Economic Development and the Growth of Income

For the first time in history, economic growth is such that per capita income far surpasses the subsistence level in most of Europe, North America, Oceania, Japan, and the Soviet Union. Living conditions have been transformed for the one fifth of the world's population that reside in these regions.

In contrast, two thirds of the world's population maintain a bare subsistence level of income in countries with a per capita GNP of less than $ 1, 5 00 per year. These countries generate only a little more than 15 percent of the world's GNP.

The major characteristics of less developed countries are (a) low per capita income, (b) a large agriculture-household sector, (c) rapid population growth, (d) inequality of income distribution, and (e) widespread illiteracy coupled with poor educational and health facilities.

Although there is no sharp dividing line between developed and less developed countries, the nations of North America, Europe (including the Soviet Union) and Oceania, as well as Japan, can be classified as developed countries. In contrast, most of the countries of Asia, Africa, South America, and Latin America exhibit the characteristics of underdevelopment.

When estimated by the exchange rate conversion method, the per capita GNP of developed countries is approximately I 3 times the comparable figure for less developed countries. Since the exchange rate conversion method does not reflect the relative purchasing power of currencies for goods not traded in international markets, it may be a misleading indicator of living standards across countries. Income comparisons based on the purchasing power parity method indicate that the exchange rate conversion method overstates the relative income of developed nations. When measured by the purchasing power parity method, the per capita GNP of developed countries is estimated to be five times that of less developed countries.

Economic growth is a positive concept. Extensive growth is present when the real GNP of a nation expands. Intensive growth requires an increase in output per person. Economic development is a normative concept, encompassing distributional and structural factors as well as higher per capita income. Economic development implies an advance in the standard of living for a broad cross-section of a nation's population, including those people in the bottom half of the income distribution.

The availability of domestic natural resources is not the major determinant of growth. Countries such as Japan and Hong Kong have impressive growth rates without such resources, while many resource-rich nations continue to stagnate.

While economists have been unable to develop a general theory of economic growth and development, several important determinants of economic progress have been pinpointed. The following factors have played an important role in the economic progress of developed nations: (a) investment in physical and human capital, (b) development and dissemination of technologically improved production methods and products, and (c) efficient economic organization.

The major obstacles to economic development among poor nations of the world are (a) low savings and investment rates that reflect the vicious circle of underdevelopment; (b) rapid population growth; (c) political instability, which reduces the security of property rights and thereby retards investment; and (d) waste and inefficiency arising from public policy that distorts pricing signals and promotes economic inefficiency. Recent economic research indicates policies that depress agricultural prices, impose high marginal tax rates, limit international trade, and generate high rates of inflation retard the economic progress of less developed countries..                                         

The economic growth record of less developed countries is mixed. Approximately one quarter of the world's inhabitants live in countries characterized by both extreme poverty and per capita real income that is either stagnating or falling. The rates of population growth in these countries are among the highest in the world. Their economic prospects are bleak. In contrast, the recent economic growth record in other less developed countries, including Egypt, Hong Kong, Indonesia, Singapore, South Korea, Thailand, Brazil, Paraguay, and more recently China, has been highly impressive. These countries may well duplicate the post-World War 11 " Japanese miracle" of economic development and join the developed world in the near future, particularly if they are able to reduce their rates of population growth.