DEVELOPMENT ECONOMICS

B.A. IIIYR (SEM – V)

DISCIPLINE SPECIFIC COURSE – PAPER-V
MODULE 1: ECONOMIC DEVELOPMENT AND GROWTH

CONCEPTS OF ECONOMIC GROWTH AND DEVELOPMENT

The two words ‘growth’ and ‘development’ are often used interchangeably. But they are essentially different.
Economic Growth is a narrower concept than economic development.
- It is an increase in a country's real level of national output. The rise in the money value of goods and services
produced by all the sectors of the economy per head during a particular period.
- It is a quantitative measure that shows the increase in the number of commercial transactions in an economy.
- Expressed in terms of gross domestic product (GDP) and gross national product (GNP), that helps in measuring
the size of the economy.
- Caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources &
improvements in technology or in another way an increase in the value of goods and services produced by every
sector of the economy. It is an outcome of the increase in the quality and quantity of resources and advancement
of technology.
Economic Development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong,
good and bad).
- Defined as the process of increased volume of production along with the improvement in technology, a rise in the
level of living, institutional changes, etc. In short, it is the progress in the socio-economic structure of the economy.
- The definition by Michael Todaro is “an increase in living standards, improvement in self-esteem needs and
freedom from oppression as well as a greater choice.” It also leads to the creation of more opportunities in the
sectors of education, healthcare, employment and the conservation of the environment. It implies an increase in
the per capita income of every citizen.
- Development alleviates people from low standards of living into proper employment with suitable shelter.
Thus, the concept of economic development is broader than economic growth. Development is taken to mean ‘growth
plus change’, whereas economic growth means growth only quantitative expansion of an economy.
Economic growth is measured by the sustained increase in real, national or per capita income of a nation over time.
Economic growth is usually measured in terms of an increase in real GNP or GDP over time or an increase in income per
head over time. Growth is desirable as it enables a society to consume more goods and services. That is why growth is
considered to be the basis of advancing real living standards or human welfare. At the same time, it is also true that growth
does not necessarily lead to an increase in human welfare. Economic development is more fundamental than economic
growth.

Economic growth figure does not give us correct assessment of an economy for the following reasons:
1. First, economic growth is associated with an increase in GNP/GDP per capita. But per head GNP does not, by itself,
constitute or measure welfare or success in development. This is because per capita income does not give any
information about income distribution. It is observed that despite high rate of growth, some of the countries
experience high incidence of poverty and unemployment.
2. Secondly, economic growth does not talk about the quality of life. In poor developing countries, people end
themselves at low level of literacy, low standards of health and nutrition, etc. Miseries arising from lack of food and
shelter do not get reflected in the concept of economic growth.
3. Thirdly, economic growth does not deal with environmental issues. In the process of achieving higher economic
growth, environmental considerations like depletion of renewable natural resources, air pollution, etc., are given little
weightage. These aspects have an important bearing on the economic development of a country in the long run.
Desire for higher and higher economic growth is associated with environmental damages. It is economic development
that cares for environmental issues.
Thus, economic development involves something more than economic growth. There are certain qualitative dimensions
in the process of development that are conspicuous by their absence in the growth or expansion of an economy. Economic
development implies both more output and changes in the technical, institutional arrangements by which it is produced,
and a change in attitudes and values.
Development is, growth plus change—social, cultural and institutional as well as economic.
Economic development is a value-based concept. It includes not only the acceleration of economic growth but also the
reduction of inequality and eradication of poverty, increase in employment opportunities and welfare of the masses, etc.
It must encompass human development.
Amartya Sen defines economic development in terms of ‘entitlement’ and ‘capability’. Entitlement refers to the set of
alternative commodity bundles that an individual can command through the totality of rights and obligations that he or
she faces.
Thus, entitlements of people generate ‘capabilities’. Entitlements of people do not only depend on their incomes but also
on a host of power relations in a society, the spatial distribution of resources in a society (like facilities of health care and
schooling) and what individuals can accumulate from such supplied by the state. ‘Capability’ represents a person’s
freedom to achieve various functioning combinations. Thus, the notion of capability is essentially one of freedom the
range of options a person has in deciding what kind of life he or she wants to pursue.
Through the policies of expansion of human capabilities, development processes can be initiated. That is why it is said that
the basic objective of development is the process of expansion of entitlements and human capabilities. That is to say, how
GNP growth is used to improve human capabilities and, in turn, how people utilise their capabilities is economic
development.
Development requires the removal of major sources of unfreedom. The basic condition for economic development are
the freedoms from hunger and famine, malnutrition, deficient schooling, poverty, poor health, economic insecurity, denial
of civil and political rights, social inequalities, etc.

