First published as a paper in the September 2000 issue of the Project Management World Today E-zine of the PMForum web site:
Published here June 2001.

Abstract | Introduction | History of Economic Development
Social Spending | Project Management | Conclusion | References

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 an economy.

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: 239).

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: unpublished).

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 Moldavia.

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