Indicators of economic development

Economic development is the expansion of national capital stock primarily by modernizing all economic activities using technology.

meaning of economic development

Indicators of economic development

Economic growth is a concept which refers to the change in the GDP (Gross domestic product) of a country compared to the previous quarter or year. Economic development, on the other hand, is the expansion of the national wealth/capital stock of a developing country primarily by modernizing all economic activities using technology. Economic development is when a low-income country undergoes a process of gradual accumulation and growth of national capital over a time-span.


The concept of economic growth and development is pertinent in the context of low income counties such as the Sub Saharan African countries and South Asian nations. These low income countries usually have low life expectancy, high unemployment rate, weak consumption, poor health care, high birth rates, extreme income inequality, and gross inequity in income distribution. They are further characterized by unproductive economic activity, high poverty levels, inflation, high external debt. Although not all such nations lack natural resource, most of them lack productivity and size in human capital and capital goods machines. As such, human development remains a problem. In addition, these countries usually experience a demographic transition, have low literacy rate, resulting in the lack of real GDP growth or national income.


Economic development results in poverty reduction, human development

and a complete transformation in living standards. Developed countries such as the USA, Australia, Japan and others score high on human development index whereas poor countries perform worse. A successful economic policy is required to attain sustainable development and inclusive growth in these countries. The economic performance of developing economies rests on fiscal policy and monetary policy.


The concept of economic development elevates in its applicability and scope within the subject of low income countries and emerging market. However, the terms economic growth and development gain importance within the context of both developed country and developing country.


Economic development in developing countries can be achieved through the following two routes. Economic development through the industrialization route involves the process of industrialization and modernization. The economy is transformed during this process, driven by investment in resource and innovation. The accumulation of Heavy Industry business capital represents the process of industrialization, wherein the resource and technology is acquired and assimilated helping the modernization process of the country. South Korea, Taiwan, and China have expanded investment and national wealth, grew their national incomes by many times, through this route of economic development.


Economic development through the non-industrial route involves modernization alone. Modernization of developing countries through this route is achieved on the back of the industrialization (and therefore the heavy industry) of foreign nations, wherein technology (in the form of heavy industry machinery and equipment) is imported. The economy of Chile belongs to this category. Other examples include Botswana, UAE, and New Zealand.

The key indicator of economic development

One of the top determinants of economic development of a nation is a concept known as Capital-income. Capital-income ratio, the economic indicator surpassing all other indicator, is a simple accounting notion that indicates a country’s aggregate net national wealth stock in market prices as a proportion of its annual national income also compiled in market prices at the end of a year.


For example, the ratio of aggregate wealth stock of the US measured at the end of 2015 at prevailing 2015 market prices, as estimated by Credit Suisse for their Global Wealth Databook (2015), stands at USD 85.9 trillion in 2015. For the same year, the net national income of the US (as calculated by the author using the World Bank data) comes to approximately USD 15.38 trillion. Capital-income ratio for the US at the end of 2015 therefore is 5.58 or 558%. That means for every USD 5.58 of capital, the US economy produced USD 1 of income in 2015.


Measuring wealth relative to national income is a much better way of gauging national wealth, or even its two components—private wealth and public wealth (another way of classifying wealth). The aggregate value of wealth stock on its own does not convey any meaning and does not capture the magnitude of the wealth stock.


Capital-income = net national wealth stock / net national income


(both values complied in market prices at the end of an year)


Capital-income ratio is linked to savings rate and national income growth rate—a purely accounting construction—in the following manner.


Capital-income ratio = s / g


The above equation is an accounting design that is true in the long term.

Savings rate and growth rate correspond to a year whereas capital-income ratio is an evolving year-to-year parameter by design. Every year new savings generated within the economy finances new capital investment, which adds to and increases the existing capital stock and by the end of the year when the much higher capital stock in aggregate is divided by that year’s national income, a new capital-income ratio is obtained.


That is, if an economy maintains savings equivalent to 12 percent of national income every year and national income growth at 3 percent year-on-year, then its capital-income approaches 400% (12/3*100), or the capital stock builds up to four times the national income over the long run.


Similarly, if an economy, typical of the successful late-developed countries, maintains savings rate at 40% and grows its national income at 10 percent rate, then the capital-income approaches 400% (40/10*100) as well.


In practice, the savings rate and the growth rate does not remain high indefinitely. The higher rates come down, and capital-income stabilizes around those levels that were determined by the previously high magnitudes of savings rate and growth rate. Simply, if an economy follows such a pattern of high savings rate and high growth rate of national income, the year-on-year capital-income ratio converges to the ratio s / g.


But what is the difference between those two scenarios? The higher savings rate (40%) and higher national income growth (10%) scenario pushes capital-income to levels (that being, 400%) faster than would the low savings rate (12%) and low national income growth (3%) scenario.

The first one is desirable for all late-developing countries, whereas the second scenario—wherein the norm is low rates—is what we observe in regards to all of the early- industrializers who built their wealth over a very long period.


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