Economics of Development

1

Economics of development

Module 1:

Economic development: concept of development-definition-distinction between economic growth and development-sustainable development-characteristics of developing countries-measures of economic development: Gross national product(GNP)- per capita income, net economic welfare, physical quality of life index(PQLI), Human development index(HDI), Gender development Index(GDI), Gender empowerment measure(GEM), human poverty index(HPI).

Economics of development refers to the problems of the economic development of underdeveloped countries. The study of economic development has attracted the attention of economist’s right from the mercantilist sch0ol and Adam Smith to Marx and Keynes; they were mainly interested in the problems which were static in nature and largely related to a western European framework of social and cultural institutions.

It is however, in the forties of the present century and especially after the Second World War that economists started devoting their attention towards analyzing the problems of underdeveloped economies. Their interest in the economic development of underdeveloped countries has further stimulated by the wave of political resurgence that swept Asian and African countries after the Second World War. The desire on the part of the new leaders in these countries to promote rapid economic development coupled with the realization on the part of the developed nations that,” poverty anywhere is a threat to prosperity everywhere”, has aroused further interest in the subject. As Meir and Baldwin has remarked,” A study of the poverty of nation has even more urgency than a study of wealth of nations”.

But the interest of the wealthy nations in removing poverty of the under developed countries has not been aroused by any humanitarian motive. The most important reason for aiding the underdeveloped countries had been the cold war between former USSR and USA. Each tried to enlist the support and loyalty of underdeveloped countries by promoting larger aid than the other. Prof.Lyle.W.Shannon, observes,” the development of underdeveloped countries will be an area of intense competition between united states and USSR for many years, underdeveloped countries contains either vast natural resources needed by world power or having strategic locations from a military view point, will be of particular interest from a standpoint of their importance in world affairs.

Economic development has also an export value for both aid receiving and aid giving countries. In order to avoid secular stagnation rich countries need an ever increasing rate of development which must be accompanied by an outlet for the use of their growing capital stock. Poor countries need an accelerating rate of development to increase their export potential for avoiding deficit in balance of payments.

However, a study of poverty of nations and the methods of removing poverty cannot be based on the experience of the rich nations. According to Prof.Myrdal,” the underdeveloped countries should not accept our inherited economic theory uncritically but remould it to fit to their own problems and interest. So far economic theory has not concerned itself with the problems of underdeveloped countries. Nevertheless if it is uncritically applied to their problems it becomes wrong”.

Economic development and economic growth:

The term economic development is used in inter-changeably with such terms as economic growth. But certain economists like Schumpeter and Mrs. Ursula Hicks have made a distinction between the more commonly used terms economic development and economic growth. Economic development refers to the problems of underdeveloped economies; economic growth refers to the problems of advanced or developed countries. Development according to Schumpeter is a discontinuous change in the stationary state, which for ever alters and displaces the equilibrium state previously existing, while growth is a gradual and steady change in the long-run which comes about by a general increase in the rate of savings. Mrs. Ursula Hicks points out that the problems of underdeveloped countries are concerned with the development of unused resources, even though their uses are well-known, while those of advanced counties are related to growth, most of their resources being already known, and developed to a considerable extent.

According to Prof. Kindleberger, “Economic growth means more output, while economic development implies both more output and changes in the technical and institutional arrangements by it is produced and distributed. Growth may well involve not only more output, but also greater efficiency, that is, an increase in output per unit of input. Development goes beyond this, to apply changes in the composition of output and in the allocation of inputs by all the sectors of the economy.

Prof. Friedman defines growth,” as an expansion of the system in one or more dimensions without a change in its structure and development is, an innovative process leading to the structural transformation of social system”.

Thus economic growth is related to a quantitative sustained increase in the countries per capita output or income accompanied by expansion in its labour force, consumption, capital and volume of trade. On the other hand, economic development is a wider term; it is related to quantitative changes in economic wants, goods, incentives and institutions. It describes the underlying determinants of growth, such as technological and structural changes.

Despite these apparent differences, some economists use these terms as synonyms. W. Arthur Lewis, in his theory of economic growth writes that,” most often we shall refer only to growth but occasionally for the sake of variety, to progress or to development”.

Measures/definitions/indicators ofeconomicdevelopment:

Economic development has defined in three ways:

One of the definitions is to measure economic development in terms of an increase in the economy’s real national income over a long period.

