UNIT 3 NATURAL RESOURCES AND

DEVELOPMENT
Structure

3.0
3.1
3.2

3.3

3.4
3.5
3.6

3.7
3.8
3.9
3.1 0

Objectives
Introduction
Natural Resources and Development
3.2.1

Renewable Natural Resources

3.2.2

Non- renewable Natural Resources

Natural Resources, lncome Distribution and Development

3.3.1

Institutions, Technology and Use of Natural Resources

3.3.2

Interplay of Natural Resources, Distribution and Development

Limitations of Income Levels as an Indicator of Development

Concept of Sustainable Development
Measures of Development
3.6.1

Human Development lndex

3.6.2

Physical Quality of Life lndex

Let Us Sum UP
Keywords
Some Useful Books/References
AnswersMints to Check Your Progress Exercises

3.0 OBJECTIVES
After going through this Unit,
- .you should be in a position to:
explain the role of natural resources in development;
identi@ the limitations of income as an indicator of development;
explain the concept of sustainable development; and
i

analyse various measures of development.

3.1 INTRODUCTION

This unit deals with the role of natural resources in the process of development.
Natural resources in conjunction with other factors of production are used to make
goods and services. Natural resources are considered as basic requirements for
development of an economy. At the same time, these are available in limited
quantity, most often with fixed location, and moving them after extraction adds to
the cost of production. It is, therefore, essential to allocate these resources in a
judicious manner so as to achieve the most efficient cost combinatiw. Resource
allocation is an important area of study for efficient allocation of factors of
production including natural resources.
Natural resources can be of two types: renewable and non-renewable. Oil and coal
are examples of non-renewable resources while water, air and solar radiation are
examples renewable resources. One basic difference between natural resources and
other resources is that the latter category of resources are renewable, mobile and can
be moulded to suit the requirements of the development process and strategy. For

Society and Economic

Development: Some H a r d Facts

example, labour as a factor of production is treated differently compared to subsoil

natural resources.
Natural resources like land, forests and water provide livelihood to mil lions.
Degradation of these resources leads to loss of livelihood and is a threat to the health
and well being of people. Air and water pollution have come up as a major health
hazard in recent decades. It is often believed that the existence of natural reserves
like minerals, oil and other metals make rapid growth for a country possible and
feasible. However, the social cost of this type of growth is environmental
degradation and less than efficient use of resources. It is the realization of these that
the concept of sustainable development has been talked about since the publication
of Bruntland Commission report in 1972. Enacting effective environmental
legislation and eradication of poverty is considered significant markers for social and
economic cohesion.
-

3.2 NATURAL RESOURCES .AND DEVELOPMENT

The attempts of the developing countries to proceed on the path of development are
constrained by the lack of specific natural resources. Natural resources can be
considered as the universal means of production, and are indispensable for canying
the productive activity of society and are taken as a gift of nature. A nation's total
supply of resources is inherited from the past.
,
The use of natural resources is to a large extent based on the level and type of
technology. Natural resources are crucial not only for raising food crops and for
other natural food items but exports of minerals can also be a foreign exchange
earner for developing countries. Developing countries face a resource crunch as these
are based mostly on primary activities such as agriculture, mining, fisheries and other
extraction based industries. However, with the help of technology, some of these
countries have been able to surpass the natural resource constraints. Japan and Korea
indicate that with the growth of technology and other institutions, it is possible to
overcome the constraints imposed by lack of resources.

3.2.1

Renewable Natural Resources

Those natural resources are classified as renewable that are capable of selfproduction. Water and air including solar radiation and anything else that is a part of
the atmosphere comes under the category of renewable natural resources. They are
used in conjunction with labour and capital to produce goods. Resources like fish and
forest are renewable resources and can also be replaced. Renewable resources are
considered to be infinite and substitutable between varieties. For example, a stock of
fish can be replaced by another so long as overall fish stocks exist. Hence, for policy
makers the focus would be upon the nature of the production function of the fishery
industry to indicate the extent of labour and capital needed for raising a particular
amount of fish stock. However, as the use of natural resources is becoming
increasingly intense, several varieties of renewable resources cannot be replaced at
the speed they are being consumed, hence the fear of destruction/extinction of these
resources. In recent years, depletion of several species of fish and extinction of
several flora and fauna thus reducing biodiversity has become a major concern.
Several action plans with a global reach have been devised to protect the endangered
species. In this context, forestry and wildlife protection have assumed significance to
retain diversity in nature and to stabilize the survival of various species of plants and
animals.

