Economic Development

ECONOMIC DEVELOPMENT
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DIRECTORATE OF DISTANCE EDUCATION

Gomal University Dera Ismail Khan
MUHAMMAD ISMAIL 03147963120 1 ASSIGNMENTS AND COMPOSING

ECONOMIC DEVELOPMENT –I
I. INRODUCTION
i) The Nature of Economic Development
ii) Traditional Economic Measures
iii) Three Core Values of Development
iv) Objectives of Development
II. DIVERSE STRUCTURES & COMMON CHARACTERISTICS OF DEVELOPING
NATIONS.
Classification of Developing Countries.
ii) Common Characteristics of Developing Nations.
a. Low levels of Living.
b. Low levels of productions.
c. High rates of population growth.
d. Unemployment
III. THEORIES OF DEVELOPMENT
The Linear stages theory.
ii) Structural change models
iii) The international Dependence revolution
iv) The new Growth Theory
v) Modern Economic Growth
IV. GROWTH, POVERTY & INCOME DISTRIBUTION
Some Basic Concepts
ii) Size & Functional Distribution of income
iii) Inequality & Absolute Poverty in Third World countries.
iv) Economic characteristics of poverty Groups
v) Kuznets Hypothesis & other tests
V. POPULATION, GROWTH AND ECONOMIC DEVELOPMENT
i) The Basic Issues, Population Growth & the quality of life
ii) The causes of High Fertility in developing countries.
iii) The consequences of High Fertility.
iv) Goals & objectives: Some Policy Approaches.
READING
Michael P.Todaro and Stephen C.Smith [2003], Economics Development 8th/latest Edition,
Pearson Education, Inc.
ECONOMIC DEVELOPMENT -I
History of Economic Development:
It is commonly said that the concept of economic development goes back to the
emergence of "Industrial Revolution" in Europe in 18th century. Because of such
industrial revolution the use of machinery, new ideas and new technology increased in
UK, France and Germany which initiated the process of industrialization in these

countries. Afterwards, this process spread over the to Japan, Russia and US. But
whole of the world could not be benefited by Industrial Revolution. The countries
from Asia, Africa and Latin America failed to avail the fruits of industrial revolution.
Accordingly, they remained poor and backward. In such state of affairs the world
divided into two distinctive parts. On the one side there were those countries which
experienced greater rise in their incomes, outputs and employments. On the other side
there were the countries which faced falling levels of outputs, rising level of
unemployment, the diseases, the poverty and ever increasing illiteracy. In this way, an
international division came into being.
The rich countries and the poor countries. In modern terminology, the world was
divided into two opposite poles which are given the name of 'North' (the rich
countries of the world) and the 'South' (the poor countries of the world).
Till a long time the people of the poor countries remained ignorant of their poverty.
They went on accepting their poverty, illiteracy, starvation and diseases as something
natural. After the World War II when so many countries got rid of 'Imperialism' a
desire emerged amongst these countries to remove their poverty, reduce
unemployment and improve their standard of living. In other words after World War II
there rose the desire for economic improvement in the backward nations of the world.
It is the “International Media" which played an important role in this surge of change.
The people of the poor countries became aware of with the life standards enjoyed by
their rich counterparts. Moreover, the foreigners living in the 'Colonies' created the
desire amongst the domestic residents to copy them in connection with their life-
standard and consumption patterns, With this back ground the concept of economic
development got the popularity.
Accordingly, the poor countries of the world are struggling for the removal of poverty,
illiteracy, starvation, unemployment, malnutrition, diseases, economic stagnation and
environmental pollution. But the poor countries can not devote such a long time what
it was devoted by the rich countries when they were poor countries.
Moreover, the level of resources, technologies and the social and institutional
structure of these poor countries does not allow them to attain economic development
as soon as could be possible. But even in the presence of these obstacles and
constraints the poor countries are highly over-ambitious to attain economic
development, particularly when we see that the inequalities at international level an
increasing day by day. As if we drew a line of demarcation between the rich and the
poor nations by $500 per capita income, i.e., these countries having per capita income
above $500 are the rich countries while the countries with per capita income lower
than $500 and the poor countries. In such situation, it is found out that 20% of the
world population which consists of the rich people is having control over 70% of
world's income. Whereas, 80% of world's population which resides in the poor
countries just occupies 30% of world's income.
I. INRODUCTION
Economic developmentis the development of economic wealth of countries, regions
or communities for the well-being of their inhabitants. From a policy perspective,

economic development can be defined as efforts that seek to improve the economic
well-being and quality of life for a community by creating and/or retaining jobs and
supporting or growing incomes and the tax base.
Different Definitions of Economic Development:
According to Prof. Winston:
"Economic Development shows the excess of consumption and production of a

country as compared with increase in population. This increase in population is due to
better combination and increase in the productivity of the factors of production".
According to Prof. Williamson:
"Economic Development is a process whereby the people of a country utilize the

available resources in such a way that the per capita income of the country increases".
According to Prof. Higgins:
"Economic Development is the increase in per capita and national income (NI) of a
country".
According to Prof. Arthur Lewis:
"Economic Development represents the per capita increase in the production of a

country".
According to Prof. Meir and Baldwin:
"Economic Development is a process whereby the real NI of a country increases over

a long period of time. If the increase in the real NI is more than the population
increase then the per capita real income of the country will also increase".
It is expressed Mathematically as:
If Y/P represents real national income (NI) and P represents population, then
economic development will take place if d(Y/P) > 0.
dt
In case d(Y/P) = dP , it would represent economic stagnation.

dt dt
While if d(Y/P) < dP or dP > d(Y/P) , it will represent backwardness.

dt dt dt dt
If we analyze Meir and Baldwin's definition we find the following important features
of economic development:
(i) Process, (ii) Increase in Real NI and (iii) Long Period of Time.

(i) Process: The process indicates the interaction of different technical and
administrative forces which result in increase of production and changes on demand
side as well as on supply side.
The changes on supply side are as:
(a) Discovery of new Resources, (b) Capital Accumulation, (c) Changes in

Population, (d) Introduction of Better Techniques of Production, (e) Improvement in
Skill, (e) Social and Institutional Changes.
The changes on demand side are as:
(a) Changes in Size and Nature of Tastes of the People, (b) Changes in the Level and
Distribution of NI, (c) Changes in Tastes of the people, (d) Changes in Social and
Institutional life.
(ii) Increase in Real Gross National Product (GNP): Economic development will take
place when the real GNP of a country increases. To get the real GNP of the country,
the GNP must be corrected by some index number. Sometimes it happens that the
GNP of a country increases due to inflation, such will not represent economic
development. Therefore, to know development we will have to deduct the price rise
from the increase in GNP. Moreover, we will have to deduct depreciation allowance
from GNP to get NI.
(iii) Long Period of Time: To assess economic development, a period of 25 years must
be kept in view. That is, if real GNP rises till the period of 25 years it will be accorded
as economic development.
Overview
There are significant differences 聽 between 聽 economic growth and economic
development. The term "economic growth" refers to the increase (or growth) of a
specific measure such as real national income, gross domestic product, or per capita
income. National income or product is commonly expressed in terms of a measure of
the aggregate value-added output of the domestic economy called gross domestic
product (GDP). When the GDP of a nation rises economists refer to it as economic
growth.
The term "economic development," on the other hand, implies much more. It typically
refers to improvements in a variety of indicators such as literacy rates, life
expectancy, and poverty rates. GDP is a specific measure of economic welfare that
does not take into account important aspects such as leisure time, environmental
quality, freedom, or social justice. Economic growth of any specific measure is not a
sufficient definition of economic development.
Local development
The term "economic development" is often used in a regional sense as well (e.g., a
mayor might say that "we need to promote the economic development of our city"). In
this sense, economic development focuses on the recruitment of business operations
to a region, assisting in the expansion or retention of business operations within a

region or assisting in the start-up of new businesses within a region. (See section
'regional policy' below.)
In addition to economic models, the needs of constituency groups guide economic
developer's actions. For example, a local economic developer working out of a
mayor's office may act towards decreasing unemployment by attracting businesses
with large labor needs (call centers). The economic developer working for the
chamber of commerce dominated by banks, real estate agents and utilities will recruit
manufacturers with large capital investments (steel and chemical plants). The
economic developer working for the state manufacturers association will lobby for
more workforce training money. The economic developer working for a university
will concentrate on business start-ups, specifically those based on intellectual property
developed by the university (biotech).
In its broadest sense, economic development encompasses three major areas:
1) Policies that governments undertake to meet broad economic objectives such as
price stability, high employment, expanded tax base, and sustainable growth. Such
efforts include monetary and fiscal policies, regulation of financial institutions, trade,
and tax policies.
2) Policies and programs to provide infrastructure and services such as highways,
parks, affordable housing, crime prevention, and educational programs and projects.
3) Policies and programs explicitly directed at job creation and retention through
specific efforts in business finance, marketing, neighborhood development, small
business start-up and development, business retention and expansion, technology
transfer, workforce training and real estate development. This third category is a
primary focus of economic development professionals.
Economic developers
Economic development, which is thus essentially economics on a social level, has
evolved into a professional industry of highly specialized practitioners. The
practitioners have two key roles: one is to provide leadership in policy-making, and
the other is to administer policy, programs, and projects. Economic development
practitioners generally work in public offices on the state, regional, or municipal level,
or in public-private partnerships organizations that may be partially funded by local,
regional, state, or federal tax money. These economic development organizations
(EDOs) function as individual entities and in some cases as departments of local
governments. Their role is to seek out new economic opportunities and retain their
existing business wealth.
With more than 20,000 professional economic developers employed world wide in
this highly specialized industry, the International Economic Development Council
[IEDC] headquartered in Washington, D.C. is a non-profit organization dedicated to
helping economic developers do their job more effectively and raising the profile of
the profession. With over 4,500 members across the US and internationally, serving
exclusively the economic development community. Membership represents the entire
range of the profession ranging from regional, state, local, rural, urban, and
international economic development organizations, as well as chambers of commerce,
technology development agencies, utility companies, educational institutions,
consultants and redevelopment authorities. Many individual states also have

associations comprising economic development professionals and they work closely
with IEDC.
i) The Nature of Economic Development
Being underpriced, nature is overexploited. So, an economy could enjoy growth in

real GDP and improvements in HDI for a long spell even while its overall productive
base shrinks. As proposals for estimating the social scarcity prices of natural resources
remain contentious, economic accountants ignore them and governments remain wary
of doing anything about them. Here is an example of how the use of nature is
subsidized.
An easy way for governments to earn revenue in countries that are rich in forests is to
issue timber concessions to private firms. Imagine that concessions are awarded in the
upland forests of a watershed. Forests stabilize both soil and water flow. So
deforestation gives rise to soil erosion and increases fluctuations in water supply
downstream. If the law recognizes the rights of those who suffer damage from
deforestation, the timber firm would be required to compensate downstream farmers.
But compensation is unlikely when (i) the cause of damage is many miles away, (ii)
the concession has been awarded by the state,2 ﾧ and (iii) the victims are scattered
groups of farmers. Problems are compounded because damages are not uniform
across farms: location matters. It can also be that those who are harmed by
deforestation do not know the underlying cause of their deteriorating circumstances.
As the timber firm is not required to compensate farmers, its operating cost is less
than the social cost of deforestation, the latter being the firm's logging costs and the
damage suffered by all who are adversely affected. So if the timber is exported
abroad, the export contains an implicit subsidy, paid for by people downstream. And I
have not included forest inhabitants, who now live under even more straightened
circumstances or, worse, are evicted without compensation. The subsidy is hidden
from public scrutiny, but it amounts to a transfer of wealth from the exporting to the
importing country. Some of the poorest people in a poor country subsidize the
incomes of the average importer in what could well be a rich country. That does not
feel right.
(a) Quantifying economic failure

The spatial character of nature's hidden subsidies is self-evident, but getting a
quantitative feel involves hard work. So the literature is sparse. As in many other
scientific fields, some of the best advances have been made in studies of localized
problems. Basing their estimate on a formal hydrological model, Pattanayak &
Kramer (2001) ﾧ reported that the drought mitigation benefits farmers enjoy from
upstream forests in a group of Indonesian watersheds are 1–10% of average
agricultural incomes. In another paper, Pattanayak & Butry (2005) ﾧ studied the
extent to which upstream forests stabilize soil and water flow in Flores, Indonesia.
Downstream benefits were found to be 2–3% of average agricultural incomes.
In a study in Costa Rica on pollination services, Ricketts et al. (2004) ﾧ discovered

that forest-based pollinators increase the annual yield in nearby coffee plantations by
as much as 20 per cent. Subsequently, Ricketts et al. (2008)ﾧ analysed the results of
some two dozen studies, involving 16 crops in five continents, and discovered that the
density of pollinators and the rate at which a site is visited by them declines at rapid

exponential rates with the site's distance from the pollinators’ habitat. At 0.6 km
(respectively, 1.5 km) from the pollinators’ habitat, for example, the visitation rate
(respectively, pollinator density) drops to 50 per cent of its maximum.
(b) Eliminating nature's subsidies

