International Economic Development Research Paper Starter

International Economic Development

International economic development must somehow find a way to bring world trade's zero-sum game to a close. The idea that someone gains only at someone else's expense makes the prospect of globalization far less appealing. Yet for better and for worse, that's exactly what happened from the sixteenth century onwards. We live today in one of two worlds — the developed and the developing — as a consequence. Such is the nature of seemingly intractable dilemmas economists specializing in development grapple with. Daily they ask themselves: How exactly can we ensure a more equitable sharing of wealth between countries and continents through the workings of competitive markets? Should developing countries invest in domestic or export industries? Is capital investment proper or the technological innovation it affords the true engine of growth? Must the agricultural poor seeking a better life make due indefinitely as subsistence-wage earners in nascent manufacturing industries to speed the domestic accumulation of capital? Can everyone win, albeit some perhaps more than others, without anyone necessarily losing?

Keywords Endogenous Growth Theory; Export Orientation; Harrod-Domar Model; Human Capital; Import Substitution; International Dependency Theory; International Monetary Fund; Lewis-Ranis-Fei Model of Surplus Labor; Neoclassical Growth Model; Neoclassical Theory; Purchasing Power; Rent-Seeking Behavior; Rowstow's Stages of Growth; Stabilization Policies; The World Bank

Economics: International Economic Development


Fairly or unfairly, wealth is unevenly distributed among people and places. Be it between classes, countries, or whole continents, the gulf between rich and poor goes as far back as recorded history itself. We live with its global consequences today. Some of us are fortunate to live in the twenty or so highly industrialized countries that collectively hold most of the world's wealth. The poverty endemic in the remaining hundred or so countries is so abject it must be seen first-hand to be believed. Yet it is all too real for billions of people who, until recently, had absolutely no hope of bettering themselves. That some now do is largely a planned outcome achieved by leveraging macroeconomic fundamentals to good effect. Greater aggregate output and the income it generates finances improved standards-of-living. This situation only happens in theory when all available labor, capital and land are actively utilized in the production of goods and services. Anything less than the 'full' employment of all these factors of production brings about scarcity; the root-cause of economic underdevelopment.

Economic Growth

Growth by definition involves going beyond existing limits. In macroeconomics, the boundaries being pushed outwards are the production possibility frontier and long-term aggregate supply. The first concept comes from microeconomics and refers to the range of maximum output of one good versus another in the short-run, when technology and capital remain unchanged. Aggregate economic growth entails the maximization of innumerable 'paired-goods' outputs in the long-run, however, it can also serve to demark the outer boundary of the trade-off in productive capacity between the manufacturing and agricultural sectors in general. The more capital and more efficient technology brought to bear over time in both sectors, the more the two's production possibilities frontiers expand. Aggregate supply and demand are macroeconomics concepts and manifest themselves in both the short and long-term. They differ however in one critical respect: Prices of some resources are assumed to be inflexible in the short term but flexible in the long-term. A price change in one resource, essentially, throws other, interdependent resources markets into temporary disequilibrium, for said rise signals an imbalance in supply and demand that must be redressed by the marketplace. Eventually, the full effect of a price change ripples through the economy as a whole and a general equilibrium reasserts itself. Whatever scarcity or surplus occasioned by the initial price change disappears. This is what is meant by price flexibility.

Trends in Economic Growth/Recession

What in theory seems a relatively straight forward distinction in practice, however, soon falls apart because there's widespread disagreement about the amount of time that must expire before the short-run turns into the long-run. Some say several months, others a year and still others several years. In the case of economic development in poor countries the more appropriate time span might be five to ten years. Then, too, maintaining general equilibrium at full employment for any length of time has proven next to impossible in 'have not' economies where 'variable' resources like labor and raw materials largely determine the extent of achievable productive capacity. Unlike more 'fixed' resources like capital and new technology, these factors of production can change fairly quickly. The minute output outstrips any of these available resources, scarcities arise and price hikes invariably follow.

If sufficiently steep and/or swift, said price hike's knock-on effect unleashes inflationary pressures. A viscous cycle often develops that takes on a life of its own as producers begin to pass along supplier price rises to customers. As rises in income rarely come as quickly, the purchasing power of the individual consumer shrinks. Offsetting wage increases often only leads to even greater inflation and the value of the affected currency depreciates even further. Real economic growth slows as appreciating prices decrease demand which, in turn, pushes unemployment higher as suppliers respond by cutting back production. Resources go unused until prices stabilize again. When such a downturn occurs in the most advanced economies, existing productive capacity shrinks for a time. No matter how long a recession lasts, however, the expectation remains that a recovery will follow. In underdeveloped economies, there is no such expectation because non-existent productive capacity simply doesn't get built in the first place. Here setbacks in the short-run stymie a more efficient allocation of resources in the long-run where, in more developed economies, a more efficient reallocation is simply delayed. Fundamentally, then, successful 'development' hinges on the answer to this paradoxical question: How does one create something out of virtually nothing?

Further Insights

Since the mid-twentieth century, economists have put forth formal economic models as possible answers noteworthy for both their number and their conceptual diversity. All of them involve investment of one sort or another. In the strict sense of the term, of course, this means funds raised by stock floatations, joint-ventures, bonds and other kinds of loans as well as direct aid or debt-forgiveness. Whatever its source, these funds go towards the acquisition of capital goods, the equipment and plant used in production processes. In the broader context of economic activity per se, the term refers to any resource — labor, land, technical know-how, entrepreneurship — dedicated to one economic purpose instead of another where the pay-off might be more immediate but not as great. Any sacrifice of short-term gains for the sake of potentially larger long-term gains thus constitutes an investment in this broader sense of the word.

Early Formal Models

Harrod-Domar Model

One rather influential early theory of economic growth, the Harrod-Domar Model was built around the narrower sense of the term. Gross Domestic Product or GDP, the sum of all goods and services sold in a year, grows at a rate proportionate to the national savings ratio and inversely proportionate to the national capital to output ratio. The latter signifies the amount that must be invested in order to produce a certain amount of something, the former the percentage of total household income left in interest-bearing accounts. By setting a targeted rate of growth in GDP, fiscal and monetary policy-makers can calculate the exact amount of investment funds required to meet it by first empirically determining the capital to output ratio. Should savings recycled by domestic banks as loans not cover the required amount, the difference can be made up by borrowing from foreign banks and governments. The exactness of the relationship stems from the model's clear cut identification of three different types of growth: The warranted, the natural and the actual. All three concepts stem from Keynes' ground-breaking General Theory of Employment, Interest and Money which states that at full employment income, not interest, sets investment levels. So, the actual rate of growth here is defined as the general...

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