Development economics
Development economics is a branch of economics that deals with economic aspects of the development process in low- and middle- income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but also on improving the potential for the mass of the population, for example, through health, education and workplace conditions, whether through public or private channels.
Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level. This may involve restructuring market incentives or using mathematical methods such as intertemporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods. Common topics include growth theory, poverty and inequality, human capital, and institutions.
Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans. Also unlike many other fields of economics, there is no consensus on what students should know. Different approaches may consider the factors that contribute to economic convergence or non-convergence across households, regions, and countries.
Theories of development economics
Mercantilism and physiocracy
The earliest Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, scholasticism, the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development. The 16th- and 17th-century School of Salamanca, credited as the earliest modern school of economics, likewise did not address development specifically.Major European nations in the 17th and 18th centuries all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th-century development of physiocrats in France and classical economics in Britain. Mercantilism held that a nation's prosperity depended on its supply of capital, represented by bullion held by the state. It emphasised the maintenance of a high positive trade balance as a means of accumulating this bullion. To achieve a positive trade balance, protectionist measures such as tariffs and subsidies to home industries were advocated. Mercantilist development theory also advocated colonialism.
Theorists most associated with mercantilism include Philipp von Hörnigk, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy. In France, mercantilist policy is most associated with 17th-century finance minister Jean-Baptiste Colbert, whose policies proved influential in later American development.
Mercantilist ideas continue in the theories of economic nationalism and neomercantilism.
Economic nationalism
Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein in Germany. A significant difference from mercantilism was the de-emphasis on colonies, in favor of a focus on domestic production.The names most associated with 19th-century economic nationalism are the first United States Secretary of the Treasury Alexander Hamilton, the German-American Friedrich List, and the American politician Henry Clay. Hamilton's 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, and drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert. List's 1841 Das Nationale System der Politischen Ökonomie, which emphasized stages of growth. Hamilton professed that developing an industrialized economy was impossible without protectionism because import duties are necessary to shelter domestic "infant industries" until they could achieve economies of scale. Such theories proved influential in the United States, with much higher American average tariff rates on manufactured products between 1824 and the WWII period than most other countries, Nationalist policies, including protectionism, were pursued by Clay, and later by Abraham Lincoln, under the influence of economist Henry Charles Carey.
Forms of economic nationalism and neomercantilism have also been key in Japan's development in the 19th and 20th centuries, and the more recent development of the Four Asian Tigers, and, most significantly, China.
Following Brexit and the 2016 United States presidential election, some experts have argued a new kind of "self-seeking capitalism" popularly known as Trumponomics could have a considerable impact on cross-border investment flows and long-term capital allocation
Post-WWII theories
The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II. The key authors are Paul Rosenstein-Rodan, Kurt Mandelbaum, Ragnar Nurkse, and Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia, Africa, and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis was an analysis of not only economic growth but also structural transformation.Linear-stages-of-growth model
An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List. This theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, thus, development. The linear-stages-of-growth model posits that there are a series of five consecutive stages of development that all countries must go through during the process of development. These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption" Simple versions of the Harrod–Domar model provide a mathematical illustration of the argument that improved capital investment leads to greater economic growth.Such theories have been criticized for not recognizing that, while necessary, capital accumulation is not a sufficient condition for development. That is to say that this early and simplistic theory failed to account for political, social, and institutional obstacles to development. Furthermore, this theory was developed in the early years of the Cold War and was largely derived from the successes of the Marshall Plan. This has led to the major criticism that the theory assumes that the conditions found in developing countries are the same as those found in post-WWII Europe.
Structural change theory
Structural change theory, or what is commonly known today as structural transformation was proposed by economist Sir Arthur Lewis in his seminal 1954 work, Economic Development with Unlimited Supply of Labor. Structural transformation is the process by which developing countries, composed primarily of subsistence agriculture labor, will shift towards more modern, urban and productive industrial work in both manufacturing and services. Over time this shift should bring substantial gains in the form of economic growth.After traveling to the Caribbean, Lewis proposed a two-sector model, in which surplus labor moves out of agriculture and into industry as a country's population continues to grow. The purpose of this model is to show that economic growth comes at a time in a country's development trajectory when subsistence farmers move into the industrial sector in which capital is deployed and productivity is improved.
Later on Hollis Chenery's Patterns of Development approach, which holds that different countries become wealthy via different trajectories. The pattern that a particular country will follow, in this framework, depends on its size and resources, and potentially other factors including its current income level and comparative advantages relative to other nations. Empirical analysis in this framework studies the
"sequential process through which the economic, industrial, and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth."
Structural change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country. The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach has been criticized for lacking a theoretical framework.