How should societies eliminate nature's subsidies? In the case of the upstream firm
and downstream farmers, the state could tax the firm for felling trees. The firm in this
case would be the ‘polluter’, the farmers the ‘pollutees’. Pollution taxes are known
today as ‘green taxes’. They invoke the polluter-pays-principle (PPP). The efficient
rate of taxation would be the damage suffered by farmers. What the state does with
the tax revenue is a distributional matter, to which I shall return presently.
But there is also a ‘market-friendly’ way to eliminate the subsidies. Lindahl (1958)
ﾧ suggested that the state (or the community) could introduce private property rights
to natural capital, the thought being that markets would emerge to price nature's
services appropriately. A problem with the proposal, at least as I have presented it
here, is that it is not clear who should be awarded property rights. In our example of
the upstream firm and downstream farmers, the sense of natural justice might suggest
that the rights should be assigned to farmers. Under a system of ‘pollutees-rights’, the
timber firm would be required to compensate farmers for the damage it inflicts on
them. Such a property-rights regime also invokes PPP.
But the rights could be awarded to the timber firm instead. In that case it would be the
farmers who would have to compensate the firm for not felling trees! The latter
system of property rights invokes the pollutee-pays-principle (a reverse PPP, as it
were), which, in the example we are studying, would seem repellent. But it has been
argued by proponents that from the efficiency point of view it is a matter of
indifference which system of private property rights is introduced.
Market-based systems have attracted much attention among ecologists and

development experts in recent years, under the label payment for ecosystem
services or PES (see Daily & Ellison (2002 ﾧ ) and Pagiola et al. (2002 ﾧ ) for
sympathetic reviews of a market-based PES). The ethics underlying PES are
seemingly attractive. If decision makers in Brazil believe that decimating the Amazon
forests is the true path to economic progress there, should not the rest of the world pay
Brazil not to raze them to the ground? If the lake on my farm is a sanctuary for
migratory birds, should not bird lovers pay me not to drain it for conversion into farm
land? Never mind that the market for ecosystem services could be hard to institute, if
a system involving PES were put in place, owners of ecological capital and
beneficiaries of ecological services would be forced to negotiate. The former group
would then have an incentive to conserve their assets.
Hundreds of new PES schemes have been established round the globe. China, Costa
Rica and Mexico, for example, have initiated large-scale programmes in which
landowners receive payment for increasing biodiversity conservation, expanding
carbon sequestration and improving hydrological services. But although PES may be
good for conservation, one can imagine situations where the system would be bad for
poverty reduction and distributive justice. Many of the rural poor in poor countries
enjoy nature's services from assets they do not own. Even though they may be willing
to participate in a system of property rights in which they are required to pay for

ecological services (Pagiola et al. (2008 ﾧ ) report in their careful study of a silvo-
pastoral project in Nicaragua that they do), it could be that in the world we have come
to know, the weaker among the farmers are made to pay a disproportionate amount.
Some may even become worse off than they were earlier. One could argue that in
those situations the state should pay the resource owner instead, using funds obtained
from general taxation. Who should pay depends on the context (Bulte et al. 2008 ﾧ).
A PES system in which the state plays an active role is attractive for wildlife
conservation and habitat preservation. In poor countries, property rights to grasslands,
tropical forests, coastal wetlands, mangroves and coral reefs are often ambiguous. The
state may lay claim to the assets (‘public’ property being the customary euphemism),
but if the terrain is difficult to monitor, inhabitants will continue to reside there and
live off its products. Inhabitants are therefore key stakeholders. Without their
engagement, the ecosystems could not be protected. Meanwhile flocks of tourists visit
the sites on a regular basis. An obvious thing for the state to do is to tax tourists and
use the revenue to pay local inhabitants for protecting their site from poaching and
free-riding. Local inhabitants would then have an incentive to develop rules and
regulations to protect the site.
5. Measuring sustainable development
Whenever economists have probed the matter, they have found that all economies
subsidize large numbers of economic transactions with nature. Some of those
transactions are large (construction of large dams that alter ecosystems), but mostly
they are small. How do those subsidies affect overall economic performance? More
fundamentally, how should economic performance be measured?
A famous 1987 report by an international commission (widely known as the

Brundtland Commission Report) defined sustainable development as ‘ …
development that meets the needs of the present without compromising the ability of
future generations to meet their own needs’ (World Commission for Environment and
Development 1987 ﾧ ). In this reckoning, sustainable development requires that
relative to their populations each generation should bequeath to its successor at least
as large a productive base as it had itself inherited. Notice that the requirement is
derived from a relatively weak notion of justice among the generations. Sustainable
development demands that, relative to population numbers, future generations have no
less of the means to meet their needs than we do ourselves; it demands nothing more.
But how is a generation to judge whether it is leaving behind an adequate productive
base for its successor?
(a) Shadow prices as social scarcities

We noted earlier that neither GDP nor HDI is of help, because neither is a measure of
a country's productive base. So, what does measure the productive base? A society's
productive base is the stock of all its capital assets, including its institutions. As we
are interested in estimating the change in an economy's productive base over a period
of time, we need to know how to combine the changes that take place in its capital
stocks.
Intuitively, it is clear that we have to do more than just keep a score of capital assets
(so many additional pieces of machinery and equipment, so many more miles of

roads, so many fewer square miles of forest cover and so forth). An economy's
productive base declines if the decumulation of assets is not compensated by the
accumulation of other assets. Contrary-wise, the productive base expands if the
decumulation of assets is more than compensated by the accumulation of other assets.
The ability of an asset to compensate for the decline in some other asset depends on
technological knowledge (e.g. double glazing can substitute for central heating up to a
point, but only up to a point) and on the quantities of assets the economy happens to
have in stock (e.g. the protection trees provide against soil erosion depends on the
existing grass cover). The values to be imputed to assets are known as their shadow
prices. Formally, by an asset's shadow price, we mean the net increase in societal
well-being that would be enjoyed if an additional unit of that asset were made
available, other things being equal. As shadow prices reflect the social scarcities of
capital assets, it is only in exceptional circumstances that they equal market prices.
It should not surprise you that estimating shadow prices is a formidable problem.
There are ethical values we hold that are probably impossible to commensurate when
they come up against other values that we also hold. That does not mean ethical
values do not impose bounds on shadow prices; they do.
(b) The wealth of nations

The value of an economy's entire stock of capital assets measured in terms of their
shadow prices is its wealth. Sometimes, we call it comprehensive wealth, to remind
ourselves that the measure is to include all capital assets (building and machinery,
roads and rail tracks; health and skills; natural capital and knowledge and
institutions), not just reproducible capital such as buildings and machinery, roads and
rail tracks. Comprehensive wealth (henceforth, wealth) is a number; expressed, say, in
international dollars.
It can be shown that an economy's wealth measures its overall productive base
(Hamilton & Clemens 1999 ﾧ; Dasgupta & Mäler 2000 ﾧ; Dasgupta 2001 ﾧ). So, if we
wish to determine whether a country's economic development has been sustainable
over a period of time, we have to estimate the changes that took place over that period
in its wealth relative to growth in population. The theoretical result I am alluding to
gives meaning to the title of perhaps the most famous book ever written on
economics, namely, An inquiry into the nature and causes of the wealth of nations.
Observe that Adam Smith did not write about the GDP of nations, nor of the HDI of
nations; he wrote about the wealth of nations. It would seem we have come full circle,
by identifying sustainable development with the accumulation of (comprehensive)
wealth.
(c) An empirical exercise

In an important paper, Hamilton & Clemens (1999) ﾧ estimated the change in the
wealth of 120 nations during the period 1970–1996 by defining an economy's wealth
as the value of its reproducible capital assets and three classes of natural capital assets
(commercial forests, oil and minerals and the quality of the atmosphere in terms of its
carbon dioxide content). The shadow prices of oil and minerals were taken to be their
market prices minus extraction costs. The shadow price of global carbon emission
into the atmosphere is the damage caused by bringing about climate change. That
damage was taken to be $20 per tonne, which is in all probability a serious

underestimate. Forests were valued in terms of their market price minus logging costs.
Contributions of forests to ecosystem functions were ignored.
ii) Traditional Economic Measures
Methods to Measure Economic Development:
There are following methods to measure the economic development:
(1) Increase in real GNP, (2) Increase in real per capita income, (3) Economic welfare
criterion, (4) Social welfare criterion, (5) Human welfare criterion.
However, in the earlier days only the first two methods were adopted to measure
economic development.
(1) Increase in Real GNP as a Criterion of Economic Development:
In the light of Profs. Meir and Baldwin's definition ﾧ , it is said that if real GNP
increases over a long period of time, this situation will be considered as economic
development. Following arguments are given in favor of this criterion:
(i) The increase in real per capita income is based upon increase in real GNP.
Therefore, how long the real GNP does not increase, the per capita income cannot
increase.
(ii) So may countries who want to increase their military power they have the desire
to increase their population. They never think of per capita income rise. Therefore, if
in such countries the per capita income remains the same, it does not mean that
economic development has not taken place. Moreover, if in some countries due to
drought, migration and genocide etc., the per capita income rises, it does not mean,
economic development.
(iii) If the per capita method is adopted the population problems will be ignored. But
as far as UDCs are concerned, the need is to face the population problems rather
keeping them aside. Moreover, if in UDCs we adopt per capita method, then there will
be hardly any development because in UDCs per capita income rises very slowly and
nominally.
(iv) The criterion of increase in real national income is also important for Developed
Countries (DCs). It is because that these countries have already attained high per
capita income levels. But they want to increase national income so that full
employment could be maintained without inflation and deflation.
(2) Increase in Real Per Capita Income as a Method of Economic Development:
Some economists are of the view that if per capita income or real GNP per capita
increases over a long period of time, it will be accorded as economic development. As
Prof. Meir says, "Economic Development is a process whereby the real per capita
income of a country increases over a long period of time". But this would occur only
when the growth of real national income is more than the growth of population.

According to this method, if the per capita income of a country increases each
resident of the country will be able to attain more goods and services than before at
average. Consequently, the average poverty will come down and the life standard of
the people of the country will improve.
Formula for Per Capita Real GDP and its Growth:

If we divide GDP or Y by population ( POP), we get per capita GDP as: Y/Pop
While if we divide GDP or Y by a price index (P), we get real GDP as: Y/P
Thus, the real per capita GDP (y) is as:
y=Y
(Pop) . (Y)
The growth rate of a product (ab) is equal to the sum of the growth rates of a and b. It
is as:
gab = ga + gb
While in case of a ratio c/d, the growth rate is equal to the difference of the growth
rates of c and d is as:
gc/d = gc - gd
Then following these principles, the growth rate of real per capita GDP (y) will be as:
gy = gY - (gPop + gP) = gY - gPop - gP
This shows that the growth rate of per capita real GDP is equal to the rate of growth
of nominal GDP minus the sum of growth rates of population and prices. This
equation holds for so-called instantaneous or point rates of growth.
As long as the rates of population growth and inflation are not very high, then the
above equation holds. We suppose that in case of Pakistan, the nominal GDP grew last
year at 6%, population grew at 2.0%, and the rate of inflation was 3.0% , then the
above equation tells that the per capita real GDP grew at 6 - 2 - 3 = 1%.
Merits of Real GNP-ism and Per Capita-ism:
(i) Primarily the criterion of GNP per capita is adopted to measure economic
development. It is so because that the information regarding national income, price
level and population are mostly available in each country.
(ii) On the basis of statistics of GNP and population the per capita GNP can easily be
calculated.
(iii) On the basis of GNP and the real GNP the international comparisons between
countries can easily be made, i.e., the country with higher GNP or GNP per capita

would be a developed country as compared with the country having low GNP or low
per capita income.
(iv) The measure of GNP per capita reflects the social and economic structure of
societies.
Demerits of Real GNP and Per Capita Method:
(i) Standard of Living: We told above that the per capita method of economic
development reflects the living standard of the people. But perhaps it is not so, as
Brunei Dar-Ul-Salaam and Kuwait have the highest per capita incomes but the
average living standard of a US citizen is far above than that of Brunei and Kuwait.
Moreover, the per capita is obtained by dividing the total national income by the total
population, but the national output and national population statistics may be
misleading, over-estimated or under-estimated. In such situation the per capita income
which has been estimated will not be correct. Again the per capita income is an
average income which includes both the big incomes of industrialists and the minor
incomes of unskilled daily wage earners. Accordingly the average or per capita
income does not truly represent the standard of living of the people. Therefore, the
level of distribution of income must be kept in view while giving some verdict about
the level of development.
Furthermore, it may also happen that GNP of a country increases but a minor segment
of the society gets the fruits of it and the standard of having of majority of masses
remains obstructed. Such phenomenon may be given the name of economic growth,
not economic development. And in such situation the economic welfare of the masses
will not improve; the economic growth and economic welfare will diverge.
(ii) Increase in Population: According to GNP per capita method, economic

development will take place if real GNP exceeds population growth. But it has also
been observed in case of poor countries that they are furnished with higher growth
rate of population. If in such countries like Pakistan along with increase in GNP the
population also increases there will be a nominal increase in per capita income.
According to per capita criterion this would be hardly any development. But it is not
true. Such countries do witness certain rise in their GNP along with changes in
productivity and efficiency. However, this situation will represent economic growth
not development which is furnished with the structural and institutional changes along
with growth in output. Thug according to per capita method population is an obstacle
in the attainment of economic development.
(iii) International Comparison: According to GNP per capita method, development is

characterized by the level of per capita incomes of different countries. The countries
having greater incomes per capita will be developed countries and vice versa. But the
comparison of per capita incomes of different countries at international level is
furnished with the; following problems:
(a) As told earlier the statistics regarding per capita income is not reliable in case of
developing countries. They are just guesses and approximates. While in case of
developed countries, most of the statistics is accurate. Accordingly, in such situation,

the comparison is difficult. In case of developed countries, there is the use of money
and there is little barter trade. The figure regarding outputs and incomes are mostly
true. While in case of poor countries there is a barter trade, reduced use of money,
there is a trend to conceal the incomes and outputs on the part of earners and
producers. In such situation, the statistics are not accurate in case of developing
countries. In such state of affairs, how the comparison regarding per capita incomes of
the poor and rich countries can be made.
(b) The national income statistics obtained with and without the inclusion of self-
services will yield different results. As in certain countries such services are included
while in certain other countries they are not included. Thus in such state of affairs, the
international comparisons will be doubtful.
(iv) Dual Economy: The economy where a few developed cities go side by side along
with the majority of the backward villages; unemployment along with capital
intensive technology; and mass poverty along with a few rich families is given the
name of dual economy. Accordingly, if in any country, per capita income rises along
with the existence of a dual economy, it will be the economic growth not the
economic development because the rise in per capita income could not bring changes
in the socio-economic life of the society.
(v) Social Opportunity Costs: As rise in per capita income is accorded as economic
development, but during such rise in GNP or GNP per capita, a common man has to
suffer; there may be the distortions in the family life; there may be the tensions and
tortures; there may be the mass environmental pollution and traffic noises etc. This
shows that the rise in per capita income is furnished with a deterioration in the quality
of life. In other words, the society will have to bear the greater opportunity costs of
rise in GNP per capita. Thus in such phenomenon the economic growth will be taking
place instead of economic development.
(vi) Nature of Output Produced: The criterion of rise in per capita income does not
consider the nature of output produced which has led to enhance the GNP per capita.
As if in a country the GNP rises due to the greater production of military hardware;
more production of alcohol; and a greater production of palacious houses it will not
represent economic development. Because the plenty and abundance has not benefited
a common man. The rich segment of the society has gone more rich while the poor
section of the society has further gone poor.
(vii) Practical Failure: The period of 1960s was accorded as a period of "Development
Decade" whereby it was conceived that for the sake of development, GNP must be
increased by 6% annually. Accordingly, a ruthless craze developed amongst the
countries to attain a 6% rise in GNP. But during such craze the problems of poverty,
unemployment and income distribution were ignored. Then the economists and policy
makers emphasized upon "Dethronement of GNP", Despite the rise in GNP by 6% per
annum the unemployment, diseases, environmental pollution could not be removed.
The income distribution could not be made fairer; the infant mortality rates could not
be decreased; the water supply and water sanitation facilities could not be enhanced;
the illiteracy could not be decreased; and social injustice could not be removed in
majority of the developing countries despite rise in GNP and GNP per capita.

