3. 1.1 Basic Concepts and Definition of Development
Economics
As people throughout the world awake each morning to face a new
day, they do so under very different circumstances.
Some live in comfortable homes with many rooms.They have
more than enough to eat, are well clothed and healthy, and
have a reasonable degree of financial security. Others—and these
constitute a majority of the earth’s more than 7 billion people—are much
less fortunate.They may have inadequate food and shelter, especially if
they are among the poorest third.Their health is often poor, they may not
know how to read or write, they may be unemployed, and their prospects
for a better life are uncertain at best.About two-fifths of the world’s
population lives on less than $2 per day, part of a condition of absolute
poverty.
An examination of these global differences in living standards is
revealing.
Michael P. Todaro and Stephen C. Smith (Economic Development, 12th edition)
4. • the majority of people found in North American and
Western Europe live in the first type of life.
Whereas, most people who live inAfrica,Asia and
Latin America live in the second type of life.
–These definitions in living standard raise various
questions.
6. Some of these questions are:-
• Why does affluence co-exist with poverty across different
continents and across people within a nation and even with in a city?
• How does traditional subsistent low productivity society can
be transformed in to modern high productivity and high
income nations?
• To what extent is the development aspiration of the poor
nation helped or hindered by the economic condition of the rich
nations?
• By what process and under what conditions do the rural subsistent
farmers in remote regions of sub-Saharan or Asian evolve
into successful commercial farms?
• Many other questions can be raised for differences in health, education
and technology.
7. • So, the subject Development Economics deals with the most
important perhaps the most complex of all economic issues,
the economic transformation of those countries known as
developing countries.
• Economic development is the prime objective of the
world’s nation including developing countries: to raise the
income, wellbeing and economic capabilities of people every
where is the most crucial task facing today.
• Every year aid is dispersed, investment is undertaken, policies
are framed and elaborated, and plans are hatched to achieve the
goals of economic development.
• How do we keep track of the effects of aid, investment and
policies this is one of the task of development economics.
8. Definition of Development Economics
Development Economics is a branch of economics that
studies systematically the economic development
of third world nations.
9. • One can say development economics starts with Adam
Smith and continued to David Ricardo, R. Malthus,
Marx K. and J. M. Keynes.
• But development economics as a separate field is recognized
some six decades ago.
• The awarding of the 1979 Novel prize in Economics to the
two eminent economists Arthur Lewis and Theodor
Schultz ( Chicago University) for their pioneering studies
of economic development provided a dramatic confirmation
of the status of economic development as a separate field with
in the economics discipline.
The Prize in Economics 1979 - Press release - NobelPrize.org
10. • So, development economics is a field of economics that is
rapidly evolving its own distinctive analytical and
methodological identity.
• It often draws on relevant principles and concepts
from other branches of economics such as Labor
Economics, Micro-Economics, Macro-Economics, Public
Finance, Monetary Economics and Political Economy in either
a standard form or modified form.
• Development Economics is
– not similar to the economics of advanced countries (in which the
economics of advanced countries is Neoclassical).
– Nor is it similar to the economics of centralized socialist societies
(non - market economics).
It is the economics of poor and underdeveloped
countries or third world nations with varying ideological
orientations and diverse cultural background.
11. 1.2. The Nature of Development Economics
Traditional Economics- is concerned with the
efficient least cost combination of resources and
with the optimal growth of these resources over
time so as to produce an ever expanding range of
goods and services (Classical and Neo-Classical
economic thought).
12. • Traditional Neo-classical economics deals with an
advanced capitalist world of perfect markets:
– consumer sovereignty,
– automatic price adjustment,
– decision making based on marginal revenue and marginal
cost, and utility calculations: and
– equilibrium outcomes on all products and input markets.
• It assumes economic “rationality” and a purely
materialistic, individualistic and self- interested
orientation towards economic decision making.
13. • Political Economy:- goes beyond traditional
economics and studies the social and institutional
process through which certain group of economic
and political elite dominate the allocation of
resources.
• Political economy is therefore, concerned with the
relationship between politics and economics, with a
special emphasis on the role of power in economic
decision making.
14. • Development Economics:- has an even greater
scope.
In addition to being involved with the efficient
allocation of the existing scarce resources and their
sustained growth over time, it also deals with
economic, social, political and institutional
mechanisms to bring rapid and large scale
improvement in the living standard of the mass of
poverty stricken people living in poor countries of
Africa,Asia and Latin America.
15. • In development economics, a larger government role
and some degree of coordinate economic decision
making are essential components.
• Development must be sensitive to the uniqueness and
diversity of the third world.
• There are only few economic principles that work
everywhere and all the time.
• So, we should be skeptical in using traditional neo-
classical economics.
16. • However, the traditional neo-classical economics can
still play a useful role in understanding of the
development problems.