3.2.2 Non-renewable Natural Resources

Some natural resources are non-renewable, and if used extensively, will get
exhausted. In other words, non-renewable resources are available in fixed quantities.
For policy makers, exploitation and use of such resources depends on the price

iI

function and market structure. For non-renewable resources, the life cycle, price and
usefulness of the resource determine the extent it is used in society (see Unit 10 of
this course). For such resources, market structure assumes particular importance.
Formation of cartels is prevalent in several metals and commodities like bauxite,
copper and oil. An example from the international petroleum industry is apt in this
context. The Organisation of the Petroleum Exporting Countries (OPEC) is an
international organization set up in 1960 and consists of the oil producing countries.
Studies have shown that there are considerable gains from cartelization in the case of
petroleum and bauxite due to the high market share held by the cartel and a relatively
inelastic demand structure (see Hanley et al. 1997). There is also a tendency of
constituting apex bodies at global level to keep a check on the prices and availability
of several commodities. Other factors that impinge upon the market price of a nonrenewable resource depend upon the cost of extraction technology and cumulative
resource depletion.

3.3 NATURAL RESOURCES, INCOME

DISTRIBUTION AND DEVELOPMENT
Use of natural resources for development depends on the availability of capital acd
labour. It also depends on the available technology to use and exploit various
resources under the soil. Proper utilization and conservation of resources therefore is
an urgent task for all the countries. It is important to know that natural resources of a
country give a direction to the economic structure of a country. Availability of
certain natural resources, their quantities and the spread within a country determine
the kind of industries that come up in these areas.
The production structure or the use of factors of production in an economy is
determined by the pattern of income distribution. In a highly inegalitarian society, a
vast section of the population lives on subsistence activities, while a smali minority
lead a luxurious life. In an economy where the production structure is dominated by
the demands of the small number of wealthy, the use of natural resources would be
limited to catering to their demand. These trends in production structure are visible in
India where the production of luxury goods and services has received the kind of
attention from policy makers, which is not paid to the demands, and requirements of
the majority comprising the lower middle class and the poor. As a result, there is no
change in the quality of life of a vast section of population in spite of developments
in science and technology and increasing use of natural resources.

3.3.1 Institutions, Technology and Use of Natural Resources

Use of natural resources, both renewable and non-renewable, involves production
and subsequently consumption of these manufacture/processed products. The nature
and quality of institutions and technology in existence in a. society determines the
rate and pattern of economic activity. Natural resources, labour and capital in
conjunction with technology form the economic subsystem and determine the
production function iri economic terms. Technology can augment resources as we
have seen in the case of 'green revolution' in agriculture. Similarly, more efficient
use of any other raw material or factor of production can augment that resource.
The production system thus depends on the availability of natural resources which is
augmented and facilitated by knowledge system or technology, institutions and
cultural practices. Institutions and organizations represented by the state, other
agencies, civil society and the market also influence the patterns and method of
resource utilization. In practice, institutions and organizations play a dual and
complementary role as they are run by a set of rules and they also have
organizational structures working for them. The state has departments and bureaus
and markets have retailers and distributors who act as disseminators of rules set by

Natural Resources and

Development

Society and Economic

Development: Some H a r d Facts

various institutions. The interplay of these institutions and organizations sets limits to
the development in technology and the use of resources.