Dr. Mahbub-Ul-Haq who once said, "First make the cake and then divide it" brought
the change in his thinking when he wrote an article "Employment and Income
Distribution in 1970s". He said, The economic development should launch a big war
against worst type of poverty. The developmental goals should be expressed in the
removal of poverty, diseases, malnutrition, unemployment and illiteracy etc. We were
taught to take care of GNP and it will take care of poverty, But now it should be
reversed. We should have an eye on poverty because it will take care of GNP. In other
words, we should be worried of components of GNP, rather growth rate of GNP.
Accordingly, in 70s a change in emphasis occurred amongst economists and policy

makers, "The
Redistribution from Growth" where it was considered that along with increase in GNP
per capita, the economic welfare should also be entertained. As the economists like
Gunner Myrdal and Lebinstein etc., are of the view that, to measure economic
development the criterion of economic welfare be employed.
iii) Three Core Values of Development
According to Todaro, Development must, therefore, be conceived of as a multi-

dimensional 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 absolute poverty.
Development, in its essence, must represent the whole gamut of change by which an
entire social system, tuned to the diverse basic needs and desires of individuals and
social groups within that system, moves away from a condition of life widely
perceived as unsatisfactory, toward a situation or condition of life as materially and
spiritually "better".
According to Prof. Goulet, at least three basic components as core values should serve
as a conceptual basis and practical guidelines for understanding the "inner" meaning
of development. These core values - sustenance, self-esteem, and freedom - represent
common goals sought by all individuals and societies'? They relate to fundamental
human needs that find their expression in almost all societies and cultures at all times.
Sustenance:
The life-sustaining basic human needs include food, shelter, health and protection.
When any one of these is absent or in critically short supply, a condition of absolute
"underdevelopment" exists.
Self-esteem:
A second universal component of good life is self- esteem- a sense of worth and self-
respect- of not being used as a tool by others for their own ends. Due to the
significance attached to material values in developed nations, worthiness and esteem
are now-a-days increasingly conferred only on countries that possess economic wealth
and technological power- those that have developed.
Now-a-days the Third World seeks development in order to gain the esteem which is
denied to societies living in a state of disgraceful "underdevelopment." ...
Development is legitimized as a goal because it is an important, perhaps even an
indispensable, way of gaining esteem.6

Freedom from Servitude:
Arthur Lewis stressed the relationship between economic growth and freedom from
servitude when he concluded that "the advantage of economic growth is not that
wealth increases happiness, but that it increases the range of human choice." Wealth
can enable a person to gain greater control over nature and his physical environment
than they would have if they remained poor.
It also gives them the freedom to choose greater leisure. The concept of human
freedom should encompass various components of political freedom, freedom of
expression, political participation and equality of opportunity.
It is interesting to note that some of the most notable economic success stories of the
1970s and 1980s (Saudi Arabia, South Korea, Singapore, Malaysia, Thailand,
Indonesia, Turkey and China among others) did not score highly on the 1991 Human
Freedom Index compiled by the United Nations Development Programme (UNDP).
iv) Objectives of Development
ecuring economic development, social equity ﾧ and justice, and environmental

protection is the goal of sustainable development. Although these three factors can
work in harmony, they are often found to conflict with one another. During the latter
half of the 20th century economic development for a better standard of living has been
instrumental in damaging the environment ﾧ. We are now in a position whereby we
are consuming more resources ﾧ than ever, and polluting the Earth with waste
products. More recently, society ﾧ has grown to realise that we cannot live in a
healthy society or economy with so much poverty and environmental degradation.
Economic growth will remain the basis for human development, but it must change
and become less environmentally destructive. The challenge of sustainable
development is to put this understanding into practice, changing our unsustainable
ways into more sustainable ones.
The aim of sustainable development is to balance our economic ﾧ , environmental

ﾧ and social ﾧ needs, allowing prosperity for now and future generations ﾧ .
Sustainable development consists of a long-term, integrated approach to developing
and achieving a healthy community ﾧ by jointly addressing economic, environmental,
and social issues, whilst avoiding the over consumption of key natural resources.
Sustainable development encourages us to conserve and enhance our resource base,

by gradually changing the ways in which we develop and use technologies. Countries
must be allowed to meet their basic needs of employment ﾧ, food ﾧ,energy ﾧ , water
ﾧ and sanitation. If this is to be done in a sustainable manner, then there is a definite
need for a sustainable level of population ﾧ . Economic growth should be supported
and developing nations should be allowed a growth of equalquality ﾧ to the
developed nations.

II. DIVERSE STRUCTURES & COMMON CHARACTERISTICS OF DEVELOPING NATIONS.
i) Classification of Developing Countries.
A developing country, also called a less developed country or underdeveloped

country, is a nation with an underdeveloped industrial base, and a low Human
Development Index ﾧ (HDI) relative to other countries.[1]ﾧ On the other hand, since
the late 1990s developing countries tended to demonstrate higher growth rates than
the developed ones.[2]ﾧ There is no universal, agreed-upon criterion for what makes
a country developing versus developed and which countries fit these two categories,
[3] ﾧ although there are general reference points such as a nation's GDP per capita
ﾧ compared to other nations. Also, the general term less-developed country should
not be confused with the specific least developed country ﾧ.
There is criticism of the use of the term developing country. The term implies
inferiority of adeveloping country or undeveloped country compared to a developed
country ﾧ , which many countries dislike. It assumes a desire to develop along the
traditional Western model ofeconomic development ﾧ which a few countries, such
as Cuba ﾧ and Bhutan ﾧ, choose not to follow.[4]ﾧ An alternative measurement that
has been suggested is that of gross national happiness ﾧ , measuring the actual
satisfactied economies but lower GDP per capita than other developing nations are
often categorized under the term newly industrialized countries ﾧ.[5]ﾧ[6]ﾧ[7]ﾧ[8]ﾧ
According to authors such as Walt Whitman Rostow ﾧ, Third World countries are in
transition from traditional lifestyles towards the modern lifestyle which began in
theIndustrial Revolution ﾧ in the 18th and 19th centuries.
Measure and concept of development

The development of a country is measured with statistical indexes such as income per
capita ﾧ (per person) (gross domestic product ﾧ), life expectancy ﾧ, the rate of literacy
(ignoring reading addiction[clarification needed ﾧ]), et cetera. The UN has developed
the Human Development Index ﾧ (HDI), a compound indicator of the above statistics,
to gauge the level of human development for countries where data is available. The
UN sets Millennium Development Goals (MDGs) from a blueprint developed by all
of the world's countries and leading development institutions, in order to evaluate
growth.[14]ﾧ
Developing countries are, in general, countries that have not achieved a significant
degree of industrialization relative to their populations, and have, in most cases, a
medium to low standard of living ﾧ. There is a strong association between low income
and high population growth.
The terms utilized when discussing developing countries refer to the intent and to the
constructs of those who utilize these terms. Other terms sometimes used are less
developed countries (LDCs), least economically developed countries (LEDCs),
"underdeveloped nations" or Third World ﾧ nations, and "non-industrialized nations".
Conversely, developed countries ﾧ , most economically developed countries
ﾧ(MEDCs), First World ﾧ nations and "industrialized nations" are the opposite end of
the spectrum.
To moderate the euphemistic ﾧ aspect of the word developing, international
organizations ﾧ have started to use the term less economically developed country

ﾧ (LEDCs) for the poorest nations—which can, in no sense, be regarded as
developing. That is, LEDCs are the poorest subset ﾧ of LDCs. This may moderate
against a belief that the standard of living across the entire developing world is the
same.
The concept of the developing nation is found, under one term or another, in
numerous theoretical systems having diverse orientations — for example, theories
of decolonization ﾧ, liberation theology ﾧ,Marxism ﾧ, anti-imperialism ﾧ, and political
economy ﾧ.
Another important indicator is the sectoral changes that have occurred since the stage
of development of the country. On an average, countries with a 50% contribution
from the Secondary sector of Manufacturing ﾧ have grown substantially. Similarly
countries with a tertiary Sector stronghold also see greater rate ofEconomic
Development ﾧ.
Some researchers in development economics, such as Theodore Schultz ﾧ who won
a Nobel Prize ﾧ in 1979, have found that literate farmers in developing countries are
more productive than illiterate farmers. They therefore recommend investing
in human capital ﾧ (education, health, etc.) as an effective tool for economic
development. Others, such as Mohammed Tamim ﾧ , believe that economic
development is measurable in educational level from primary school to the university.
They noticed that wherever the educational level is raised, the level of development is
also raised. They conclude that the percentage of the schooled population is
proportional to the economic growth rate and inversely proportional in the
demographic growth rate. The Take-Off ﾧ of Walt Whitman Rostow ﾧ can start in a
country if its population is completely schooled. It is therefore necessary for the
organization of a worldwide education program, itself conditioned by another
worldwide program of birth control and the establishment of a worldwide
organization for the implementation of this development strategy.
ii) Common Characteristics of Developing Nations.
Introduction:
The total major countries of the world are 182 out of which only 34 are developed and
remaining 148 are under developed. Developing Country (DC) is a nation which, compare to
developed nations, lacks industrialization, infrastructure, developed agriculture developed natural
resources, and suffers from a low per capita income as a result. Developing countries and developed
countries are differentiating on the bases of self-esteem, freedom of choice and influence of
externals. A country where the average income of the people is much lower than that of developed
countries, the economy depends upon a few export crops and where farming is conducted by primary
methods is called developing country. Rapid population growth is causing the shortage of food in many
developing countries.
Developing Country:
Developing countries are also called under-developed nations (UDN) or the South. Most of them
are in Africa, Asia and Latin America.
According to Prof. R. Nurkse:
“Under developed countries are those which when compared with the advanced countries, are
under-equipped with capital in relation to their population and natural resources.”
Developed Country:
A group ﾧ of industrialized nations ﾧ including Australia, Austria, Canada, France, Germany, Italy,
Japan, the UK and the United States ﾧ . In some contexts ﾧ such countries ﾧ are collectively called
the North ﾧ.
According to Kofi Annan ﾧ, former Secretary General of the UN:
"A developed country is one that allows all its citizens to enjoy a free and healthy life in a safe
environment."