• Before using traditional economics, we have to see if
the assumptions held in the neo-classical economics
are violated.
• Then if the assumptions are violated, we have to
take in to consideration and perform our economic
analysis.
17. • Because of the heterogeneity of the
developing world and the complexity of the
development process, development economics
must be extensive, attempting to combine relevant
concepts and theories from traditional economic
analysis along with new models and broader
multidisciplinary approaches derived from studying
the historical and contemporary development
experiences of Africa,Asia and Latin America.
18. 1.3 Interests in and Evolution of Development
Economics
• The study of development economics as a recent
and separate subject is because of the increasing
political and public concern of the poor nations of
the world.
• The factors that account for changes in attitude and
upsurge of development economics are:-
19. 1. There is a renewed interest from academician in the
growth and development process of developing
countries.
Adam Smith, D. Ricardo, R. Malthus, and K. Marx
studied about economic issues and their consequences.
For example, classical thinkers say that population growth
with diminishing return is one of the reason for economic
stagnation.
They ignore the role of technology and international trade
on the development of poor countries.
20. • The present day development economists have
already shown the role of technological
development on growth of Least Developed
Countries (LDCs). But they have still to show more
on the role of trade on growth.
• AfterWorldWar II, there is a greater acceptance of
interference in market and planning in developing
countries.
• This requires the input of development
economists.(example, Harrod – Domar Model).
21. 2. Poor countries themselves are aware of their
backwardness which leads to a desire to grow and strength
their political power through economic growth.
Example, developing countries ask the world for a new
economic order.
The United Nations GeneralAssembly adopted the Declaration
for the Establishment of a New International Economic
Order and its accompanying program of action on 1 May
1974
The UN GeneralAssembly works for the establishment of the
new international economics order based on equity,
sovereignty, equality and common interest among all nations.
22. The New International Economic Order calls for :-
a) Improve terms of trade for poor countries.
b) Greater access to markets of developed countries for
manufacturing goods of developing countries.
c) Greater financial assistance for canceling of past debts.
d) Reform of IMF and have a greater say in decision
making
e) They ask international food program.
f) They ask greater assistance.
23. 3. An increasing mutual interdependence of the
world economy.
During the cold war, developed countries were rushing to
divide the world to side with them. Economically, rich
and poor countries are locked up together through
trade and balance of payment.
Poor countries get support of developed nations not only
for moral reason, but also from practical reasons, that
is, it is from the self – interest of the developed
countries.
24. • The ability of the poor nations to sustain their
growth and development means a greater demand
for the goods and services of the developed nation
which generates output and employment directly
and also helps to maintain the balance of payments
stability of the developed countries.
25. 1.4. Economic Growth and Economic
Development
• Many people seem to use the term economic
growth and economic development interchangeably.
• But the two terms are quite different in their scope
and magnitude.
• Therefore, it is important at the outset that we have
some working definition or core perspective on
their meanings.
25
26. Meaning of Economic Growth and Economic
Development
• Economic Growth is a steady process by which the
productive capacity of the economy is
increased over time to bring about rising
levels of national output and income.
Where as:
26
27. • Economic Development is more than economic
growth.
– Economic development includes, in addition to a rise
in per capita income, a fundamental change in the
structure of the economy.
• That is a falling share of agriculture and a rising share of
industry in GDP and
• rising share of population living in urban areas rather than in
rural areas.
– Economic Growth is only one dimension of Economic
development.
• To put it in simple explanation Economic Growth
is a necessary but not a sufficient condition
for Economic Development.
27
28. The Meaning of Economic Development
through history
• Originally economic growth was considered similar to development.
• Before 1970s economic development means growth.The problem of
poverty, unemployment and income distribution (equity) were of
secondary importance in development.
• There was a strong assumption that a gain in the overall real GDP will
trickle down to the poor.
• Sometimes countries indicate non–economic indicators such as gains in
literacy, schooling, health condition and provision of housing were
considered as part of development.
• However, in 1970s economic development was redefined in terms of
the reduction or elimination of poverty, inequality and unemployment.
“Redistribution from growth” becomes a common slogan. 28
29. TheWorld Bank in itsWorld Development report
(1991),asserted:
• “The challenge of development… is to improve the
quality of life in the world’s poor countries: a better
quality of life requires higher income, but it involves
more than that.
• It involves better education, high standard of health and
nutrition, less poverty, a cleaner environment, more
equality of opportunity, greater individual freedom and
a richer cultural life” [World Bank,World Development
Report(1991),Oxford University Press, NewYork.]
29
30. • Development must therefore be conceived of as a
multidimensional process involving major
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.
30
31. 1.5.Three CoreValues of
Development
Professor Goulet (1971),stated that development has
three core values.