“Real national income” refers to the country’s totaloutput of final goods and services in real terms rather than in money terms. Thus price changes will have to be ruled out, while calculating real national income. But this is unrealistic in a developing economy, where variations in price are inevitable. In this definition, the phrase,” over a long-period of time” implies a sustained increase in real income. A short period rise in national income which occurs during the upswing of the business cycle does not constitute economic development.

This definition fails to take into consideration changes in the growth population, if a rise in the national income is accompanied by a faster growth in population.

2. The second definition relates to an increase in the percapita real income of the economy over a long period. Economists are one in defining economic development in terms of an increase in per capita real income.

Prof.Meier defines economic development.” As the process of a country increases over a long period of time.

Prof. Baran opines,” let economic development be defined as an increase over time in per capita output of material goods”.

According to Buchanan and Ellis,” development means developing the real income potentialities of the underdeveloped areas by using investment to effect those changes and to augment those productive resources which promise to raise real income per person”.

These definitions emphasize that, for economic development the rate of increase in real income should be higher than the growth rate of population. But there are some difficulties or criticisms.

An increase in per capita income may not raise the real standard of living of the masses. It is possible that while per capita real income is increasing per capita consumption might be falling. People might be increasing the rate of saving or the government might itself be using up the increased income for military or other purposes.

The masses can also remain poor despite an increase in the per capita income, if the increased income goes to a few rich instead of going to the many poor.

Moreover, such a definition subordinates other questions regarding, the structure of the society. The size and composition of its population, its institutions and culture, the resource patterns and even distribution of output among the members of the society.

3. Economic development is also defined from the point of view of economic welfare. Economic development is regarded as a process whereby the real per capita income increases accompanied by reduction in inequalities of income and the satisfaction of the preferences of the masses. In the words of Richardson, economic development is,” a sustained secular improvement in material well-being, which we may consider to be reflected in an increasing flow of goods and services.

This definition is also not free from limitations:

1. Sustained growth in real national income does not necessarily mean an improvement in economic welfare. It is possible that with the increase in real per capita or national income, the rich may become richer and the poor poorer. Thus a mere increase in economic welfare does not lead to economic development unless the resultant distribution of national income is also considered just.

2. In measuring economic welfare, caution has to be exercised with regard to the composition of the total output. The increased total output may be composed of capital goods. It may be at the cost of a reduced output of consumer gods.

3. From the welfare point of view, we must also consider not only what is produced but how it is produced. The expansion of real national output might have raised the real costs (pain, sacrifice) and several costs in the economy.

Lastly, we cannot equate an increase in output per head with an increase in economic welfare, let alone social welfare, without additional considerations. To specify an optimum rate of development, we must make value judgments, regarding income distribution, composition of output, tastes, real costs and other particular changes that are associated with the overall increase in the real income. Therefore, in order to avoid value judgments and for the sale of simplicity economists use the per capita income as the measure of economic development.

Measures of economic development:

NEW, PQLI, HDI, GDI, GEM:

Net economic welfare (NEW):

There is also a tendency to measure economic development from the point of view of economic welfare. James Tobin and Paul Samuelson have popularized the concept of Net Economic Welfare (NEW).

NEW is arrived at by modifying GNP, by adding to it certain items like the value of leisure and housewives services and from subtracting from GNP such items like unmet costs of population and other disamenities of modern urbanization. Adjustments for increased leisure may not increase percapita, NEW is beyond percapita GNP growth. But disamenities of urbanization such as growing pollution would slow down NEW.

In overall development planning, the important question would be to decide how much of GNP growth the community would be willing to sacrifice to enhance the quality of life and net economic welfare. For instance, as a country becomes highly affluent, people prefer to work fewer hours in order to enjoy greater leisure, then the measured rate of growth of GNP may fall, but net economic welfare will shoe an increase, that is, people would have sacrificed to some extent certain quantity of goods and services for experiencing better quality of life.

The concept of NEW is more meaningful than GNP as a basis for development planning, because the aim of development planning is to improve the quality of life and net economic welfare helps to achieve this goal.

Gender related development (GDI):

Gender related development index was introduced in human development report (HDR) 1995. It measures achievements in the same dimensions and variables as HDI does, but takes account of inequality between women and men. Thus GDI attempts to capture achievements through the same set of basic capabilities as included in the human development index, such as, life expectancy, educational attainment and income but adjusts the HDI for gender inequality. The greater the gender disparity in basic human development, the lower a country’s GDI compared with its HDI.

