Definition of Economic Development

DEVELOPMENT is

the intelligent adoption of measures or actions, small scale or large scale, by a community, alone or in partnership with other communities, that enables, unbinds or secures the effort, entrepreneurial and aspirational potentials of the individuals of that community, or, nudges its productive potentials to (or supports them in) activities with learning spillovers or know-how spinoffs—hence, improving terms of trade over time—causing decades-long income per capita growth and building up of variety and flexibility in its productive structure that leads to attainment, with reasonable resilience, of basic living standards for that community.

Economic development definition, assumptions and illustrative points

I. Economic development, schematic representation

The following diagram—the development 'causal path'—should help reading the definition.

Economic Development Causal Path

II. The target notion for the definition and the terminology considerations

1. Economic development v human development

The term development is being used in various contexts and is being qualified as: economic development, human development, international development, democratic development, and social development. In the present context, the first two terms merit special attention. The notion human development—quantitated by the UN’s HDI, Human Development Index—has been used and emphasized by some development thinkers to counteract the mainstream thinking in development that is thought to emphasize too much on ‘economic’ development and growth. This approach may not be valid: there is nothing desirable in ‘economic’ development per se other than human welfare, development, and fulfillment. Development is the discipline, first and foremost, for tackling human destitution, poverty and lack of basic welfare—and, after attaining those, maybe, 'raising' living standards. Given the appropriate context, the use of the qualifier ‘economic’ is redundant, and, there would be no substantive difference between economic and human development. To economists, ‘economic’ growth and development are only valuable in so far as they act as a proxy for ‘human’ development.
Attainment of higher levels of civil and political rights is not a component of this definition. Although some attainments in these rights might have instrumental value for attainment of economic welfare objectives. Needless to add, economic growth too may cause attainment of civil and political rights.

2. Basic living standards

Lack of mass poverty—in the areas of food, shelter, basic primary health, literacy, and reproductive behaviour—is the sine qua non of development. The Millennium Development Goals (MDGs) provide an operational example of the basic living standards by 2015. A more philosophical treatment of the notion of the basic living standards may be studied.

3. Developed status v development process

The developed status is the development process's destination, i.e., attainment of the basic living standards for the population. Depending on their status, countries are categorized as 'developed' and non-developed 'developing' countries. Growth does not have such a connotation: a community may have growth and continuous improvement in welfare. The World Bank practically defines a developed economy as a GNI per capita of above around $12,000. Although the World Bank does add the ‘disclaimer’ that ‘the use of the term is convenient; it is not intended to imply that all economies in a category are experiencing similar development or that other [developed] economies have reached a preferred or final stage of development.’

4. Development economics v economic development

Development economics is a scientific discipline and a process, while economic development is a phenomenon and an outcome. Development economics constitutes a specialized area of economics answering the same questions ‘general’ economics is asking, only, in a specific context: mass poverty, unfulfilled pressing basic needs, less than established democratic processes, less than well-established cooperative (legal) communal organization, conflict, and maybe postcolonial status.

5. International aid v economic development

While many of the international aid efforts are qualified as efforts for economic development, some that are directed towards tackling urgent basic needs, relief or humanitarian operations are to be viewed out of the development realm. Some can be qualified as both. US government’s PEPFAR—directed at combating AIDS in several African countries—is an example: it responds to an emergency humanitarian situation, and, it is geared towards elimination of a ‘binding constraint,’ i.e., AIDS epidemic, on economic growth and development. A third form of international aid in the form of simple charitable giving can also be recognized, sort of ‘international’ transfer and welfare payment. This category may not cause capital or productivity growth—only spending.

6. Sufficient geography and population

The development concept and term used here is applicable to a country or community with 'sufficient' geography and population, countries like Egypt or India and not countries like Belize or Maldives. Mixing these countries is epistemologically wrong. The development as we know it may be of little relevance to small nation-states.

III. Economic development causality

1. Manageable and non-manageable causes of economic development

In one categorization, causes of development can be put into two broad categories: those that are amenable to human agency and design and those that—for practical purposes—are almost non-amenable to human agency and design. Examples of the latter category are of course a country's latitude and a country's neighboring countries economic ecology. At times these are extremely important contributors to (or constraints on) a nation's prosperity. Nonetheless, two points are worth mentioning: firstly, nations can devise innovative ways to compensate for such shortcomings as there are alternative growth paths and, secondly, nations may devise ways to turn around such challenges. Establishing a regional transit agreement, for instance, might be a way to address a land-locked geography.

2. Endogeneity, the recalcitrant nut in the development causality

Legal environment improvement can cause development, development leads to legal environment improvement; HIV combat can be pro-development, generous healthcare may constrain development and thus be anti-development; a vocational education policy may be pro-development, good effective education is the feat of wealth. These conundrums plague the development question at all levels and particularly the public finance. Similarly, and as a particular case, despite the fact that some basic levels of old age pension and healthcare are the sine qua non of the ‘developed status,' they seem to be more incidental, than instrumental, to the 'development process.'
Every definition containing potentially endogenous factors is inadequate if not wrong and misleading. The current definition claims to have adequately managed this endogeneity challenge by boiling down causality to the most exogenous level.