Definitions of Developing Nations:
 According to United Nations Experts:
“A developing country is that in which per capita income is low when compared to the per
capita incomes of U.S.A., Canada, Australia and Western Europe.”
 According to Prof. R. Nurkse:
“Under developed countries are those which when compared with the advanced countries, are
under-equipped with capital in relation to their population and natural resources.”
 According to Michal P. Tadaro:

“The under developed country, is that which has low levels of living (absolute poverty, poor
health, poor education and other social services), low self esteem (low respect, honour,
dignity) and limited freedom (freedom from external influence and dominance, freedom of
choice etc.).”
Criteria to an Under-developed Nation:
Ø Potential to become economically developed.
Ø Low or no rising trend of per capita income.
Ø Countries very poor in resources.
Prof. Harvey Leibenstein, in his “Economic Backwardness and Economic Growth” divides these
characteristics into four categories:
Following are the economic characteristics of UDC’s:
1- General Poverty and Low Living Standard
Poverty cannot be described, it can only be felt. The most of the less developed countries
(LDC) are facing the major problem of general as well as absolute poverty and low standard of living.
Most of the people in developing nations are ill-fed, ill-housed, ill-clothed and ill-literate. In LDCs
almost 1/3 population is much poor. But in Pakistan, 21.0 % population is living below poverty.
2- Burden of Internal and External Debts
Under developed countries (UDC) are loans and grants receiving nations. Most of the
developing countries of the world are depending on foreign economic loans. An amount of foreign
loans is increasing as the years pass. Their foreign trade and political structure is also dependent on the
guidance of foreigners. The outstanding total public debts are Rs. 10020 billion (55.5 % of GDP) and
the value of external debts and liabilities is $ 59.5 billion and its services charges are $ 7.8 billion in
2010-11 in Pakistan.
3- Low Per Capita Income
Due to low national income and huge population growth rate, per capita income in developing
countries is very low. At constant prices (Base Year 1959-60) per capita income of Pakistan was Rs.
985 and according to the Economic Survey of Pakistan 2010-11 per capita income of Pakistan is $
1254.
4- Over Dependence on Agriculture
61% Population of Pakistan is living in more than 50,000 villages. Backward agriculture is the
major occupation of the population. Agriculture sector is backward due to old and traditional methods
of cultivation, in-efficient farmers, lack of credit facilities; un-organized agriculture market etc. 66.7%
population is directly or indirectly depending on agriculture sector in Pakistan. It contributes to GDP
20.9 % while in advanced nations it is less than 10 %. It employed 45.0 % of labour force while it is
less than 5 % in developed countries.
5- Backward Industrial Sector
Backward industrial sector is an additional feature of under developed countries. Industrial
sector of Pakistani economy is backward since independence. Pakistan got only 34 (3.7 % of total
industrial units) industrial units out of 921 units in sub-continent in 1947. Small and backward
industrial sector is based on low level of capital formation, technology, training and education and over
dependence on agriculture sector. 13.2 % labour force is attached with industrial sector in Pakistan. Its
share to GDP is 25.8 % and to exports is about 60 %.
6- Unemployment
An outstanding problem of developing countries is their high rate of un-employment, under-
employment and disguised-unemployment. More than 3.05 million people are unemployed in Pakistan.
There is 16 % underemployed and 20 % disguised unemployed of total labour force. Unemployment
rate is 5.6 %; it is mainly due to high population growth rate, which is 2.1 %.
7- Low level of Productivity

The productivity level is very low in under developed countries as compared to developed
countries. Low level of productivity is due to economic backwardness of people, lack of skill, illiteracy
and ill-training. Value of annual productivity of labour is about $ 100 while it is more than $ 2500 in
advanced nations in Pakistan.
8- Deficit Balance of Payment
Third world countries have to import some finished and capital goods to make economic
development, on the other hand they have no products to export but raw material. During July-March,
its exports were $ 24 billion and imports were $ 32.3 billion In case of Pakistan. So, its deficit balance
of payment was $ 8.3 billion in 2010-11.
9- Dualistic Economy
Dualistic economy refers to the existence of advanced & modern sectors with traditional &
backward sectors. Pakistani economy is also a dualistic economy as other developing countries on the
following grounds: Co-existence of modern and traditional methods of production in urban and rural
areas, Co-existence of wealthy, highly educated class with a large number of illiterate poor classes and
Co-existence of very high living standard with very low living standard.
10- Deficiency of Capital
Shortage of capital is another serious problem of poor nations. Lack of capital leads to low per
capita income, less saving and short investment. Domestic saving is 9.5% of GDP and total investment
is 13.4% of GDP in Pakistan. Rate of capital accumulation is very low as 5%. On the other hand,
capital output ratio (COR) is very high which is not desirable for economic development.
11- In-appropriate Use of Natural Resources
Mostly there is shortage of natural resources in developing nations and this is also a cause of
their economic backwardness. Natural resources are available in various poor countries but they remain
un-utilized, under-utilized or mis-utilized due to capital shortage, less efficiency of labour, lack of skill
and knowledge, backward state of technology, improper government actions and limited home market.
Natural resources contribute to the GDP about 1%.
12- Market Imperfection
Market is imperfect in accordance with market conditions, rules and regulations in the most of
developing nations. There exist monopolies, mis-leading information, immobility of factors; hoarding
and smuggling etc. that cause the market to remain imperfect.
13- Limited Foreign Trade
Due to backwardness, developing countries have to export raw material because the quality of
their products is not according to international standard ISO etc. Lower developing nations have to
import finished and capital goods. Imports of Pakistan are $ 32.3 billion and exports are $ 24 billion
that cause into unfavourable balance of payment.
14- Vicious Circle of Poverty
According to vicious circle of poverty, less developed nations are trapped by their own poverty.
Vicious circle of poverty is also applied in case of Pakistani economy. Due to poverty, national income
of Pakistan is low which causes low saving and low investment. So, rate of capital formation is very
low results in “a country is poor because she is poor”.
15- Inflation
High rate of inflation causes economic backwardness in poor nations. Due to high level of
price, purchasing power, value of money and saving of the consumers tend to decrease. Rate of
inflation (CPI) is 14.1% in 2010-11 in Pakistan.
standard of living
Definition
Financial health ﾧ of a population ﾧ, as measured by per capita income ﾧ and consumption ﾧ of goods
and services ﾧ byindividuals ﾧ or households ﾧ.
Standard of Living refers to the necessaries, comforts and luxuries which a person is
accustomed to enjoy.
Factors determining standard of living:
The factors affecting the standard of living have been discussed below, in respect of
country and individual separately.

A. Factors of which the standard of living in a country depends.
Level of national income (output): The level of national income depends upon the
total volume of production in the country. The countries having higher national
income enjoy higher standard of living.
Level of productivity: The national income depends upon the productivity of a

person engaged in agriculture, industry, industry or any economic activity. Thus high
productivity resulted in high national income and high standard of living. The
advanced countries enjoy high standard of living because their productivity is high.
Size of population: The per capita income can be estimated by the total national
income and size of population. Thus if size of population is larger, the per capita
income will be smaller and as such standard of living will be lower.
Distribution of National Income: It the distribution of income is not equal, the

standard of living will affect. National income which has been ill distributed resulted
into wide disparity. Thought the per capita income is higher, Due to ill distribution of
income few rich person only enjoy higher standard of living and the masses of people
have to live with extremely low standard.
Level of Education: Generally it is observed that educated people tend to have high
standard of living on the contrary the illiterate people are reluctant to improve the
living standard even though they are provided large income.
General Price level: Different countries are having different price levels. The country
having low price level can provide good standard of living to her people and vice-a
versa.
Terms of trade: The terms of trade can be measured by the taking the ratio of price
level of its exports to the price level of its imports, thus only physical production is
not sufficient to have higher standard of living, the terms of trade is also equally
important in this regard.
The standard of living measures our material welfare

“Equity, dignity, happiness, sustainability – these are all fundamental to our lives but absent in the GDP.
Progress needs to be defined and measured in a way which accounts for the broader picture of human
development and its context"
Source: Helen Clarke, UNDP

The baseline measure is real national output per head of population or real GDP
per capita
Real income per capita is an inaccurate and insufficient indicator of living standards
For many economists, there is a growing disconnect between GDP and wellbeing
National income data can be used to make cross-country comparisons. This requires
1. Converting GDP data into a common currency
2. Making an adjustment to reflect differences in the cost of products in each country to produce
data expressed at purchasing power parity standard
3. The PPP dollar takes into account the fact that it is cheaper to live in some countries than
others

Problems in using national income statistics to measure living standards
 Official data on GDP understates the growth of real national income per capita over time due
to the shadow economy and the value of unpaid work by volunteers and people caring for
their family
 The "shadow economy" includes illegal activities such as drug production and distribution,
prostitution, theft, fraud and concealed legal activities such as tax evasion on otherwise-
legitimate business activities such as un-reported self-employment income
 Often official GDP data is inaccurate, e.g. many countries in sub-Saharan Africa do not
update their reporting often enough, and so their GDP numbers may miss large and fast-
growing sectors, like cell phones. In 2014 Nigeria became the largest economy in Africa
(over-taking South Africa) after a fundamental reassessment of their GDP calculation. GDP
data may become a target for political manipulation.
ﾧ
Changes in per capita GDP for member nations of the European Union
Reasons why GDP data may give a distorted picture of living standards in a
country:
Bill Gates on Alternative Measures of the Standard of Living
 The Human Development Index uses health and education statistics in addition to GDP.
 The UN's Multidimensional Poverty Index uses 10 indicators; including nutrition, sanitation, and
access to cooking fuel and water.
 By using purchasing power parity, which measures the cost of the same basket of goods and
services in different countries, economists can adjust GDP to gain better insight into living
standards.
1. Regional variations in income and spending: National data can hide regional variations in
output, employment and income per head of the population
2. Inequalities in income and wealth: Average (mean) incomes might rise but inequality could
grow
3. Leisure and working hours and working conditions: An increase in real GDP might have
been achieved at the expense of leisure time if workers are working longer hours or if working
conditions have deteriorated
4. Imbalances between consumption and investment: High levels of investment as a share of
GDP might be superb for creating extra capacity to produce but at the expense of consumer
goods and services for the current generation
5. Changes in life expectancy: Improvements in life expectancy don't always show through in
GDP accounts. Putting a monetary value on the benefits of increased longevity is difficult
6. The value of non-marketed output: Much useful and valuable work is not sold in markets at
market prices. The value of the output of people working for charities, self-help groups and of
housework might reasonably be added to national income statistics
7. Innovation and the development of new products: New goods and services become
available because of invention and innovation that simply would not have been available to
the richest person on earth less than fifty years ago. About half of what we spend our money
on now was not invented in 1870. Examples include air travel, cars, computers, antibiotics,
hip replacements, insulin and many other life-enhancing and life-saving drugs
8. Environmental considerations: Rising output might have been accompanied by an increase
in air and noise pollution and other externality effects that have a negative effect on our social
welfare
9. Defensive expenditures: Much spending is to protect against an economic or social bad e.g.
crime, or spending to clean up the effects of pollution and waste
d. Unemployment
Government policies to reduce unemployment must be based upon

the types and causes of unemployment that are prevalent. It may be worth glancing
back to that section to remind yourself of the major kinds of unemployment; however,
we will go into more detail in this section. General policies such as cuts in direct taxes

should be effective across any kind of unemployment, as it increases the appeal of any
job to any potential employee.
Real Wage Unemployment[
This is unemployment as a result of a kind of market failure, a failure of the labour
market to respond to changes in demand. If demand for workers rises, it is logical that
they will demand greater real wages (diagram). Similarly, if demand falls, workers
should expect to suffer lower real wages for the same work. Unfortunate though it
may seem, that is the way the market works! Real wage unemployment is usually
caused by a combination of:
 Strong trade unions - giving employees greater power over deciding wage conditions with the
threat of industrial action (strikes etc.) With strong unions, firms will not be able to reduce wages
when demand is low, leading to bankruptcy (unemployment) or layoffs of workers
(unemployment)
 Wage 'stickiness' - Employees on long term contracts will have a fixed wage over a long period of
time. If a downturn in demand occurs, wages cannot fall immediately in response - they are 'sticky'
 Minimum wage - This is a characteristic of most modern economies, guaranteeing every worker a
minimum standard of living. Whilst this is undoubtedly wonderful, if the minimum wage is set too
high, the labour market is once again inflexible
Government policies to tackle this form of unemployment are invariably unpopular

for workers, as their wage levels are threatened to the benefit of firms and businesses.
However, it is largely appreciated that, for example, overly strong trade unions can
utterly paralyse an economy (see Margeret Thatcher's time as Prime Minister in the
UK). Policies to combat real wage unemployment include trade union reform
(reducing their powers), increasing firms' ability to change wages and encouraging
shorter term contracts and ensuring that the minimum wage level does not adversely
impact the economy.
Frictional Unemployment
Remember, this is unemployment generated through incomplete information of the
labour market. This can be solved in two main ways. Firstly, increasing the
knowledge of the local vacancies through government funded 'job centres' could
reduce time between jobs. Secondly, increasing the incentive to search for suitable
jobs (such as reducing unemployment benefits and lower taxes on wages) could serve
the dual purpose of increasing incentives to search for work, and making more
vacancies acceptable to the unemployed individuals.
Cyclical Unemployment
It is worth noting that this form of unemployment can also be known as Keynesian or
demand-deficient unemployment. Over the economic cycle demand changes, and
regardless of how flexible wages are, unemployment will rise or fall (diagram). There
are clear links between the rate of economic growth and the level of unemployment. It
is clear that in a depression, unemployment will rise, as demand for good and services
falls. This could result in a negative multiplier effect, without government
intervention. Policies to reduce the impact of Keynesian unemployment include:
 Increased government spending - this includes reductions in taxes. Increased G will cause an
outward shift in AD, and may create a multiplier effect. Theoretically, government spending to pay
workers to dig huge trenches and fill them in again will help, as it increases national income.
However, targeted policies to increase the quality of infrastructure or levels of investment will be

more effective. Also, reductions in direct taxes will encourage more people into work, and also
increase the level of disposable income, hopefully leading to a positive multiplier effect
 Reduction of interest rates - remember that a fall in interest rates can also stimulate AD. Return to
that section to remind yourself that a fall in interest rates encourages consumption and investment
Geographical Unemployment
Naturally, policies to reduce geographical unemployment will seek to
decrease geographical immobility of labour. This is the inability of people to relocate
from areas with low demand for labour, to areas with high demand for labour. Policies
to reduce geographical unemployment include:
 Regional Incentives - this is regional policy to increase the incentives for new businesses to locate
in areas of high unemployment, thus reducing regional variations in unemployment caused by
geographical immobility
 Reducing geographical immobility - is the second and more direct method of combatting
geographical unemployment. It aims to reduce geographical immobility by reducing barriers to free
movement of workers (such as no border controls and cheap housing). This is more difficult within
a country as the barriers are often social in nature, such as family ties.
Structural Unemployment[edit]
This is the inability of workers to change the kind of employment (for example from
manufacturing to IT) they are in. Left without intervention, this could lead to
dangerous long term unemployment, whereby workers find it increasingly difficult to
find jobs as they become less desirable the longer they are unemployed. Policies to
reduce occupational unemployment include:
 Retraining - incentives for both companies to retrain and employees to take part in training to make
them more attractive and useful to firms. Governments may also directly take part in retraining
projects where unemployment levels as a result of structural unemployment are very high
 Reducing geographical immobility - could result in no need for retraining programs, as worker
could simply move to an area in which their skills are in high demand. This works providing the
costs associated with reducing geographical immobility are lower than those required for
occupational-orientated projects such as retraining, and that their skills are in demand somewhere.
Definitions of Unemployment
Measuring and defining unemployment is often at least as difficult as, for example,
determining the rate of economic growth within an economy, for several reasons.
Firstly, economist may disagree over what unemployment is, and how to measure it.
Secondly, individuals may either not wish it be known they are unemployed (i.e. not
claim benefits) or alternatively, claim that they are unemployed when they are not.
Measurements of Unemployment
Claimant Count
These include all the people that are nationally registered as claiming unemployment
benefit from the government. This does not include those receiving a form of
disability benefit, or those who do not claim unemployment allowance, only those that
are willing and able to find work, and do claim.
Labour Force Survey
This is an internationally accepted measure used by the International Labour
Organisation (ILO). This counts everyone without a job of any kind who have looked