These are:
– Life sustenance
– Self –esteem, and
– Freedom from servitude
32. Life sustenance- Ability to meet basic needs
• It is concerned with the provision of basic human needs
including food, shelter, health, minimal education and
protection.This is called the Basic Need Approach of
Development (initiated by theWorld Bank).When any of
these is absent, or in a critically short supply, we can not say
that the country is fully developed.
• Rising per capita income and the elimination of absolute
poverty, greater employment opportunities and lower income
inequalities are a necessary but not sufficient condition for
development.
32
33. Self esteem-To be a person
• This is concerned with the feeling of self-respect
and independence or not being used as a tool by
others for their own need.
• No country can be regarded as fully developed if it
is exploited by others & does not have the power &
influence to conduct relations on equal terms.
33
34. Freedom from servitude-To be able to choose
• This refers to freedom from ignorance, squalor and poverty,
so that people are able to determine their own destiny. No
man is free if he can not choose, if he is imprisoned by living
in the margin of subsistence with no education and skill.
• The advantage of economic growth is that it expands the
range of human choice open to individual and societies at
large.
• Wealth also gives you more leisure as well as more goods and
services.Wealth enables people to have more control of
nature, and their physical environment.
34
35. • Freedom also refers to political freedom, including
personal security, the rule of law, freedom of
expression and political participation on equal
footing.
• Hence the objectives of development must
include the following:
a) Increasing the availability and widen the distribution of
basic life sustaining goods such as food, shelter,
education, health facilities and protection.
35
36. b) Raising the level of living including, in addition to higher
incomes, the provision of more jobs, better education,
greater attention to cultural and humanistic values, all of
which will serve to generate individual and national self
– esteem.
c) Expanding the range of economic and social choices
available to individuals and nations by freeing them from
servitude and dependence not only in relation to other
people and nations but also from the forces of ignorance
and human misery.
36
37. • The challenge of development economics lies on the
formulation of economic theory and in the application of
theories in order to understand better and meet these
core components of development.
• Hence development economists have to adapt the
Conventional economic theory to suit the conditions
prevailing in developing countries.
• And many of the assumptions underlay the
conventional economic model have to be
abandoned or modified if they are to yield
fruitful insight in development process.
37
38. Terminology of the Developing world
• The most common way to define the developing world
is by per capita income.
• Several international agencies including the
Organization for Economic Cooperation and
Development (OECD) and the United Nations offer
classifications of countries by their economic status, but
the best known classification is that provided by and
used by the former International Bank for
Reconstruction and Development (IBRD), currently
known as the World Bank.
39. • According to theWorld Bank’s classification system,
countries are classified as developed and
developing countries.
• The criterion used by theWorld Bank, to classify
these countries into different category, is the per
capita income (PCI) of the countries measured in
common monetary unit, US dollar.
40. • As of the year 2021, developing countries are classified as follows:
– Low – income economies (< $1046PCI, 1988 price).
These economies are known as Less Developed Countries
(LDCs). Ethiopia $936 (2020)
– Lower – middle – income economies ($1036-$4095 PCI)
– Upper middle income ($4096-$12695 PCI, 1988 price) -
Some of the upper middle – income countries are known
as the newly industrialized countries (eg. Taiwan,
Hong Kong…).
Developed countries (high income countries) are those whose per
capita income is greater than $12695 in 1988 price
41. • In addition to the classification by theWorld Bank,
different international organizations use their own
classification and criterion.
• The following are some of the classification used in
the field of development economics and by major
international organizations.
42. Third world countries:- The idea comes from:
- 1st world means- North America,West Europe and Pacific
Countries
- 2nd world means- East Europe socialist countries including
Russia
- 3rd world means- Developing countries of Africa,Asia and
Latin America
North and South countries:- Geography based
classification:
– The North: 1st and 2nd world countries
– The South: Developing countries
44. 1.6.1 Conventional Measures of
Development and their Limitations
• One reason why the concepts of growth and development are
too often confused with each other is lack of proper indicators
to measure them.
• Often the same measures are used for calculating both growth
and development processes.
• The problems are serious in the measurement of development
than quantifying economic growth.
• This will be clear from the following subsequent discussions.
45. 2.3.1 Measure of Economic Growth
• By economic growth we generally mean the rate at
which the national income is growing over a period
of time.
• This definition implies that economic growth can be
measured in terms of changes in the national income
of a country.
45
46. • The growth rate could be computed as:
Where, g = is the growth rate
Yt = is the national income in year t and
Yt-1 = is the national income in year t-1
46
47. Example:
The Ethiopian national income/nominal GDP was estimated to be birr 1297.9
billion (Y t-1) in 2014/15. If it has reached the income level of Birr 1429.0
in 2015/16 (Yt) then the growth rate (g) during 2014/15-2015/16 is
10.1%
It is calculated as follows:
Y t = Birr 1429.0 billion
Y t-1= birr 1297.9 billion
g = (Yt -Yt-1)/Yt-1
= (1429.0-1297.9)/1297.9
g = 10.1%
47
48. • Gross Domestic Product can be defined as the total
values of all production in a given country in a given
fiscal year.