INDIA - ECONOMIC GROWTH AND DEVELOPMENT

India is one of the most populous countries in the world with a population in excess of 1.2 billion.
 India has sustained rapid growth of GDP for most of the last two decades leading to rising per capita incomes and a
reduction in absolute poverty. Per capita incomes (measured in US $) have doubled in 12 years
 But India has one third of all the people in the world living below the official global poverty line. It has more poor
people than the whole of sub-Saharan Africa
 Per capita income is $1,270, placing India just inside the Middle Income Country category
 India's per capita income is 1/20th that of the UK
 Life expectancy at birth is 65 years and 44% of children under 5 are malnourished. The literacy rate for the population
aged 15 years and above is only 63% compared to a 71% figure for lower middle income countries.
 Despite a strong attempt to become an open economy, exports of goods and services from India account for only 15%
of GDP although this will rise further in the years ahead
 India runs persistent trade and fiscal deficits and has suffered from high inflation in recent years
 India's growth rate has slowed and high inflation is a constraint on competitiveness and growth.
 Investments by Indian businessmen abroad have overtaken foreign direct investment for the first time – reflecting a
lack of confidence among Indian entrepreneurs about their home economy

Development path
India has followed a different path of development from many other countries. India went more quickly from agriculture
to services that tend to be less tightly regulated than heavy industry. That said there are some emerging manufacturing
giants in the Indian economy.

Supply-side factors supporting Indian growth and development

1. A fast-growing population of working age. There are 700 million Indians under the age of 35 and the demographics
look good for Indian growth in the next twenty years at least. India is experiencing demographic transition that has
increased the share of the working-age population from 58 percent to 64 percent over the last two decades.
2. India has a strong legal system and many English-language speakers – this has been a key to attracting inward
investment from companies such as those specialising in IT out-sourcing.
3. Wage costs are low in India and India has made strides in recent years in closing some of the productivity gap between
her and other countries at later stages of development.
4. India's economy has successfully developed highly advanced and attractive clusters of businesses in the technology
space – witness the rapid emergence of Bangalore as a hub for global software businesses. External economies of
scale have deepened their competitive advantages in many related industries.
Growth and Development Limiters for India
Despite optimism for India's prospects for economic growth and development, there are a number of obstacles which
may yet see growth and development falter.
 Poor infrastructure - notably in transport and power networks
 Low productivity and weak human capital. A high % of workers are low-skilled and work in small businesses
 High inflation and a persistent trade deficit
 Low national savings as a share of GDP, low share of capital investment
 Relatively closed economy - India is a net importer of primary products

Indian Development – An Infrastructure Gap

India has problems that persist when a country cannot rely on adequate critical infrastructure such as roads, railways,
power and basic sanitation. India wants to build $1 trillion worth of infrastructure in the next five years but the
government expects the private sector to fund half of it – which is unlikely! Poor infrastructure hurts the Indian economy
in numerous ways:
1. Causes higher energy costs and irregular energy supplies for nearly every business and especially India emerging
manufacturing sectors – there were huge power black outs in 2012
2. It is more expensive to transport products across the country and it creates delays at ports hamper export businesses
and delays at airports which increases the cost of international freight.
3. It makes India less attractive to inward FDI
4. It adds to the cost of living and limits the extent to which millions of India's lowest income families can escape extreme
poverty
5. A creaking infrastructure damages the reputation and potential of India's tourism industry
Despite these growth constraints, India's expansion far exceeds that of the vast majority of developed nations – to put
this into some context, India is delivering 30 years of US economic advance every ten years!