In its 6 point plan of action to eradicate poverty, the human development report 1997 urges nations to commit themselves to gender equality, in order to unleash the energy and productive capabilities of women around the world. The report says there is much work to be done. In developing countries, the report illustrates women outnumber men by 60%, women earn only 3/4th of what men earn , meanwhile women bear a disproportionately large share of chores and child rearing responsibilities. They also have less access to land, credit and employment opportunities. In industrialized countries, unemployment rate among women is higher that among men. Globally women still hold 13% of parliamentary seats and 6% of cabinet posts.

To help nations monitor their progress in closing the gender gap, recent editions of the Human Development Report (HDR) have presented two measures of the disparities in opportunities for men and women in countries around the world. The findings of the report include:

a. The GDI measure 146 countries achievements in life expectancy, educational attainment and income and compares the status of women and men. Canada tops the GDI rankings, Norway is second and Sweden followed by Iceland and United States of America.

b. Several developing countries do well in GDI. Barbados 17, Uruguay 13, Trinidad and Tobago32, Korea 35, Cost Rica 36, Thailand 39. These countries have succeeded at enhancing the basic human capabilities of both men and women.

c. Sierra Leone falls at the bottom of the GDI, Nigeria ranks next to last and Burkina Faso third from the bottom. These countries also rank near the bottom in overall human development.

d. No society treats its women as well as its men. In every country, GDI values are lower than values on a HDI which measures people’s well-being.

e. Gender inequality often accompanies human poverty which reflects limited choices and opportunities. Sierra Leone, Nigeria, Burkina Faso, for example is at the bottom of the GDI rankings. They also report the worst human poverty, measured by a ‘human poverty index’(HPI), a new indicator of human deprivation featured in the HDR of 1997.

3. Gender Empowerment Measure (GEM)

Gender empowerment measure examines women’s access to professional, economic and political opportunities. This measure was also introduced by the Human development Report, 1995. It indicates whether women are able to actively participate in economic and political life. It focuses on participation, measuring gender inequality in key areas of economic and political participation, and decision making. It thus, differs from the GDI which is an indicator of Gender inequality in basic capabilities.

Human development report of 2004, presented GEM for 94 countries. The top four rankings are occupied by Norway, Sweden, Australia, and Canada. These countries are not only good at strengthening the basic capabilities of women but they have also opened many opportunities for them to participate in economic and political fields.

Some developing countries outperform many richer industrial countries in gender equality in political, economic, and professional activities. For example, Barbados outranks Italy and Belgium. Bahamas leads Japan, Philippines leaves behind Venezuela and Korea. In some countries there is a strong association between extent of poverty and opportunities for women.

However, the link between income, poverty and opportunities for women is not always positive. There are some countries which are quite highly placed in the GEM rankings, but have a high incidence of poverty by $1 a day poverty line. In some other countries GEM ranks are quite low but income poverty is also low.

The GEM results show that only 8 countries have a GEM value exceeding 0.800 only 27 countries have a GEM value of more than 0.600. And 31 countries have a Gem value less than 0.500. The latter group of countries has much further to travel in extending broad economic and political opportunities to women.

4. Human Development Index (HDI):

A more sensible index and the most recent one is HDI. In use since 1990, it was prepared by the United Nations under UN development programme. It is based on the three aspects of human living:

1. Income for decent living

2. Educational attainment and

3. Life expectancy

Elements and index:

Of the three components of the index, percapita income is the economic indicator. It is taken because it can well serve as a proxy measure fro the satisfaction derived from a bundle of basic goods and services. For this reason, the nominal GDP is adjusted for price changes, so that it reflects the real purchasing power. It is assumed also to reflect employment level of people. The other two are social indicators. The educational attainment is indicated by a combination of two measures. One is the adult literacy ratio. The second is the combined enrolment ratio at primary, secondary and tertiary levels which shows the stock of literacy for the young. This is in recognition of the importance of high levels of skill-formation for modern development. This also greatly helps in differentiating countries which are near the top of the ladder, particularly by the industrialized countries. Life expectancy or longevity, a much desired objective of human beings, reflects the progress made in such fields of health as infant and child mortality and nutrition. Thus one economic and two social components are brought together in the index. It reflects progress in the availability of material goods and services, employment adult literacy and the education for the young, infant and child mortality and nutrition. The improvements in these get reflected in the 3 indicators which together from one composite index of human development.