Economic Development

Introduction
 Definitions of Economic development
• G. M. Meier:
– “Economic development is a process, whereby the real
per capita income of the country increases over a long
period of time”
• United Nations Expert Committee:
– “ Development concerns not only man’s material needs
but also the improvement of the social condition of his
life”.
– Development is thus, not only economic growth, but
growth plus change – i.e social, cultural and institutional
as well as economic.
• C.P.Kindleberger:
– Economic development refers to both more output and
changes in the technical and institutional arrangement by
which it is produced”.
 Features of Economic Development
• 1) It is a dynamic process
• 2) Long term phenomenon
• 3) Measured by the real per capita income
• 4) Refers to the quantitative as well as qualitative
improvements in the development variable.
• 5) Distributive justice
• 6) Development aims at improving the quality of
life of an individual and society.
 Inner meaning of development
• Now when we define development in terms of better
human life, the question arises “What constitutes
the good life?”
• Denis Goulet and others agree that at least 3 basic
components are essential for good life:
• Three Core Values of good life
– Sustenance: The Ability to Meet Basic Needs
– Self-Esteem: To Be a Person
– Freedom from Servitude: To Be Able to Choose
 1) Life Sustenance
• The basic needs without which good life is
impossible.
– When any of these is in short supply, the life of
the people become miserable, and it is in a state
of underdevelopment.
– The aim is to provide as many as possible the
basic needs of life to be provided.
– Thus economic development is a necessary
condition for improving the quality of life.
• M. P. Todaro:
– Rising per capita incomes, elimination of
absolute poverty, greater employment
opportunities and lessening income inequalities
constitute the necessary but not sufficient
conditions for development.
 2) Self - esteem
• Natural instinct that people of all shades ( e.g,:
political or social) seek is self esteem – Be a
Person
• Third world countries suffer from inferiority complex
coming in contact with technologically advanced
countries.
• Through economic development, under developed
countries can gain self esteem.
 3) Freedom
• Final component of good life is freedom
from servitude.
• Freedom in terms of emancipation from
social taboos, dogmatic beliefs and
ignorance.
• Also includes the wider range of choices
for individuals and societies with
minimization of external dependence.
Definition of Economic Development:
“Development is a multi dimensional
process involving changes in social
structures, popular attitudes, and national
institutions, as well as the acceleration of
economic growth, the reduction of
inequality, and the eradication of
poverty.” (Todaro and Smith)