Relative importance of services in India

 One of the key differences for India contrasted with countries such as China, Japan and South Korea is that the Indian
economy is heavily reliant on service industries especially in her export sector
 The country has a comparative advantage in many service industries such as business software.
 One consequence of this structural difference in the economy is that India has not yet seen the rapid urbanization
experienced in other nations; more than 60 per cent Indians still live in rural areas.
 Productivity growth in Indian agriculture has been fairly low and this has limited the potential to release people from
the land to move into towns and cities and find work in manufacturing sectors.
India's failure to adopt enough of the large-scale, labour-intensive manufacturing is regarded as one of the greatest
weaknesses of the Indian economy.
India's growth has been impressive in recent years but this is a country whose development is hampered by endemic
structural problems. India requires significant investment in infrastructure, manufacturing and agriculture for the rapid
growth rates of the last fifteen to twenty years to be sustained.

Structural Changes of Economic Development:

Economic development represents following structural changes in various sectors of the country:
There is a change in the occupational structure. In economic development there is decrease in the share of labour
force in primary sector (farming, fishing and mining etc.) and increase in the share of labour force in secondary sector
(industry etc).
i. There is a change in the structure of national output. The contribution of primary sector in the national output
falls and the share of secondary and tertiary (3rd) sector slowly go up.
ii. There is a change in the structure of industrial production. There is an increase in the production of capital goods
and decrease in the production of consumer goods.
iii. There is a change in the structure of foreign trade. The share of primary goods in exports decreases and the share
of capital goods in imports increase. Accordingly, in economic development there is an increase in exports of
manufactured and final goods. Similarly, there is decrease in the imports of consumer items.
iv. There is a change in the structure of technology. In the economic development modern and advanced techniques
are used in all the sectors of economy.
 v. There is a change in the social and institutional sector. Due to economic development there is an increase in the
self-esteem and living standard of the population.

MEASURES OF ECONOMIC DEVELOPMENT

The main factors besides the hallmarks of economic growth that affect economic development are social ones which are
also indicators of quality of life. The quality of life indicators are the most important as well as crucial measures of
economic development. Economic experts usually look at unemployment ratios, literacy rates, infant death rates, life
expectancy, and more to get the social characteristics of economic growth. In fact, happiness and satisfaction surveys can
help evaluate the measure of economic development. Not only experts, but a common man can also evaluate social
indicators of economic development. Other factors can include, westernization, global acknowledgement, and distribution
of wealth in that country.
Measuring economic development is not as precise as measuring GDP, because it depends what factors are included in
the measure. There are several different measures of economic development, such as the
Per Capita Income, Basic Needs, Physical Quality of Life, Human Development Index, Gender Empowerment Measure.

PER CAPITA INCOME

Dividing GDP/GNP by the total population one gets per capita GDP/GNP. Conventionally, per capita income is used as an
index of development. Economic development emphasises on the qualitative aspects of economic expansion processes.
This view says that increases in per capita income over a long period of time are suggestive of economic development.
Greater the income, higher the standard of living of people, and lower the incidence of poverty and inequality. The only
thing that has to be taken into account is that the growth rate of per capita income should exceed the country’s population
growth—to have more growth and development.
Although there may be a positive association between high income and higher level of development and between low
income and a state of un-development, there are many reasons that suggest per capita income is not an acceptable
criterion of development.
Firstly, per capita income is a ‘crude’ index of measuring economic performance of a nation as it throws no light on income
distribution within countries.
Secondly, economic well-being is measured by income – higher the income, greater is the living standard. However, per
capita income figure does not give an idea about the composition of goods and services produced in an economy.
Thirdly, per capita income does not reveal a country’s economic and social environment under which goods and services
are produced in an economy.
Fourthly, growth measured by per capita income is good since it is equated with progress, advancement, higher
consumption, and a better quality of life. Thus, growth in that sense is desirable. But can economies grow indefinitely?
Answer is: There are ‘Limits to’ Growth’ since economic growth is not compatible with environmental quality.
Thus, the per capita income figure does not throw light on the holistic approach to development. We can conclude that
this index is a ‘crude’ one. It may be a necessary condition for nation’s economic and social uplift but not a sufficient
condition. This is because increase in income involves both costs and benefits. Costs arising out of economic activities (e.g.,
pollution) do not get reflected in the per capita income figures.
In spite of these limitations of per capita income as an index of development, it is used widely as a measure of growth. Per
capita income figures of different nations are ‘used as a starting point for classifying levels of development, and can
certainly be used to identify the need for development.’

