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D. E. Davis
Development, Economics of
Economic development is the process through which
economies are transformed from ones in which most
people have very limited resources and choices to ones
in which they have much greater resources and choices.
Economic development therefore covers almost all
areas of economics, though with modifications to re-
flect the particular situations of developing countries.
Development economics refers to studies of economies
with relatively low per capita resources: low- and
middle-income economies in Table 1. About 85 per-
cent of humanity currently lives in these economies.
Product per capita in low-income economies averages
1.7 percent and in middle-income economies 9.6
percent of averages in high-income economies, with
that in Switzerland over 500 times that in Mozam-
bique. Correcting these comparisons for different
price structures reduces the variations a lot, but the
range still is considerable, with per capita product
almost 60 times as high in the United States as in
Ethiopia. Human resource indicators (e.g., life expec-
tancies and illiteracy) also are poorer for developing
than developed economies, but current differences are
much smaller proportionately than are those in pro-
duct per capita. The question of what causes economies
to move from per capita resource levels as in Mozam-
bique and Ethiopia to those as in Switzerland and

Table 1
Population, product per capita, life expectancies at birth, and illiteracy rates by level of development in 1995
Gross national product per capita
Population United States
Country groups (billions) ($)
Low-income 3.180 430
Middle-income 1.591 2390
High-income 0.902 24930
Source: World Bank 1991–1997, Table 1.
the United States is the fundamental question that
development economics addresses.
1. Conceptualization of De
elopment in the Mid-
twentieth Century
Prior to the neoclassical developments in economic
analysis of the late nineteenth century, most influential
economists, for example, Smith, Ricardo, Marx, were
concerned substantially with economic development.
In the decades prior to the Second World War, in
contrast, most neoclassical economists were not con-
cerned with development, but with topics such as
behaviors of firms and households, general equilib-
rium, and efficiency and, starting in the 1930s, short-
run macroeconomic equilibria with aggregate demand
shortfalls.
In the immediate post-WWII era, mainstream eco-
nomics continued to focus on the extension of the
neoclassical paradigm and on Keynesian macro short-
run disequilibria with virtually no attention to de-
velopment. Development economics as a subdiscipline
branched off from what Samuelson called the ‘neo-
classical synthesis’ of mainstream economics because
the development of poorer lands was viewed by
development economists as different in essence from
concerns that dominated the neoclassical synthesis.
Development was seen as involving discontinuous
shifts from a stagnant low-income traditional equi-
librium (‘a low level equilibrium trap’ or a ‘vicious
circle of poverty’) to a modern higher-income, chang-
ing, and growing economy with increasing average per
capita income, poverty alleviation and improvements
in human resources. Development was viewed as
requiring structural change different in kind from the
marginalism of neoclassical economics.
The dominant paradigm of the new\reborn disci-
pline of development economics in the mid-twentieth
century was based on key perceptions about the way
markets, incentives, and other institutions operated in
poor countries. These, in turn, had important policy
implications.
De
elopment, Economics of
Purchasing
power parity Life expectancy Adult illiteracy
(United States l 100) at birth (years) rate (%)
1.7–12.1 63 34
6.6–43.4 68 18
42.4–100 77 5
1.1 Key Perceptions about Markets, Incenti
es, and
Other Institutions in View of De
elopment in the Mid-
twentieth Century
1.1.1 Surplus labor and capital shortages. Factor pro-
portions in poor countries implied high labor to
capital ratios. Family farms\firms with sharing rules
based on average products permitted marginal labor
products to fall to zero so that labor was in surplus
in large traditional agriculture sectors. Surplus labor
presented an advantage because, if it could be moved
to industry, large gains in product could be obtained
and much of the income generated could be re-
invested in further capital accumulation since the
‘unlimited supply of labor’ keeps real wages low.
