What is development, and how two countries develop? These are questions that could occupy an entire semester long course in economics, and we're going to cover them in a couple of minutes, but just so you have a few foundations to draw from as we start looking at the case of two developing countries which are; China, and India in this section of the course. So, the term development often, we define it only as a certain level of GDP per capita. So, there's a threshold that is drawn every year by international institutions saying, "any country beyond this certain level of GDP per capita, is developed". If we think of it in a deeper way, development as the great economist Amartya Sen said, is the process of removing unfreedoms of people being able to escape the unfreedoms in their life, which could be poverty, but it could be ignorance, it could be disease, losing children to infectious diseases, it could be leaving an authoritarian system. So, for for Amartya Sen, who is one of the great thinkers about development, it's not just GDP per capita, it's removing unfreedoms, it's people being able to fulfill themselves in a greater way, by being able to act more freely in their lives. Now, how do countries develop? If we think just of getting the GDP per capita up, and the truth is, if you get this one up, it correlates very highly with other sorts of freedom like; better health, better education. So, if you can get this one to grow, usually the others will take off although there are exceptions. But, the way we can get GDP per capita to go up, is to get GDP to go up, right? That's our starting place. GDP is made up of four elements; there's consumption, there's investment, there's government spending, and there is net exports. So, if we're going to get this to go up, something over here has to be rising, and normally that can only happen, if there's capital flowing into the country somehow. If there's money flowing into the country, that's making it possible for people on this side of the equation to acquire more. Maybe to build companies, maybe to build infrastructures and you're the government, right? To build houses, so capital needs to come in and this capital actually, when we think again of development in a broader sense, it's all kinds of capital. It's not just financial capital, as we develop, we're investing in human capital, in education of people, or in preserving our natural capital, or in building infrastructures and factories so that we've got physical capital. Anyway, where could this capital come from so we can develop? Well, there are a number of sources, you might have actually, your domestic, the people within your company, and within your country. Your businesses, your individuals might have savings, or profits, that they can then take and invest to build more factories, or to build highways, or to acquire houses. So, domestic savings is one source. This often can be a problem though if a country is poor, they don't have a lot of savings, they don't have a lot of companies earning big profits. So, this may not work, right? Another source could be, aid flowing into the country. So, foreign countries give aid to you, and you spend that aid on infrastructures, or factories, or giving it to people so that they can actually consume more. Often, the record of aid has not been very good either, although there is a role for it. So, where else could it come from? Well, there's something called Foreign Direct Investment. This would be money that foreign companies want to put into your country, so that they can build factories, build infrastructures, and your GDP will grow. The nice thing about this is, you don't necessarily have to pay the money back. They put the money into the economy, and then they will take back some profits, but you're not borrowing the money to build the factory, or the bridge. There's another source which would be the government, the government itself. So, maybe your government goes out and borrows money, and then it spends it on infrastructures, or factories and GDP can grow. The problem with this is that, debt accumulates and sometimes when debt gets to high, growth will slow down. There's another place where it might come from, which is remittances. So, maybe people from within your country have gone abroad to work, and they're sending their money home. So, this is money coming from outside that again will boost the capital available to the country and maybe entrepreneurs will spend it on building factories, or maybe households will be able to build houses. So, these are all places the capital can come from, but the capital has to come from somewhere in order for you to grow and gain higher levels of GDP per capita. Countries have gone about development in different ways. So, we're going to talk about two strategies that we're going to detect in India and China in this section. One idea and this was popular after World War II, was to try to make sure that no foreigners get any of the spending of C, I and G. In other words, close down your economy to imports, so that their very competitive imports don't compete with yours, and make sure your companies produce for your demand. This is something that we called, Import Substitution Industrialization, and it was very popular in the 60s, and 70s, and the idea was close it down as I said close down your borders, make sure that your companies get to enjoy all of your demand without competition from imports, and then you can grow. This hasn't had a lot of success. Both India and China started with this strategy at the beginning, and you usually end up with pretty uncompetitive firms, goods that not a lot of people want to buy, and eventually, the government takes over failing firms, and your capital starts to decline, growth stagnates. The other strategy, would be to focus on this part of GDP, and do something that is called Export Oriented Industrialization. Here, what you're doing, is you're saying, "Okay, I know C and I and G are not very big, because I'm a poor country, I don't have a lot going on over here yet, but if I could access foreign markets and sell them a lot of my goods, all right, really strong exports, then I could bring in money from abroad, profits coming in, extra capital coming into my country, and we can start this process of development. So, what we're going to be looking at in this part of the course is, first we'll be looking at indications that development has happened, and then we're going to be looking for strategies of how India and China have developed. You can look for these strategies in other countries as well.