3.3.2 Interplay of Natural Resources, Distribution and Development

The effective and relevant use of natural resources, however, is determined by the
distribution of resources across the country as well as across people. The nature and
the type of use that the natural resources are put to will depend on the demand
structure which is in turn based on the income distribution of the population. As
pointed out earlier, in a country with a high degree of income inequality, demand for
industrial goods will be limited. The production structure would be small in which
case these natural resources will be of limited use. Another possibility would be that
the country's production structure will be based on demand in other markets where
the natural resources in taw or processed forms are exported. In recent decades, most
of the developing countries have adopted an export-oriented strategy for growth, as
their domestic market for goods and services is relatively small. In effect, the
domestic population is being denied the use of the natural resources available in their
country. If the export earnings are not reinvested to provide employment and income
to the local population, the deprivation and denial of access to goods and services is
further accentuated. The effective use of natural resources for equitable development
would depend on the pattern of demand where the end product of these resources is
first used in the domestic market. This would improve the quality of life of the
domestic population.
Lack of egalitarian distribution of resources can lead to an inefficient allocation of
assets. Luxury consumption and wasteful expenditure leads to use of resources in
producing such items which do not meet the requirements of the vast majority. It is
observed that increasing global income concentration amongst the rich nations has
shifted the pattern of consumption all over the world. One of the stark examples of
such a trend is the global dependence on cars which is creating the problems of over
crowding, vehicular pollution besides accidents and other problems. Economic
growth based on the growth of car industry has diverted significant resources from
investment in public transport and other mass projects. A similar trend is observed in
the investment pattern related with educational and health care institutions. Super
specialty hospitals and institutions of higher learning, which demand much larger
investments, have diverted resources away from public health and public education
system.

3.4 LIMITATIONS OF INCOME LEVELS AS AN

INDICATOR OF DEVELOPMENT
It is believed by social scientists that income is not a complete indicator of
development. In fact, income measurements like the GDP or GNP of a country only
indicate the total wealth or output in an economy. These measurements do not tell us
how this output or wealth is distributed among the population. Similarly, per capita
income tells us about the average income per person in a country and does not
indicate the distribution of the income across the population. Therefore, GNP or the
per capita income measurements do not inform us about expenditure and
consumption level of each person in the country. The quality of life lived by people
thus is not reflected accurately by the income indicator, more so when cross country
comparisons are based on the levels of income. At best we can draw inferences based
on averages and general view of income levels. It has been observed that a growing
per capita GNP could be consistent with stagnant per capita personal income if the
policies pursued for growth lead to the development of pockets of advanced sectors
of modem technology. This is evident in a large number of developing countries
where income inequalities have grown with the development of the modem sectors.
A number of attempts have however been made to make income a representative
indicator of the well being by including other measures like the per capita personal

'

,/-

income which is considered a preferable aggregate income indicator. This

measurement also cannot be accurate as long as the spread of the per capita is not
included in the data set.
The basic needs concept of poverty attempts to address some of the limitations of the
income indicator by distinguishing between private income, publicly provided
services and different forms of non-monetary income. The basic needs approach is
based on access to such necessities as food, shelter, schooling, health services,
potable water and sanitation facilities, employment opportunities, and opportunities
for community participation. Basic needs indicators add a wide range of dimensions
to income measures. The advantage of the basic needs approach over the income
approach is that they measure goods and services directly in terms of human welfare.
For example, a rise in housing or essential transport costs would be counted as a
decline in well being using basic needs indicators, while per capita GNP would
record this as an increase (see McKinley for detailed discussion on this). It is
suggested by scholars that indicators like access to productive assets (i.e., land,
capital); access to social and physical infrastructure; access to housing and other
consumer durables; and access to common property (i.e., certain aspects of the
natural environment) could give a broader picture of the economic status of a
country.

Check Your Progress 1

1)

Explain the importance of natural resources for development.

2)

How are renewable resources different from non-renewable resources? Give

some examples.

3.5 CONCEPT OF SUSTAINABLE

DEVELOPMENT
The concept of sustainable development lays more emphasis on equity which is
different from the importance given to the principle of efficiency in economic
literature. In its report, the World Commission on Environment and Development,
1987, puts stress on achieving international and inter-generational equity for
achieving a level of growth which can be sustained over time. This would facilitate
the use of resource base for improvement in the average quality of life of present and
future generations. Economists, in the past, have considered sustainable development
in the context of intergenerational efficiency with a possibility of non-declining
consumption of resources. This would be possible by reinvesting into the creation,
exploration and search of the renewable and non-renewable resources thus
augmenting natural capital. This approach has been questioned as all resources are