for a job in the past month and is willing to start working within the next fortnight. Of
course since this is a survey and not a census (a survey is of a representative sample
of a population, a census is of the entire population), there will always be inaccuracies
and omissions in the data.
The effect of unemployment on our society
Unemployment affects not just the person himself but also his/her family and in the
long run the society where he lives.
Unemployment brings with it despair, unhappiness and anguish. It forces people to
live their lives in a way they do not wish to – The life expectancy is negatively
affected.
Life expectancy is the ease by which people living in a time/place are able to satisfy
their needs/wants. Here are the main aspects:
1. Mental health: Mental health problems like: Law self-confidence, feeling unworthy,
depression and hopelessness. With the lost income and the frustration involved in it, the
recently unemployed may develop negative attitudes toward common things in life and may
feel that all sense of purpose is lost. Frequent emotions could be – low self-esteem,
inadequateness and feeling dejected and hopeless.
2. Health diseases: The unemployment overall tension can increase dramatically general health
issues of individuals.
3. Tension at home: Quarrels and arguments at home front which may lead to tension and
increased numbers of divorces etc.
4. Political issues: Loss of trust in administration and the government which may lead to
political instability
5. Tension over taxes rise: Unemployment also brings up discontent and frustration amongst the
tax paying citizens. In order to meet the demands of the unemployment fund the government
many a times may have to increase the taxes thus giving way to restlessness amongst the tax
paying citizens.
6. Insecurity amongst employees: The prevailing unemployment and the plight of the
unemployed people and their families may create fear and insecurity even in the currently
employed people.
7. Crime and violence: Increase in the rate of crime.
8. Suicide cases: Increase in the rate of suicide attempts and actual suicides as well.
9. Social outing: Unemployment may bring a decrease in social outings and interactions with
other people, including friends.
10. Stigma: Unemployment brings with more than just ‘no work’. It also brings with it the
disgrace that the person has to bear. Nobody likes to be termed as unemployed.
11. Standard of leaving: In times of unemployment the competition for jobs and the negotiation
power of the individual decreases and thus also the living standard of people with the salaries
packages and income reduced.
12. Employment gaps: To further complicate the situation the longer the individual is out of job
the more difficult it becomes to find one. Employers find employment gasps as a negative
aspect. No one wants to hire a person who has been out of work for some time even when
there’s no fault of the individual per say.
13. Lose of skills’ usage: The unemployed is not able to put his/her skills to use. And in a
situation where it goes on for too long the person may have to lose some of his/her skills.

III. THEORIES OF DEVELOPMENT
Linear-stages-of-growth model
An early theory of development economics, the linear-stages-of-growth model was

first formulated in the 1950s by W. W. Rostow ﾧ in The Stages of Growth: A Non-
Communist Manifesto, following work of Marx and List. Professor Rostow has
described the five stages of economic growth through all the developing countries
passes are following;
1. The Traditional Society: It is basic stage of economic development. It is

society where production is limited. The level of per capita income is so low
that it can hardly meet the minimum level of consumption. The labour force
depends upon agriculture. The methods of production are old. There is less
mobility of factors of production. There is unequal distribution of wealth in
the country. Social change is regarded a sin. There is complete hold of
landlords on political power. The people are the slaves of the customs and
traditions. In the present age, there is hardly any country which can be called
traditional.
2. The Pre-conditions for take off: In this stage people look to economic progress
as a healthy sign. They show the desire and willingness to participate the
productive activity. The stagnation in various sectors is broken. People begin
to apply new techniques of production in various sectors. People accept the
importance of education. Banking system always begins to develop. The
domestic and foreign trade increases. In this stage savings, income,
investment, production and purchasing power increases.
3. The Take off: In third stage, all the obstacles are controlled, the rate of
economic development increases. New markets are found. Discoveries and
inventions take place. New industries are stabilized. The latest technology is
used in the various sectors. Rate of employment increases. According to
Rostow take off period is normally 20 to 30 years. This stage has three
important characteristics; i) The rate of saving and investment increases from
12 to 15 percent of GNP ii) The growth of one and more than one sector
increases more swiftly. iii) There is a resolution in the social, political and
economic structure. The country has increases the rate if economic growth.
Pakistan is now in the take off stage, because we have achieved the target of
saving and investment which is required for this stage. The drive to maturity:
In this stage more refined technology is used in the economy. The rate of
investment increases from 12 percent to 20 percent of the national income.
The substitutes of imports are produced inside the country. Exports quantity
increases and balance of payment improves. The rate of economic growth
increases than the rate of population growth. There is increase in per capita
income.
4. The age of high mass consumption: In this stage of economic growth,

prosperity is being found in the country. The per capita income is very high
and people can save easily after meeting the basic necessities. Rural
population moves to urban areas. Durable goods like cars and machines are
produced in the country. Government prepares the social welfare plans.

Colleges and universities are available in large numbers. College education is
within the reach of more than half of the population. Russia is struggling hard
to achieve this stage of economic growth. But America, Canada, England,
Australia, Japan and Germany have achieved this stage. New people and
economies are willing to participate in the economic struggle and they want to
increase the rate of development.
Evaluation of linear stage theory
The theories of Rostow, Harrod and Domar, and others consider savings to be a
sufficient condition for growth and development. In other words, if an economy
saves, it will grow, and if it grows, it must develop. Aggregate savings are largely
determined by national income, so if income is low, savings will not be accumulated.
According to Rostow’s theory, saving between 15% and 20% of income (a savings
ratio of 0.15 – 0.2) would be enough to provide the basis for growth. If this level of
saving is maintained, growth would also be sustained.
Major criticisms of this approach include:
Although saving is regarded as highly significant, moderngrowth theory takes into

account a broad set of growth factors.
Other criticisms of stage theory point to general weakness in terms of the unrealistic
assumptions of these models, such as perfect knowledge, stable exchange rates, and
constant terms of trade.
Most analysis was based on the reconstruction of Europe after World War II, but most
developing countries do not have Europe’s institutions, attitudes, financial markets,
levels of education, and desire to succeed as found inEurope.
Modern theory tends to see savings as a necessary but not sufficient condition for
growth.
Structural-change theory:
Structural-change theory deals with policies focused on changing the economic structures of
developing countries from being composed primarily of subsistence agricultural practices to being a
"more modern, more urbanized, and more industrially diverse manufacturing and service economy."
There are two major forms of structural-change theory; W. Lewis' two-sector surplus model, which
views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur
the development of an urbanized industrial sector, and Hollis Chenery's patterns of development
approach, which holds that different countries become wealthy via different trajectories. The pattern
that a particular country will follow, in this framework, depends on its size and resources, and
potentially other factors including its current income level and comparative advantages relative to other
nations. Empirical analysis in this framework studies the "sequential process through which the
economic, industrial and institutional structure of an underdeveloped economy is transformed over time
to permit new industries to replace traditional agriculture as the engine of economic growth."
Structural-change approaches to development economics have faced criticism for

their emphasis on urban development at the expense of rural development which can
lead to a substantial rise in inequality between internal regions of a country. The two-
sector surplus model, which was developed in the 1950s, has been further criticized

for its underlying assumption that predominantly agrarian societies suffer from a
surplus of labor. Actual empirical studies have shown that such labor surpluses are
only seasonal and drawing such labor to urban areas can result in a collapse of the
agricultural sector. The patterns of development approach has been criticized for
lacking a theoretical framework.
Lewis model the line of argument runs:
An economy starts with two sectors; a rural agricultural sector and an urban industrial
sector. Agriculture generally under-employs workers and the marginal productivity of
agricultural labour is virtually zero.
Therefore, transferring workers out of agriculture does not reduce productivity in the
whole economy.
Labour is then released for work in the more productive, urban, industrial sector.
Industrialisation is now possible, given the increase in the supply of workers who
have moved from the land.
Industrial firms start to make profits, which can be re-invested into even more
industrialisation, and capital starts to accumulate.
As soon a capital accumulates, further economic development can sustain itself.
Evaluation of the Lewis model

Though highly influential at the time, and despite theconsiderable logic of the Lewis
approach, the benefits of industrialisation may be limited because:
Profits may leak out of the developing economy and find their way to developed
economies through a process calledcapital flight.
Capital accumulation may reduce the need for labour in the urban industrial sector.
The model assumes competitive labour and product markets, which may not exist in
reality.
Urbanisation may create problems, such as poverty, squalor and shanty-towns, with
unemployment replacing underemployment.
The financial benefits from industrialisation might not trickle down to the majority of
the population.
Dependency Theory
Dependency Theory developed in the late 1950s under the guidance of the Director of
the United Nations Economic Commission for Latin America, Raul Prebisch. Prebisch
and his colleagues were troubled by the fact that economic growth in the advanced
industrialized countries did not necessarily lead to growth in the poorer countries.

Indeed, their studies suggested that economic activity in the richer countries often led
to serious economic problems in the poorer countries. Such a possibility was not
predicted by neoclassical theory, which had assumed that economic growth was
beneficial to all (Pareto optimal) even if the benefits were not always equally shared.
Prebisch's initial explanation for the phenomenon was very straightforward: poor
countries exported primary commodities to the rich countries who then manufactured
products out of those commodities and sold them back to the poorer countries. The
"Value Added" by manufacturing a usable product always cost more than the primary
products used to create those products. Therefore, poorer countries would never be
earning enough from their export earnings to pay for their imports.
Prebisch's solution was similarly straightforward: poorer countries should embark on

programs of import substitution so that they need not purchase the manufactured
products from the richer countries. The poorer countries would still sell their primary
products on the world market, but their foreign exchange reserves would not be used
to purchase their manufactures from abroad.
Three issues made this policy difficult to follow. The first is that the internal markets
of the poorer countries were not large enough to support the economies of scale used
by the richer countries to keep their prices low. The second issue concerned the
political will of the poorer countries as to whether a transformation from being
primary products producers was possible or desirable. The final issue revolved around
the extent to which the poorer countries actually had control of their primary products,
particularly in the area of selling those products abroad. These obstacles to the import
substitution policy led others to think a little more creatively and historically at the
relationship between rich and poor countries.
At this point dependency theory was viewed as a possible way of explaining the
persistent poverty of the poorer countries. The traditional neoclassical approach said
virtually nothing on this question except to assert that the poorer countries were late in
coming to solid economic practices and that as soon as they learned the techniques of
modern economics, then the poverty would begin to subside. However, Marxists
theorists viewed the persistent poverty as a consequence of capitalist exploitation.
And a new body of thought, called the world systems approach, argued that the
poverty was a direct consequence of the evolution of the international political
economy into a fairly rigid division of labor which favored the rich and penalized the
poor.
How Can One Define Dependency Theory?
The debates among the liberal reformers (Prebisch), the Marxists (Andre Gunder
Frank), and the world systems theorists (Wallerstein) was vigorous and intellectually
quite challenging. There are still points of serious disagreements among the various
strains of dependency theorists and it is a mistake to think that there is only one
unified theory of dependency. Nonetheless, there are some core propositions which
seem to underlie the analyses of most dependency theorists.
Dependency can be defined as an explanation of the economic development of a state

in terms of the external influences--political, economic, and cultural--on national

development policies(Osvaldo Sunkel, "National Development Policy and External
Dependence in Latin America," The Journal of Development Studies, Vol. 6, no. 1,
October 1969, p. 23). Theotonio Dos Santos emphasizes the historical dimension of
the dependency relationships in his definition:
[Dependency is]...an historical condition which shapes a certain

structure of the world economy such that it favors some countries to
the detriment of others and limits the development possibilities of the
subordinate economics...a situation in which the economy of a certain
group of countries is conditioned by the development and expansion of
another economy, to which their own is subjected.
(Theotonio Dos Santos, "The Structure of Dependence," in K.T. Fann

and Donald C. Hodges, eds., Readings in U.S. Imperialism. Boston:
Porter Sargent, 1971, p. 226)
There are three common features to these definitions which most dependency
theorists share. First, dependency characterizes the international system as comprised
of two sets of states, variously described as dominant/dependent, center/periphery or
metropolitan/satellite. The dominant states are the advanced industiral nations in the
Organization of Economic Co-operation and Development (OECD). The dependent
states are those states of Latin America, Asia, and Africa which have low per
capita GNPs and which rely heavily on the export of a single commodity for foreign
exchange earnings.
Second, both definitions have in common the assumption that external forces are of
singular importance to the economic activities within the dependent states. These
external forces include multinational corporations, international commodity markets,
foreign assistance, communications, and any other means by which the advanced
industrialized countries can represent their economic interests abroad.
Third, the definitions of dependency all indicate that the relations between dominant
and dependent states are dynamic because the interactions between the two sets of
states tend to not only reinforce but also intensify the unequal patterns. Moreover,
dependency is a very deep-seated historical process, rooted in the internationalization
of capitalism. Dependency is an ongoing process:
Latin America is today, and has been since the sixteenth century, part of an
international system dominated by the now-developed nations.... Latin
underdevelopment is the outcome of a particular series of relationships to the
international system.
Susanne Bodenheimer, "Dependency and Imperialism: The Roots of Latin

American Underdevelopment," in Fann and Hodges, Readings, op. cit., p. 157.
In short, dependency theory attempts to explain the present underdeveloped state of

many nations in the world by examining the patterns of interactions among nations
and by arguing that inequality among nations is an intrinsic part of those interactions.
The Structural Context of Dependency: Is it Capitalism or is it Power?