Physical capital was relatively scarce, so that, in
Nurske’s (1952, pp. 1–2) words, ‘the problem of
development is largely … a problem of capital accu-
mulation.’ But domestic capital accumulation was
limited by a vicious circle: low incomes meant low
savings so that investment was low that kept incomes
low. Human capital was given little emphasis.
1.1.2 Limited role of domestic markets. Markets
had limited efficacy because: (a) large population
shares, including traditional peasants and govern-
mental officials, were not responsive to market and
other incentives. (b) Markets were not well developed
because of large subsistence sectors, costly transpor-
tation and communication, and the predominance of
mechanisms internal to households and firms for trans-
ferring resources across time and space. (c) Markets
did not incorporate well information about demand
complementarities of investments (e.g., Rosenstein-
Rodan 1943) and could not provide the right guid-
ance for investments that would change the basic
structure of the economy with more than marginal
effects. (d) There were important market failures of
the types considered in mainstream economic anal-
yses: technological externalities not transferred
through markets (e.g., pollution), increasing returns
to scale relative to market sizes, and ‘public goods’
the use of which are not ‘rival’ so that more con-
sumption by one individual does not mean that less is
3567
De
elopment, Economics of
available for another entity (e.g., information). (e)
Some major actors in markets—rural moneylenders,
landlords, and traders—were ‘rapacious profiteers’
who ‘exploited’ the uninformed poor by paying them
low product prices and charging them high input and
credit prices.
1.1.3 Key role of industrialization. Agriculture
dominated employment and production. But the
development process was in substantial part indust-
rialization. Productivity-enhancing technologies and
positive externalities were primarily available for
industry, domestic demand would shift towards
industry with increased incomes because of income-
inelastic demands for food (Engel’s law), surplus
labor in agriculture could be shifted to productive
uses in industry, savings potentials were much
greater in industry, and industrialization was essen-
tial for maintaining national autonomy (e.g., Mand-
elbaum 1945, Rosenstein-Rodan 1943, Singer 1950,
Mahalanobis 1955, Lewis 1954, Ranis and Fei 1961).
1.1.4 Limited prospects in international markets. Pes-
simism prevailed regarding international market pro-
spects, in part because of the market collapses in the
1930s. Prebisch (1950) and Singer (1950) argued that
international trade transferred most benefits from in-
creased productivity in poor countries to richer
countries, the terms of trade of primary producers
decline secularly because demands were income-in-
elastic for primary commodities and the developed
countries had monopoly power in markets for manu-
factured products, and opportunities for developing
countries to expand their manufacturing exports
were limited because such markets would not grow
quickly and these markets were dominated by mon-
opolistic producers in the high-income countries who
had succeeded in establishing protectionist policy-de-
termined barriers to expanded manufacturing imports
from developing countries. International capital
markets would not provide sufficient investable funds
for development and they cause exploitation and
crowd out domestic investments.
1.1.5 Policy makers ha
e good information, are dis-
interested and are effecti
e. Policy makers could
identify current and future magnitudes of negative
and positive externalities, complementarities among
production sectors, and responses of various entities
to policies so they could and would design and im-
plement good policies.
1.2 Policy Implications of the View of De
elopment
in the Mid-twentieth Century
1.2.1 Capital accumulation. Physical capital accumu-
lation was central, as codified by the Harrod–Domar
3568
dynamic equilibrium condition, which in the simplest
case is that the rate of growth equals the average
saving rate divided by the incremental capital output
ratio (ICOR). This relation was used to calculate
savings requirements to achieve growth targets given
ICORs and to justify efforts to increase savings, in-
cluding shifting resources from private entities to
governments under the assumption that govern-
mental savings rates exceeded private ones, and to
obtain foreign savings to supplement domestic
savings. When exchange rates became overvalued,
foreign capital to purchase critical machinery and
equipment became of particular concern, as system-
atized in the ‘two-gap’ model of Chenery and Bruno
(1962) in which the constraint on growth is either
savings or foreign exchange. Human capital accum-
ulation was not central in most analysis partly beca-
use of the widespread perception of surplus labor.