BASIC NEEDS APPROACH or PHYSICAL QUALITY OF LIFE APPROACH:

The traditional approaches to measure economic development is concerned with, (i) increase in GNP, (ii) increase in per
capita GNP. But with the passage of time a dissatisfaction developed against these measures.
According to this approach if people are in a position to avail more amount of food, have better access to educational
facilities, and have greater command over the civic amenities like water supply, water sewerage, health care and shelter
etc., all such would represent economic development.
Therefore, according to this approach whether GNP and per capita GNP increase or not, whether a fairer distribution of
income is made or not, the real matter lies with the 'Provision of Basic Needs or facilities to the people'.
This index identifies the components of the produced goods and the segments of the society which are benefited by such
goods and services. Therefore, if people fail to get more goods and services even if GNP has gone up, it will not represent
economic development. Therefore, for the sake of economic development we make such a measure whereby the
availability of basic needs to the masses could be made sure.
Thus in the basic needs approach, the following aspects are analyzed:
(i) How much goods and services are produced?
(ii) What goods and services are being produced?
(iii) How goods and services are being produced?
(iv) What will be the effects of production and distribution on the society?
This shows that in this theory the 'Amount of goods and services' is of crucial importance and the increase in the quantity
of goods and services will help in removing poverty. The criterion of 'Basic Needs' tells us what are the components of
GNP and which segments of the society have utilized such components.
This approach works like social indicators of economic development.
According to the proponents of the Basic Needs approach to economic development, following indicators can become
helpful to measure economic development:
(i) Health Standard: Here it is considered; (a) the life expectancy of the citizens of the country, (b) the infant mortality
rates (IMR) in the country.
(ii) Education Level: Here it is considered the 'Literacy Rate' in the country. Moreover, what is the enrolment ratio at
primary level.
(iii) Food Availability: Here it is considered that what is per capita food availability in the country.
(iv) Water Supply: What is the percentage of the population which is getting the facility of clean water supply.
(v) Water Drainage: Here it is assessed that what is the percentage of the population which is getting the facility of water
drainage etc.
(vi) Shelter And Residence: Here it is estimated that what is the ratio of the population who is having suitable shelter and
residences.
The PQLI value is the average of three statistics - life expectancy at age one, infant mortality, and basic literacy rate.
The PQLI method is superior because it is devoid of those flaws which exist in per capita GNP measure. The PQLI measure
keeps in view the welfare considerations, and it attaches the fruits of economic growth with human betterment. It
analyses the nature of distribution of income as the more life expectancy, decrease in infant mortality rate (IMR) and
increase in literacy rates can become possible due to better distribution of income. The PQLI informs about the changing
distribution of social benefits among countries, between the sexes, among ethnic groups, and by region and sector. The
PQLI facilitates international and regional comparisons by minimizing developmental and cultural ethnocentricities.
Criticisms
1. PQLI is a limited measure of basic needs
2. Many societal and psychological factors like security, justice, human rights, etc are excluded.
3. Does not explain the changing structure of economics and societal development.
4. Arbitrary weights are given to each determining factor.
5. PQLI does not measure economic development and total welfare.
6. There is no unanimity among the economists as to the number and type of items to be included in such an index.

HUMAN DEVELOPMENT INDEX

Human development is the process of enlarging peoples’ choices and raising the level of well-being. The Human
Development Index (HDI) is a quality of life index prepared by the United Nations Development Program. It is a composite
index of life expectancy, adult literacy and years of schooling. It also considers P.C.I. (real)
The Human Development Index was created by Mahbub ul Haq and Amartya Sen. The HDI combines:
1. Life Expectancy Index. Average life expectancy compared to a global expected life expectancy.
2. Education Index
a. mean years of schooling
b. expected years of schooling
3. Income Index (GNI at PPP)
Calculation of HDI 1. Longevity 2. Education (2/3) Educational attainment of adult literacy, (1/3) Gross enrollment ratio
(GER) for primary, secondary and tertiary levels. 3. Standard of living, Purchasing Power Parity in terms of dollars.
HDI = (1.+2.+3.) / 3
High HDI .8+ Med HDI .5-.8 Low HDI Below .5
Limitations of Human Development Index
 Wide divergence within countries. For example, countries like China and Kenya have widely different HDI scores
depending on the region in question. (e.g. north China poorer than south east)
 HDI reflect long-term changes (e.g. life expectancy) and may not respond to recent short-term changes.
 Higher National wealth GNI may not necessarily increase economic welfare, it depends how it is spent.
 Also higher GNI per capita may hide widespread inequality within a country. Some countries with higher real GNI
per capita have high levels of inequality (e.g. Russia, Saudi Arabia)
 However, HDI can highlight countries with similar GNI per capita but different levels of economic development.
 Economic welfare depends on several other factors, such as – threat of war, levels of pollution, access to clean
drinking water etc.