Most dependency theorists regard international capitalism as the motive force behind
dependency relationships. Andre Gunder Frank, one of the earliest dependency
theorists, is quite clear on this point:
...historical research demonstrates that contemporary underdevelopment is in

large part the historical product of past and continuing eonomic and other
relations between the satellite underdeveloped and the now developed
metropolitan countries. Furthermore, these relations are an essential part of the
capitalist system on a world scale as a whole.
Andre Gunder Frank, "The Development of Underdevelopment," in James D.

Cockcroft, Andre Gunder Frank, and Dale Johnson, eds., Dependence and
Underdevelopment. Garden City, New York: Anchor Books, 1972, p. 3.
According to this view, the capitalist system has enforced a rigid international
division of labor which is responsible for the underdevelopment of many areas of the
world. The dependent states supply cheap minerals, agricultural commodities, and
cheap labor, and also serve as the repositories of surplus capital, obsolescent
technologies, and manufactured goods. These functions orient the economies of the
dependent states toward the outside: money, goods, and services do flow into
dependent states, but the allocation of these resources are determined by the economic
interests of the dominant states, and not by the economic interests of the dependent
state. This division of labor is ultimately the explanation for poverty and there is little
question but that capitalism regards the division of labor as a necessary condition for
the efficient allocation of resources. The most explicit manifestation of this
characteristic is in the doctrine of comparative advantage.
Moreover, to a large extent the dependency models rest upon the assumption that
economic and political power are heavily concentrated and centralized in the
industrialized countries, an assumption shared with Marxist theories of imperialism. If
this assumption is valid, then any distinction between economic and political power is
spurious: governments will take whatever steps are necessary to protect private
economic interests, such as those held by multinational corporations.
Not all dependency theorists, however, are Marxist and one should clearly distinguish
between dependency and a theory of imperialism. The Marxist theory of imperialism
explains dominant state expansion while the dependency theory
explains underdevelopment. Stated another way, Marxist theories explain the reasons
why imperialism occurs, while dependency theories explain the consequences of
imperialism. The difference is significant. In many respects, imperialism is, for a
Marxist, part of the process by which the world is transformed and is therefore a
process which accelerates the communist revolution. Marx spoke approvingly of
British colonialism in India:
England has to fulfil a double mission in India: one destructive, the other
regenerating--the annihilation of old Asiatic society, and the laying of the
material foundations of Western society in Asia.
Karl Marx, "The Future Results of the British Rule in India," New York Daily
Tribune, No. 3840, August 8, 1853.

For the dependency theorists, underdevelopment is a wholly negative condition which
offers no possibility of sustained and autonomous economic activity in a dependent
state.
Additionally, the Marxist theory of imperialism is self-liquidating, while the

dependent relationship is self-perpetuating. The end of imperialism in the Leninist
framework comes about as the dominant powers go to war over a rapidly shrinking
number of exploitable opportunities. World War I was, for Lenin, the classic proof of
this proposition. After the war was over, Britain and France took over the former
German colonies. A dependency theorist rejects this proposition. A dependent
relationship exists irrespective of the specific identity of the dominant state. That the
dominant states may fight over the disposition of dependent territories is not in and of
itself a pertinent bit of information (except that periods of fighting among dominant
states affords opportunities for the dependent states to break their dependent
relationships). To a dependency theorist, the central characteristic of the global
economy is the persistence of poverty throughout the entire modern period in virtually
the same areas of the world, regardless of what state was in control.
The Central Propositions of Dependency Theory
There are a number of propositions, all of which are contestable, which form the core
of dependency theory. These propositions include:
1. Underdevelopment is a condition fundamentally different

from undevelopment. The latter term simply refers to a condition in which
resources are not being used. For example, the European colonists viewed the
North American continent as an undeveloped area: the land was not actively
cultivated on a scale consistent with its potential. Underdevelopment refers to
a situation in which resources are being actively used, but used in a way which
benefits dominant states and not the poorer states in which the resources are
found.
2. The distinction between underdevelopment and undevelopment places the

poorer countries of the world is a profoundly different historical context.
These countries are not "behind" or "catching up" to the richer countries of the
world. They are not poor because they lagged behind the scientific
transformations or the Enlightenment values of the European states. They are
poor because they were coercively integrated into the European economic
system only as producers of raw materials or to serve as repositories of cheap
labor, and were denied the opportunity to market their resources in any way
that competed with dominant states.
3. Dependency theory suggests that alternative uses of resources are preferable

to the resource usage patterns imposed by dominant states. There is no clear
definition of what these preferred patterns might be, but some criteria are
invoked. For example, one of the dominant state practices most often
criticized by dependency theorists is export agriculture. The criticism is that
many poor economies experience rather high rates of malnutrition even though
they produce great amounts of food for export. Many dependency theorists

would argue that those agricultural lands should be used for domestic food
production in order to reduce the rates of malnutrition.
4. The preceding proposition can be amplified: dependency theorists rely upon

a belief that there exists a clear "national" economic interest which can and
should be articulated for each country. In this respect, dependency theory
actually shares a similar theoretical concern with realism. What distinguishes
the dependency perspective is that its proponents believe that this national
interest can only be satisfied by addressing the needs of the poor within a
society, rather than through the satisfaction of corporate or governmental
needs. Trying to determine what is "best" for the poor is a difficult analytical
problem over the long run. Dependency theorists have not yet articulated an
operational definition of the national economic interest.
5. The diversion of resources over time (and one must remember that
dependent relationships have persisted since the European expansion
beginning in the fifteenth century) is maintained not only by the power of
dominant states, but also through the power of elites in the dependent states.
Dependency theorists argue that these elites maintain a dependent relationship
because their own private interests coincide with the interests of the dominant
states. These elites are typically trained in the dominant states and share
similar values and culture with the elites in dominant states. Thus, in a very
real sense, a dependency relationship is a "voluntary" relationship. One need
not argue that the elites in a dependent state are consciously betraying the
interests of their poor; the elites sincerely believe that the key to economic
development lies in following the prescriptions of liberal economic doctrine.
The Policy Implications of Dependency Analysis
If one accepts the analysis of dependency theory, then the questions of how poor
economies develop become quite different from the traditional questions concerning
comparative advantage, capital accumulation, and import/export strategies. Some of
the most important new issues include:
1. The success of the advanced industrial economies does not serve as a model
for the currently developing economies. When economic development became
a focused area of study, the analytical strategy (and ideological preference)
was quite clear: all nations need to emulate the patterns used by the rich
countries. Indeed, in the 1950s and 1960s there was a paradigmatic consensus
that growth strategies were universally applicable, a consensus best articulated
by Walt Rostow in his book, The Stages of Economic Growth. Dependency
theory suggests that the success of the richer countries was a highly contingent
and specific episode in global economic history, one dominated by the highly
exploitative colonial relationships of the European powers. A repeat of those
relationships is not now highly likely for the poor countries of the world.
2. Dependency theory repudiates the central distributive mechanism of the

neoclassical model, what is usually called "trickle-down" economics. The
neoclassical model of economic growth pays relatively little attention to the
question of distribution of wealth. Its primary concern is on efficient

production and assumes that the market will allocate the rewards of efficient
production in a rational and unbiased manner. This assumption may be valid
for a well-integrated, economically fluid economy where people can quickly
adjust to economic changes and where consumption patterns are not distorted
by non-economic forces such as racial, ethnic, or gender bias. These
conditions are not pervasive in the developing economies, and dependency
theorists argue that economic activity is not easily disseminated in poor
economies. For these structural reasons, dependency theorists argue that the
market alone is not a sufficient distributive mechanism.
3. Since the market only rewards productivity, dependency theorists discount

aggregate measures of economic growth such as the GDP or trade indices.
Dependency theorists do not deny that economic activity occurs within a
dependent state. They do make a very important distinction, however, between
economic growth and economic development. For example, there is a greater
concern within the dependency framework for whether the economic activity
is actually benefitting the nation as a whole. Therefore, far greater attention is
paid to indices such as life expectancy, literacy, infant mortality, education,
and the like. Dependency theorists clearly emphasize social indicators far
more than economic indicators.
4. Dependent states, therefore, should attempt to pursue policies of self-

reliance. Contrary to the neo-classical models endorsed by the International
Monetary Fund and the World Bank, greater integration into the global
economy is not necessarily a good choice for poor countries. Often this policy
perspective is viewed as an endorsement of a policy of autarky, and there have
been some experiments with such a policy such as China's Great Leap
Forward or Tanzania's policy of Ujamaa. The failures of these policies are
clear, and the failures suggest that autarky is not a good choice. Rather a
policy of self-reliance should be interpreted as endorsing a policy of controlled
interactions with the world economy: ppor countries should only endorse
interactions on terms that promise to improve the social and economic welfare
of the larger citizenry.
Neoclassical theory
First gaining prominence with the rise of several conservative governments in the
developed world during the 1980s, neoclassical theories represent a radical shift away
from International Dependence Theories. Neoclassical theories argue that
governments should not intervene in the economy; in other words, these theories are
claiming that an unobstructed free market is the best means of inducing rapid and
successful development. Competitive free markets ﾧ unrestrained by excessive
government regulation are seen as being able to naturally ensure that the allocation of
resources occurs with the greatest efficiency possible and the economic growth is
raised and stabilized.
It is important to note that there are several different approaches within the realm of
neoclassical theory, each with subtle, but important, differences in their views
regarding the extent to which the market should be left unregulated. These different
takes on neoclassical theory are the free market approach, public-choice theory, and

the market-friendly approach. Of the three, both the free-market approach and public-
choice theory contend that the market should be totally free, meaning that any
intervention by the government is necessarily bad. Public-choice theory is arguably
the more radical of the two with its view, closely associated with libertarianism ﾧ, that
governments themselves are rarely good and therefore should be as minimal as
possible.
Academic economists have given varied policy advice to governments of developing

countries. See for example, Economy of Chile ﾧ (Arnold Harberger ﾧ ), Economic
history of Taiwan ﾧ (Sho-Chieh Tsiang ﾧ). Anne Krueger ﾧ noted in 1996 that success
and failure of policy recommendations worldwide had not consistently been
incorporated into prevailing academic writings on trade and development.
The market-friendly approach, unlike the other two, is a more recent development and
is often associated with the World Bank ﾧ. This approach still advocates free markets
but recognizes that there are many imperfections in the markets of many developing
nations and thus argues that some government intervention is an effective means of
fixing such imperfections.
Definition of 'New Growth Theory'
An economic growth theory that posits humans' desires and unlimited wants foster ever-increasing
productivity and economic growth. The new growth theory argues that real GDP per person will
perpetually increase because of people's pursuit of profits. As competition lowers the profit in one area,
people have to constantly seek better ways to do things or invent new products in order to garner a
higher profit. This main idea is one of the central tenets of the theory.
Investopedia explains 'New Growth Theory'
The theory also argues that innovation and new technologies don't occur simply by random chance.
Rather, it depends of the number of people seeking out new innovations or technologies and how hard
they are looking for them. In addition, people also have control over their knowledge capital, ie: what
to study, how hard to study. If the profit incentive is great enough, people will choose to grow human
capital and look harder for new innovations.
The neoclassical growth theory was developed in the late 1950s and 1960s of the
twentieth century as a result of intensive research in the field of growth economics.
The American economist Robert Solow, who won a Noble Prize in Economics and the
British economist, J. E. Meade are the two well known contributors to the neo-
classical theory of growth. This neoclassical growth theory lays stress on capital
accumulation and its related decision of saving as an important determinant of
economic growth. Neoclassical growth model considered two factor production
functions with capital and labour as determinants of output. Besides, it added
exogenously determined factor, technology, to the production function.
Thus neoclassical growth model uses the following production function:
Y = AF (K, L) … (i)
Where Y is Gross Domestic Product (GDP), K is the stock of capital, L is the amount
of unskilled labour and A is exogenously determined level of technology. Note that

change in this exogenous variable, technology, will cause a shift in the production
function.
There are two ways in which technology parameter A is incorporated in the

production function. One popular way of incorporating the technology parameter in
the production function is to assume that technology is labour augmenting and
accordingly the production function is written as
Y= F (K, AL) … (ii)
Note that labour-augmenting technological change implies that it increases

productivity of labour.
The second important way of incorporating the technology factor in the production
function is to assume that technological progress augments all factors (both capital
and labour in our production function) and not just augmenting labour. It is in this
way that we have written the production function equation (i) above. To repeat, in this
approach production function is written as
Y-AF (K, L)
Considering in this way A represents total factor productivity (that is, productivity of
both factor inputs). When we empirically estimate production function specified in
this way, then contribution of A to the growth in total output is called Solow residual
which means that total factor productivity really measures the increase in output
which is not accounted for by changes in factors, capital and labour.
Unlike the fixed proportion production function of Harrod-Domar model of economic

growth, neoclassical growth model uses variable proportion production function, that
is, it considers unlimited possibilities of substitution between capital and labour in the
production process.
That is why it is called neoclassical growth model as the earlier neoclassical

considered such a variable proportion production function. The second important
departure made by neoclassical growth theory from Harrod-Domar growth model is
that it assumes that planned investment and saving are always equal because of
immediate adjustments in price (including interest).
With these assumptions, neoclassical growth theory focuses its attention on supply
side factors such as capital and technology for determining rate of economic growth
of a country. Therefore, unlike Harrod-Domar growth model, it does not consider
aggregate demand for goods limiting economic growth. Therefore, it is called
‘classical’ along with ‘neo’.
The growth of output in this model is achieved at least in the short run through higher
rate of saving and therefore higher rate of capital formation. However, diminishing
returns to capital limit economic growth in this model. Though the neoclassical
growth model assumes constant returns to scale which exhibits diminishing returns to
capital and labour separately.