1.2.2 Import-substituting industrialization with balan-
ced growth. One major mechanism widely used to
shift resources to industry, to protect new domestic
industries against foreign competitors, and to in-
crease economic independence was high protection,
through tariffs and quotas, on manufacturing im-
ports. This established inducements for ‘balanced in-
dustrial growth,’ with important complementarities
for intermediate inputs and for final product de-
mands (‘backward and forward linkages’).
1.2.3 Policy mix—quantitati
e, direct public-sector
production, planning, and irrele
ance of macro
balance. The state role was very extensive. The domin-
ant policy mode was dirigiste. Efforts to improve
markets or to use ‘market-friendly’ taxes\subsidies
were relatively rare. Direct quantitative regulations
and allocations, including substantial investment in
public-sector production, were common because it
was thought that the desired ends could be effected
with most certainty through such direct actions by
knowledgeable, disinterested policy-makers. Public-
sector investments included physical capital and
human resource infrastructure and many other sub-
sectors in the ‘commanding heights’ of the economy
so that the state could control directly development.
Planning often was viewed as essential because of
market limitations, reinforced by international aid
agencies that interpreted plans as essential evidence
concerning the seriousness of countries’ development
efforts. Planning agencies were concerned with in-
vestment criteria and choice of techniques for deciding
on direct public sector investments and for guiding
private investments. ‘Shadow’ (‘scarcity’) prices were
used to evaluate social cost-benefit ratios or internal
rates of return to alternative investments, with un-

skilled labor valued at zero because of surplus labor
and foreign exchange valued more highly than official
overvalued exchange rates. A considerable literature
developed methods for calculating general-equilib-
rium shadow prices. Multisector planning models were
developed and widely used to determine sectoral
primary factor requirements, physical capital in-
vestments, import substitution possibilities and ‘non-
competitive imports’ (for which domestic substitutes
were not available) for target growth rates. These
models generally assumed no substitution among
production inputs nor among demands, focused on
physical capital, and were quite aggregated with little
or no variation in qualities of products. They ad-
dressed directly possibilities of supply or demand
complementarities. Optimizing versions yielded
shadow prices that indicated impacts on objective
functions of marginal changes in binding model
constraints. Often these shadow prices were not very
robust to small changes in the model. Moreover, these
models did not incorporate most macroeconomic
phenomena, so they did not provide guidance con-
cerning such matters as inflation. Furthermore, most
of these planning models ignored or only crudely
incorporated most of the major phenomena other
than the supply and demand complementarities that
underlay the critique of the dependence on markets
(Sect. 1.1). Subsequent models improved in some
important respects, for example, discontinuities were
incorporated into integer programming models and
price responses in Johansen-type models (1960) that
led to more recent computable general equilibrium
(CGE) models (Blitzer et al. 1974). But still many of
the limitations noted remained.
Policies to establish macroeconomic balance—a
major topic in high-income economies—were rejected
as irrelevant. Rao (1952) and others argued that the
separation between savings and investment that was
critical in Keynesian underemployment analysis was
not relevant for developing countries given the domi-
nance of family firms. The Latin American ‘struct-
uralists’ argued that rigidities precluded economic
entities from responding quickly to changes so that
orthodox currency devaluation or monetary and fiscal
policies would reduce output and employment.
2. The Dominant Paradigm Concerning De
elop-
ment at the Start of the Twenty-first Century
Aggregate development experience since WWII in
many respects has been very impressive, though with
considerable variations across economies. Average
growth rates in GDP per capita have been high by
historic standards and high for developing relative to
developed economies. Other indicators of human
welfare, such as life expectancy and schooling, have
improved even more impressively. Prima facie, such
De
elopment, Economics of
success might be interpreted to ratify the post-WWII
development paradigm and associated policies (Sect.
