Development Economics

Development economics is the application of economics to the study of low and middle countries that are typically characterized by more agricultural and less industrial economies and account for five sixths of the world's population. This broad definition of development economics encompasses a wide variety of topics and approaches. Most applied economics topics (and some theoretical ones) are relevant in the study of developing countries so that development economics overlaps with labor economics, industrial organization, monetary policy, public economics, environmental economics, and so on. Work in growth theory and information economics is also essential for the study of development. Some topics such as structural transformation and informal markets are relatively unique to the study of development, while others such as household models and the diffusion of technology originated elsewhere but have been greatly refined by development economists. There are a number of different analytical approaches, including neoclassical, structuralist, dependency/Marxist, and world systems. The first approach is more prevalent among economists, the latter three being more evident in the work of scholars in development sociology and other disciplines. With advances in the availability of data on developing countries and widespread interest in institutional and information economics, the lines between development and other branches of economics have become increasingly blurred.

The roots of the neoclassical approach to development can be seen in the origins of economics. Many introductory courses in economics start with Adam Smith's pin factory discussion in which Smith describes the productivity gains from specialization. David Ricardo's analysis of international trade identifies comparative advantage as the source of the gains from trade. We can apply these ideas to economic development starting from a subsistence economy. Such an economy is limited in its ability to develop because each family must perform a wide variety of tasks (grow staple crops, process them into food and clothing, gather water and fuel, educate children, care for the sick, etc.). The main potential for a higher standard of living is through specialization. Some farmers may specialize in food crops well-suited to their geographic and labor resources. Different ecological zones would specialize in different crops, perhaps including inputs for clothing, medicine, and shelter. If each specializes in the crop in which they possess a comparative advantage, the total amount grown would be greater. The various farmers could trade so that all had more than under subsistence. Likewise, villages might form with individuals to specialize in tasks previously performed by each household: processing crops into food and clothing, providing potable water, gathering and selling fuel, educating children in schools. The development of the economy continues through more specialization, including professions that provide the institutions necessary to facilitate specialization [Page 584]and trade. A natural extension of this is to the international arena where international trade allows a country to capture even more benefits through greater specialization.

Taking this perspective of development driven by specialization and facilitated by markets, development economics then focuses on ways in which markets or governments fail and how best to address these failures. The early approach, dominating policy in the 1950s and 1960s, focused on market failure. Adopting the attitude of colonial administrations, many development economists saw market failure as widespread and largely uncorrectable. Small-scale agriculturalists were bound by custom and tradition; private agents were deficient in entrepreneurship; missing capital and risk markets meant that private companies would not undertake large investments even when immensely profitable. Thus, government was seen as the prime mover, often using compulsion rather than market forces. This attitude also reflected the apparent lesson of the Soviet Union at the time, namely, that government planning could more rapidly propel a country from a simple agrarian system to an advance industrial power. This view was reflected in W. W. Rostow's “Stages of Growth” and Nurkse and RosensteinRodan's “Big Push” where there was a critical level an economy must reach before achieving sustained, modern growth. Work in this area of “development planning” shifted its focus to include distributional issues as evidence accumulated in the 1960s that growth could have high social and environmental costs.

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