UNIT I ECONOMIC GROWTH AND DEVELOPMENT

Although this course is about economic development in India it is important that you understand a few concepts that are used in the realm of developmental issues in general and to have an idea so that you can follow the debates about our economy and the rest of the world. Four basic concepts, which we shall discuss in Chapter 1, are: (i) Economic Growth, (ii) Economic Development, (iii) Sustainable Development, and (iv) Quality of Life. These concepts have some historical evolution. We shall try to follow this historical evolution of concepts. If there are important digressions to the text, we shall put them in boxes. We also suggest you some activities so that you learn things by doing them. In Chapter 2, we shall discuss alternative indices for measuring level of development reached by a country in a particular year, We shall specifically deal with Per Capita Income, Physical Quality of Life Index and Human Development Index.

CHAPTER 1

Concepts in Development
Introduction Economies grow and develop, they expand and advance, and they progress and prosper. There are phases when they decline too, and there are economies that experience continuous decay. If one considers long stretches of human history, one knows that economies (civilizations) disappeared altogether. We will not take into account such long stretches of time. We shall not consider too distant a past either. We will leave them to historians, may be, economic historians. Let us take a normal view. We shall then accept decline as an occasional, temporary phenomenon. We shall, therefore, use positive terms only. Of the positive terms, which have been used to describe changes as well as to prescribe changes, two have survived. They are growth and development. Because we shall primarily look at nations and countries as economies, and use terms such as economic growth and economic development . We shall often try to distinguish economic from noneconomic though there are cases where it becomes difficult to do so. In order to accommodate decline in level, we use phrase negative growth and to describe perverse tendencies, we may use words de-development or maldevelopment though, we will not have occasions to use them. You may find that, sometimes in many scientific treatises and very often in colloquy, words growth and development are used in interchangeable fashion. But, normally a distinction is made between the two, particularly in economics literature. It is maintained along the following lines. You might have noticed that the word growth is used to describe increase in stature or size. It is used to describe a uni-dimensional change, as in the case of stature of a child or a uniform expansion in all directions, as in the case of size of a balloon. Even when we refer to development of a child, we refer to various dimensions of its personality. When we do not refer to dimensional aspects we use the word growth. Even schools and institutes, colleges and universities, hotels and hospitals grow. But, we are often quick to point out certain features that are not captured by word growth. It is rare, if ever, that growth takes place without development or development takes place without growth. In most cases, they would accompany each other. There may be cases when one is dominant and the other is dormant. In such cases, people

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talk of growth without development or development without growth. It is, therefore, good to make an analytical distinction between the two. Economic Growth Let us take here a comprehensive view of the economy, taking all activities together, and call its growth as economic growth.
GROWTH One can talk of growth of labour force or of export or of agriculture or of industry. One can talk of growth of consumption expenditure or investment expenditure. One can also talk of growth of banking, insurance or information technology sector. We are, however, restricting ourselves here to the growth of whole economy.

Let us look at it from the view point of production. The total quantum of goods and services produced in an economy in a given year is referred to as Gross Domestic Product . Let us measure it at factor cost and write it in its abbreviated form GDPFC. The GDPFC in 2000-01 was around Rs 17,00,000 crore. This is a flow of goods and services produced during the year 2000-01, measured in value terms. We may be interested in knowing whether the flow this year is larger than the flow last year. If so, we should know the measure of the flow last year. In order to see that we measure the real change in flow, we should compute the magnitude of flows in both the years in the same prices. The prices may belong to 2000-01 or 1999-2000 or to 1993-94; the point is that the prices should relate to only one common year so that we measure only the change in flow of