1). But the appropriate comparison should be with
what could have been achieved given the conditions of
the post-WWII era and appropriate development
strategies and policies.
One major change in the last three decades or so of
the twentieth century was the rapid expansion of
systematic quantitative analyses of development, often
based on data and approaches that were not available
earlier. Many studies explored the underlying as-
sumptions for the dominant initial post-WWII con-
ceptualization of development. Some were undertaken
in relatively visible large-scale comparative projects
(e.g., Little et al. 1970, Bhagwati 1978, Krueger 1978,
1983, Taylor 1988, Page et al. 1993). Others have been
individual country and microstudies that have in-
vestigated more detailed aspects of the development
experience using new micro data sets with systematic
models (e.g., see references in Chenery and Srinivasan
1988–1989 and Behrman and Srinivasan 1995; some
more recent examples are Behrman et al. 1997, 1999,
Foster and Rosenzweig 1995, 1996a, 1996b, Jacoby
1995, Jacoby and Skoufias 1997, Pitt and Khandker
1998).
These studies question many of the assumed initial
conditions in the post-WWII development paradigm
and suggest more nuanced characterizations of others.
They suggest: (a) traditional agriculture is relatively
efficient and traditional institutions such as share-
cropping, contracts tied to multiple transactions,
attached farm servants, arranged marriages, and
migratory patterns are efficient arrangements given
imperfect or absent capital and insurance markets. (b)
Substantial increases in savings and physical capital
investments rates are not sufficient for development
because (i) incentives structures affect strongly on-
going productivity growth and (ii) human resource
development related to nowledge acquisition and
adaptation is critical. (c) Domestic markets work well
for many goods and services and returns to market
improvements through infrastructure development,
better information, and lessening policy barriers to
well-functioning markets are often great. Nevertheless
some markets—particularly those related to capital,
insurance, and information—are imperfect or missing.
(d) Industrialization is not equivalent to development
and industrialization strategies that penalize other
production sectors may retard development. (e) In-
ternational markets have presented substantial op-
portunities for developing countries, with the most
successful experiences being for those developing
economies (initially primarily in East and Southeast
Asia) that expanded rapidly their exports and used
international markets to induce ongoing productivity
improvements as well as sources of foreign investment.
(f) Policymakers have limited information and may
be rent-seekers rather than knowledgeable and dis-
interested.
3569
De
elopment, Economics of
This re-evaluation of initial conditions has sub-
stantial implications for policies. Because of the
combination of currently perceived much greater
responsiveness, limited information (and information
asymmetries) faced by governments, limited govern-
mental implementation capacities, much greater vari-
ations in quality of goods and services, much more
efficient transmission of certain types of information
through unhindered markets, important role of
markets in inducing greater efficiency, much greater
importance of basic macroeconomic stability, and
rapid changes in markets and in technology than
assumed in the immediate post-WWII paradigm, there
has been a sea change in perceptions of appropriate
governmental roles and of the best mix policy mix. A
broad new consensus had risen by the early 1990s on
the nature of development processes and implications
for policies. Components of this consensus include the
following.
2.1.1 The basic economic en
ironment must be con-
duci
e for in
estments. The two major components
are: (a) a stable macroeconomic environment with non-
inflationary monetary policy, fiscal restraint, and in-
ternational balance (e.g., World Bank 1991, Corbo et
al. 1992, Page et al. 1993) and (b) institutions that
permit investors to have reasonable expectations of
reaping much of the gains from their investments. Dom-
estic macrobalance is important because inflationary
taxes advocated by many earlier development eco-
nomists are inefficient, inequitable, erode confidence
in policy and in the prospects for the economy, dis-
courage longer-run productive investments by in-
creasing uncertainty, and are difficult to eliminate.
Balance in international economic interchange is im-
portant so that critical imports of intermediate and
capital goods can be maintained, pressures for in-
creased efficiencies are ongoing through exposure to
world markets, and access to international finance
and technology is maintained. Institutions include
basic property rights, legislative and legal systems
that resolve disputes fairly, and various mechanisms
to share (but not to eliminate) risks.
