DEVELOPMENT ECONOMICS
DEVELOPMENT ECONOMICS THEORY
In order to understand development economics and growth, economists look at production models for growth and determinants of development. An expanded understanding of development and growth focuses on four main drivers: population, physical capital, human capital, and productivity.
Scroll down or use the menu to the right to learn more about development economics theory.
Economic Development: A Personal Lens
Before we jump into the individual drivers for growth, let us take a look at a personal story…
Population
How does population affect growth?
Population growth is the increase in the number of individuals in a country over time. Population growth may arise from the following:
- Increased fertility rate
- Decreased mortality rate
- Increased immigration
Population plays an important role in providing labor for an economy
Tap the image below to reveal more information:
Growth Impact
A larger population provides a greater pool of potential labor. Labor is an essential component in producing output, but more people also means more consumption.
An increase in the population growth rate can lead to a decrease in output per worker, unless capital accumulation increases.
Policies for Growth
Depending on a country’s labor needs, nations may want to increase or decrease population growth.
Reducing Population Growth
- Contraception promotion
- Women’s empowerment campaigns
Increasing Population Growth
- Tax breaks and incentives for families with children
- Pro-immigration policies
Physical Capital
How does physical capital affect growth?
Physical capital is one of the main factors used in production, especially manufacturing
Growth Impact
A higher savings rate can enable more investment and a higher capital stock. This will lead a temporary boost to growth.
Since increased capital is subject to diminishing returns, it does not permanently raise the growth rate. The economy will be able to achieve a higher level of steady-state output – more income per capita.
Physical capital are the tools and equipment used by labor. Capital accumulation generally involves investment in the following:
Physical fixed capital
- Non-residential buildings (factories and retail)
- Residential buildings (e.g., apartment buildings, single family homes)
- Productive equipment and machinery
Intangible capital
- Research and development spending
- Intellectual property (trademarks/patents)
Numerous policies aim to increase physical capital at the national and household level
Macro Policies
Policies that try to boost a country’s overall capital stock at a macro level include:
Foreign Direct Investment (FDI) promotion aims to develop new industry with outside funds.
Infrastructure investment connects businesses to markets and lowers the cost of operating for firms.
Micro Policies
Many countries have policies that aim to improve a country’s capital stock at a household level.
Micro-finance Programs aim to increase credit and liquidity for households, allowing them to invest in productive assets.
Household Savings Programs help households save earnings for future investments in physical and human capital.
Human Capital
How does human capital affect growth?
Human Capital helps us understand the quality and overall productivity of labor
Human capital refers to characteristics of labor that increase productivity, including education and skills training, health improvements, and better nutrition. We typically divide human capital into the following categories:
Health
- Nutrition – malnutrition & obesity
- Health – healthcare access; infectious & non-communicable disease prevention
- Environmental health factors – pollution & sanitation
Education
- Schooling – primary, secondary, and tertiary education
- Girls’ education – access to school; % of girls enrolled in school
Growth Impact
Increasing human capital raises the growth rate of per capita output.
Human capital can be increased and accumulated through investment in people: more and better education, job training, and improvement in health conditions.
Policymakers have many tools to improve health and education outcomes
Health Policies
Many policies try to reduce the burden of disease and help individuals reach full biological potential.
Immunization programs focus on stopping often fatal, but preventable diseases among children and adults.
Nutrition programs provide additional calories and nutrients to ensure children develop both physically and cognitively.
Education Policies
Education policies often aim to expand access and quality of education.
Education Access Programs aim to ensure that students enroll and stay in school until they complete secondary school.
Vocational Training Programs try to provide young people and unemployed workers with skills to work in specific sectors or generate new businesses.
A Smarter and Stronger Labor Force
Human capital is heavily influenced by the opportunities available to individuals based on their specific circumstances throughout their lifetime – how healthy they are as children, what schools they can attend, what training they receive.
Data Source
The World Bank has established a Human Capital Index to help policy makers understand their own country’s human capital. Look up your country here.
Productivity
How does productivity impact long-term growth?
Productivity is the key component to unlocking long-term growth
Growth Impact
Increasing population and physical capital generally lead to short-term growth. Technical progress increases the quality of capital and efficiency of production processes, which can increase labor productivity and contribute to long-term economic growth.
Human capital can be increased and accumulated through investment in people: more and better education, job training, and improvement in health conditions.
Productivity refers to the amount of output produced with a given amount of inputs. There are many ways in which productivity can increase:
- Technological advances that allow economies to produce more output with the same amount of resources;
- Exposure to and adoption of better management practices, learning-by-doing, and organizational change;
- Improvements in governance and institutional efficiencies (e.g., rule of law, contract enforcement, reduced corruption, etc.);
- Increased openness to trade and competition; political and macroeconomic stability.
Policymakers focus on strengthening the enabling environment to promote development
Technology Policies
Governments often promote the adoption of new technologies and better management practices.
R&D Promotion includes incentives and training programs to help firms adopt new technologies that improve the productivity of capital.
Programs also reduce cost of new research that can create valuable, new technologies.
Governance Policies
Education policies often aim to expand access and quality of education.
Economic Governance Strengthening Programs promote investment, reduce corruption, and increase coordination in an economy.
Free Trade Promotion seeks to reduce barriers to trade, ensuring low-cost material inputs, and efficient allocation of labor and capital.
Ease of Doing Business
Economic governance is often as important as developing and adopting new technologies for development. Strong economic governance ensures that firms can invest in new capital easily and securely, which will lead to increased economic growth.
Data Source
The World Bank has established an Ease of Doing Business index to track economic governance around the world over time. Look up your country here.
Learn how better economic governance is key to economic development
Governance & Economic Development
Edmund Malesky is a political economist and a noted specialist in economic development, authoritarian institutions, and comparative political economy in Vietnam. Dr. Malesky’s research uses applied quantitative methods and field experiments to explore the intersection of Comparative and International Political Economy. His research includes the political influence of foreign direct investment and multinational corporations. Dr. Malesky is also highly active in applying his research to policymaking.
Learn more about Development Economics