• Measuring real income (Real Gross Domestic Product)
in developing countries is not such simple.
• Because of various reasons the real income or value
added in developing countries is not accurately
measured.
• As a result, in general the real income (GDP) of
developing countries is understated compared to
the income level of developed countries.
48
49. The major reasons that leads to the under measurement and
understatement of income/value added in developing countries
are:
1) the majority of the population is subsistence farmer who produce
for own consumption and such output are not reported correctly.
Greater than 70 percent of the population of developing country is
engaged in the agricultural sector in which they produce, mainly, for
own consumption.
Such productions are not accurately records in the national income
account of developing countries.
Therefore, the national income account mostly understates the
production capacity and level of many developing countries.
49
50. 2) Under reporting income is common in developing
countries fear of tax and it is partly due to inefficient
taxation system.
Particularly, in a country where the taxation system is
progressive producers are obliged to pay a higher rate
when their income increases.
Therefore, in order to avoid paying a higher tax, most
economic agents under report the amount of
production and the income they get.
– Example: In Ethiopia roughly income reports are 20% less
than consumption.
50
51. 3) Usually no allowance is made for non-monetary sectors in the
national income account of least developed countries/
developing countries. Most economic activities which involve
adding value and production are not considered in the
measurement of Gross Domestic Product.
• For example- In the process of making Injera, many value
additions are involved.The first value added is changing the
raw teff into flour, the next value added will be changing the
flour into dough, and finally the dough will be baked and
became a final product.
However, in developing countries such value added is not
considered while it should have been.
51
52. 4) Distortion in prices is very high in developing countries
than developed countries. Since GDP is a measure of
value of production it is affected by both the price of
the product and the quantity being produced.
Therefore, if there is high distortion in the price of the
product that leads to a volatility in the GDP of a
country.
• However, in order to solve this problem,
macroeconomists recommend the use of Real GDP
which represents the value of the product measured in a
constant price over time.
52
53. In addition the above simple measure of growth has
two limitations:
1. The national income is in the value terms, which
change as the price level change. Even if physical
volume of goods and services remain the same the
growth rate could be positive for simple reason that
inflation has to be taken into account while measuring
economic growth (in constant real terms)
2. The second limitation of such a measure is that it
cannot take in to account the population growth.
There are several instances where population has
grown more than national income.
53
54. In this context, a more rise in national income is a questionable
criterion for assessing the growth performance of an economy.
To overcome the above two problems, some economists have
suggested to measure economic growth in terms of rise in real
per capita income.
Per capita income is the ratio of total GNP to total population.
That is,
These days growth performance of an economy is judged on the
basis of change in the per capita product.
Per capita income =
ation
totalpopul
GNP
54
55. 2.3.2 Measure of Economic Development
• Economic development is generally measured in
terms of increase in real national income per capita
of an economy.
• It may be noted that the division of countries into
developed and developing economies is on the basis
of per capita income.
• It may be the reason that United Nations declared
1950’s and 1960’s as the “Development Decades”.
55
56. • Taking the per capita income as indicator of average
standard of living, however, has many limitations.
• As any average measure, it conceals more than what it
reveals.
• In recent years, this measure has come under increasing
criticism as an index of economic development.
– First, there is no difference in economic growth and
development as the same indicator is used to measure both of
them.
– Moreover there is no relationship between the definition of
development and measure of development in terms of per
capita income.
• Therefore, attempts have been made to use other indices
of development. 56
57. • One of the main grounds for criticism of using per
capita income as an index of development is that it
takes no account of the distribution of income.
• That is, distribution of the total income among
different parts of the society.
• Therefore, attempts have been made to construct
measures of growth taking account of income
distribution.
57
58. • In their proposal Chenery et.al first calculated the
growth rates (gi) of incomes accruing to different
income groups (i = 1,2, …… k) and then measured
the growth rate G of total income as a weighted
average of growth rates of income of the different
classes.
G= Σwigi
• Where;Wi = is proportion of total income initially accruing to
the ith class.
**This new index is a measure of both the growth of income
and the change in distribution.
58
59. • This measure has also limitation.
– That is it gives haphazard weights to growth and distribution.
– Other dimensions of Economic Development are not considered
in this measurement.
• Recent attempts have been made to incorporate as many
dimension of development process as possible to measure the
level of development of an economy.
• As the definition suggests development process is composed
of several aspects of an economy.
• Therefore, a measure of development must take in to account
not only the level of per capita income and its distribution but
also other indicators of quality life such as level of education
and health status.