We explain below how neoclassical growth model explains economic growth through
capital accumulation (i.e., saving and investment) and how this growth process ends
in steady state equilibrium. By steady ‘State equilibrium for the economy we mean
that growth rate of output equals growth rate of labour force and growth rate of capital
(i.e., ∆Y/Y = ∆L/L = ∆K/K) so that per capita income and per capita capital are no
longer changing.
Note that for income per capita and capital per worker to remain constant in this
steady state equilibrium when labour force is growing implies that income and capital
must be growing at the same rate as labour force. Since growth in labour force (or
population) is generally denoted by letter in this steady state equilibrium, therefore, =
∆Y/Y = ∆K/K = ∆N/N = n. Neoclassic growth theory explains the process of growth
from any initial portion to this steady state equilibrium.
Neoclassical Growth Theory: Production Function and Saving:
As stated above, neoclassical growth theory uses following production function:
Y = AF (K, L)
However, the neoclassical theory explains the growth process using the above
production function in its intensive form, that is, in per capita terms. To obtain the
above production function in per capita terms we divide both sides of the given
production function by L, the number of labour force. Thus
Y/L = AF ( K,L, L/L)
= AF (K/L, 1) = AF (K/L) ….(2)
To begin with we assume that there is no technological progress. With this assumption
then equation (2) is reduced to
Y/L = F (K/L) …..(3)
The equation (3) states that output per head (Y/L) is a

function of capital per head K/L. Writing y for Y/L and
k for K/L, equation (3) can be written as
y = f (k) … (4)
Now, in Figure 45.1 we represent the production function (4) in per capita terms. It
will be noticed from Figure 45.1 that as capital per capita (k) increases output per
head increases, that is, marginal product of labour is positive. But, as will be seen
from Figure 45.1, the slope of the production function curve decreases as capital per
head increases. This implies that marginal product of capital diminishes.That is, the
increase in capital per head causes output per head to increase but at a diminishing
rate. It will be seen from the Figure 45.1 that at capital-labour ratio (i. e. capital per
worker) equal to k1 output per head is y1. Similarly we can read from the production
function curve: y – f (k) the output per head corresponding to any other capital per
head.

Neoclassical Growth Theory: Fundamental Growth Equation:
According to neoclassical theory, rate of saving plays an important role in the growth
process of an economy. Like the Harrod-Domar model, neoclassical theory considers
saving as a constant fraction of income. Thus,
S = sY …(5)
Where S = saving
Y = income
s = propensity to save
Since s is a constant fraction of income, average propensity to save is equal to

marginal propensity to save. Further, since national income equals national product,
we can also write equation (5) as
sY = sF (K, L)
As in neoclassical theory planned investment is always equal to planned saving, net

addition to the stock of capital is (A K), which is the same thing as investment (I), can
be obtained by deducting depreciation of capital stock during a period from the
planned saving. Thus,
∆K = I = sY-D … (6)
Where ∆K = net addition to the stock of capital, I stands for investment and D for
depreciation. Depreciation occurs at a certain percentage of the existing capital stock.
The total depreciation (D) can be written as
D = dK
Substituting dK for D in equation (6) we have
∆K= sY-dK
or sY= ∆K+ dK …(7)
Now dividing and multiplying the first term of the left hand side of equation (7) by K
we have
sY = K. ∆K/K + dK…(8)
We have seen above, for the steady state equilibrium, growth of capital (∆K/K) must
be equal to growth of labour force (∆L/L), so that capital per worker and therefore
income per head remains constant. If we denote growth rate of labour force (∆L/L) by
n, then is steady state ∆K/K = n.
Substituting n for ∆K/K in equation (8) we have
sY = K. n + dK

or sY=(n + d)K …(9)
The above equation (9) is a fundamental growth equation of the neoclassical growth
model and states the condition for the steady state equilibrium when capital per
worker and therefore income per capita remains constant even though population or
labour force is growing.
Thus, for steady state growth equilibrium capital must be increasing equal to (n + d)
K. Therefore (n + d) K represents the required investment (or change in capital stock)
which ensures steady state when capital and income must be growing at the same rate
as labour force (or population)
The Growth Process:
From the growth equation (9) it is evident that if planned saving sY is greater than the
required investment (i.e. (n + d) K) to keep per capita income constant, capital for
worker will increase. This increase in capital per worker will cause increase in
productivity of worker.
As a result, the economy will grow at higher rate than the steady-state equilibrium
growth rate. However, this higher growth rate will not occur endlessly because
diminishing returns to capital will bring it down to the steady rate of growth, though
at a higher levels of per capita income and capital per worker.
In order to graphically show the growth process the growth equation is conventionally
used in intensive form, that is, in per capita terms. In order to do so we divide both
sides of equation (9) by L and have
sY/L = (n + d) K/L
where Y/L represents income per capita and K/L represents capital per worker (i.e.
capital-labour ratio)
Writing y for Y/L and k for K/L we have
sy = (n + d)k …(10)
The equation (10) represents fundamental neoclassical growth equation in per capita
terms.
Growth Process and Steady Growth Rate:
Figure 45.2 shows the growth process that moves the economy over time from an
initial position to the steady state equilibrium growth rate. In this Figure 45.2 along
with per capita production function (y = f (k)) we have also drawn per capita saving
function curve sy. Besides, we have drawn (n + d) k curve which depicts required
investment per worker to keep constant the level of capital per capita when population

or labour force is growing at a given rate n. ﾧ In
Figure 45.2 y =f (k) is per capita production function curve as in Figure 45.1. Since
per capita saving is a constant fraction of per capita output {i.e. income), the curve sy
depicting per capita saving function is drawn below the per capita output function
curve (y =f (k)) with the same shape. Another straight line curve labelled as (n + d) k,
is drawn which depicts the required investment to keep capital per head (i.e., capital-
labour ratio) constant at various levels of capital per head.
Now, let us assume the current capital per head is k0 at which per capita income (or
output) is sy0 and per capita saving is It will be seen from Figure 45.2 that at capital
per head k0, per capita saving sy exceeds investment required to maintain capital per
head equal to k0 (sy0 > (n + d)k).
As a result, capital per head (k) will rise (as indicated by horizontal arrows) which
will lead to increase in per capita income and the economy, moves to the right. This
adjustment process will continue so long as sy> (n + d) k. It will, seen when the
economy reaches at capital per head equal to k* and per capita income equal to y*
corresponding to which saving curve sy intersects the (n + d) k curve at point T.
It will be noticed from Figure 45.2 that the adjustment process comes to rest at capital
per head equal to k* because saving and investment corresponding to this state is
equal to the investment required to maintain capital per head at k*. Thus point T and
its associated capital per head equal to k* and income or output per head equal to y*
represent the steady state equilibrium.
It is worth noting that whether the economy is initially at the left or right of k*, the
adjustment process leads to the steady state at point T. It may however be noted that in
steady-state equilibrium, the economy is growing at the same rate as labour force (that
is, equal to n or ∆L/L).
It will be seen from Figure 45.2 that although growth of economy comes down to the
steady growth rate, its levels of per capita capital and per capita income at point T are
greater as compared to the initial state at point B.
An important economic implication of the above growth process visualised in

neoclassical growth model is that different countries having same saving rate and
population growth rate and access to the same technology will ultimately converge to
same per capita income although this convergence process may take different time in
different countries.
Impact of Increase in the Saving Rate:

As has been explained above that in steady state, both capital per head (k) and income
per head (y) remain constant when economy is growing at the rate of growth of
population or labour force . In other words, in steady state equilibrium ∆K= 0 and
∆Y= 0.
It follows from this that steady state growth rate or long-run growth rate which is
equal to population or labour force growth rate n is not affected by changes in the
saving rate. Changes in the saving rate affect only the short-run growth rate of the
economy. This is an important implication of neoclassical growth model.Now an
important question is why do we get this
apparently incredible result from the neoclas-
sical growth theory. Impact of increase in the saving
is illustrated in Figure 45.3. It will be seen from
this figure that initially with the saving curve sy,
the economy is in steady state at point T0 where
the saving curve sy intersects required investment
curve (n + d) k with k* as capital per head and
y* as income (output) per capita.
Now suppose that saving rate increases, that is,

individuals in the society decide to save a
higher fraction of their income. As a result, saving curve shifts to the new higher
position s’y (dotted). This higher saving curve s’y intersects the (n + d)k curve at
point which therefore represents the new steady state.
We thus see that increase in saving rate moves the steady state equilibrium to the right
and causes both capital per head and income per head to rise to k** and y**
respectively Note that in the new steady state the economy grows at the same rate as
the growth rate of labour force (or population) which is denoted by n. It therefore
follows that long-run growth rate of the economy remains unaffected by the increase
in the saving rate though the steady, state position has moved to the right.
Two points are worth noting here. First, though long-run growth rate of the economy
remains the same as a result of increase in the saving rate, capital per head (k) and
income per capita (y) have risen with the upward shift in the saving curve to s’y and
consequently the change in steady state from T0 to T1, capital per head has increased
from k* to k** and income per head has risen from y* to y**.
However, it is important to note that in the transition period or in the short run when
the adjustment process is taking place from an initial steady state, to a new steady
state a higher growth rate in per capita income is achieved. Thus, in Figure 45.3 when
with the initial steady state point T0, saving rate increases and saving curve shifts
upward from sy to s’y, at the initial point T0, planned saving or investment exceeds (n
+ d) k which causes capital per head to rise resulting in a higher growth in per capita
income than the growth rate in labour force (n) in the short run till the new steady

state is reached. ﾧ The effect of increase in saving on growth in output or
income per head (y) and growth rate of total output (i.e., ∆Y/Y) is shown in Figure
45.4(a) and 45.4(6). Figure 45.4(a) shows the growth in output (income) per head as a
result of increase in the saving rate. To begin with, the economy is initially in steady
state equilibrium at time t0 with output per head equal to y*.
The increase in saving rate causes capital per head to rise which leads to the growth in
output per head till time t1 is reached. At time r, the economy is again in steady state
equilibrium but now at a higher level y** of output per head. Note that in the
transition perused from t0 to t1 output per head increases but at a diminishing rate.
Figure 45.4 (b) illustrates the adjustment in growth rate in total output from Figure
45.4 (b) that starting from initial steady state at time t0 the increase in saving rate and
capital formation leads to growth rate in total output higher than the steady growth
rate n in the period from t0 to t1 but in period t1 it returns to the steady growth rate
path n.
It is thus evident that the higher saving rate leads to a higher growth rate in the short
run only, while long-run growth rate in output remains unaffected. The increase in the
saving rate raises the growth rate of output in the short run due to faster growth in
capital and therefore in output. As more capital is accumulated, the growth rate
decreases due to the diminishing returns to capital and eventually falls back to the
population or labour force growth rate (n).
Effect of Population Growth:
For developing countries like India it is important to discuss the effect of increase in
population growth rate on steady levels of capital per head (k) and output per head (y)
and also on the steady- state rate of growth of aggregate output.Figure 45.5. Illustrates
these effects of population growth. An increase in population growth rate causes an
upward shift in (n + d) k line. Thus in Figure 45.5, the increase in population growth
rate from n to n’ causes upward shifts of (n + d) k to (n + d) k curve dotted.
It will be seen from the Figure 45.5 that the new (n’ + d) k curve cuts the given saving
curve sy at point T’ at which capital per head has decreased from k*1 to k*2 and
output per capita has fallen from y*1 to y*2. This can be easily explained.
Due to higher growth rate of population a given stock of capital is spread thinly over
labour force which results in lower capital per head (i.e. capital-labour ratio).
Decrease in capital per head causes decline in per capita output. This is an important
result of neoclassical growth theory which shows that population growth in
developing countries like India impedes growth in per capita income and therefore
multiplies our efforts to raise living standards of the people.
The Figure 45.5 also shows that higher growth rate of population raises the steady-
state growth rate. It will be seen from this figure that increase in population growth

rate from n to n’ causes (n + d) k curve to shift upward to the new position (n’ + d) k
(dotted) which intersects the saving curve at new steady-state equilibrium point T’.
The steady state growth rate has therefore risen to n’, that is, equal to the new growth
rate of population. It may however be noted that higher steady rate of growth is not a
desirable thing. As a matter of fact, a higher steady growth means that to maintain a
certain given capital-labour ratio and per capita income the economy has to save and
invest more.
This implies that a higher rate of population acts as an obstacle to raise per capita
income and therefore living standards of the people. Thus, this result provides a
significant lesson for the developing countries like India, that is, if they want to
achieve higher living standards for its people they should make efforts to control
population growth rate.
Long-run Growth and Technological Change:
Let us now analyse the effect of technological change on long-run growth of an

economy. It is important to note that neoclassical growth theory considers
technological change as an exogenous variable. By exogenous technological change
we mean it is determined outside the model, that is, it is independent of the values of
other factors, capital and labour. That is why neoclassical production function is
written as
Y = AF (K, L)
Where A represents exogenous technological change and appears outside the bracket.
In the foregoing analysis of neoclassical growth theory for the sake of simplification
we have assumed that the technological change is absent, that is, ∆A/A = 0. However,
by assuming zero technological change we ignored the important factor that
determines long-term growth of the economy.
We now consider the effect of exogenous technological improvement over time, that
is, when ∆A/A > O over time.
The production function (in per capita terms), namely, y = Af (k) considered so far
can be taken as a snapshot in a year in which A is treated to be equal to 1. Viewed in
this way, if technology improves at the rate of 1 per cent per year a snapshot taken in
a year later will be y= 1.01 f(k), 2 years later, y = (1.01)2 f(k) and so forth. As a result
of this technological change production function will shift upward.
In general, if technological improvement ∆A/A per year is taken to be equal to g per

