In order to define ‘economic development’, I have looked into the literature on the subject to subsidize my answer. I have looked particularly into the works of Acemoglu, Laibson, & List (2016) and Rahnama-Moghadam, Samavati, & Dilts (1995).
Acemoglu, Laibson, & List (2016, p. 205) indicate that the term less developed country (LDC) fosters images of backwardness, poverty, and lower levels of technological sophistication. They claim there is some truth in these images but, nonetheless, there is a broad range of countries that are correctly described as being less developed. One country has not reached the known levels of financial well-being that industrialized nations have is deemed to be a less developed country. The stages of development, under this conception, are defined purely as a function of how big the Gross Domestic Production (GDP) of a country is. The general economic welfare of its inhabitants and their technological sophistication will also be a function of the dimensions of the world's total economy. In other words, the size of the GDP is just the first step in understanding the stages of development of countries.
There are limitations to this approach. Rahnama-Moghadam, Samavati, & Dilts, (1995, p. 10) state that because per capita GDP is relied upon as the standard determining stage of development, the limit per capita GDP that qualifies a country for LDC status changes every year. Put simply, the definition of LDC changes each year because the dollar value of per capita GDP, below which a country is classified as an LDC, changes each year. The authors give the example that, in 1990, per capita GNP – which is a slightly varying definition of the Gross Product in a country, more common in the past – of $7,619 or less placed a national country in the LDC category. In 1991, this qualifying per capita GNP rose to $7,910. This means that exchange rates have an overvalued impact on the definition of LDC.
Rahnama-Moghadam, Samavati, & Dilts (1995, p. 10) state that the World Bank additionally classifies nations in the LDC category as medium-income or low-income countries. In 1991, the World Bank organized LDCs as low-income countries if their per capita GNP had been $635 or less. Middle-income nations are the ones that did not qualify as high- income countries (with a per capita GNP in excess of $7,910) or as low-income countries. In 1991, countries such as the United States ($22,240 per capita GNP) and Ireland ($11,120 per capita GNP) were all countries that are high-income thus developed (or industrialized) nations. Middle-income countries, according to the World Bank's classification scheme, included nations such as Saudi Arabia ($7,820 per capita GNP), Iran ($2,170 per capita GNP) and Bolivia ($650 per capita GNP). Low-income countries included Indonesia ($610 per capita GNP), China ($370 per capita GNP), and Mozambique ($80 per capita GNP). The authors comment that there was a substantial variation in per capita GNP within each category, suggesting that one could find significant differences within the phases of development even within high-, middle-, and low-income classifications. Two things are important within the World Bank's definition. First, if a country is in the middle- or low-income it is classified as an LDC. Second, it is impractical to infer much about the stages of development between nations in either LDC category. The World Bank simply claims that the employment of the categories (and the label LDC) is convenient.
I took the facts from the academic literature above described to come up with my definition of economic development. I thus define economic development as an arbitrary and comparable standard which fundamental measure is the per capita Gross Domestic Product of a country. This definition does not have to be limited to a country: it can be of a city, or an economic union, as long as GDP is calculated and the population is known. Countries could then be readily comparable as more or less developed one from the other – this comparability is crucial, as, for example, the 1950s United States can only be deemed developed as compared to other 1950s nations, and not as an absolute standard of development. To further define the arbitrary guideposts that will place a given country in a category, I would look into the per capita GDP of each the Organization for Economic Cooperation and Development (OECD, an institution of mostly developed nations, with some middle-income countries) and use them to define the ‘cutoff’ points. As an example, I could use OECD countries in the bottom 10% of per capita GDP and place them in the LDC category. Hence, the highest per capita GDP of the bottom 10% OECD would provide me with the arbitrary number to define the LDC group.
One of the greatest problems that LDCs face is, ironically, linked to the volatility of the definition of a country as an LDC itself: the exchange rate. A study by Arize, Osang, & Slottje, (2000) indicate that there is a negative and statistically significant long-run relationship between export flows and exchange rate volatility in many LDCs. They studied the export flows of 13 LDCs and came to the conclusion that exchange rate volatility has a dampening effect on short-run export. Their article corroborates preexisting evidence that concluded that exchange-rate uncertainty inhibits exports. The authors describe that these empirical results, derived from the LDCs data, are consistent with the theoretical considerations and also confirm previous research done for developed countries, which implies that exchange rate volatility has a significant negative impact on export flows in both the short and the long run.
The importance of exchange rates, thus, is not only restricted to the determination of the yardstick which will label a country as developed or less developed: the volatility of the exchange rate will impact a country’s exports and, consequentially, its GDP. An LDC’s GDP can grow more steadily if its currency is less volatile against stronger coin such as the U.S. dollar or the Euro. The value of a country’s currency depends, furthermore, on its fiscal and monetary policies. And these are heavily dependent on the quality of its institutions.
Acemoglu, Laibson, & List (2016, p. 207-208) mention the work of economic historian Douglass North, who was granted the Nobel Prize in Economics largely as a result of his work emphasizing the need for institutions in the development of nations. According to the authors, North defined institutions as “the rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction” (Acemoglu, Laibson, & List, 2016, p.208). The fact that institutions are humanly developed provides a sharp contrast to former ‘geographical theories of development’, that attempted to understand the development of nations as a factor of their distance to the Equator line or other conventions. North posits that institutions do not simply appear out of nowhere, but develop due to the choices people of a society make over exactly how to organize their interactions. Also, organizations place constraints on particular behavior (such as stealing from other people or to walking away from debts). Policies, regulations, and laws that punish or reward specific types of behavior will naturally have an effect on behavior. As a result, institutions affect incentives (in a sense that there is a high price to stealing or cheating debt) that can create an environment conducive to economic growth.