59
60. • This will lead us an index called human
development Index (HDI) (sometimes called
quality of life index.) This is basically a non-
monetary index measuring the level of
development.
• The typical approach in constructing such an index
is to take a number of non-monetary indicators such
as educational stocks and flows, fertility and
mortality rates and per capita income, and compress
them by various multivariate statistical techniques
into single composite index of development.
60
61. Human Development Index
The HDI attempts to rank all countries on a scale of 0
(lowest human development) to 1 (highest human
development) based on three goals or end products of
development:
1. Longevity measured by life expectancy at birth.
2. Measure of educational attainment (this takes the
weighted average of adult literacy (2/3), and combination
of primary, secondary and tertiary level enrollment (1/3).
3. Real per capita income :- Which is adjusted after the
threshold ($5000 purchasing power / dollar)
61
62. • Human Development Index creates for each country a final
coefficient (number) their value ranges from 0 to 1. HDI is
interpreted as the fraction of “Ultimate Development “that a
country has achieved.
• One major advantage of the HDI is that it does reveal that a
country can do much better than might expected at a low
level of income, and that substantial income gains can still
accomplish relatively little in human development.
• Moreover, the HDI reminds us that by development mean, we
clearly mean broad human development, not just only higher
income.
• Many countries such as some of the higher income oil
producers have been said to have experienced “growth with
out development.”
62
63. Criticisms;
i. Gross enrollment in many cases overestimates the
amount of schooling, because in many countries a
student is counted as enrolled in primary school if he
or she begins school, without considering whether he
or she drops out at some stage.
ii. Attaching equal weight(one-third) to each of the three
components is vague.
iii. The units of measurement that each of the variables
measured is different.
63
64. Least Livable” Countries by HDI, 2010
64
1. Zimbabwe 0.140
2. Congo, DRC 0.239
3. Niger 0.261
4. Burundi 0.282
5. Mozambique 0.284
6. Guinea-Bissau 0.289
7. Chad 0.295
8. Liberia 0.300
9. Burkina Faso 0.305
10. Mali 0.309
11. Central African Republic 0.315
12. Sierra Leone 0.317
13. Ethiopia ( 157° out of 169) 0.328
65. “Most Livable” Countries by HDI, 2010
65
1. Norway 0.938
2. Australia 0.937
3. New Zealand 0.907
4. United States 0.902
5. Ireland 0.895
6. Liechtenstein 0.891
7. Netherlands 0.890
8. Canada 0.888
9. Sweden 0.885
10. Germany 0.885
66. HDI rank Country HDI score GDP rank
GDP per capita
rank
1 Norway 0.957 32nd 4th
2 Ireland 0.955 27th 3rd
3 Switzerland 0.955 20th 2nd
4 Hong Kong 0.949 40th 15th
5 Iceland 0.949 110th 7th
67. Physical Quality of Life index
67
• PQLI was developed by David Morris
• Measured the quality of life in a country by
combining the average of three statistics
- Basic literacy rate
- infant mortality
- life expectancy at age one
(two health measures and one education measure)
To calculate PQLI, statistics are normalized from 0 to 1
for example, the highest infant mortality is assigned a value
of 0, the lowest infant mortality is assigned a value of 1,
and the rest are set in between), and the unweighted
values of the 3 factors are added together to determine a
country’s PQLI
68. Human Poverty Index (HPI)
was introduced in 1997, and is a composite index which
assesses three elements of deprivation in a country –
longevity, knowledge and a decent standard of living.
There are two indices; the
• HPI – 1, which measures poverty in developing
countries, and the
• HPI-2, which measures poverty in OCED developed
economies.
69. HPI-1 (for developing countries)
The HPI for developing countries has three components:
1. The first element is longevity, which is defined as the
probability of not surviving to the age of 40.
2. The second element is knowledge, which is assessed by
looking at the adult literacy rate.
3. The third element is to have a ‘decent’ standard of living.
Failure to achieve this is identified by the percentage of the
population not using an improved water source and the
percentage of children under-weight for their age.
As a region of the world, Sub-Saharan Africa has the highest
level of poverty as a proportion of total population, at over
60%. The second poorest region is Latin America, with 35% of
its population living in poverty.
70. HPI-2 (for developed – OECD countries)
The indicators of deprivation are adjusted for advanced
economies in the following ways:
1. Longevity, which for developed countries is considered
as the probability at birth of not surviving to the age of
60.
2. Knowledge is assessed in terms of the percentage of
adults lacking functional literacy skills, and;
3. A decent standard of living is measured by the
percentage of the population living below the poverty
line, which is defined as those below 50% of median
household disposable income, and social exclusion,
which is indicated by the long-term unemployment rate.
71. Disadvantage of HPI:
• Limited utility, because it combined average
deprivation levels for each dimension and thus could
not be linked to any specific group of people.