3. Economic development agencies

As ‘measures or actions,’ the development agency itself is understood as being devoid of economic/productive substance. It is the agencies—taking broadly the forms of commissions or omissions—that govern, control, steward or else the activities with economic content. Examples of ‘small scale and large scale’ are combating a parasitic disease in a community and inflation targeting, respectively.

A. Anti-development agencies

Economic mismanagement and anti-development agencies, too, can broadly take the forms of mal-commissions or mal-omissions. As a relatively topical example, the financial crisis of 2008 can be attributed to three mal-omissions in regulation:
    -First, 'legality' of semi-fraudulent and fraudulent mortgage contracts—the extreme form being the NINA, no income no asset, loans;
    -Second, 'legality' of bogus accounting practices happen—credit agencies banking their debts out of their balance sheets into new entities that would allow further leverage beyond what was legally allowed; and,
    -Third, allowing financial alchemy and accounting tricks that creates AAA financial products out of high risk debt.**
Although, the definition may not directly bring such areas into mind, yet, such mal-omissions are clearly at odds with agencies:: 'enables, unbinds or secures the effort and entrepreneurial potentials.'' The understanding here is that in this example, the cause of the problem/crisis is not greed rather sloppy regulation, the latter is in the need of correction and not the human greed and enterprise.
* Financial regulation should be constructed to counter market failure problems—too big too fail, for example. Provided that functioning of a segment of the financial market would not have spillovers to the rest of the financial sector or the real economy, economic theory would call for the liberalized functioning of the market. This should be the broad framework through which the policy design is looked at. This point was added to prevent a misconception of the existence of some pre-conceived notions about the structure of the financial regulation here.

B. Development and natural resources abundance

Natural resources riches—interacting with other factors like poor transparency—may endogenously prevent our two fundamental agencies: 'enables, unbinds or secures the effort and entrepreneurial potentials' or 'nudges its productive potentials to or supports them in activities with learning spillovers or know-how spinoffs.' Dynamics and processes such as rentier state; abundance and affordability of side payments that undermine pressure for building developmental institutions and (industrial) upgrading; deindustrialization; corruption; and conflict may just be inimical to, if not the exact opposite of, those agencies—hence the notion, the natural resource curse. This is a massive criticism of the definition that claims to have pushed causality to the most exogenous level. If those two broad agencies are yet again determined so strongly by other factors, here political forces, the definition is serious undermined. (The theory of the second-best is applicable to this conundrum.)

C. Development and government

Development measures as 'meta-economical' agencies at the community-level is some forms of government activities. The government and governance activities that affect the national capital stock (human or physical), productivity, or national products and services portfolio are development. Let's look at a typology of government activities and try to rediscover development efforts from that angle. Here is a broad typology of what governments do:
    (1) public goods and infrastructure provision
    (2) creating and setting laws and regulations
    (3) (vertical) sector-specific subsidies and protections in the realm of trade
    (4) transfer payment and welfare services/aids
    (5) direct economic or commercial activity
Improvement in security services (1), labor law reform (2), and export subsidies (3) are examples of the first three government operations, and, they all may be considered as development acts. Large, national scale projects such as rail, dam or refinery projects, if implemented and run by the state (category 1)—and not by ‘effort, entrepreneurial and aspirational potentials’—as much as economical they might be, they are still to be considered infra-structural meta-economical acts ‘enabling’ the said potentials. The word reconstruction too has this connotation. Public goods and infrastructure provision ranges from security, roads and tobacco tax policy to national currency and central bank’s interest rate. From another angle, number 1, 2, and 3 activities cover activities that correct market distortions, tackle market imperfections and the area that is known as the industrial policy. Also, number 1, 3, and 4 constitute the area of public finance. That means that there is a big overlap between the realm of development realm and the realm of public finance. Finally, number 1 and 3 activities that controls the environment of business and activity in a cybernetics sense can be considered as governance (v government).

D. Industrial policy

Rooted in their level of industrializations or possession of knowhow, trading nations have different terms of trade: an hour of work by a person in the industrialized country A buys—through product A—say, 10 hours of work by a person in the developing country B—through product B. Now, some economists argue for the existence of international market distortions, imperfections or externalities that would require government interventions—in order to improve a nations terms of trade. A developing country then may be able to shift the structure of its productive capacity to sectors with higher productivity of labor vis-à-vis global prices through targeted supportive and protective measures. The supported and protected sector over time learns and produces at lower costs; its downstream and upstream industry components and suppliers through its value chain are built, coordinated and streamlined; generates know-how spinoffs or cross-fertilizations; and/or break international monopolies or oligopolies. Weaned off government’s subsidies and protections, these industries are then competitive at the global level and/or create new capabilities and products and services range.
Business or commercial activities vary enormously in terms of their know-how, learning, and innovation spillovers. Development can be understood as a process that encourages a shift in the productive capacity to the activities with greater learning spill-overs. This philosophy is sometimes summed up under the notion of dynamic (v static) comparative advantage.
Finally, if the country in question has some international market dominance that allows it to be a price maker, then it might be able to manipulate its terms of trade, something that is called the strategic trade policy.
A major catch exists about the industrial policy in the context of international relations: Support or protection of certain domestic industries by a state may induce similar actions by other states and kicks in protectionism, beggar-thy-neighbor or trade wars. This may neutralize the country's initial intended benefit and in effect hamper its growth. This is a game and is a prisoner's dilemma: if you cheat and your party does not you gain the most but if you cheat and your party cheats too both lose. Rule-based approach v discretion-based approach in international trade and financial governance is supposed to do the coordination work and address these dynamics. This very short note on industrial policy is only meant to give some context to the related section in the definition: 'nudges its productive potentials to (or supports them in) activities with learning spillovers or know-how spinoffs'; it is by no means a serious treatment of the subject of industrial policy.