8
 Distinction between Economic
Development and Economic Growth

• 1) Mrs. U. Hicks:
• 2) J.A. Schumpeter
• 3) C.P. Kindleberger:
 1) Mrs. U. Hicks
• 1) Mrs. U. Hicks:
– The problems of UDCs are concerned with the
development of unused resources, even though their
uses are well known.
– While those of developed countries are related to
growth, most of their resources being already known
and developed to a considerable extent.
– Economic development is the outcome of the
conscious and deliberate efforts of the states to solve
the problems of UDCs.
– While Economic growth is an automatic process and it
does not require any special effort to be undertaken
by the government.
 2) J.A. Schumpeter
• Development is discontinuous and
spontaneous change in the stationary state,
which forever alter and displaces the
equilibrium state previously existing.
• Growth is gradual and steady state change in
the long run.
 3) C P Kindelberger
• Growth means more output
• Development means both more output
and changes in the technical and
institutional arrangements by which it is
produced.
 Capability Approach and Economic
Development
• Amartya Sen’s “Capability” Approach
– Functionings as an achievement
– Capabilities as freedoms enjoyed in terms of
functionings
– Development and happiness
– Well being in terms of being well and having
freedoms of choice
– “Beings and Doings”:
 Some Key “Capabilities”
• Some Important “Beings” and “Doings” in
Capability to Function:
– Being able to live long
– Being well-nourished
– Being healthy
– Being literate
– Being well-clothed
– Being mobile
– Being able to take part in the life of the
community
– Being happy – as a state of being - may be
valued as a functioning
 Measurement of Development
• Following methods are used for measuring
economic development
• Real National Income:
• Per capital Real Income:
• Economic Welfare
• Other Criteria
 Real National Income
• Higher RNI means higher level of economic
development and vice versa
• Division of global economy into DC and UDC
are based on RNI
• Limitations:
• NI does not include non-marketable activities
• NI may increase because of progress in a
particular sector of the economy while other
sector may be underdeveloped.
 Per Capita Real Income
• PCRI = RNI/Population
• Higher PCRI is regarded an index of higher
economic development and vice versa.
• However, with the growth in population, it
depresses the PCRI
• Limitations:
• It ignores the distributive aspect
 Economic Welfare
• Improved economic status of the society.
• If the level of economic welfare is high, then
economic development is promoted.
• Economic welfare is interpreted in two ways:
– 1) Larger national output and its equitable
distribution among different sections of society.
– 2) Price stability
 Other Criteria
• Improvement in skill development and formal
education facilities
• Effectiveness and distribution of medical
services
• Effectiveness of transport facilities, telephone
and other communication facilities
• Availability and reliability of electric power
supply.
• Provision for water supply and sewage
disposal.
 Underdeveloped Countries
• According to UN, “An UDC is one, in which per
capita real income is low compared with the
per capita real income of USA, Canada,
Australia and Europe.
• Indian Planning Commission: An UDC is
characterized by the co-existence in greater or
less degree of unutilized or under utilized
manpower on the one hand and unexploited
natural resources on the other.
 Underdeveloped Countries
• Three important things:
• 1) unutilized resources – unemployment
• 2) Disguised unemployment
• 3) unexploited natural resources
 According to the WDR, 2019
--Low income countries – GNI per capita of $996 or
less in 2018;
--Lower middle income countries – GNI per capita
between $996 and $3895;
-- Upper middle income countries – GNI per capita of
$3896 and $12,055
-- High income countries – GNI per capita of $ 12, 055
and above
• Out of 197 countries considered in the report, 31
were low income, 53 were lower middle income, 56
are upper middle income and 57 were high income
countries
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
• 1)Low level of GNI per capita and slower GNI per
capita growth
• 2)larger Income inequalities
• 3)Low Level of Productivity
• 4)Greater Dependence on agriculture with a
backward industrial structure:
• 5)The industrial sector is both small and
backward.
• 6) High proportion of consumption expenditure
and low saving rate:
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
• 07)High rates of population growth and
dependency burden:
• 08)High level of Unemployment and
Underemployment:
• 09)Technological backwardness:
• 10)Dualism
• 11)Lower participation in Foreign Trade:
• 12) Dependence:
• 13) Other Factors
Their Common Characteristics - Low level of
GNI per capita and slower GNI per capita
growth
• According to the World Bank in 2018 UDC had
GNP PC was $996 or less
• DCs had GNP PC above $12055 and above.
• There is widespread in equalities between UDCs
an DCs.
• Every year this inequality increases further.
• Apart from that every year this growth rate is
slow and some case it is even negative.
 Their Common Characteristics -
Larger Income Inequalities
• income inequalities are greater in UDCs than
DCs.
• Comparing poorest 60% of population with
rich 20%, it was found that poor 60% account
for less than 30% of NI and rich 20% have
more than 40% of the NI.
• 3) Widespread Poverty: At the relatively lower
level of GNP per capita larger income inequlity
resulted in the widespread poverty.
 Their Common Characteristics
• Improving income distribution is necessary to
improve a minimum standard of living in
terms of calories intake and nutrition levels,
clothing, sanitation, health, education and so
on.
• According to WDR (world development
report) poverty line of $1.25 a day a person to
compare the poverty in the developing world.
 Their Common Characteristics-
Low Level of Productivity
• Labour productivity is invariably low in the UDCs.
• Because of cause and effect of low level of living
in these countries.
• With low level of living, low productivity
• Labour productivity depends on the availability of
other inputs to be combined with labour.
• They are health and skill of worker, motivation for
worker, institutional flexibilities etc.
• These factors raise the productivity of the labour.
• These forces are low in UDCs
 Their Common Characteristics
• Malnutrition, inadequate health care services
leads to poor health.
• In agriculture, wages are determined
traditionally and hence lack of motivation
• Educational and training facilities are absent
• Credit facilities and tax structure adversely
affect the labour productivity as well.
 Their Common Characteristics -
Greater Dependence on agriculture
with a backward industrial structure
• UDCs are agrarian in character.
• Nearly 30 to 80% of the labour force is
engaged and dependent on agriculture.
• The contribution of agricultural sector to
national income is also more.
• The sector is also not modernized.
 Their Common Characteristics - The
industrial sector is both small and
backward.

