Economic Development

Much of modern economics has been dedicated to the importance of building an economy through industrialization. Industrialization brings more trade, more trade brings higher GDP, higher GDP = good. The view of developing countries is that they are the same as developed countries fundamentally, only they are poor. With outside help these developing countries can become industrialized.

In modern economics the goal of growth in an economy is to build up revenue to the point where there is surplus revenue. That surplus revenue becomes savings, and the savings can become investment. To many economists investment goes hand and hand with growth. A steady growth rate consists of a constant per capita output/income, coupled with investment. In order to achieve these goals set forth for an economy, key industry must spring up.

The idea that industrialization is the most important factor to nurse a growing economy is an idea that is shared by many modern economists. Industrialization is the key factor to competing in the global market. Although industry can be beneficial for an economy, it can also have negative effects.

Paul Prebisch believes that industrialization should not be the goal of development. The main goal of industrialization is to compete in the global marketplace. Prebisch believes that the terms of trade are biased against developing countries. Trying to compete with other countries.

Import substitution industrialization substitutes products a country is importing, with domestically produced products. Easy ISI focuses on substituting products like furnished goods and clothing. This type of ISI is concerned with building a healthy domestic market capable of creating goods that countries would otherwise need to import. Some countries go further to the next stage, which is aggressive ISI. Aggressive ISI includes creating big industry with the intention of internationally competition. This type of industry can create problems to a developing country under the wrong conditions. In order to create the industry needed countries must invest in heavy machinery and technology. The money being used to finance this operation still comes from the country’s primary export which is most likely an agricultural product. If the country’s primary export becomes devalued or another country begins to flood the market, then the revenue from exports decreases. When the revenue from exports decreases it creates deficit because the exports are no longer balanced with imports. A country can create serious debt problems when faced with this dilemma. Another problem with aggressive ISI is the wuality of the products being produced. Inferior products may be produced that are already avalable in the international market. As a result firms fail to compete and must shut down, losing money that was invested in the creation of these particular firms. It can’t be expected that a country can just suddenly join an industry and be able to compete with other countries that may have decades of experience.

In this respect ISI can be helpful or damaging. Easy ISI promotes self sufficiency and strengthens local trade. Aggressive ISI has the tendency to create debt problems.

Amartya Sen believes that “growth is a means not an end”, Sen goes on to say that it is not even an efficient means for some ends. Sen believes that traditional economics focuses too much on GDP, and supply and demand, rather than “entitlements” of people and the “capabilities” these entitlements generate. Entitlements are represent alternative commodities on can command using the rights or opportunities he has. If you have $500, you can get education, or healthcare, or job training worth up to $500. These things represent the capabilities Sen points out. Basically entitlements and their capabilities represent what people can and cannot have/do with the resources they have and the conditions they are in. The fact that Sen believes we need to focus more on entitlements and capabilities than creating industry makes sense. In a poor developing country there are often bad conditions people need to overcome. There are often a lack of schools, or few hospitals, unhealthy living conditions, and little police force. Improving these conditions is crucial to development and needs to be concentrated on more instead of focusing solely on capital accumulation.

Sen believes the end of development should be focused on enhancing human capabilities. Income is a bad way to judge one’s entitlements. No matter how wealthy a person may be if he gets sick and there is no hospitals around, than he has no entitlement to a hospital. African Americans are far wealthier than people in china but they’re living conditions might not be any better. Development comes from enhancing public facilities, social opportunities, political opportunities and rights, and security. Economic