Developmental economics

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Developmental economics is deals with growth in developing countries and specific issues such as weak institutions, corruptions, instability, and natural resource problems specific to developing countries.

Developing countries often also suffer from geographic disadvantages such as being landlocked or having even poorer neighbors. These make trade and globalization difficult since there are fewer options for export and import. Additionally, neighboring countries may support economies, such as through migrant workers and remittances, or hurt them such as through spillovers of conflict from civil wars and refugees.

Weak institutions is also often a consequence of factors such as colonialism, ethnic conflict, a history of military uprisings, and natural resource abundance that may increase corruption. In particular, oil and diamonds are well-documented resources that have been linked to sudden influxes of outside capital that often hurt exchange rates and choke off all other starting up export industries. They also fuel greater corruption within the government and sometimes money winds up being delivered to armed opposition groups, which free up mining or drilling to the detriment of the people of the land.

These factors have a multiplier effect once they are set in motion as they may also drive out skilled labor (brain drain) and direct capital away from the country. Even controls to keep capital within a country sometimes fail as fradulent export documentation can be used to smuggle capital outside a country to better investing opportunities.

Many developmental economists work with the IMF and World Bank that both, with some overlap, supply loans and other forms of aid or incentives to developing countries. Critics point out that because of its close ties with developed countries that fund it they encourage imperialism or attempt reforms too quickly or in the wrong sequence. Their traditional solutions have been through managing aid along with NGOs in the form of projects, and budget reinforcement.

Recently, Microfinance has emerged as a point of high interest among developing economists and economists have even been recognized with Nobel Peace Prize in memory of Alfred Nobel in economics for this idea. It essentially begins with a ground up philosophy of making small loans to entrepreneurs who lack capital to start up their own businesses. Due to low default ratios it is even possible for institutions in Bangladesh to offer these loans with low interests and make a profit (see Grameen Bank). Other attempts to bring this idea worldwide, though, have not always been as successful.