• The major manufacturer in UDCs are related

to food and textiles
• The production in this sector ignores the
production of capital goods.
 High proportion of consumption
expenditure and low saving rate:
• Based on the keynesian theory, as the income
level if low, the MPC is very high.
• As the MPC is very high, the MPS is very low.
• As the saving is very low, the capital formation
is also very low.
Their Common Characteristics - High rates of
population growth and dependency burden:
• In the UDCs, birth rate ranges from 3-5%.
• In DCs the birth rate is less than 2%.
• High rate of population growth leads to greater
dependency burden.
• In UDCs, the proportion of children below 15
years is half of the total population.
• The proportion of productive population to to the
unproductive population is very low.
• This leads to low earning and hence low standard
of living.
Their Common Characteristics –High level of
Unemployment and Underemployment

• The traditional agriculture along with outdated

techniques of production and low level of
productivity lacks labour absorption capacity.
• Rapidly increasing population leads of disguised
unemployment.
• Sometimes people migrates to cities where not
many employment opportunities are available.
• Inadequate growth of industries in the towns
may not have to absorb the migrated population.
 Their Common Characteristics -
Technological backwardness
• Lack of research and development, weak
communication system between the research
institutes, lack of capital, lack of skilled labour leads to
technological backwardness.
• UDCs do not have large effective institutions working
for discovering appropriate technology.
• Failing to adopt local technology, they depend on the
import of technology.
• Sometime, out of ignorance, they keep on using
outdated techniques.
• Strong labour union oppose introduction of labour
displacing technology.
Their Common Characteristics- Dualism
• In UDCs, there are two compartmentalized
sectors: the traditional rural sector and
modern sector.
• Rapid growth of population which is not
accompanied by a sufficient capital
accumulation leads of unemployment of
excess supply of labour.
• It must seek employment in the rural sector
where marginal productivity falls to zero.
Their Common Characteristics - Lower
participation in Foreign Trade
• The export volumes are less, Imports are
relatively more.
• Inadequate development transportation
facilities and inefficiency leads to comparative
disadvantage.
• The prices are high and hence they do not
have competitive advantage.
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
12) Dependence:
• Many UDCs were under colonial rule and now
specializing in production of primary products.
• They always depend on developed countries for
capital goods.
13) Other factors:
Social system is orthodox
High degree of illiteracy
Legal system is defective
Corruption is very high
Obstacles to Growth and Development
• When we were discussing the common
characteristics of UDCs, we have given a
glimpse of the characteristics related to
obstacle to growth.
• Here we will discuss certain major obstacles of
development.
• 1) Vicious Circle of poverty and scarcity of
capital
 1) Vicious Circle of poverty and
scarcity of capital
• For decades together, many UDCs have remained
in a period of stagnation.
• R Nurkse, in his book, “Problems of capital
formation in underdeveloped countries” had
explained the problems of the stagnation.
• According to him, Vicious circle of poverty implies
“a circular constellation of forces tending to act
and react upon one another in such a way as to
keep a poor country in a state of poverty.”
 1) Vicious Circle of poverty and
scarcity of capital
• The circle has both demand side as well as the
supply side.
• Demand side:
• Low productivity  low income  low demand
 low investment  low capital deficiency 
low productivity.
• Supply Side:
• Low productivity  low income  Low saving 
Low investment  capital deficiency  low
productivity.
 Vicious Circle of poverty and scarcity of capital
• R Nurkse is of the view that “A country is poor
because it is poor”.
• Poor people not having enough food  health
deteriorates  becomes weak physically and
mentally  productivity decreases  income
