Chapter 1
Introduction
Economic Development and Economic Growth
Define and explain Economic Development and Economic Growth.
OR
Explain the meaning of Economic Development.
Very often the terms economic growth and economic development are used interchangeably, suggesting that they both mean the same thing. In fact, they are different from each other.
Economic Development:
There are two views defining and explaining Economic Development. They are a) Traditional Economic View and b) The New Economic View.
a) Traditional Economic View: In this view economist considered two facts. A) All modern developed industrial nations were once undeveloped agrarian societies. B) The then latest experience had shown that the war-torn economies of
Under the Traditional Economic View, economic development is defined as follows: ‘Economic development is a process whereby an economy’s real national income increases over a long period of time.’ (Meier and Baldwin 1957)
According to Meier and Baldwin the ‘process’ implies an operation of certain forces over a long period and represent certain changes. These changes are divided into two parts a) Changes in factor supplies b) Changes in the structure of demand. Most of the changes in factor supplies need investments.
b) The New Economic View: The
The new approach is called the ‘international-structuralist’ model. This has two major streams of thought. One is the Neo-Marxist view that highlights the exploitation of poor countries by the rich countries. The second view blames the inappropriateness of advice given by international agencies and other experts. Both these streams reject the exclusive emphasis on the growth of GNP. This new approach wants more emphasis to be placed on the needed structural and institutional reforms so as to eradicate absolute poverty, provide growing employment opportunities reduces income disparities and raise the levels of living of the masses. The new economic view goes beyond narrow economic criteria.
Definition of Economic Development under the new view is as follows:
‘Development must therefore be conceived of as a multi-dimensional process involving changes in structures, attitudes and institutions as well as the acceleration of economic growth, the reduction of inequality and eradication of absolute poverty.’(Michael Todaro)
The above definition suggests that the whole social system has to go through the process of economic development. This process involves several changes, which enable the system to move from a situation widely though to be unsatisfactory to a condition of life regarded a better.
Economic Growth:
Prof. Simon Kuznet defines economic growth as follows:
‘It is a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity being based on advancing technology and the institutional and ideological adjustments that it demands.’
This definition suggests –
1. Indicator of economic growth is the increase in the capacity of the economy to produce goods and service.
2. An advance technology is necessary for this long-term growth of capacity,.
3. Growth calls certain adjustments, both institutionally and ideologically.
Distinction between Economic Development and Economic Growth
Several authors have reversed the term ‘development’ for the growth-process in developing countries, while the term ‘growth’ is used in the context of advanced or developed countries. There is some logic in doing so. The fact that the problems of underdeveloped countries are concerned with the development of unused resources, even though their uses are well known. The problems of advanced countries on the other hand are related to growth, since most of the resources are already known and developed to a considerable extent.
Definitions - Prof. Simon Kuznet defines economic growth as follows:
‘It is a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity being based on advancing technology and the institutional and ideological adjustments that it demands.’
Michael Todaro defines economic development as follows:
‘Development must therefore be conceived of as a multi-dimensional process involving changes in structures, attitudes and institutions as well as the acceleration of economic growth, the reduction of inequality and eradication of absolute poverty.’
These two terms can be distinguished as follows
Qualitative v/s quantitative – Economic growth is related to a quantitative sustained increase in output and income. Increase in GNP is a broad indicator of growth. Economic development, on the other hand, is related to qualitative changes in the economy. These changes include the nature of wants, the quality of goods, tastes of consumers and so on.
Labour Force – Economic growth is accompanied by an expansion of labour force, consumption capital and volume of trade. Growth implies such a quantitative expansion. Economic development, on the other hand, tries to analyze and explain the qualitative changes in wants, goods, incentives and institutions.
Structural changes – Economic growth is accompanied by certain structural changes. E.g. workers may shift from agriculture to industry or urbanization may accompany growth. Economic development describes the underlying determinants of growth. The change in attitude of labour is important. E.g. agricultural labour shifted to urban industry. Here we can find the change in attitude of labour.
Income and other variables – Economic growth there is a continuous increase in income. E.g. The increase in annual income by some percent comparing to previous year, can be called growth. On the other hand in economic development beside increase in income, several variables are also considered. e.g. government policy, social changes, industry, etc.
Difference in concept – Economic development includes economic growth. In a way, the term economic development is broader than the term economic growth. The countries having high rate of economic growth may not be called economically developed countries. Thus there can be growth without development, but development without growth is not possible.
Conclusion – In the words of Prof. Kindleberger, ‘Economic growth means more output, while economic development implies both more output and changes in the technical and institutional arrangements by which it is produced and distributed.’
