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Development economics is a branch of economics that deals with the study of macroeconomic causes of long term economic growth, and microeconomica; the incentive issues of individual households and firms, especially in developing countries. This may involve using mathematical methods from dynamical systems like differential equations and inter-temporal optimization, or it may involve a mixture of quantitative and qualitative methods. Unlike classical economics, development economics incorporates social and political strategies to devise particular plans for development in third world countries. In this way, development economics does not rely simply on classical economic theory.

Topics of Research

Development economics also includes topics such as Third World debt, and the functions of such organisations as the International Monetary Fund and World Bank. Many economists in this field are interested in ways of promoting stable and sustainable growth in poor countries and areas, by promoting self reliance and education in some of the lowest income countries in the world. Where economic issues merge with social and political ones, it is referred to as development studies.

Criticisms

Per capita Gross Domestic Product (GDP per head) is used by developmental economists as an approximation of general national well-being. However, these measures are criticized as not measuring economic growth well enough, especially in countries where there is much economic activity that is not part of measured financial transactions (such as housekeeping and self-homebuilding), or where funding is not available for accurate measurements to be made publically available for other economists to use in their studies (including private and institutional fraud, in some countries). Even though per-capita GDP as measured can make economic well-being appear smaller than it really is in some developing countries, the discrepancy could be still bigger in a developed country where people may perform outside of financial transactions an even higher-value service than housekeeping or homebuilding as gifts or in their own households, such as counseling, lifestyle coaching, a more valuable home decór service, and time management. Even free choice can be considered to add value to lifestyles without necessarily increasing the financial transaction amounts. More recent theories of Human Development have begun to see beyond purely financial measures of development, for example with measures such as medical care available, education, equality, and political freedom. One measure used is the Genuine Progress Indicator, which relates strongly to theories of distributive justice. Actual knowledge about what creates growth is largely unproven; however recent advances in econometrics and more accurate measurements in many countries is creating new knowledge by compensating for the effects of variables to determine probable causes out of merely correlational statistics.

Recent developments

The most prominent contemporary development economist is perhaps the Nobel laureate Amartya Sen. Recent theories revolve around questions about what variables or inputs correlate or effect economic growth the most: elementary, secondary, or higher education, government policy stability, lack of trade barriers, fair court systems, available infrastructure, availability of medical care, prenatal care and clean water, ease of entry and exit into trade, and equality of income distribution (for example, as indicated by the Gini coefficient), and how to advise governments about macroeconomic policies, which include all policies that effect the economy.

Recently acted upon ideas in developmental economics include the idea that large public debt can be sometimes released in the best interest of the creditor nations (helping the country get stable again and then participating in a re-payment plan that can produce more cash than a bankrupt nation can). Recent discoveries (1990) include the second theorem of welfare economics, which states that under the assumptions of the economic model that include rational actors and lack of force on the buyer or seller, along with perfect competition and no externalities, that the outcome of negotiation that satisfies all the buyers and sellers in all markets simultaneously in such a way that no actor in any negotiation can benefit by any further negotiation without dis-benefitting the other, then that outcome is also the best total outcome for all actors combined. This theorem is a relatively recent surprise in the field, even though it was predicted by earlier models; and reinforces those earlier economic models (exemplified by Adam Smith's invisible hand) that say that self-interest in a world of free-trade benefits the whole of society. While it is a theorem with much real-world potential for understanding and improving economies, it is criticised for not representing the real world because of its assumptions; and also for not recognizing the principle of equal distribution (communism). Actually, under the model, it treats every actor equally, optimizing for the sum fulfillment of the actors' own preferences. However, in the real world there are special interest groups (including dictatorships, monopolies, and tyranny of the majority) that create more favor for one group over another.

Recent research (2001, Dollar & Dollar and others), controversial yet seen as significant, indicates that there is reason to believe that increasing per-capita GDP in some developing nations accrues more to the rich of the country than the poor, although geometrically it may accrue just as much or even a little more to the poor. This relates to one of the main arguments in developmental economics, and that is what is good for both parties is good for the whole, even if one benefits little. Examples include free trade agreements like NAFTA that benefit México and Canada hugely, but benefit the USA only a little (by some studies it actually costs the USA a slight amount, but not when savings over previous foreign aid costs are also considered). Another--more abstract--example is the theory of the "black box", which is used to point out that one person making more income than another person does not matter when a person's services are modeled to come out of an abstract input-output machine, for which we know nothing about the contents. We pay much more than an individual salary for city water services, for example. Would it then matter if one person provided those services using new technology that provided better water at a lower cost, and we paid it all to that one person until new innovations spread the income around again? For example, even if Bill Gates makes a billion dollars in a year and the poorest person in the world makes less than a dollar that year, then regardless of the inequality, Gates's service is still good for the society since it is freely paid for on the open market. That is it does not matter that he is a human being that may be morally wrong to earn more than other people do--and that society should, therefore, continue paying the large "wage" in its own best interest. In contrast, recent research concludes that inequality is a drain on per-capita GDP. In other words, even if it is OK for households to have different incomes, it may still be in society's best interest to equalize the incomes to some extent. Other recent research encompasses the following ideas: elementary education is the best national investment in education, especially for girls, and that clean water supplies are still one of the areas where the most efficient investment can be made--surprisingly, even in the USA, which is normally considered a developed rather than a developing country.

Some theories used in the past to promote economic growth have been largely discredited by 2000, including communism, which removes free-market incintives to innovate; protectionism and price controls, which remove the free-choice ability of buyer and seller to negotiate a pareto-optimum (societal optimum) choice; import substitution, which can have the effect of controlling investment to the point of having the nation produce the wrong mix of goods as compared with their comparative advantage; and politically instable macroeconomic restructuring plans, which by switching back and forth or unpredictably remove incentives to invest. Edward C. Prescott, Nobel Laureate in economics in 2004, showed this latter phenomenon that showed that changes in government policy also change the decisions of the economic actors, which theory was used to modify policy in the USA and many other countries to that of choosing a credible stable policy that the public can trust will stay the same over choosing a policy that may be theoretically superior on some other count.

Daniel Khaneman won the Nobel Prize in economics in 2002, even though he was a psychologist. One of his conclusions mentioned in his prize-accepting speech is that people make their economic decisions based upon perceptions rather than careful calculation (as exemplified by experiments such as the one that showed that people will pay more for a set of 8 tableware than for a set up 8 plus an incomplete set of 8 when the choices are presented separately), which has wide implications for the study of how households and nations develop economically.

Further reading

See also

External links

Development | Development studies | Economic development

Economia del desenvolupament | Entwicklungsökonomie | Économie du développement | economia dello sviluppo | განვითარების ეკონომიკა | 開発経済学 | 发展经济学

 

This article is licensed under the GNU Free Documentation License. It uses material from the "Development economics".

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