GENDER EMPOWERMENT MEASURE (GEM)

The UN introduced two new measures of human development in the Human Development Report 1995 that highlights
the status of women.
(i) Gender related Development Index (GDI)
(ii) Gender Empowerment Measures (GEM)
The GDI measures achievement in the same basic capabilities as the HDI does, but take notes of inequality in achievement
between men and women. This methodology imposes a penalty for inequality.
Gender Empowerment Measure (GEM) is one of the five indicators used by the United Nations Development Programme
in its annual Human Development Report 1995.
The GEM is a measure designed to measure of gender equality and is focused on indicating the relative empowerment of
women in a given country. It evaluates progress in advancing women's standing in political and economic forms. It
examines the extent of equality between men and women in economic, political and decision making activities.
India's ranking is 139 as compared to general HDI which is 134
In developing countries, as women are subject to various forms of inequality they are caught in ‘inequality trap.’ This
gender inequality, being undesirable, needs to be closed. This requires empowerment of women. In this respect, activities
of women’s organisations and other forms of agency that promote, say, female labour force literacy, female literacy,
demographic change, etc., are of crucial impor-tance, as far as empowerment of women is concerned.
Five elements of women’s empowerment are:
(i) Education,
(ii) Ownership rights over property and assets,
(iii) Position and status of women in the labour market,
(iv) Opportunities to work, and
(v) Familiar and societal attitude regarding women’s employment. For overall development of a society, empowerment
of women is prerequisite.
The GEM was designed to measure "whether women and men are able to actively participate in economic and political
life and take part in decision-making".
The GEM is determined using three basic indicators:
1. Proportion of seats held by women in national parliaments
2. Percentage of women in economic decision making positions (incl. administrative, managerial, professional and
technical occupations) and
3. Female share of income (earned incomes of males vs. females).
GEM is simply the average of these three indices. The essence of GEM has been shown in the below Fig.
ROLE OF STATE AND MARKET IN ECONOMIC DEVELOPMENT
Globalisation is a process of increasing integration into the world economy. Globalisation has reduced the economic
autonomy of the State and seeks to harmonise not only policy regimes but also institutions around the world.
This envisages a strategic role for the State not only in the sphere of domestic economic policies but also in the arena of
economic and political interaction with the outside world.
The State must create the necessary physical and social infrastructure for economic development. The State should also
establish institutions that would regulate the functioning of market. The role of Government is crucial as markets tend to
widen disparities between people and regions. The State should also ensure prudent macro-management of the economy.
The state should actively involve in development by providing a macroeconomic and micro-economic framework
conducive to efficient economic activity, by providing the institutional infrastructure that encourages long term
investment and by ensuring the delivery of basic education, healthcare and infrastructure.
The government has to devise physical controls and monetary and fiscal measures and these measures are essential for
reducing economic and social inequalities that are prevailing in under-developed countries.
The problems prevailing in the under-developed countries cannot be solved by private enterprises and hence state action
is necessary for the economic development. The sphere of state action is very vast. It includes, “maintaining public
services, influencing the use of resources, influencing the distribution of income, controlling the quantity of money,
controlling fluctuations, ensuring full employment and influencing the level of investment.”
Thus the state has to shoulder heavy responsibilities in order to ensure rapid economic development in under-developed
countries.
This task can be performed by two types of measures i.e. (A) Direct and (B) Indirect.
(A) Direct Measures:
1. Organizational Changes:
The organizational changes play an important role in the process of economic development. It includes the expansion of
the size of market, organization of labour market, developing the means of transport and communications, help the
growth of agriculture and industries, help in the mobility of labour, solving problems of urbanization - housing, drinking
water supply, electricity, slums, transport etc.
2. Social and Economic Overheads:
The main obstacle in the way of economic development of under-developed countries is the lack of economic overheads
such as means of communications and transportations, ports, electricity irrigation, education and training facilities and
health services etc.
In industrially advanced countries, these facilities are provided by private enterprises. But in under-developed countries
the private enterprises are not interested to invest because the return is not fruitful and, moreover, such huge investments
are beyond the capacity of private sector.
Besides this, there is dearth of entrepreneurial ability in under-developed countries and the entrepreneurs prefer to invest
in trade, housing, gold, jewellery etc. where the rate of return is very high. Thus, it becomes the responsibility of state to
provide these economic overheads in the under-developed countries.
3. Education:
Education plays an important role in the process of economic development. If educational facilities are provided in under-
developed countries, it increases the quality of labour, their geographic and occupational mobility, raising their
productivity and facilitating innovations.
Through public education the state can increase the effective labour supply and hence their productivity. There should be
