🛟Global Poverty Entrepreneurship Unit 2 – Economic Development: Theories & Approaches

Key Concepts and Definitions

• Economic development focuses on improving economic, political, and social well-being of people in developing nations
• Gross Domestic Product (GDP) measures the total value of goods and services produced within a country's borders
  • GDP per capita divides a country's GDP by its population to show the average standard of living
• Human Development Index (HDI) measures a country's development based on life expectancy, education, and per capita income indicators
• Poverty trap occurs when individuals or nations remain in a state of poverty due to self-reinforcing factors (lack of capital, education, or infrastructure)
• Inequality refers to the uneven distribution of income, wealth, or opportunities among individuals or groups within a society
• Absolute poverty defines a set standard for minimal living conditions which is consistent over time
• Relative poverty compares the lowest segments of a population with the upper segments of that same population

Historical Context of Economic Development

• Mercantilism (16th-18th centuries) emphasized maximizing exports, minimizing imports, and accumulating gold and silver
• Industrial Revolution (late 18th-19th centuries) led to mechanization, factory system, and increased productivity
  • Shifted focus from agriculture to manufacturing and trade
• Colonialism exploited resources and labor from colonies to benefit the colonizing countries
• Post-World War II era saw the rise of development economics and focus on newly independent nations
• Washington Consensus (1989) promoted free markets, privatization, and deregulation as paths to growth
• Sustainable Development Goals (2015) established 17 global goals to address poverty, inequality, and environmental issues by 2030

Major Economic Development Theories

• Modernization theory suggests that developing countries can progress through similar stages as developed countries did
  • Assumes traditional societies can evolve into modern ones with the right interventions (technology transfer, infrastructure investment)
• Dependency theory argues that the global economic system perpetuates poverty in developing countries
  • Suggests that wealthy nations exploit poorer ones, leading to unequal exchange and underdevelopment
• World Systems theory divides the world into core, semi-periphery, and periphery countries based on their position in the global economy
• Neoclassical growth models emphasize the role of capital accumulation, labor force growth, and technological progress in driving economic growth
• Endogenous growth theory highlights the importance of human capital, innovation, and knowledge spillovers for long-term growth

Approaches to Economic Growth

• Import substitution industrialization (ISI) encourages domestic production of previously imported goods to reduce foreign dependency
• Export-oriented industrialization (EOI) focuses on producing goods for export to generate foreign exchange and stimulate growth
  • East Asian Tigers (Hong Kong, Singapore, South Korea, Taiwan) successfully pursued EOI strategies
• Structural adjustment programs (SAPs) involve market-oriented reforms promoted by international financial institutions (World Bank, IMF)
  • Aim to correct balance of payments issues and promote efficiency, but can have negative social impacts
• Microfinance provides small loans and financial services to low-income individuals and small businesses
• Foreign direct investment (FDI) occurs when a company invests in business activities in another country

Role of Institutions and Governance

• Property rights provide incentives for investment and efficient resource allocation
  • Lack of clear property rights can hinder economic growth and development
• Rule of law ensures that laws are applied fairly and consistently, promoting stability and predictability
• Corruption undermines economic growth by distorting incentives, reducing efficiency, and discouraging investment
• Effective governance is essential for implementing policies, providing public goods, and creating an enabling environment for private sector development
• Inclusive institutions allow broad participation in economic and political life, fostering innovation and growth
• Extractive institutions concentrate power and resources in the hands of a few, often leading to stagnation and underdevelopment

Challenges in Developing Economies

• Inadequate infrastructure (transportation, energy, communication) hinders economic activity and raises costs
• Low levels of human capital result from limited access to education, health care, and nutrition
  • Affects productivity and the ability to adopt new technologies
• Limited access to finance constrains investment and entrepreneurship, particularly for small and medium enterprises (SMEs)
• Vulnerability to external shocks (commodity price fluctuations, natural disasters, global economic crises) can derail growth and development efforts
• Environmental degradation and climate change pose risks to livelihoods, food security, and long-term sustainability
• Rapid population growth strains resources and public services, making it difficult to improve living standards

Measuring Development and Progress

• GDP growth rate measures the annual percentage change in a country's GDP, indicating the pace of economic expansion
• Gini coefficient measures income inequality within a population, ranging from 0 (perfect equality) to 1 (perfect inequality)
• Multidimensional Poverty Index (MPI) captures the multiple deprivations that individuals face in education, health, and living standards
• Gender Development Index (GDI) measures gender disparities in human development achievements
• Sustainable Development Goals (SDGs) provide a framework for tracking progress across 17 social, economic, and environmental dimensions
  • Indicators include access to clean water, renewable energy usage, and gender equality in education

Case Studies and Real-World Applications

• South Korea's successful transition from a low-income to high-income economy through export-oriented industrialization and investment in human capital
• Grameen Bank's pioneering work in microfinance, providing small loans to poor individuals in Bangladesh and promoting entrepreneurship
• Costa Rica's focus on environmental conservation and eco-tourism as a driver of sustainable economic development
• Rwanda's post-genocide economic recovery, driven by institutional reforms, foreign investment, and a focus on reducing poverty
• China's rapid economic growth and poverty reduction through market-oriented reforms, infrastructure investment, and global trade integration
  • Challenges include rising inequality and environmental sustainability
• The role of mobile money (M-Pesa) in promoting financial inclusion and economic activity in Kenya and other African countries