Natural Resources and

Development

Society and Economic

Development: Some Hard Facts

not substitutable and cannot be created at the pace it is being consumed. In fact,
natural capital can be considered as a set of primary inputs with man-made capital
and labour as agents of substitution (Hanley 2004). This would imply that both types
of inputs need to be used in higher quantities to increase the level of output. There is,
therefore, the problem of constraints imposed by the limits on the use of natural
resources.
There is a lot of discussion based on the concept of ecological sustainability which
could at times challenge the concept of consumer sovereignty. To keep the welfare of
the future generations in mind, there should be allocation of resources in a manner
that there is stability in the system which can lead to levels of development to be
sustained over time. In other words, there is need to question the levels of
consumerism that contemporary societies in developed world and the elite of the
developing countries have achieved.
It was in this context that The Earth Summit was convened in Rio de Janeiro in 1992.
The Agenda 21 of the Earth Summit accepted that human beings are entitled to a
healthy and productive life in harmony with nature. It also accepted that poverty
eradication and reduction of disparities in global standards of living are crucial points
of departure for achieving the goal of sustainable development. The developed
countries did acknowledge their role in consuming world resources thus impacting
the environment. The UN Commission on Sustainable Development monitors the
developments in the areas, among others, like health, human settlement, fresh waters,
land, agriculture, desertification, biodiversity, oceans and seas (Krishnamoorthy,
2005). While there has been commendable work done in the areas of wildlife
protection, air pollution and other such areas, a lot needs to be done for two most
important recommendations of the Earth Summit, viz., implementation of policies to
eradicate world poverty, and to reduce inequality . The process of globalization has
further intensified the use of untapped natural resources of the poor countries with
minor benefits for the traditional users of these resources. The multinational
companies - particularly those engaged in trading agricultural products or processed
agricultural produce - have destroyed the sustainable agriculture of several poor
nations through exports of their cheap and subsidised food products. The control
bver the production and distribution of seeds by multinationals has led to destruction
of biodiversity. In other words, while the United Nations and other agencies talk
about achieving the goal of sustainable development, the process of globalization and
increasing concentration of wealth has negated these measures. 'The lop sided
distribution of wealth has led to manifold increase in consumption levels of the rich
few while the poor are displaced from their traditional habitat.

3.6 MEASURES OF DEVELOPMENT

As mentioned earlier, per capita GDP provides a measure of output; it can indicate
the average income of the country. However, it neither represents the level of
development nor the level of societal welfare of an economy. In the presence of steep
inequality, high per capita income may imply acute poverty for large sections oP
society. In order to overcome this limitation of per capita income as an indicator of
development, economists have come up with several alternative measures. We
discuss these measures below.

3.6.1 Human Development Index

The Human Development Index (HDI) was developed in 1990 on the initiative of
noted economist Mahbub ul Haq and has been in use since 1993 by the United
Nations Development Programme (UNDP) in its Human Development Report.
Based on various indicators, HDI is constructed and ranking of countries is done on
a scale of 0 (zero) to 1 (one). Zero signifies the lowest human development while one
signifies highest human development. Three main factors considered in construction

hiitur:~lHc~ourcesand
1)evelopment

of HDI are: i ) longevity as measured by life expectuncy at birth; ii) knowledge as

measured by a weighted average of adzllt literacy (with two-third weight) and gross
enrolment ratio at the primary, secondary and tertiary levels of education (with onethird weight); and iii) and standard of living as measured by per capita GDP
expressed in purchasing power parity (US$). The ad-justment by purchasing power
parity is made in order to compare the cost of living across countries. Countries are
ranked according to their HDI and then divided into three groups: low human
development (0.0 to 0.499), medium human development (0.50 to 0.799) and high
human development (0.80 to 1.0). In the list of countries Norway tops with an HDI
of 0.965 for the year 2005. The top five countries in order of HDI are Norway,
Iceland, Australia, Ireland, and Sweden. India is considered at the medium level with
an HDI index of 0.6 1 1 and ranks 126"' in the list of 177 countries.
I

I1

HDI indicates the status of the three ma-jor components which the countries can
improve to better their ranking, It brings out the disparities in the indicators of health
and education as well as general living standards. It has been observed that countries
with similar GN P per capita can have different human development indicators
depending on how that income is used to develop human welfare. In recent reports,
HDI is disaggregated for men and women, different social classes and different
regions and ethnic groups.