2.1.2 Human capital is important, additional to
physical capital. In the views of some, investment in
human resources is in itself development. For most
mainstream development economists, in addition to
any direct welfare effects of better human resources,
there are important productivity effects. Positive ex-
ternalities through human resource investments may
be considerable, moreover, primarily because of ex-
ternalities to knowledge and to capacities for in-
dividuals to find and to process information. Given
gender roles and current market\policy failures, the
social returns to human capital often may be
relatively high for investments in females (King and
Mason 2000).
3570
2.1.3 Responsi
eness to incenti
es created by
markets and policies are broad and often substantial.
Therefore, it is desirable that markets and policies
create incentives for behaviors that are socially de-
sirable and not sufficient, as in the earlier paradigm,
that policy makers know shadow prices. Economic
entities also adjust many or even all elements of their
behaviors in response to changes. Therefore, antici-
pating full effects of policies or market outcomes on
behavior is difficult because of such cross-effects. The
impact of new technological options, for example,
may increase the value of educated women in mar-
riage markets if gender roles dictate that women play
major roles in child education (Behrman et al. 1999).
2.1.4 Information problems are per
asi
e in a rap-
idly changing world so incenti
e-compatible instit-
utions and mechanisms are desirable. Information is
imperfect in general, information that policy makers\
implementers have often is less and more dated than
the information that individuals have who are di-
rectly involved in production and consumption of
particular goods and services, asymmetrical inform-
ation creates incentives for opportunistic individual
behaviors that are likely to be socially inefficient and
inequitable, and markets are relatively efficient in con-
veying certain types of information. Rather than at-
tempting directly to regulate and monitor many
micro activities related to the development process,
governments more effectively can support instit-
utions that are relatively effective in inducing desirable
behavior. The oft-cited claim that an important as-
pect of the successful East Asian development ex-
perience has been outward orientation, for example,
may be viewed in part as a mechanism for encour-
aging increasing productivity through forcing com-
petition on world markets. Likewise, efforts to make
markets work better through open and transparent
bidding for governmental contracts, better market in-
tegration to lessen monopoly power, introducing
voucher systems and decentralization of human re-
source-related services, eliminating governmental
regulations on entry, improving communication and
transportation and subsidizing or mandating inform-
ation that has public goods characteristics all may
have important effects in increasing efficiency.
2.1.5 Selecti
e global and directed policy inter-

entions that are ‘market friendly’ where there are
market failures are warranted. Policies should: (a)
maintain macroeconomic balance, (b) develop instit-
utions, including property rights and related legal
frameworks, so that investors have reasonable ex-
pectations of gaining returns from good investments,
(c) encourage competition to induce productivity in-
creases through an unbiased international trade sys-
tem and through eliminating legal barriers and less-
ening transportation and communication barriers to

greater competition, and (d) use ‘market-friendly’ inter-
ventions that are transparent, rule-based, general and
nondiscriminatory such as open auctions, vouchers,
subsidies, and taxes to attempt to offset market
failures (and directing such policies as directly as pos-
sible towards the market failures to limit unintended
distortion costs). These considerations imply a criti-
cal, but also more selective role for government than
in the earlier paradigm. Also involvement in these
activities is not necessarily best accomplished by
governmental direct production rather than taxes\
subsidies and regulations concerning disclosure of
private information.
3. Current Contro
ersies and Possible Future
De
elopments
Despite substantial current general consensus (Sect.
2), there is neither consensus on every dimension nor
on how the paradigm is likely to change.