4. Mathematical modeling of economic development

The definition is an a priori deductive synthesis starting from neoclassical assumptions. It builds on those assumptions to require two fundamental agencies summarized in the box two of the schematic representation above. Those agencies can then be further operationalized as follows: friendly 'doing business' regulations, communication and transportation infra structure, information, credit access, survival of the workforce, talent drain mitigation, relative macro-environment predictability (mostly inflationary), conflict mitigatory processes, industrial policy, national identity, and geography. These will be the right hand side variables (regressors) and the average long-term growth, say, over a period of 5-10 years will be the left hand side variable in a hypothetical mathematical model. However, it should be emphasized that due to a sheer and fundamental limitation on the size of the population and theirs samples—here national economies—effective model specification—in terms of the entered variables, form (quadratic, log, etc. terms), and interaction terms—and its empirical validation will be seriously hampered.
Ideally we would want to be able to do a growth gap analysis for a country where we could calculate the country's 'ideal' growth potential and compare it with its growth performance. Now, we know that we do not do a formal growth potential analysis in development. In growth accounting based on the Cobb-Douglas function—its left-hand side position notwithstanding—we do not estimate growth by plugging in our measurements of capital, labor and productivity, rather, we calculate TFP as a residual.

IV. Linguistic disambiguation in the economic development definition

Basic (living standards), intelligent (adoption), reasonable (resilience), and aspirational (potentials) are not as positive, e.g., 'self-explanatory,' as it was aimed for in this definition project. Some explanation follows. The first one was discussed above.

Intelligent adoption
Intelligent is about technical, quantitative, empirical basis and political savvy. Evidence-based policy, second-best solutions or political economy considerations are intelligent adoption for example.

Reasonable resilience
Reasonable is a normative concept. It is understood that some countries are better able at resisting or absorbing external shocks or natural disasters and maintain their basic living standards. Some immunity against shocks is part of a developed status. This has to do with the diversity and flexibility of a community's productive structure.

Aspirational potentials
Aspirational is provided here in recognition of the sometimes nationalist, patriotic or collective value basis of an individual's enterprise and effort. This has policy implications: governments and communities may be building upon and capitalizing on this potential as well.

V. Equity/distribution and the economic development definition

A few points are salient here. First, this definition is based on the premise that the attainment of basic living standards for all humans is a desirable human objective—this is in fact the whole development discipline's what-for. However, the definition is agnostic about the desirability, if any, of the broader and more comprehensive equity. Second, although attainment of distribution is not directly addressed, yet, it is hardly conceivable that agencies: 'enables, unbinds or secures the effort, entrepreneurial and aspirational potentials' could lead to bad distribution. It is mal-omissions or mal-commissions in the same areas that would create rent and patronage, or, allow, e.g. incentivize or not disincentivize, free-ride, cheating, and fraud that cause bad distribution. The upshot is that the desirable distribution is incidental to a valid development process in and of itself.

Methodological point

Rational reconstruction

The methodology employed for the definition is rational reconstruction. Rational reconstruction is a logical procedure applied to language that attempts to construct positive (or descriptive and objective) v normative (or evaluative and subjective) statement of a language term. Starting from raw builds—such as ‘basic welfare,’ ‘better function,’ ‘desirable order,’ or ‘priority of interest’—this methodology involves continuous removal of linguistic subjectivity and ambiguity. It is a logical deductive process applied to language that ends in the delineation of necessary conditions of a phenomenon. The linguistic revisions are tested against counterexamples to achieve robustness. This iterative logical linguistic process removes wrongness, vagueness, or inadequacy from a definition piece. The incorporated phrases in the current definition statement are individually necessary and jointly sufficient for development. The statement provides a test for resolving questions of relevance to development too. The statement contains 11 logical tests or requirements that a question or topic of interest could be tested against.

Invention v discovery

While the word definition might have some invention or convention connotation, what is done here—rational reconstruction—is discovery and not invention or convention. The definition is about carving out a construct that exists out there in and of itself; it is not about making a convention among humans. Certain fundamental things in nature and human society underpin and determine development as an entity: earth, ecology, biology, and human agency. The word 'development' is only linguistic label for an already-existing notion. Likewise, people do not need a definition of development before starting to practice development; they know it by hunch, although they may not be as verbally eloquent about it. Hence, the definition statement is neither an invention nor a convention, it is only an explicit logical test for the phenomenon development.

Looking at the revision history would be illustrative.