free and compulsory provision of primary education and the schools of secondary education should be opened. Various
training institutions should be opened to provide training to mechanics, electricians, artisans, nurses, teachers, etc.
4. Public Health and Family Planning:
The development and maintenance of public health services are important functions to be performed by the government.
It is necessary that the health of people should be maintained to increase the efficiency and productivity of labour. Public
health measures generally include the improvement of environmental sanitation in both rural and urban areas, removal
of Stagnant and polluted water, better disposal of sewage, control of communicable diseases, provision for medical and
health services particularly in the field of maternity and child welfare, health and family planning education and the
training of health and medical personnel and all this requires planned efforts on the part of public authorities. But all the
development efforts will be futile, if the growth of population is not checked.
5. Changes in Institutional Frame Work:
The rigid institutional frame work is a positive hindrance in the path of development in UDC. The government play an
important role in changing the institutional structure in developing countries and creating conditions for evolution of new
institutions.
The institutional changes can be brought about by the state in the form of land reforms, improvement in the laws of
inheritance, regulation and control of monopolies, regulation for the control of money market, improvement in the
distribution system etc. In addition to helping the evolution of suitable economic institutions, the government can also do
a lot in moulding the social and political institutions of a country.”
6. Stepping up Rate of Investment:
The process of development is accelerated by increasing the rate of investment. The rate of savings in UDC is highly
inadequate as compared to their investment requirements. Thus, it becomes essential for government to accelerate the
rate of capital formation in these countries and the government can achieve this through taxation or inflation.
7. Agricultural Development:
In UDC majority of people depend upon agriculture for their livelihood. Lack of irrigation and credit facilities are main
hurdles in the way of economic development. If the agriculture remains backward, the other sectors of the economy
cannot develop. The success of the agricultural development programmes depends upon land reform measures taken by
the government.
8. Industrial Development:
In LDC, the natural resources are under- developed or less developed. Moreover, these poor countries lack in basic and
key industries like iron, steel, cement, heavy engineering etc., which require heavy capital investment, technical
knowledge. Further, the private entrepreneur is totally reluctant to enter in these areas of production. Therefore, it
becomes the prime duty to start basic and key industries to boost the economic development of the country. Few
manufactures control the entire economic structure and industries are confined in a few big cities while rest of the country
remains backward facing a number of problems.
Therefore the state should come forward and take measures to formulate and implement a judicious industrial policy.
This industrial policy should focus on decentralisation of industries which may spread all over the country without any
political interference; promote exports which may substitute import; establish cottage and small scale industries in rural
areas so that the local resources may be used; prevent the emergence of monopolistic organisations and concentration
of wealth in few pockets; help the growth of private industries by importing capital equipment machinery and technical
knowhow and even raw materials; provide various facilities and concessions for the promotion of basic and key industries.
It can provide cheap credit facilities, tax rebate, cheap power, water, transport facilities etc., specially to those who are
engaged for consumer goods industries for domestic consumption.
9. Influencing the Use of Resources:
UDC are generally characterized by under-utilization and mis-utilization of resources. Hence the government must take
measures to ensure proper utilization of resources.
10. Removal of Inequalities:
Another important function of state is the removal or at least reduction of inequalities both economic and social because
there is a great social disparity between various groups of society due to the highly unequal distribution of income.
The government must adopt appropriate measures for the equitable distribution of wealth. The government should
impose progressive taxes on income and wealth and on luxury goods and benefit the poor through wise public expenditure
policy.
11. Optimum Allocation of Resources:
In most of UDC natural resources are not only underutilized but mis-utilized. Proper survey of natural resources and their
proper exploitation must be done by the active participation of state.
12. Maintenance of Peace and Security:
Peace and security are the two things which are essential for economic growth. A country involved in a prolonged war or
internal strife cannot plan economic development in an effective manner.
13. Balanced Growth:
The development of UDC is unbalanced and lop sided. UDC must adopt the strategy of balanced growth and has to be
planned in a systematic manner by the government.
14. Self Reliance:
UDC are dependent on foreign trade for their development projects. In fact, foreign aid is beneficial at initial stages of
development but the process cannot go endlessly. Sooner or later these countries stand on their own legs. Self-reliance is
must for these countries. Self-reliance should be not be looked upon an end but as means to attain economic
development. This implies creating a strong industrial base. After a certain stage foreign aid becomes burden rather than
help. Then it is better to remove it for success of economic development. The state has to play major role to achieve this
objective.