decreases and become poor.
• Low level of real income, reflecting low investment
and capital deficiency is a common feature of both
the circle.
 Vicious Circle of poverty and scarcity of capital
• Supply side is governed by the ability and willingness
to save.
• Demand side is governed by the incentives to invest.
• Extremely poor countries rarely save more than 10%
of their NI and faces shortage of capital for
development activities
• Scarcity of capital  use of labour intensive
technology  low productivity.
• Low productivity  less income  less standard of
living.
 2) Inappropriate Technology
• UDCs generally have low productivity
techniques which fails to generates economic
surplus.
• In UDCs there are excess supply of labour and
hence it is not possible to discard these
technologies which have larger labour
absoption capacity.
• Their inability of displacing this techniques is
also due to scarcity of capital.
• Sometimes UDCs also may have imported
sophisticated techniques with low labour
absorption capacity.
• This imported techniques are some time second
hand used techniques/ machinary.
• Hence, UDCs rarely compete in the international
markets due to technological gaps.
• These technologies are highly capital and skill
intensive and hence it is not of any sue to LDCs.
 3) Population Growth
• In UDCs the mortality rates have suddenly
decreased without a decline in birth rates.
• Population growth arrest development
because it leads to decrease in land-man ratio
and capital-man ratio.
• This also results in disguised unemployment
with marginal productivity of labour equals
zero.
• Due to population expansion and increase in the
percentage of poor people, many are deprived off
food.
• Govt. takes measures to provide food at
subsidized price (Food Security).
• On the one had govt. gives food at subsidized
price and on the other Govt. guarantees good
price for the producers of food.
• This gap creates a huge pressure on the budget
and budget deficit / GDP ratio increases.
• Hence the contradiction and not conducive for
development.
• Growth of population and labour force is an
impediments to the rising of average incomes
and the alleviation of poverty.
 4) Political and Administrative
Obstacles
• UDCs have suffered colonial exploitation in the
past and present political and administrative
system of the UDCs are not conducive for
development.
• Political instability, democracy and people
participation, strikes and dharna, loss of
confidence in the mind of people.
• Administration is inefficient and unethical, large
public section with less contribution, corruption
in the system, Industrial licensing is not
transparent.
 5. Socio-cultural Obstacles
• Religion (spiritualism), Casteism and tribal loyalties, Contempt for manual labour
among the high caste Hindu
• According to Max Weber, religion excludes the economic
motive, and replaces it with customs and status.
– It has prevented occupational mobility
– An essential condition for economic development is that there
should be optimum utilization of human resources for which
occupational mobility is necessary along with geographical
mobility.
– Person were forced to accept the traditional occupation of his
caste, which decreases his efficiency level.
• Joint family system ties.
– Encourages inactivity
– Prevent migration
 6. External Bottlenecks
• Comparative advantage theory states that
international trade between nations is beneficial.
• In UDCs, international trade did not stimulate
manufacturing industries, rather promoted
production of primary products.
• The demand for these product is inelastic.
• Thus, their production and employment linked with
exports has little prospects of expansion.
• The wages and the export returns per unit of
product fail to rise as supply of labour is almost
unlimited.
• Paul Prebisch looks at the problem from the BOP
point of view (BOP deficits)
• Thomas E. Weisskopt:
– Till middle of the 20th century, the major capitalist
countries had exploited the resources of UDCs and they
are retarded of it.
– DCs try to dump their products in these markets.
– Relatively capital intensive product and technology tend
to be transferred to these countries, fail to provide
alternative employment opportunities.
– The gap between DCs and UDCs widens.