We must have some measures or some characteristics to judge whether economic development is taking place. Prof. Simon Kooznets, a Nobel Prize winner economist has mentioned six characteristics of the process of economic development through which almost all the modern developed nation have gone. These can serve as indicators of economic development. These characteristics can be classified into three types given below:
| I] Aggregate economic variables | 1. High rates of per capita output and population growth. |
| 2. High rates of increase in Factor Productivity | |
| II] Structural transformation variables | 3. High rates of structural transformation |
| 4. High rates of social and ideological transformation | |
| III] Factors affecting the international spread of growth | 5. International economic outreach |
| 6. International factor and product flows |
A. Indicators mentioned by Prof. Kooznets –
1. High rates of per capita output and population growth – Economic development includes the process of economic growth. Economic growth is there when the per capita output is increasing at a high rate. Even if the total output is increasing it is possible that the per capita output has not increased. This will be a situation when the population is also growing at a high rate along with the output. In such a situation it will not lead to economic development. Based on the output the income level will vary in different countries. The countries of the world can be divided into -
a) High-income economies – An average income is more than US$ 25000. And the countries are
b) Middle-income economies – An average income of about US$ 2000. And the countries are
c) Low income economies – An average income of less than US$ 500. And the countries are India, Pakistan, Kenya, etc.
Thus the per capita income in a country helps to indicate whether economic development is taking place or not.
2. High rates of increase in Factor Productivity – Productivity refers to the input and output ratio of the various factors of production. It has been noticed that the main reason for high level of output is the high rate of productivity increase. In the developed countries use of scientific and modern methods of production and manufacture helps to increase the productivity level. On the other hand in the LDCs, the use of unscientific and outdated methods leads to low productivity. Prof. Kooznet has claimed that more than half of the growth of per capita GNP is due to the growth in productivity.
3. High rates of structural transformation – A high rate of structural transformation is the third characteristic of the historical growth record of the present day. Economic growth requires structural transformation or changes. One such change is the gradual shifts away from agricultural to non-agricultural activities. A further shift from industry to services is observed in the advanced and mature stage of development. Another change is in the scale or average size of the unit of production. A third shift is away from rural agricultural and allied employment of labour to the urban manufacturing and urban-oriented service sectors.
4. High rates of social political and ideological transformation – Economic development means not only economic growth but also a change in attitude and social behaviour. Such changes are an ingredient of development as well as causes of economic growth. That is why they can be viewed as indicators of economic development. There must be equality of status, opportunities, wealth and levels of living in a value of a modern society. Such a social, political and ideological transformation is not only shown by urbanization but urbanization acts as booster for such a transformation because, urbanization leads to division of labour, specialization and extension of the markets. It involves more costs on transportation; it causes a change in the basic pattern of life and facilitates modernization.
5. International economic outreach – Rapid economic growth was observed in a few European countries. These countries reached out to the rest of the world for raw materials, cheap labour and markets for their manufactured products. This outreach was made possible by means of the increased power of modern technology, especially in the field of transport and communications. These outreach activities mean ‘even-increasing interdependence among nations because of the potential of closer contact and because of the sharing of an increasing number of nations of one and the same transnational stock of knowledge.’
6. International factor and product flows – The growing interdependence of nations is a cause and consequence of international factor and product flows. The migration of men and flow of capital to Asia,
These are the indicators mentioned by Prof. Kooznets. But there are some more indicators.
7. Increase in the real GNP – An increase in the economy’s real national income over a long period of time is taken as a measure of economic growth. Such economic growth is required for economic development. So it is taken as an indicator of development. Increase in national income means there is an increase in country’s total output of final goods and services in real term at stable prices. But this has following limitations:
a) This measure does not take into account the changes in population.
b) It cannot reflect the externalities or social costs of development including loss to environment, pollution, overcrowding of cities, etc.
c) it tells us nothing about the distribution of income.
8. Welfare – Economic welfare is measured by considering the flow of goods and services. But this has following limitations:
a) What weight age be given b) What composition be judged to be better, c) How goods are produced d) How to measure tastes, etc. are problems which place severe limitation.
In spite of this consumption pattern and changes in it can be viewed ans an index.
9. Social Indicators – Economic development is a much wider concept. Several social indicators have been suggested. These include health, nutrition, education, employment, consumption pattern, social security, etc. such indicators describe the quality of life..
10. Other indicators – Capital formation is another indicator. In advanced economies there is high capital output ratio. Changing structure or imports and exports can also serve as an indicator. An underdeveloped country imports manufactured goods and exports raw materials and primary products. Use of energy is another indicator. In developed countries there is high-energy consumption.
All these and many more indicators can be mentioned. But for the sake of simplicity of calculation, understanding and objectivity, economists as well as U.N. Organization very frequently use GNP per capita as the ready reckoner of development.
Meaning of the Term ‘Less Developed’
Some Terms
Third World – The African, the Asian and the Latin American member countries of the U.N. who achieved independence mostly after the Second World War are called collectively the
An Undeveloped country – A country, which has no prospects of development. The Antarctic and
Developing country – A country that is not stagnant (still / without progress) and is undergoing the process of development.
Underdeveloped country – A country that has potentialities (possibilities) of development.
Less Developed Country – A country, which is not as developed as the mature advanced countries.
Characteristics of the Indian Economy as a less Developed Economy
Indian economy displays a number of characteristics, which proclaim that the Indian economy is a less develop economy. The characteristics are as follows.