3.1 Integration into the International Financial
System
International financial movements have expanded
rapidly and can swamp foreign exchange movements
from international trade. This may provide useful
discipline for governments to keep their policies
credible. But this also may result in enormous shocks,
perhaps fueled by speculative bubbles, which present
great difficulties for even the best of governments. The
Asian financial crisis of the late 1990s intensified
greatly such concerns. Considerable debate continues
about the extent to which such problems can be
lessened by greater transparency in developing
countries finances, more restrictions on capital move-
ments, appropriate sequencing of liberalization efforts
with capital flows liberalized relatively late in the
process, new systems to assure that developed country
investors bear some of the social costs of disruptions
originating in large international capital movements,
and greater international insurance through inter-
national organizations (with attendant moral hazards
of encouraging risky behaviors).
3.2 Demographic ‘Windows of Opportunities’ and
Aging Populations
Waves of Malthusian overpopulation fears have fea-
tured prominently among noneconomists. But stat-
istical analyses of relations between population growth
and economic development do not find important
long-run associations. However, recently developing
countries are claimed to have transitory (but perhaps
lasting several decades) opportunities because aging
De
elopment, Economics of
due to fertility reductions means that they have large
working-age populations relative to younger and older
populations. Some have attributed a substantial part
of the high recent economic growth in some Asian
economies to such a ‘demographic bonus’ associated
with higher savings and labor force participation and
lower health and education expenditures (Asian De-
velopment Bank 1997, Bloom and Williamson 1999).
There are controversies about what conditions permit
developing economies to exploit successfully demo-
graphic windows of opportunity to enhance devel-
opment, rather than being hindered by faster increases
in supplies than in demands for labor. Empirical
associations for the 1950–1995 period suggest that the
conditions embodied in the consensus that is sum-
marized in Sect. 2 increase probabilities of being able
to exploit demographic opportunities. Eventually
aging populations will imply increased dependency
ratios due to a larger number of aged individuals, which
will raise issues about intergenerational transfers for
retirees and increased health problems associated with
aging. Projections suggest that average ages in most
currently developing countries will converge substan-
tially to those of developed economies by 2025, so
demographic–development interactions will change
further.
3.3 Po
erty Reduction
s. Growth
The dominant view is that the most effective form of
sustained poverty reduction is rapid development that
exploits comparative advantages (perhaps including
relatively large labor forces), though some safety nets
are likely to be desirable for individuals who cannot
participate or who suffer dislocations in adjustments
towards sustained growth (e.g., Page et al. 1993). But
others claim that there are substantial tradeoffs be-
tween poverty reduction and the dominant conven-
tional wisdom, at least during transition structural
adjustment programs (e.g., the UNICEF critique,
calling for ‘adjustment with a human face,’ Cornia et
al. 1987). There are inherent productivity-equity trade-
offs in providing safety nets because a sense of
entitlement tends to develop that makes such policies
hard to change (e.g., political responses to efforts to
eliminate food and transportation subsidies) and
because they may dampen incentives for work efforts
through implying high effective marginal tax rates.
Therefore, there is likely to be an ongoing debate
about the extent to which such safety nets should be
provided and exactly what forms they should take.
3.4 Social Cohesion and Social Capital
There is a growing perception that these are important
factors in successful development efforts. If so, then
3571
De
elopment, Economics of
there may be important policy implications from the
perspective of the currently dominant paradigm (Sect.
2) because factors that increase social cohesion and
social capital are likely to have social returns beyond
private returns and thus be under-rewarded by un-
hindered markets. Establishing the importance of such
factors, however, requires the development of more
careful integrated modeling\estimation approaches.
Suggestive anecdotes and associations are currently
available, but not persuasive systematic studies that
lead to confident identification of causality in the
presence of behavioral choices and unobserved in-
dividual and community characteristics.