3.6.2 Physical Quality of Life Index

7'he Physical Quality of Life Index (PQLI) was developed by the Overseas
Development Council in Washington in the mid-1970s due to dissatisfaction with the
use of GNP as an indicator of development. PQLl measures infant mortality,
expectation of life at birth and rates of adult literacy as well as other indicators of
development such as birth and death rates all equally weighted on a 0 to 100 scale.
'['his measure is based on a number of indicators which tell us about the quality of
life led by people. However, an accurate assessment of these indicators is based on
the quality of data used in the ranking. It is difficult to measure indicators like
freedom. participation, environmental health and innovation which are at times
included to get a comprehensive measurement of quality of life. PQLl combines
literacy rate, infant mortality rate, and life expectancy, using scales from the lowest
to the highest values in the global system with equal weights to all three. Based on
countrylregion-specific Physical Quality of Life, it is possible to compute world
quality of life (WPQLI) and the North-South gap in quality of life (NSPQLI). It is
also possible to compute world literacy (WL17').
The Human Poverty Index for Developing Countries (HPI-1)

The UNDP has further sharpened its measurement index to measure the poor across
various countries. "A composite index measuring deprivations in the three basic
dimensions captured in the human development index - a long and healthy life,
knowledge arid a decent standard of living."
The Human Poverty Index for Selected OECD Countries (HPI-2)

The Human Development Reports website summarizes this as "A composite index
measuring deprivations in the three basic dimensions captured in the human
development index - a long and healthy life, knowledge and a decent standard of
living - and also capturing social exclusion." (Human Development Report 2003)

Check Your Progress 2

1)

Explain the limitations of income levels as an indicator of development.

Society and Economic

Development: Some Hard Facts

2)

Do you think that the distribution of income in a country would determine the
use of natural resources?

...............................................................................................
3)

Write short notes on the following:

i)

Physical Quality of Life Index

ii)

Human Development lndex

...............................................................................................

...............................................................................................
...............................................................................................
...............................................................................................

LET US SUM UP
In this Unit, we explained the importance of natural resources for development.
Differences between renewable and non-renewable resources have been explained
with a comment that ruthless and unmindful exploitation of non-renewable resources
can lead to long-term damages. The market structure of the non-renewable natural
resources is an important feature and often is seen to emerge as a cartel. The global
oil industry is an example of a czytel as the oil supplying countries control the
decisions to produce certain quantity of oil to keep prices at a higher level. In other
industries, oligopolistic market conditions prevail as the producers of metal and
minerals try to control the prices of these commodities. Use of natural resources for
development is based on the structural characteristics of the economy. The outcome
of high inequality appears as deficient domestic demand in a country thus leading to
limited potential for industrialization. In such a situation, exports to other countries
forms a base for using the natural resources of a country. It is therefore important to
have relative equality in a country so that the consumption and use of natural
'resources is largely based on the requirements of the domestic markets. In this
context, the income criteria - whether personal income or GNP - is limited in
explaining the inequities in the country. Other methods based on the 'quality of lik'
index are considered more representative. Human Development lndex and the
Physical Quality of Life lndex are considered as comprehensive measures of the
quality of life that people lead in a country.

3.8 KEY WORDS

Human Development

It refers to the quality of life lived by people

in a country. It is based on the indicators like
mortality, nutrition, and health care.

Institutions

Institutions are defined as 'rules in society'

and organizations as a 'functional body or
group' to act for a specific purpose.

Sustainable Development

The concept of sustainable development lays

more emphasis on equity rather than on
efficiency in the use of resources. This implies
that resources should be used in an egalitarian
manner which would improve the quality of
life of the majority of people.

3.9 SOME USEFUL BOOKSIREFERENCES

Hanley, Nick et al, 2004, Environmental Economics in Theory and Practice,
Macmillan India, Delhi.
Krishnamoorthy, B., 2005, Environmental Management, Prentice Hall, New Delhi.
McKinley, Terry, 1997, 'Beyond the Line: Implementing complementary Methods of
Poverty Meusurement', UNDP Poverty Reduction Series.
Todaro, Michael and Stephen Smith, 2005, Economic Development, Pearson
Education, London.
UNDP website: www.undp.org for The Human Development Reports.
Yujiro, Hayami, 2001, Developn~entEconomics- From the Poverty to the Wealth of
Nations, Oxford University Press, New York.

3.10 ANSWERSIHINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1
1)

See Section 3.2 and answer.

2)

See Section 3.2 and answer.

Check Your Progress 2

1)

See Section 3.6 and answer.

2)

See Section 3.6 and answer.

Natural Resources and

Development