Current Status:
• The HPI was replaced in 2010 by the
Multidimensional Poverty Index (MPI)
72. Multidimensional Poverty Index (MPI)
• The MPI assesses poverty at the individual level.
• If someone is deprived in a third or more of ten
(weighted) indicators,the global index identifies
them as‘MPI poor’,and the extent – or intensity
– of their poverty is measured by the percentage
of deprivations they are experiencing.
73.
74. • The global MPI can be used to create a
comprehensive picture of people living in poverty,
and permits comparisons both across countries and
world regions, and within countries by ethnic
group, urban/rural area, subnational region, and age
group, as well as other key household and
community characteristics.
• For each group and for countries as a whole,
the composition of MPI by each of the 10
indicators shows how people are poor.
75. Freedom as cause and result of development
Constitutive and instrumental
Five Freedoms, mutually reinforcing:
1. political freedom
2. economic facilities
3. social opportunities
4. transparency guarantees
5. protective security
Functionings and Capabilities lead to an ability to
live the life you value living
Amartya Sen
Development as Freedom (1999)
76. [The argument] that markets typically work to expand
income and wealth and economic opportunities that
people have… is certainly strong, in general, and there is
plenty of empirical evidence that the market system can
be an engine of fast economic growth and expansion of
living standards. Policies that restrict market opportunities
can have the effect of restraining the expansion of
substantive freedoms that would have been generated
through the market system, mainly through overall
economic prosperity. This is not to deny that markets can
sometimes be counterproductive… But by and large the
positive effects of the market system are now much more
widely recognized than they were even a few decades ago.
E.g. Amartya Sen (1999), p. 26
77. ‘… a competitive market mechanism can achieve a
type of efficiency that a centralized system cannot
plausibly achieve both because of the economy of
information (each person acting in the market
does not have to know very much) and the
compatibility of incentives (each person’s canny
actions can merge nicely with those of others).’
…contd. p.27
78. Trojan Horse for more neoliberal ideas? (Bagchi)
Freedom to Develop vs Development as Freedom?
The end of freedom is generally not questioned, but
freedom as means is not consistent with historical
experience (Corbridge)
How is factory production or mass consumption
about freedom? Are we really free?
Capitalism is based on compulsion, not freedom
Does development result in ‘freedom’ or in more
complex forms of social organisation based on myths
of freedom as powerful self-disciplining devices (e.g.
Foucauldian ‘governmentality’)?
Various criticisms of Sen
79. Development Diamonds
79
• Experts at the World Bank use so-called
development diamonds to portray relationships
among four socioeconomic indicators for a given
country relative to the averages for that country’s
income group (low-income, lower-middle-
income, upper-middle-income, or high-income)
• Life expectancy at birth, gross primary (or
secondary) enrollment, access to safe water, and
GNP per capita are presented, one on each axis,
then connected with bold lines to form a polygon.
80. CONT…..
80
• The shape of this “diamond” can easily be compared to
the reference diamond (see colored diamonds), which
represents the average indicators for the country’s
income group, each indexed to 100 percent.
• Any point outside the reference diamond shows a value
better than the group average, while any point inside
signals below-average achievement.
82. What do all these tell about the concept of development
and problems of development?
82
• Development is seen as an improvement in incomes (and
eradication in poverty), health, education, equality in
incomes (both locally and globally), achievement of gender
equality, and good environment.
• Problems in achieving development are seen as interlinked:
low incomes go together with low education and high
inequality, etc.
83. Cont….
83
Income is not everything
Even though Sub-Saharan economies have not
grown, they have advanced in many other respects
(showing in HDI-indices as well).
expected life-times at birth have increased,
adult literacy rates have increased
better education
84. 1.7 Obstacles to Economic Development
• The following factors (characteristics) analyze the mutual causative
relationships that inhibit development.
i) Vicious Circle of Poverty:
• Vicious circle of poverty implies a circular association of forces
tending to act and react up on one another in such a way as to keep a
poor country in state of poverty.
• The basic vicious circle stems from the fact that in LDCs total
productivity is low due to deficiency of capital, market
imperfections, economic backwardness and underdevelopment.
• We can see the vicious circle of poverty from demand side and
supply side with the following diagram. 84
86. • Another vicious circle envelops underdeveloped human and
natural resources.
• development of natural resources is dependent upon
the productive capacity of the people in the country.
• If the people are backward and illiterate, lack in technical skill,
knowledge and entrepreneurial activity, the natural resources
will tend to remain unutilized or underutilized.
• On the other hand, people are economically backward in a
country due to underdeveloped natural resources.
• Underdeveloped natural resources are, therefore,
both and consequence and cause of the backwards.
86
88. The savings of the few rich do not flow into productive channels
but into durable consumer goods and conspicuous
consumption.