3.5 Paternalism\Maternalism, Indi
idual Choice,
and Endogenous Preferences
In the immediate post-WWII dominant paradigm
(Sect. 1) policy makers and analysts acted as if they
knew what was best for the poor in developing
countries. If the poor were perceived to hold the
‘wrong’ values (e.g., not working hard enough, want-
ing too many children, saving too little) it was deemed
appropriate to ignore or to try to change their
preferences. The current dominant paradigm places
greater weight on individual preferences, at least in so
far as they are manifested through responses to
markets and policies (though limited resources limit
the effectiveness of the poorest). There also is rec-
ognition of difficulties in making welfare comparisons
if preferences are changed. Nevertheless, there are
some who appear to wish to impose their values on
others regarding, for example, appropriate gender
relations. Such concerns raise the analytical question
that also has been of increasing interest in general
mainstream economics of how to model endogenous
preferences and to include them usefully in applied
analysis.
3.6 Association between Economic Participation and
Political Participation
An important component of the current economic
development paradigm is much greater recognition of
active participation of individuals, which, together
with discipline of competitive-like markets, provide
checks and balances that limit predatory economic
behavior. But is an essential component of successful
development also a political system with checks and
balances? Some argue that some of the most successful
East Asian economic development experiences have
been under strong autocratic governments (e.g., Korea
under Park, China, Singapore). Others note that
strong autocratic governments have not been a suf-
ficient condition for successful economic development
(e.g., Myanmar, Cuba, the Philippines under Marcos).
3572
This controversy about what forms of political systems
lead most effectively to development is likely to be
ongoing.
3.7 Extent of Technological Externalities for
Human Resources, Population Control, and
En
ironmental Effects and Remedies for those
Externalities
Assertions are widespread that there are substantial
positive externalities of human resources and negative
externalities of population growth and economic
growth on the environment. Yet empirical evidence
regarding magnitudes and natures of such externalities
is almost nonexistent, at times a priori arguments
about what constitutes an externality are confused,
and means sometimes advocated to address such
externalities do not seem directed well towards the
supposed sources of externalities nor do they recognize
well the importance of incentives, so they may have
substantial distortion costs. There would be high
returns to persuasive systematic studies that lead to
confident identification of the magnitudes of such
externalities in the presence of behavioral choices and
unobserved individual and community characteristics
(e.g., Foster and Rosenzweig 1995).
4. Conclusion
The economics of developing countries was an inte-
grated part of most major streams of economic
analysis in the nineteenth and early twentieth cent-
uries. But in the immediate post-World War II period,
economic development was widely seen as sufficiently
different in degree to be different in kind from
mainstream economics for the developed economies.
Developing economies were seen as having such
imperfect markets and limited responsiveness to
markets by private entities that effective development
could be best pursued by (supposedly disinterested
and very knowledgeable) policy makers using direct
quantitative policies guided by planning models to
industrialize in part by protecting their economies
from the many negative effects of international
markets. In the last quarter of the twentieth century,
there was a radical shift in the dominant paradigm
concerning economic development. This was in part
due to a number of new systematic quantitative studies
of a range of developing experiences, importantly in-
cluding the unprecedented growth in a number of East
and Southeast Asian economies. The dominant para-
digm at the start of the twenty-first century emphasizes
that there is considerable responsiveness to oppor-
tunities in developing countries so the incentives
created by markets and policies may be critical, that
development is much more than physical capital

accumulation and industrialization, that human capi-
tal and knowledge acquisition may be critical in the
development process, that policymakers have limited
information and may be rent-seekers, and that a much
more nuanced understanding of the nature and
response to market failures implies an important but
much more limited and incentive-sensitive role for
policy. There remain a number of current contr-
oversies, such as related to the appropriate degree of
integration into global financial markets, the impor-
tance of some aspects of social cohesion and social
capital, the relation between economic and political
participation, and the nature and extent of alleged
externalities and other market failures. But for the
most part they are considered at least by economists
within the framework of this paradigm.