output, not a mix of change in output and change in prices. Such GDPs are said to be measured at constant prices. Suppose you look into a recent issue of the National Accounts Statistics published by the Central Statistical Organisation and find that at 1993-94 prices, the GDPFC for 1999-2000 and 2000-01 are Rs.10,00,000 crore and Rs.10,60,000 crore respectively. The growth in flow called GDPFC in absolute terms is Rs.60,000 crore. In relative terms it is 6 per cent and it is called growth rate. If we prepare a whole series for 10, 20 or 50 years then we often add words per annum or per year to growth rate. The growth rate is often expressed in terms of per cent per annum. This is a positive change; there could be a negative change also. Suppose, we look at a twenty-year period and use yearly figures for flow of output of goods, which is measured in terms of GDPFC at constant prices. The growth rates calculated on yearly basis would differ from year to year. Shall we use nineteen year-to-year figures of growth rate, some of which may be negative, to describe the change? Or, should we just compare the initial figure with the final figure? If we adopt the former, how to summarise the nineteen figures? If we adopt the latter, it is possible that one of these (initial or final) figures is just abnormal as it does not fall in line. Would it not be a good idea to speak of general tendency and ignore abnormal fluctuations around the general tendency of increase? Economic growth should, therefore, be taken as a long-term tendency reflected by increase in flow of final goods and services produced by the economy.

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GROWTH RATE The growth rate for period t can be defined in the following manner: Qt Q Qt1 gt = t = 1... (1) Qt1 Qt1 where gt = (relative) growth rate of GDP in period t Qt = GDPFC for period t Qt1 = GDPFC for period t1 Suppose GDPFC for period 1999-2000 at 1993-94 prices is Rs 11,52,000 crore and GDPFC for period 1998-99 at 1993-94 prices is Rs 10,83,000. We can find out that
gt = Rs 11,52,000Rs 10,83,000 = 1.06371 = 0.0637 Rs 10,83,000

conditions. They define economic growth as long-term increase in production potential of the economy. Some economists feel that it is growth of per capita GDPFC, not GDPFC, that should be used to gauge the growth of an economy. But the point to be noted is that economic growth is a long-term phenomenon about the change in total economic activity of an economy. Economic Development Some economists hold a view that the economic development is not much different from economic growth. For them, both are processes of long-term increase in per capita income. Some other economists believe that development is distinctly different process than growth and covers other dimensions of change besides growth. Still others hold that, development is nothing but the level of per capita income achieved in a particular year. Whole human history may be thought of as a succession of developments or changes, largely in positive direction. Looking from a distance, we find that production structure of the economy has changed: from hunting-gathering to settled agriculture, from agriculture to manufacturing, from manufacturing to automatic production, from production of goods to production of services. It does not mean services were not produced, say thousand years ago; it only means that its relative importance has changed and that this might have occurred with increase in all activities in a broad sense. However, economics takes most of its lues from the economic history of the

The growth rate is therefore 0.0637. However, numerically growth rate is presented in terms of per cent. Growth rate would therefore be written as 6.37 per cent. Sometimes, people average such growth rates for a number of periods (decade or quinquennium) and call it as average annual growth rate (AAGR).

If there is a general tendency of growth but there are occurrences of decline, the rates of growth will be negative in certain years. Shall we then say that, while the potential of economy to produce is continuously increasing, the potential is sometimes not realised? There could be various reasons for occasional decline. In economies that depend to a large extent on external trade conditions in other countries may affect the realisation. Monsoon may widely fail in certain years and economy may get derailed for a while. Internal demand may for a variety of reasons fail to make full use of the potential. Some economists put too much emphasis on supply potential and ignore demand

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West during the last two centuries or so. During this period, a variety of sweeping changes took place in Europe, which may broadly be categorized as technological and institutional. Early economists working in the field of development economics took notice of change in the composition of output and deployment of labour in activities. They called it structural change. Structural change meant relative increase in terms of proportion of non-agriculture/nonprimary output and concomitant changes in proportion of employment of labour in non-agricultural activities (and also in that of allocation of capital and land). However, this structural change has to take place along with increase in output of all (or majority of) goods, not with decrease. They defined economic development as economic growth with structural change in favour of nonagricultural activities. And structural change was understood in terms of composition of GDP and industrial distribution of labour. This was a reflection of changing demand for goods and services on the one hand and changing demand for labour by production technology in different sectors on the other. Most of the mainstream economists believed that all economies in the West traversed the same path and believed that other economies would also follow the same path. When they did not find it happening they pointed out that institutional changes are equally important. Institutional changes could mean emergence of new institutions in governance, as also in capital market and money market. Some pointed out necessity of attitudinal changes in people a leap from traditional value system to