Besides the main reasons for the lack of incentives to save and
invest are;
– Imperfect maintenance of law & order.
– Political instability.
– Unsettled monetary conditions.
– Lack of continuity in economic life.
– The extended family system with its drain on resources.
– The small extent of the market system.
– Difficulties to secure funds for investment purposes.
– Lack of skilled labor.
– The absence/inadequacy of basic services (transport, water, power
etc) and
– Scarce entrepreneurial ability
88
89. ii) Low rate of Capital Formation
• Poverty is both a cause and consequence of a country’s low
rate of capital formation.
• Most of the LDCs people are illiterates and unskilled.They
use outmoded capital equipment and methods of production.
• Their marginal productivity is also extremely low.
• According to the vicious circle of poverty, low productivity
leads to low real income, low saving and low investment and a
low rate of capital formation.
• The consumption level is already low in that, it is difficult to
restrict further to increase the capital stock.
89
90. iii) Social and Cultural obstacles
• Economic Development has much to do with human
endowments, social attitudes, political conditions and
historical accidents.
• Capital is a necessary but not a sufficient condition of
progress.
• Broadly speaking, LDCs possess social institutions and
display such attitudes as they are not conducive to
economic development.
90
91. • According to the UN Report on Processes and
problems of Industrialization in LDCs, their
elements of social resistance to economic change in
LDCs which include institutional factors like,
– Rigid stratification of occupations reinforced by
traditional beliefs and values;
– Attitudes involving inferior valuation attached to
business roles,
– Backward social attitudes.
– Unfavorable political conditions and historical accidents
(class , religion, ethnic)
91
92. iv) Repercussions of International Forces
• These include:
– Disequalizing forces in the world economy as a result of that the gains
from trade have gone mainly to the DCs.
– Historical influence (e.g. Colonialism, Neo-colonialism).
– Adverse effects of foreign investment.
• Foreign investment has been mainly directed towards increasing
exportable goods.
• But is has tended to affect the economy adversely. Because, the
levels of productivity, incomes, and living standards have not risen
in the primary sector which LDCs are highly dependent.
• Even in the export goods sector, the level of real wages of unskilled
labor has remained low.The foreigners have been draining out large
sum of money on account of profits and wages of management.
92
93. 1.8 Basic requirement for Economic Development
• According to Lewis, the proximate causes of economic
growth are:
– the effort to economize,
– the increases of knowledge or its application in production, and
– the increasing amount of capital or other resources per head.
• Economic development is closely associated with human
endowments , social attitudes, political conditions
and historical accidents.
• Therefore, political, psychological, social and cultural
requirements are also as much important as economic
requirements.
93
94. • In the light of the above, certain requirements for
Economic development are;
i. An Indigenous Base.This implies internal motivation
for the growth process must be firmly rooted within the
domestic economy.
ii. Removing market Imperfections:The market
imperfections lead to factor immobility and inhibit
sectoral expansion and development.
Under this:
– The existing socio-economic institutions must be removed
and improved in order to replace them by better ones.
– Capital and money markets should be expanded.
– Cheap (low interest rate) and larger credit facilities should be
made available to the cultivators, small traders and business
men. and
– Radical changes must be brought in order to push the
production frontier beyond the production possibility curve 94
95. iii. Structural Changes
Structural changes implies
- the transition from a traditional agricultural society
to modern society or industrial economy involving a
radical transformation of existing institutions, social attitudes
& motivations, structural change leads to increasing
employment opportunities, higher labor productivity and
stock of capital, exploitation of new resources and
improvement in technology.
- Furthermore, structural changes transfer population from
primary to secondary and tertiary sectors.
95
96. iv. Capital formation
• Capital formation involves three interdependent
stages
a) An increase in the volume of savings:
b) The existence of credit and financial institutions to
mobilize and canalize these savings for converting them
into investable funds, and
c) The use of these saving for purposes of investment in
capital goods.
96
97. Capital formation can be achieved through the following
activities.
– Forced saving – as a result of this consumption will be curtailed.
– Taxation-imposition of new taxes and increase in the rates of
existing taxes.As a result of this, use of savings for unproductive
purposes will be reduced.
– Deficit financing- By increasing money incomes and reducing real
consumption, deficit financing increases the community savings.
– Borrowing from the public and
– Restricting luxury imports and by importing capital goods
instead.
97
98. v. A suitable Investment criterion
Having a suitable investment criterion is inevitable to assist a
faster economic development.
It includes:
a. Social marginal productivity: Several economists have
put guiding principles of social marginal productivity.These
criterions are:
Investment should be directed towards the most productive uses
so that the ratio of current output to investment is maximized or
conversely the capital output ratio (K/O) is minimized.
Maximum use of labor – due to the availability of more labor.