Such a summary of decades of the evolving con-
ceptualization of economic development into a few
major paradigms, of course, suppresses considerable
heterogeneities of perceptions and approaches among
the many economists and policymakers concerned
with economic development over the years. But it also
captures major dominant features of the evolution of
thought on economic development that originally was
an integral part of the major approaches to economics,
was increasingly separated from main-stream eco-
nomics in the mid-twentieth century, and then has
increasingly converged back with mainstream eco-
nomics by the start of the twenty-first century. This
latter convergence has occurred both because de-
velopment economics has moved closer to mainstream
economics with regard to emphasis on responsiveness
to incentives, gains from greater market dependence
and limitations of policy interventions and because
mainstream economics has moved closer to devel-
opment economics with regard to such issues as
market limitations related to information problems
and the broader political, social and cultural context
in which economic analysis occurs and policies are
made.
See also: Development and the State; Development:
Socioeconomic Aspects; Development Theory in
Geography; Economic Development and Women;
Economic Geography; Economic Growth: Theory;
Economic Restructuring: Geographic Aspects; Glob-
alization: Geographical Aspects
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Copyright # 2001 Elsevier Science Ltd.
All rights reserved.
Development: Organizational
1. Introduction
Organizational development (OD) is a special inter-
disciplinary field focused on organizational change. It
provides conceptions for understanding the logic of
change as well as techniques and tools for managing
the change process effectively. The major purpose of
OD interventions is to overcome resistance to change
and to encourage the willingness of organizational
members to participate actively in the change process.
As a discipline of social sciences OD has been criticized
for lacking a sound theoretical basis and for mis-
conceiving the nature of organizational change as
exceptional projects in organizational life.
2. Historical O
er
iew
In classical organization theory, the problem of coping
with organizational change was not of much concern.
Change basically meant reorganization and the criti-
cal activity was to determine the best organizational
solution to master new situations. Realizing the new
solution, if regarded as a problem at all, was seen as a
problem of careful preparation and of giving the right
instructions. After a brief period of tolerance, all
employees were supposed to work according to the
new organizational guidelines.
This traditional model, however, rarely proved to
be a success. Organizational members notoriously
3574
International Encyclopedia of the Social & Behavioral Sciences
Figure 1
Lewin’s triadic episode of organizational change
resisted the new organizational design, unforeseen
events rendered the design worthless, the change
process came to nothing, etc.
The typical reaction to these irritations was to
blame the plans for having been imperfect and to ask
for their refinement. In most cases this actually made
the situation even worse; the resistance became
stronger, the rejections more sophisticated, etc. Al-
though the problems of organizational change made
themselves felt in practice, they did not gain the status
of salient question in classical theory.
It was the behavioral sciences, especially the human
resources approach, which made organizational
change a problem in its own right and developed
completely new approaches for its solution.
The impetus to establish organizational change as a
field came from empirical studies finding that success
in change critically depends on the attitudes of
organization members as well as on the general mood
towards the new design. This insight originated from
studies on ‘resistance to change.’
The initiative to study resistance to change, as well as
the approaches on how to overcome it, dates back to
Lewin (1958). Most salient are his seminal experiments
on changing the aversion to specific foods. Group
meetings and active involvement of group members
proved to be the best way to change food habits. The
foundations for what were later to become the ‘golden
rules’ of successful organizational change (Lawrence
1954) have been laid in these studies:
(a) Broad information at an early stage and active
participation in the change process.
(b) The group as an important medium (facilitator)
for change: Change processes are perceived as less
worrying in groups and generally are accepted more
easily.
(c) Mutual cooperation among organizational
members.
(d) A settling-down period at the end of the change
process designed to institutionalize the changes that
were carried out.
Lewin (1958, p. 210) later elaborated on these
insights and conceived the well-known ‘triadic epis-
ode’ of successful change. The model builds on the
idea of homeostasis and suggests a three-step proc-
edure: unfreezing, moving, and refreezing (see Fig. 1).
The most important issue of the model is that
organizations need an initial period of irritation in
order to break up their habits and routines. Or as
Lewin put it, organizations have to become ‘unfrozen’;
otherwise they are not likely to give up their equi-
ISBN: 0-08-043076-7