(B) Indirect Measures:

In an indirect manner, the government can perform a vital function in providing the ever increasing needs of people.
1. Monetary Policy:
A proper monetary policy helps economic and industrial development by increasing the volume of scarce resources, raising
the productivity of factor of production, improving the economic and social conditions and removing the various
bottlenecks in the process of economic development. In developed countries control of money supply by the government
is necessary as they had ensured the full employment.
But in UDC the unemployment is not due to cyclical fluctuations but is primarily the result of paucity of resources to put
the people to work. This can be checked by creating additional resources through capital formation. In such countries
monetary policy has to be utilized as an instrument of increases capital formation and diverting investment resources into
desired channels.
2. Fiscal Policy:
Fiscal measures, through changes in government revenue and expenditure patterns are a desirable instrument of
government policy in UDC. Taxation can be used for increasing savings by restricting consumption and directing
investment in promoting channels and preventing it from going into undesired lines.
The direct investment to sociably desirable channels, stimulate private investment, promote distributive justice, avoid
economic fluctuations and so on. Deficit financing can help in raising the rate of capital formation in UDC.
3. Price Policy:
In the initial stage of economic development prices increase due to increased investment in the economy due to policy of
deficit finance followed by the government. Hence, it is essential for the government to evolve a suitable price policy and
keep the prices of essential commodities under control.
4. Increase in Foreign Trade:
In UDC the size of foreign trade in terms of value and quantity is small. The government can promote exports, facilitate
the import of goods necessary for promoting and accelerating economic growth and restrict the import of luxury goods.
Foreign exchange crisis in developing countries can be checked through proper exchange control measure adopted by the
government so that scarce foreign exchange resources are conserved and properly utilized.
5. Strengthening of Public Sector:
Encouraging public sector for due social welfare of the common masses can speed up economic development.
6. Economic Planning:
UDC need capital for investment but have scarcity of funds and funds can be raised through deficit finance also. Therefore
government must ensure that the economic resources are used for socially described beneficial projects. Public finance is
used to secure balanced development in different projects.
The government must watch whether these funds are invested in proper channels and there is no wastage of resources.
Moreover they also watch that deficit finance should not have any inflationary impact of the economy.
7. Public Debt:
When government lacks internal resources, it uses external assistance to accelerate the pace of economic development
of the country. In this regard government adopts certain measures.
The nature and role of State, market and institutions have undergone many changes since the emergence of development
economics from 1940s and 1950s. During the initial period, State had a larger role to play in economic development. Later
the market was allowed to operate freely in many aspects with a strong State to regulate the economic activities.
It can be argued that the role of state and market should be based on the developmental objectives of a specific country.
There cannot be a universal approach in defining the roles of state and market. It also depends on the degree of
development of a country and the capacity of market to take over the activities of the State.
In the era of globalization, it can be accepted that the State has a larger role to play in regulating the activities of the
market and also for human development. Thus strong interrelationships exist among the State and the market in the
economic development of a country.