History of Economic Development
According to the classical view of macro economic theory (Grabowski & Shields
1996: 2), all people have work where they produce goods and services, in return
for which they earn money, which they spend on goods and services to create demand.
Price is used as a mechanism to control supply and demand or in the words of
the French economist Jean Baptiste Say, supply creates its own demandî (Grolier
Sayî 1996: CD-ROM) giving rise to the creation of wealth to satisfy peopleÍs
wants and needs.
Economic growth considers the possibility of raising the standard of living
not only for the rich but also for the poor (Fourie & Van den
Bogaerde 1989: 236), which is usually defined as the annual rate
of increase in real gross domestic product (GDP) or real gross national
product (GNP) (United Nations 1996: 1). GDP is defined as the
total value of all final goods and services produced within the
economy in a give period of time (Fourie & Van den Bogaerde
1989: 25). GDP and GNP are equal when local interests abroad are
the same as foreign interests in the local economy.
To calculate GNP, subtract from GDP all profits, interest, wages
and other income earned by non-residents and add profits, interest,
wages and other income earned by ex-patriots (Mohr et al. 1988:
38-39). Dividing GDP by the number of nationals from a specific
country results in per capita data. This is simply stated as an
average currency earned per person per year for a particular country.
Per capita is used to measure changes in efficiency and growth of
The Union Bank of Switzerland goes one step further when calculating purchasing
power parity for their research into prices and earnings around the world, by
taking the average working hours per year into consideration, in each city surveyed
(Enz 1991: 5). Research done in the United States during the 1980's showed variations from
$12 000 for Sweden to $136 for Ethiopia per capita GDP (Fourie & Van den
Bogaerde 1989: 240). These vast differences in the level of economic activity
between established countries and less developed countries has led to a difference
in terminology where economic growth describes the process of increased
GDP, and economic development the process which results in an increase
in real potential production. This implies a fundamental change in the community
as a whole, as well as its economic system in the case of a developing country
(Gillis et al. 1996: 15-16).
Of particular significance is the physical displacement between rural and urban
areas, cultural patterns, training of workers and a very different approach to
health services and transport between developed and less developed countries.
To overcome this problem, the United Nations in itÍs various development programmes
determines economic development in an economy through per capita GDP,
Investment to GDP, exports to GDP and adult literacy (United Nations 1996: 1)
then compares this data to other similar nations in four segments: Low Developed
Countries, Developing Countries, Transitional Countries and Developed Countries.
Economic growth is attained when a countryÍs per capita GDP increases
year on year. There are four factors in the growth process. These are, the size
and quality of the labour force, the quantity and quality of capital, technology
and the availability of natural resourcesî (Fourie & Van den Bogaerde 1989:
An inquiry into the nature and causes of wealth of nations published in 1776
by Adam Smith postulates that the economy grows when production increases in
volume and/or efficiency. He found that by separating production into several
different operations and having people specialise, production could be made more
efficient. The extent to which specialisation could be implemented depended on
the size of the market. The more people the larger the market the greater specialisation
and therefore higher productivity.
David Ricardo devised the law of diminishing returns in 1800, in terms of which
production may increase but only at a decreasing rate until a maximum is reached
(Fourie & Van den Bogaerde 1989: 243). Malthus added his law of population
to show that the standard of living of the masses cannot be improved because
the power of population is greater than the power of the earth to produce subsistence
for man. Population, he asserted, when unchecked by war, famine, or disease,
would increase by a geometric ratio but subsistence only by an arithmetic one
(Grolier Malthusî 1996: CD-ROM). This meant that as production increased the
average amount of food available would continue to decrease until only a subsistence
level was reached (Ghatak 1995: 49-50).
Until 1930, Adam Smith's theory held true and economic growth was unprecedented
in the history of man. The great depression and the Second World War saw the
emergence of the Keynesian model. In his book The general theory of employment,
interest and money published in 1936 J.M. Keynes postulated, that one could
not rely solely on market forces to carry the economy back to full employment.