modern value system. In order to accommodate this thought, economic development could be defined as economic growth plus, that is, something more than economic growth. There were attempts to emphasize technological dimension of development. It was pointed out that economic growth should be accompanied by rise in productivity. Then, we could define economic development as economic growth accompanied by rise in productivity. Development is, however, just not concerned with description of economic history. It is to be pursued as a deliberate mechanism of deliverance of the masses from poverty and idleness in a relatively short period of time. Developments in the fifties and sixties did not perceptibly change the scene in these crucial areas. Many economists felt disillusioned and started showing their anguish. One such Western economist who had been dealing with problems of development asserted in a World Conference in Delhi: The questions to ask about a countrys development are: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development for the country concerned. If one or two of these central problems have been growing worse, especially if all the three, it would be strange to call the result development even if per capita income doubled. Indeed, here is a reference to conscious attempts made to develop an economy by adopting a strategy. If the strategy brings in growth in capacity to

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produce more and in actual output, transformation in structure of economy in terms of composition of output of goods and services or even in deployment of labour force, emergence of institutions in terms of variety of banks, and technology making use of machines and power instead of men and cattle, but makes no significant dent on basic problems of underdeveloped countries, what use are the efforts or the strategy?
UNDERDEVELOPED ECONOMIES The poor countries have been variously described in literature on development economics : as backward, underdeveloped, developing, low income, and Third World countries. Various terms have their origin in objection to some other terms. We do not feel good if someone calls our economy backward as economy is often substituted for country or nation; after all we are an ancient living civilisation. The choice of the word largely depends on sensitivity of the audience and sensibility of the analyst, said Jagdish Bhagwati, a leading economist from India. Third World was used to describe countries, which were neither in capitalist block nor in socialist block and members of non-aligned movement. Some try to classify countries as least developed countries, non-oil exporting developing countries and petroleum-rich OPEC countries (OPEC stands for Organisation of Petroleum Exporting Countries). The term Fourth World is sometimes used to describe the poor in the underdeveloped countries and sometimes to least developed countries.

as well as its distribution. One is entitled to ones wages when one is employed. One should get adequate wages, if employed or should get remunerative prices for what one produces, if self-employed. Mass poverty was one particular problem we attributed to the colonial rule and wanted to secure self-governance in order to eradicate it. If that scourge still persists on a large scale, we have a cause to worry about. In short, the suggestion is that the income should get redistributed in favour of relatively worse-off. Keeping this in view, some economists prefer to define economic development as economic growth with redistribution of resources in favour of the relatively worse off. In this concept, it is believed that reduction in inequality will reduce poverty and will lead to reduction in unemployment too. Sustainable Development In recent years an important issue has arisen. The issue is whether the level of development, even in a developing country where it is fairly low, is sustainable. In developed countries, the major cause of worry about sustainability of development is supposed to be a wasteful consumption style and in many developing countries, the cause of such worry is said to be large and increasing population. In this context, there are two facts, which are brought to our notice. One, present production technology makes use of non-renewable (exhaustible) natural resources such as fossil fuels (coal, gas and petroleum) or even of renewable natural resources (such as forests, animals and water) to such an extent that their regeneration becomes difficult. Two, present production technology

This implies that development has to be related to welfare of people. It was suggested much earlier that welfare of people depends on the size of the cake

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(along with disposal practices of waste) pollutes atmosphere and water bodies with garbage, litter, smoke and other poisonous gases. The more goods you produce, more non-renewable natural resources get exhausted and our environment become further polluted. Nature has some assimilative capacity. But, if pollution level is too high, the nature may not be able to assimilate it. Clean air and clean water may not be available to us. There may not be enough trees around us to clean our atmosphere and we may have to suffer from various health problems. If non-renewable natural resources deplete fast, future generations may not have enough stock for its use. It means that if we continue growing our economies the way we do, there may come a point when it may become impossible to continue with the level of development reached. Sustainable development may, therefore, require the preservation of stocks of resources, including environmental resources and exhaustible natural resources. A study in 1972 had tried to show that limits to growth on the planet will be reached sometime in next hundred years if present growth trends in world population, industrialization, pollution, food production and resource depletion were to continue unchanged. There is little reliance, in this view, on future development of technology, which may enhance productivity through efficiency. Some do point out that there would then be no mining and no industry. However, it is always prudent to be cautious. Before constraints loom large, it is not a bad idea to apply restraint. The message is that the pattern of growth