Production of goods appropriate to the market use of domestic
raw material.
98
99. b. Balanced growth:The doctrine of balanced growth implies an all round
and simultaneous development of sectors, of the economy.This is because the
various sectors of an economy should grow in a harmonious way so that no
section lags behind or moves far ahead of others.
c. Social and Economic Overheads
Investment should aim at developing the growing points in the economy. In
the beginning particular growing points should be developed which, in turn,
will set chain reactions and influence the entire economy. E.g. Infrastructures
d. Choice of Technique – Choice of Techniques influences the amount
and pattern of investment in an underdeveloped (developing) economy.
• In adopting a particular technique of production, the planners must always
decide in the light of broad development perspectives.
99
100. vi) Socio- Cultural Requirements:
These requirements include changing people’s attitudes
selectively by stages through persuasion and not coercion.
For example, people attitudes toward work, domestic
products etc.
In this regard, Education is a means of enlightenment.
100
101. vii) Administrative:
The existence of strong competent and incorrupt
administration is crucial for economic development.
Government must be strong one, capable of maintaining law &
order and defending the country against external aggression.
In the absence of stable government and peace, and tranquility
public policies are likely to change very often.
101
102. Economic plans cannot be implemented without efficient
administration.
In this regard government must offer;
– Order, Justice, police and defense
– Rewards commensurate with ability and application in
production
– Security in the enjoyment of property, which may be of
extremely, varied character.
– Testamentary right i.e. assurance that business covenants and
contracts will be kept.
– The provision of standards of weights, measures and
currency, and
– Stability of the government itself to maintain a sense of order
and future calculability of expectations and duties. 102
103. 1.9 Development gap
• Once we have seen how we can measure a
development of a country, our next concern will be
how the development gap between developed and
developing counties is measured.
• As eliminating the development gap between
developed and developing countries is the primary
objective of almost all developing countries and
major development oriented multi-national
corporations.
103
104. But what are the gaps?
1. Real per capita GDP.
2. Developing countries have higher unemployment
(Particularly disguised unemployment).
3. Level of educational attainment.
4. In developing countries there is poor
infrastructure, inadequate public service, high level
of corruption, and inefficient institutions.
104
105. • Thus, the implications of differing conditions in
development in developed and developing countries can
perhaps be most vividly seen in tests for economic
“convergence” across countries.
• Can under developed countries “catch up” with the
developed countries in per capita income?
• To answer this question, we need to see absolute
income gap and relative income gap.
• To eliminate the absolute income gap between rich and
poor countries, growth rate of income of poor
countries has to be higher than rich countries.
105
106. Let’s answer four questions which would help us to see the
challenge of developing countries.
1. Given the recent growth experience of poor countries, how
long it take them to reach the current average level of per
capita income in the industrialized countries? (i.e. years
needed to equalize per capita income).
2. Given the recent growth experience of poor countries
relative to industrialized countries, how many years it takes
the per capita income gap eliminated?
3. Given the rate of growth of the industrialized countries from
now (say, 2000) until the year (2020), how fast would the
poor countries have to grow for the per capita income to be
equalized by 2020?
4. Given the rate of growth of the industrialized countries, how
fast would the poor countries have to grow to prevent the
absolute per capita income gap between rich and poor
countries from being wider in the year 2020? 106
107. To answer these questions, let us use simple compound
interest formula:
FV= PV (1+r)n
Where, FV = FutureValue
PV = PresentValue
R = rate of growth, and
n = time
107
108. Let
YD = the current level of average PCI of the industrialized countries is $
20,000 (2018 PCI)
rD = PCI growth rate of the industrialized countries ( let be 3% per
year From 2018-2038).
YDC = Current level of PCI of developing countries is $1200
rDC = growth rate of PCI of developing countries ( let be 2%)
Y*
D = the PCI of industrialized countries in 2038 (PCI after 20 years)
That is, Y*
D =YD (1+rD) 20
The above equation provides the per capita income of developed
countries after 20 years (in the year 2038), assuming the current
PCI (year 2018) and they grow at a constant growth rate of 3%.
r*
DC = required growth rate of PCI of the developing countries.
108
109. Q1 How many years is needed to equalize average PCI of
developing countries with a current PCI of developed countries,
or years required to fill the relative income gap?
110. Q2. How many years is needed to equalize average PCI
of developing countries and developed countries, or
years required to eliminate the absolute income gap?
Example: for South Korea whose current PCI is
assumed to be $5000 that grows at the rate of 7%.
And the current average PCI of developed countries is
assumed to be $20000 that is growing at the rate of 3%.
111.
112. Q3. The growth rate of the developing countries
required to equalize per capita income between
developed and developing countries in 2020
113. Q4. The rate at which developing countries should grow to
maintain the current PCI gap between developed and developing
countries