Government's expenditure was to be applied to offset unfavourable deviations
in private expenditure to create employment (Encarta Economicsî 1997: CD-ROM).
Monetarists led by Milton Friedman became critical of Keynes after the Second
World War with the emergence of inflation. Monetarists were extremely critical
of exaggerated government expenditure to keep total expenditure at an acceptable
level (Fourie & Van den Bogaerde 1989: 17).
With employment approaching 100% during the 1970s in America, economists had
until then concentrated only on the demand side of the economy. Oil shortages
awoke the concept of limited natural resources and brought a realisation that
there could be problems with the supply side of the economic equation with the
occurrence of simultaneous inflation and recession (Yergin 1991: 615). The enormous
economic growth of the post world war two years resulted in a baby boom resulting
in exponential growth of global population. For years, the human birth rate was
slightly higher than the death rate resulting in very slow increases in population.
However, during the 1960s, global population was increasing exponentially and
trends clearly showed that demand would eventually outstrip supply.
In 1972 the Club of Rome presented a Doomsday Model (Fourie & Van den
Bogaerde 1989: 250). The model was a computer simulation based on data available
in 1972 postulating that the global economy would slow down to a zero growth
rate due to increases in population while at the same time experiencing an increase
in consumption at a faster rate thus returning to the theories of Ricardo and
Malthus. Since then the rise of the twin evils, inflation and recession, have
been seen to play havoc with economies the world over; while global economies
are slowing down (World Bank 1998: 171).
Industrialisation brought about an increasing rate in the economic process.
Technological developments resulted in increased productivity, increased production
led to increased employment which led to increased personal wealth and capital
formation. This led to more funds being available for training labour, giving
rise to both a market in which to sell goods and a labour force to produce increasing
output. (Hirschey & Pappas 1992: 12-15)
Technology has kept production in pace with consumption as it races ahead.
The cost of economic growth in terms of environmental impact has in the last
days of the 20th century revealed disparities. It is argued that high
levels of pollution resulting from production in developed countries, damages
the environment globally, leading to crop losses in less developed countries.
It is further argued that if damage to the environment is deducted from global
GDP the trend that emerges is one of global recession and not growth. (Heap 1999:
Economic development in less developed and transitional countries have shown
slow progress in the years between 1987 and 1998 (World Bank 1998: 24), as they
show deficiency in all four factors required to sustain economic development.
Production is limited and they have become nations of consumers while the population
growth has continued to increase in these countries, economic growth has not.
(Bhattacharya 1993: 4)
Developed countries investment in the social development of the less developed
countries has resulted in increased life expectancy and birth rate, without creating
work. While in the developed countries work is replaced by technology, as the
birth rate decreases keeping unemployment figures low. It would seem that in
some less developed countries once a measure of economic development is attained,
social development takes on a higher priority. Increased expenditure on social
development instead of on continued economic development leads to economic downfall
as several less developed countries have experienced recently (Ro 1993: 30-36)
Originated by the Martinique-born Marxist writer Frantz Fanon, the designation
third world was given to countries containing some two-thirds of the world's
population and located in Latin America, Africa, and Asia. The term arose during
the cold war, when two opposing blocs one led by the U.S. first world the other
led by the USSR second world appeared to dominate world politics. Third World
consisted of economically and technologically less developed countries belonging
to neither bloc while economies considered intrinsically incapable of development,
are at times lumped together as forming a fourth world (Grolier Third world 1996: CD-ROM).
This compares with the current United Nations classification of low developed
countries 4th), developing countries (3rd), transitional countries (2nd) and
developed countries (1st) or low income, low middle income, upper middle income
an high income used by the World Bank in the same order. I prefer to use a classification
of only three as I find all countries economies transitionalî whether up or down
as history has thought that todayÍs 1st world is tomorrows 3rd world. In my classification
system 1st world countries are developed e.g. England, France, Germany
and the USA; 2nd world countries are developing e.g. Brazil, Hungary and
Malaysia; 3rd world countries are undeveloped e.g. Angola, Ethiopia and