may have to be changed in certain economies and in others, the level reached may have to be maintained rather than substantially enhanced. Many analysts do not segregate environment; they suggest that it does not respect national boundaries. Irrespective of where green house gases are produced, global warming will take place. If ozone layer withers, whole humanity will suffer from its consequences. Concerned with environmental degradation, a world commission was set up in the recent past, which produced a report in 1987 under the title Our Common Future. This report defines sustainable development as that level which takes care of the needs of the present generation without compromising the needs of the future generations. We normally discussed development as process not as level. The definition of sustainable development can, therefore, be modified as a path of development in which options of future generations are not compromised by the path taken by the present generation. It is indeed difficult to determine the path that is sustainable or to find out whether the path is unique. It simply makes us cautious about our choice over consumption style and efforts in inventing technology and perhaps restraining growth in population. Quality of Life One shred of quality of life is already indicated in earlier section on sustainable development. If quality of air, quality of water and quality of sanitation are not good, the quality of life also will not be good. If our surroundings are

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littered, if the air is polluted or if we do not get safe drinking water, then we will not have a good life, no matter how much of many desirable goods we are able to buy from market. One can add availability of food, clothing, shelter, education facilities, health care, legal aid and security to the list of clean water, clean air and clean surrounding in order to define the quality of life. However, there is another shred of thinking which is not altogether unrelated to it. Those who suggest the other line, point out that the items listed above are determinants of well-being. We can think about quality of life in terms of its constituents too. The items listed above lead to better health, welfare, freedom of choice, and basic liberties, which are all indices of well-being. One should also be interested in distribution of well-being along gender, caste, class or regional lines. Many analysts hold that a society with somewhat overall lower literacy rate but equality between male and female literacy rates is better than another that has somewhat higher overall literacy rate but has gross inequality between male and female literacy rates. Some people also think that certain rights, which people enjoy in certain societies, are denied in others. These
1. 2. 3. 4. 5.

rights should also be included in this set of well-being indicators even though they do not fall in the economic category. This argument is acceptable in the sense that life cannot be separated into economic and non-economic compartments. Most of us would not prefer to be put in prison for any considerable period even if food, clothing, shelter and healthcare provided in the prison is far superior to what we normally get outside. Therefore, it is said that, political rights and civil rights or some indicators reflecting these rights should be added to the quality of life. With increasing concern for human rights, it would be a good idea to incorporate these indicators of well-being and welfare. After all, the whole purpose of consciously developing a society is to raise the level of well-being and welfare of its people. The idea of quality of life enriches the concept of standard of living, which is generally thought of in terms of rich food, expensive clothing, luxuriant cars and palatial houses, often manifestation of high income. In societal terms, it is captured through per capita income. But the quality of life idea adds the dimensions, which at times may not be captured through monetary valuation. EXERCISES

Explain the meaning of economic growth. Does it pertain to growth in short term? How do you differentiate two ideas of economic growth? How do we normally measure economic growth? Write about the basic ideas involved in various definitions of economic development. Is growth an essential condition of development? While concept of economic development in terms of growth with structural

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change is descriptive, whereas growth with redistribution is prescriptive. Do you agree or not? Explain your answer. 6. 7. How much importance do you assign to institutional and technological factors in development? What do you mean by sustainable development? Is it a problem of pollution affecting present generation or a problem of resource- depletion affecting future generation? What are the essential ingredients of quality of life? If standard of living is understood in terms of level of consumption of goods, how would you distinguish the quality of life from the consumption of goods? Match the following: A. B. C. D. A. B. C. D. A. B. C. D. Economic Development Economic Growth Sustainable Development Quality of Life Economic Development Economic Growth Sustainable Development Quality of Life Economic Development Economic Growth Sustainable Development Quality of Life A. B. C. D. A. B. C. D. A. B. C. D. GDP Health Environment Structural Change Long-term Redistribution Future Generations Structural Change Productivity Increase in GDP Basic Liberties Non-renewable resources

8.

9.

10. Match the following:

11. Match the following:

12. Discuss the evolution of four concepts outlined in this chapter. ACTIVITIES 1. 2. Prepare a table showing relevant series of GDP at current and constant prices. Calculate growth rate for each year and average growth rate for each decade. Write down things, places, activities and institutions, which are not economic.