development Index
The most widely used measure of the comparative status of socioeconomic development is
presented by the United Nations Development Programme (UNDP) in its annual series of
Human Development Reports in 1990, called Human Development Index (HDI). The New HDI
ranks each country on a scale of 0 (lowest human development) to 1 (highest human
development) based on three goals or end products of development: a long and healthy life as
measured by life expectancy at birth; knowledge as measured by a combination of average
schooling attained by adults and expected years of schooling for school-age children; and a
decent standard of living as measured by real per capita gross domestic product.
Bangladesh’s HDI value for 2018 is 0.614 — which put the country in the medium human
development category — positioning it at 135 out of 189 countries and territories.

What are the sources of growth? What is the role of innovation in economic growth?
There are three important factors underpinning economic growth: (1) Capital accumulation,
including all new investments in land, physical equipment, and human resources, (2) Growth in
population and hence eventual growth in the labor force, and (3) Technological Progress
(Todaro, 1997). Recently, new growth theories support the view that the key driver for economic
growth in global economies is innovation. The core of innovation is the use of production
resources in a new way and the simultaneous withdrawal of older resources from current
application and use (Boskin and Lawrence, 1992). Joseph Schumpeter specified that innovation
consists of the following five circumstances: (1) introduction of a new good; (2) introduction of a
new method of production; (3) opening of a new market; (4) conquest of a new source of supply
of raw materials or semi-manufactured goods; and (5) implementation of a new form of
organization (Yang, 2006). Innovation can be based on product or process innovations. Product
innovations are new products or services introduced to meet an external user or market need, and
process innovations are new processes that are used in production or service operations
(Damanpour, 1991), and behavioral innovations are the replacement of older organizational
routines with new ones (Griffith et. al, 2004). Also, innovation is contributing in competitiveness
and the growth of firms, industries, and national economies.
Many of the early models treated technological progress as an exogenous process driven only by
time. Robert Solow treated technological progress as exogenous, and focused on the role played
by capital accumulation in driving economic growth (Crosby, 2000). On the other hand,
endogenous growth models, led by Romer (1990), postulate that growth is driven by
technological change. Romer stated that growth is driven by technological change that arises
from intentional investment decisions made by profit-maximizing agents.

What is the Role of R&D in Economic Growth?

Innovation drives economic growth. But what fuels innovation? At the heart of it, research and
development (R&D) activities allow scientists and researchers to develop new knowledge,
techniques, and technologies. As technology changes, people can produce more with either the
same amount or fewer resources, thereby increasing productivity. As productivity grows, so does
the economy (Wu, John (2015) Comments: Race to innovate in Economics, R&D).

R&D investment increases the possibility of achieving a higher standard of technology in firms
and regions, which would allow them to introduce new and superior products and/or processes,
resulting in higher levels of income and growth. Endogenous growth model pioneers, Romer
(1990) and Lichtenberg (1992) have pointed out that the relationship between investment in
technology and R&D expenditure leads to increases productivity, and therefore growth (Bilbao-
Osorio and Rodriguez, 2004).

From a sample of 15 Organization for Economic Cooperation and Development (OECD)

countries, including the United States, Begun Erdil Sahin estimates that a 1 percent increase in
R&D spending could grow the economy by 0.61 percent. This means that as countries invest
more in R&D, their economy will grow faster.

The United States spends the most on R&D worldwide, estimated at $465 billion in 2014 (from
business and government). China comes in second at $284 billion, and Japan comes in third with
$165 billion.

Although the United States currently outperforms many OECD nations in R&D intensity, if
China’s trend of rapid research and development funding continues expanding as seen from
Figure 1, it may well outpace U.S. R&D intensity within a decade. Battelle estimates that in
absolute dollar figures, China will outspend the United States by the early 2020s.
 Figur
e 1: R&D intensity of selected countries, 2000-2013. Source: World Bank Data.