Economic development is the process by which a country�s economic system changes. This includes ECONOMIC GROWTH, an increase in a country�s output, and changes in resource allocation and control, improvement in a country�s INFRASTRUCTURE, and expansion of CAPITAL formation. Economic development occurs in all countries but is most closely associated with the process of change in poorer countries. Development economists study the process by which countries� economic systems grow or fail to grow, labeling them lesser-developed, underdeveloped, or developing economies. To understand economic development, consider first the circle of poverty: low INCOME leads to low levels of savings, which leads to low levels of investment, which leads to low levels of income. In many developing countries, few households have sufficient income to save. If savings were available, households could choose to send their children to schools, expanding human capital and the productivity of future generations. With savings, farmers could purchase new equipment, seeds, simple tools, or storage bins to improve their productivity, but with only subsistence levels of income, most households in poorer countries cannot afford to save. Development economists ask the question, �Why are some countries so much poorer than others?� Obviously some areas of the world are endowed with greater quantities of natural resources and more hospitable climates, but geographic differences only explain some of the differences in economic development among countries. Differences in political and social systems also contribute to explaining differences in economic development. One of the roles of a government in a capitalist economic system is to define and enforce property rights. Without control over their resources, households cannot effectively and efficiently allocate RESOURCES. Many resource-allocation decisions involve a long-term commitment of resources, which, if undermined by political instability, encourages people with portable resources, knowledge, and financial capital to seek alternatives elsewhere. With political instability, owners of land and other nonportable resources will attempt to extract as much income as possible in the short term, often at the expense of SUSTAINABLE GROWTH AND DEVELOPMENT of their resources. Social customs and practices also influence economic development. Social systems that encourage maintaining existing social structures and customs such as limitations on work roles based on gender, restrictions to access to education, or nonacceptance of entrepreneurial efforts influence economic development. Corruption adds to the cost of doing business, limiting resource and business development. Countries pursuing economic development typically adopt one or more of three strategies: primary production, import-substitution-industrialization, or export promotion. Many Mideast countries have developed their primary natural resources, oil and natural gas, as a means to economic growth and development. The kingdom of Saudi Arabia, until the 1930s a series of small tribal groups, grew rapidly with a joint agreement to extract oil from its land with ARAMCO (Arab American Oil Company), a consortium of U.S. oil companies. ARAMCO provided the capital and technology to develop Saudi Arabia�s natural resources. MULTINATIONAL CORPORATIONs (MNCs) frequently participate in primary production development around the world. Supporters argue that without foreign capital and technology, developing countries would not be able to expand development of their primary products. Supporters contend MNCs are an agent of change and modernization. Critics argue that MNCs align themselves with the political elite in developing countries, maintaining the status quo, and once the primary products are depleted, they leave the developing country, sometimes in worse economic and environmental condition than when it arrived. A second development strategy is import-substitutionindustrialization (ISI). This strategy focuses on replacing previously imported products with domestically produced substitutes. Many developing countries have assisted domestic industry development through combinations of low-cost capital and TARIFFs on competing imported products. ISI development can stimulate domestic production and income but has two inherent problems: market limits and lack of COMPETITION. The assisted producers can produce for the domestic market, but if the market is small, they may not be able to achieve ECONOMIES OF SCALE. Domestic producers protected from global competition often will produce goods of sufficient quality to sell domestically but not up to global standards, when or if the company tries to expand internationally. Mexican leaders, fearful of U.S. economic dominance, pursued ISI development in the 1960s and 1970s. Only in the 1980s, after a series of economic collapses, did Mexico move away from ISI and gradually toward export promotion. Since the 1950s, many developing countries, particularly the so-called Asian Tigers (Japan, Korea, Hong Kong, Taiwan, and Singapore), have stimulated economic growth and development through export promotion. With government support and subsidies, domestic producers are encouraged to produce output for sale in global markets. Although export promotion requires producers to meet world-class standards, is vulnerable to changing prices and FOREIGN EXCHANGE problems, and requires access to major markets, it has been a successful development strategy for many countries. At some point government subsidies have to be withdrawn, which has created problems for many countries and companies. Critical to economic development is access to capital. There are five general ways businesses and governments pursuing economic development acquire capital. Foreign direct investment (FDI), the development of factories or purchase of interests in existing businesses, is sometimes encouraged and sometimes discouraged. One of the major features of the NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) was the reduction in restrictions on FDI in Mexico. In the 1990s, portfolio INVESTMENT became an increasingly popular way to raise capital, particularly in countries like Mexico, where there was some existing level of industrialization. U.S. investors, often pursuing diversification, bought shares of stock or AMERICAN DEPOSITORY RECEIPTS in business around the world. Before the expansion of portfolio investment, commercial bank LOANS were a major source of capital for development. In the 1980s, U.S. banks were close to bankruptcy when loans to foreign businesses and governments failed. Trade credit, the extension of short-term loans by exporters to importers, is often an important source of capital to businesses in developing countries. Foreign aid acts as a source of capital, mostly for governments in developing countries. The WORLD BANK and U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT are major sources of foreign aid for economic development.