Acemoglu, Laibson, & List (2016, p. 208-209) suggest that we look into the ‘experiment' of the Korean peninsula after the war to understand the importance of institutions in economic development. They describe that the Korean peninsula is divided in two by the thirty-eighth parallel. To the south is the Republic of Korea, also referred to as South Korea, one of the fastest-growing economies of the last 60 years and close to achieving living standards similar to numerous nations in Europe. To the north of the thirty-eighth parallel, there is the Democratic People's Republic of Korea, or just North Korea, which living standards in North Korea resemble those in a sub-Saharan African country. The best estimate suggests that their 2005 GDP per capita was $1,612, making its inhabitants worse off compared to the citizens of Sudan or Yemen. In contrast, in that year the per capita GDP in South Korean had been $26,609.
Geography and culture do not explain the difference in the two countries, which goes back to 1947 when the country had been split into two. Korea was at that point a country unusually homogeneous both ethnically and culturally. If we were poised to think that geography or culture were key elements in determining South Korea’s development after 1947, we would expect considerable similarity to the economic development of North Korea.
Acemoglu, Laibson, & List (2016, p. 209) describe that the separation of Korea into two halves ended up being not something to which its residents willingly agreed. It was an outcome of a geopolitical deal between the Soviet Union and the United States, who agreed at the end of World War II that the thirty-eighth parallel would be the dividing line for their spheres of influence in Korea and create different governments within the North and the South. These governments adopted nearly opposing methods of arranging their economies. In North Korea, Kim Il-Sung established himself as a dictator and introduced a notoriously rigid form of communism. Resources in North Korea were allocated through central planning, private property was outlawed, and markets were banned. Freedoms were curtailed not only in the marketplace but in every sphere of North Koreans’ lives, and continue to this day. In the South, institutions had been shaped by the liberal-educated, anti-communist Syngman Rhee, with help from the United States. Rhee and his successors have since supported a market-based economy, with incentives to businesses and industrialization, and substantial investments in the education of South Koreans. The sharply divergent institutions of the two Koreas have led to very different economic outcomes.
Acemoglu, Laibson, & List (2016, p. 223) also point out that economists’ overall verdict on foreign aid is that it is ineffective in alleviating poverty. For instance, over the past 50 years, an enormous amount of billions of dollars have been directed to Africa as development help, but African nations are still much poorer than the United States or Western Europe. Although generous from the viewpoint of these donor countries, the amount of foreign aid is not sufficient to lead to a sizable escalation in physical capital or to significantly increase the educational attainment of the countries' population. Moreover, it does not have a visible impact on technology. As a result, foreign aid hasn’t made significant progress in increasing GDP per capita among the poorest countries. Furthermore, issues associated to corruption imply that cash provided to governments or other organizations in developing nations can be captured and distributed to dishonest officials. Studies suggest that only about 15 percent of any money fond of foreign aid reaches its intended destination. Again we can see that institutions – or in this case, the lack or poor use of them – is paramount for development.
As for the future, North (2005, p. 168-170) has pointed out that the fall in information costs has apparently accelerated imitation of institutions. But in spite of such accessibility, the gap between developed and LDCs has widened. The author states that the understanding of the entire process of evolution from a LDC to a developed country is not clear and that the procedure of catching up is intricate. North indicates that the sobering story of limited success in encouraging development in sub-Saharan Africa and Latin America shows that more is needed until there can be confidence in institution building to improve performance. He mentions that all communities throughout history have decayed and disappeared: some like Rome have lasted for numerous centuries; others like the Soviet Union have lasted less than a hundred years. This variability in length underpins another crucial element of development, adaptability to changing circumstances. The brief tale of the Soviet Union is a testimonial to the pitfalls inherent in an inflexible institutional framework.
Peterson (2002) offers us a positive view of the future. He directly compares experiences from the recent past and states that, in side-by-side comparisons, South Korea is more prosperous than North Korea, West Germany than East Germany, and Taiwan than mainland China. The author notes that the previous century, frequently singled out as the one of the rises of Nazism, Stalinism, and Maoism, was also witness to their virtual demise, and the increasing threat of government control happens to be a dull failure, as shown in his comparison of countries. He finishes his article stating that, instead the dismal science, “market economics should be renamed the enriching science.”
My understanding is that the path of future economic development is rocky, yet bright. As more countries realize from their historical experience the importance of reforming their institutions into the necessary tools for proper economic incentive, and recognize that wealth creation is directly linked to free-market tenets, it is increasingly likely that LDCs will find their path to prosperity.
References
Acemoglu, D., Laibson, D. I., & List, J. A. (2016). Macroeconomics. Boston, Mass.: Pearson.
Arize, A. C., Osang, T., & Slottje, D. J. (2000). Exchange-Rate Volatility and Foreign
Trade: Evidence from Thirteen LDC's. Journal of Business & Economic Statistics,
18(1). Retrieved from Questia.
North, D. C. (2005). Understanding the Process of Economic Change. Princeton, NJ:
Princeton University Press. Retrieved from Questia.
Peterson, W. H. (2002, January). It's Getting Better All the Time: 100 Greatest Trends in
the Last 100 Years. Ideas on Liberty, 52(1), 56. Retrieved from Questia.
Rahnama-Moghadam, M., Samavati, H., & Dilts, D. A. (1995). Doing Business in Less
Developed Countries: Financial Opportunities and Risks. Westport, CT: Quorum
Books. Retrieved from Questia.