1. A Dualistic Economy – When contradictory things come together it is called as dualism. There are the four key elements of dualism. They are as follows. a) Low per capita real income, b) low level of capital per person, c) high incidence of mass poverty and d) the existence of a dual society where outdated organizational methods, production techniques and attitudes co-exist with modernism. This characteristic of dualism is found in
In the industrial sector, along with modern industries, there exist a number of cottage and village industries. In transport sector, there are planes, trains, buses, and cars along with bullock-carts, and wheelbarrows and animals used for transport. In finance, indigenous bankers and moneylenders co-exist with modern banks. This dualism has continued to exist over the last 50 years and the gap between the two sectors appears to be widening.
2. Widespread poverty – ‘Poverty is defined as deprivation (lack) in well-being.’ This means that poor people who are living in poverty are lacking behind in attaining their well-being. In a country like
a) Income poverty or material deprivation – Income level or level of consumption expenditure, per capita is used to find out the number and percentage of people below the poverty line. The average income level in
b) Health and education – Healthy living and education are very important goals for human development. They help people to overcome material or income poverty. In
Similarly education facilities are poor. As a result many people are illiterate. Illiteracy is more in female. Also there are number of dropouts from the school.
c) Vulnerability (helplessness) and exposure to risk – Due to poverty there is a problem of vulnerability. This is observed in the general helplessness among the poor people. Such people have lack of insecurity and protection from violence, crime, etc. This is specially observed in
d) Voicelessness and powerlessness - Due to such vulnerability the people find themselves voiceless and powerless. No one is ready to listen their problems. As a result even if the democracy is there the opinion of the poor does not matter. They are not able to take part in decision-making.
3. Predominance of Agriculture – Agriculture, animal husbandry, poultry, dairy and such other allied occupations constitute ‘primary sector.’ In the process of evolution of economic activity, primary sector was the first to be developed. Industry as a secondary sector emerged next and at last the tertiary sector as the service sector. The contribution of each sector in economy is important. As a less developed country,
The pre-dominance of agriculture in
4. Low levels of Living – A reasonable standard of living is expected to be available to a human being and its absence means low level of living. The comparison of low level of living is not with the rich countries but with the richer sections in the same country. The most standard indicator of low level of living is ‘low per capita income’. But there are other indicators too.
a) Low per capita income – The per capita income in
b) Other quality of life indicators –Nutrition, mother and the child’s care, basic education, drinking water and sanitation are the most basic needs. In respect of these, where advanced countries have achieved almost 100% success, in
5. Pressure of population – Rapid growth in population puts pressure on Indian economy.
The number of working population has only doubled during the period of 50 years; but at the same time the number of unproductive consumers has gone up from 20.6 crores in 1951 to 69 crores in 2001; while working population was 15.5 crores & 32.3 crores respectively. In other words the dependency burden has increased from 57% to 70%.
With growing population, when job opportunities are not growing, the obvious result is swelling number of the unemployed. According to planning commission the backlog of unemployment in 1951 was 5 lakhs inflated high to 75 lacks in 2001.
The metro cities are swollen with a large number of slum area leading towards the overburden to drinking water, medical facilities, transportation, dwellings, education, etc.
The number of children below 14 years have grown from 14.4 crores to 34.7 crores during second half of the 20th century.
The most horrifying aspect of population pressure is that the per capita availability of grain land, which was 0.21 hectares in 1960, came down to 0.10 hectares in 1999.
6. Low rate of Capital formation – Capital formation takes place out of the savings of the society. In all LDCs, due to low levels of income, the rate of domestic saving is low. Naturally, the rate of capital formation is also low. Technological advancement all over the world shows necessity of increasing capital-intensive techniques of production. This means that with passage of time, the capital required per worker would goon increasing. In the interest of economic growth, the rate of capital formation must keep growing. The savings in terms of money are converted into real capital i.e. steel, cement, machinery, etc. which can be used for producing consumer’s goods. The total of such goods is called economy’s capacity to produce and counted as the rate of capital formation. In
7. Deficiencies in Infrastructure –
During the last 50 years,
8. Widespread chronic unemployment – Unemployment in developed countries is structural, cyclical or temporary. Due to change in technology or due to change in the structure of economy or due to shortfall of demand resulting from recession or depression, people are thrown out of employment. But the problem of unemployment in
9. Poor quality of Human Resources – Human resources of a country is the real strength of the economy, since human resources are the motive force of all economic activity. Even though
10. Low lever of World or Global Competitiveness – Competitiveness means the ability of a national economy to achieve sustained high rates of economic growth, on the basis of suitable economic policies, institutions and other economic characteristics. After adopting the economic reforms and accepting globalization as the main aspect of economic policy, World or Global competitiveness has become a very important parameter for judging a country’s capacity to sustain economic growth. As there is low productivity and low level of technology in LDCs, it affects World or Global competitiveness. In over all ranking of Global competitiveness
11. Disparities, inequalities and imbalances – For rapid economic growth with sustainability and competitiveness, the socio-economic order must be just and balanced.
Besides the economic disparities, social inequality and cultural diversity is another major characteristic of Indian society. This has a great impact upon the Indian economy.
The above-mentioned characteristics prove that