cent per year, then production function shifts upward at g per cent per year as shown
in Figure 45.6 where to begin with production function curve in period t0 is y0 =
A0 f(k) corresponding to which saving curve is sy0.
With this, in steady state equilibrium, capital per head is equal to k*0 and output
(income) per head is y1. With g per cent rate of technological progress in period
tvproduction function shifts to y1 =A1f(k) and correspondingly saving curve shifts

upward to sy1. As a result in period t1 in new steady state equilibrium capital per head
rises to k*l and per capita output to y1.
Conclusion: Key Results of Solow Neoclassical Model:
Let us sum up the various key results of Solow’s neoclassical growth model:
1. Neoclassical growth theory explains that output is a function of growth in factor

inputs, especially capital and labour, and technological progress.
2. Contribution of increase in labour to the growth in output is the most important.
3. Growth rate of output in steady-state equilibrium is equal to the growth rate of

population or labour force and is exogenous of the saving rate, that is, it does not
depend upon the rate of saving.
4. Although saving rate does not determine the steady-state growth rate in output, it
does cause an increase in steady-state level of per capita income (and therefore also
total income) through raising capital per head.
5. Steady state rate of growth of per capita income, that is, long-run growth rate is
determined by progress in technology.
6. If there is no technical progress, then output per capita will ultimately converge to
steady state level.
7. A significant conclusion of neoclassical growth theory is that if the two countries

have the same rate of saving and same rate of population growth rate and has access
to the same technology (i.e. production function), their levels of per capita income
will eventually converge that is they will ultimately become equal.
In this context it is worthwhile to quote Dornbusch, Fischer and Startz. “The poor
countries are poor because they have a less capital but if they save at the same rate as
rich countries, and have access to the same technology, they will eventually catch up.
Sources of Economic Growth:
An important issue in growth economics is what contributions of different factors,

namely, capital, labour and technology make to economic growth. In other words,
what is relative importance of these different factors as sources of economic growth?
Robert Solow and Denison have attempted to study the relative importance of the
various sources of economic growth by using the concept of production function.
The rate of economic growth in an economy and differences in income levels of

different countries and also their growth performance during a period can be
explained in terms of the increase in these sources of economic growth.
It will be recalled that the production function describes the amount of total output
produced depends on the amount of different factors used and the state of technology.

The following production function has been used to measure the various sources
of economic growth:
Y = AF(K, L) …(1)
Where Y = total national product
K = the quantity of physical capital used
L = the quantity of labour used
A = the state of technology
The production function equation (1) shows that increase in capital and labour and
improvement in technology will lead to growth in national output.
Note that improvement in technology causes output increases with the given factor
supplies. In other words, advancement in technology leads to the increase in
productivity of factors used. Therefore, improvement in technology is generally
measured by growth in total factor productivity (TFP).
It will also be noticed from the production function equation (1) that technology (A)
has been taken to be a multiplicative factor. This implies that progress in technology
increases the marginal productivity of both capital and labour uniformly.
Such technological change is generally referred to as neutral technological change.

Besides, we measure the sources of economic growth with the above production
function by assuming constant returns to scale. Constant returns to scale implies that
increase in inputs, that is, labour and capital, by a given percentage will lead to the
same percentage increase in output. Further, the increase in improvement in
technology (A) or what is also referred to as increase in total factor productivity
causes a shift in the production function.
With the above assumptions it can be proved that the following factors represent the
sources of economic growth.
Where Ө denotes share of capital in national product, 1- Ө denotes share of labour in

national product.
The above equation, which is generally referred to as growth accounting equation

shows the various sources of growth which are summarised below:
1. The contribution of increase in capital to the growth in output (G or ∆Y/Y) is given

by increase in (∆K/K) capital multiplied by the share (Ө) of capital in national
product;

2. The increase in labour force contributes to rate of economic growth equal to the
labour share (1-Ө) in national product multiplied by the growth in labour in force
(∆L/L)
3. The technological improvement ∆A/A which is measured by the increase in total

factor productivity also makes an important contribution to economic growth. As
mentioned above, technological progress leads to the increase in total factor
productivity (TFP) which implies that with the given resources (i.e. capital and
labour) more output can be produced.
Proof:
We can formally prove the growth accounting equation mentioned above. In the
production function equation (1) the change in output (∆Y) depends on changes in
various inputs or factors — capital and labour ∆K and ∆L and change in technology.
This can written as under:
∆Y=F (KL)∆A + MPk x ∆K + MPL x ∆L …(3)
Where MPk and MPL represent marginal products of labour and capital respectively.
Dividing both sides of equation (3) by Y we have
Now multiplying and dividing the second term of the left-hand side of equation (4) by
K and also multiplying and dividing the third term of left-hand side of the equation by
L we have
Now, if rewards of factors of production are determined by marginal products of

factors as actually is the case under perfect competition in neoclassical theory, then
K.MPK/Y represents the share of capital in national product which we denote by Ө
and L.MPL/Y represents the share of labour in national product (Y) which we denote
by 1 – Ө, then substituting these in equation (5) we have:
The above is the same as growth accounting equation (2) which indicates the sources
of growth of output.

Table 45.1. Sources of Economic Growth:
In Table 45.1 we present the contributions made by capital, labour and total factor
productivity (i.e., technical improvement) in growth of output in the United States,
Japan and the major countries of Europe in the two periods 1960-73 and 1973-90.
It will be seen from the table that growth of capital and improvement in total factor
productivity (i.e. technological progress) have been the important sources of
economic growth, especially in case of economic growth in Japan and European
countries.
Table 45.1 further reveals that it is decline in total factor productivity (i.e. techno-
logical improvement) and in growth of capital that is responsible for slowdown of
economic growth in the USA, Japan and European countries during the period 1973-
90.
Knowledge or Education: the Missing Factor:
In the above growth accounting equation one factor, namely knowledge or education
is missing which has been stressed among others by Nobel Laureate Prof. Amartya
Sen as an important factor contributing to economic growth. It may be noted that
increase in knowledge or education increases the productivity of workers by
improving their productive skills and abilities.
Besides, increased knowledge raises the productivity of capital and raises the return to
investment in capital goods. Since investment in promotion of knowledge or
education makes workers and machine more productive, the workforce equipped with
knowledge and education is often called human capital which is regarded by modern
economists as an important source of economic growth.
Thus human capital or knowledge and education is the important missing factor in the
growth equation of neoclassical economists, Solow and Denison. On including human
capital as a separate factor which contributes to growth of output, the production
function can be written as under.
Y = A F (K, L, H)
Where H represents human capital which was omitted by Robert Solow in his growth
accounting equation.
Economies of Scale and Economic Growth:

Robert Solow in his study of sources of growth in real income did not consider
economies of scale as a factor contributing to growth. Solow assumed constant returns
to scale which implies if each factor in the production function increases by one
percent, output also increases by one per cent.
However, some economists such as Denison and those associated with World Bank
emphasise economies of scale or what is also called increasing returns to scale as a
separate factor determining the rate of economic growth. In case of the United States
Denison estimated that of 2.92 per cent annual growth in national income recorded
during the period 1929-1982, 0.26 per cent was due to economies of scale. However,
whether there are increasing returns to scale or constant returns to scale is an
empirical matter for investigation.
Modern Economic Theory
Deals with the nature of economic definition, scope and method, partial equilibrium and analysis,
indifference curve techniques, utility analysis of demand, revealed reference theory, social accounting,
determinants of income and employment, and the nature and function of money.
Modern economic theory ﾧ tends to separate itself from classical economic theory by
looking at more than just the source of production and the invisible hand ﾧ theory.
Modern economics ﾧ also looks at items such as the role of demand, money supply ﾧ,
and its effect on growth or monetarism and free trade ﾧ . In some ways, modern
economic theory is a much more macroeconomic study that looks at vast swaths of a
single economy. This does not mean that an individual labeled a classical economist
ﾧ does not favor these items; it simply means that economics changes through
history, with the term modern economics coming after the period of classical
economics ﾧ. There is still a distinct relationship between these two schools of thought
for economic theory.
Classical economics started by looking at the resources used in the production of

goods and services. How various entities gathered these goods and used them were of
great interest in the 16th century. The purpose of these studies was in effect to
determine how an economy could best use resources in a given market. For example,
economists would study if a central entity would be best at the allocation of these
resources or if numerous individuals working in their own self-interests would be
sufficient. So, much study on this topic left open the need for a review as in modern
economic theory.
Keynesianism is perhaps the single greatest modern economic theory, with all its
benefits and flaws. Keynes looked at the role of demand in a market and what
happened when there was too much supply and not enough demand. Essentially, he
thought the government should step in and grease the market skids in order to spur
economic movement. This, in turn, would allow companies with the supply to remain
profitable and continue on in their natural course of business. Employment, however,
was not necessarily something Keynes took into account, since he could not answer
whether or not full employment would occur in this scenario.
Money supply economics also comes from modern economic theory. Here, using a
central bank to govern interest rates and the amount of money in a market is

important. This theory is necessary to control inflation and manage growth in order to
not exceed upper limits in the economy.
Open markets and free trade between countries is another modern economy theory
tenet. In short, free trade is necessary for a country to have a thriving economic center.
Most countries would desire an equal balance between imports and exports or a
situation where imports are far below exports because this means more currency
remains in the country. The ability to move goods between domestic and other
international markets also allows for growth and expansion. Modern economic theory
may have several different concepts on how this is best accomplished.

IV. GROWTH, POVERTY & INCOME DISTRIBUTION
Size & Functional Distribution of income
The distribution of income has been a focal point in the study of economics since the
time of Adam Smith. At first, the emphasis was almost exclusively on the functional
distribution—that is, the division of income among the factors of production. For
Smith and many of his successors in the development of economic thought, including
Ricardo and Marx, the distribution of income among the suppliers of labor, land, and
capital was the key indicator of the relative welfare of different groups in society.
Rents represented the income of agricultural proprietors; profits, the income of
commercial and industrial entrepreneurs; wages, the income of laborers.
Even before the end of the nineteenth century, more attention began to be given to the
distribution of income by size—in terms of individuals, families, or other consumer
units. This was made more and more relevant by the blurring, particularly in the
United States, of the sharp lines between various economic classes. Quantitative
studies of the size distribution were encouraged by the growing availability of data
from income tax returns and, subsequently, from modern sample surveys.
It is true, of course, that the direct identification of social groups with particular types
of income can no longer be made so readily as in the past. In the United States in
1950, for example, over half the interest, dividends, and rents received by urban
consumer units went to units headed by employees (Kravis 1962), and during the
period between the two world wars the top 1 per cent of income receivers obtained
about a third of their income in the form of employee compensation (Kuznets 1953).
However, the significance of the dispersion of various types of income among all
socioeconomic groups can easily be exaggerated. Income units headed by clerical,
sales, and blue-collar workers received about 90 per cent of their incomes in the form
of wages and salaries. The salaried-managerial group were the only employees for
whom property incomes were important; in 1950, for example, they received about a
fifth of their incomes in the form of rent, interest, and dividends. Property incomes are
also important for the self-employed and the not-gainfully employed. Thus, it remains
true that a given shift in the functional distribution is still likely to affect certain
socioeconomic groups in the population favorably and others unfavorably.
Even if sources of income for individuals or families were more thoroughly mixed
than in fact they are, an analysis of the functional distribution would still be an
important step toward an explanation of the size distribution. This is true as long as
the income of any individual or family depends, at least to a major extent, upon the
supplies of the various factors that he or it is able to offer on the market and if the
conditions underlying demand and supply differ from one factor of production to
another.
However, our interest in the study of factor shares need not be limited to the
implications for particular groups in society. We may be interested in measuring
changes in the productivity of individual factors of production. Or we may wish to
know how the division of returns to current effort and returns to accumulated assets
has altered over time. In both instances, our understanding of the historical processes
of the society would be enhanced even though every person might contribute some of
each factor.

Finally, the historical trend of factor shares has sometimes been used in efforts to
explain other significant aspects of the economy. For example, Kalecki (1954) has
used the percentage of entrepreneurs’ markup over direct cost as an index of the
degree of monopoly, and Weintraub (1962) has used the entrepreneurs’ markup over
the compensation of employees as a basis for explaining and predicting changes in the
level of prices.
The empirical study of income shares

The study of the trends in the functional distribution of income is handicapped by the
fact that the nature of the components of income for which we have data has not been
determined by the requirements of economic analysis but, rather, by the legal and
institutional arangements of our society. Each factor share found in the national
accounts, as maintained, for example, in the United States by the Department of
Commerce, differs significantly from its corresponding theoretical concept. The
“rent” of national accounting is the “rental income of persons” and does not represent
a scarcity return either on the indestructible resources of nature or on specific factors
temporarily fixed in quantity. A significant part of it may be regarded as a reward for
entrepreneurial activity. It does not, however, include the net income on all leased
property, but only the portion thereof received by persons; the net income on real
estate owned by businesses is not counted as rent, but as part of corporate profits or
unincorporated business income. Corporate profits also include explicit or computed
interest received by firms, and the income of unincorporated enterprises contains not
only rent and interest but also the return for the labor of the proprietor. Even employee
compensation cannot be regarded as a pure return to current effort in a modern
economy such as that of the United States, where substantial resources have been
invested in the education and training of the labor force.
A threefold division of national income
Accepting for the moment the accounting framework used for national income
purposes, a threefold division of income into employee compensation, entrepreneurial
(unincorporated) income, and property income (rent, interest, and corporate profit) is
perhaps most relevant to the study of functional shares. Data for the United States cast
in these terms are set out in the form of average shares for overlapping decades in
Table 1. Employee compensation rose in two long swings, from 55 per cent in 1900-
1909 to 67 per cent in the 1930s, and then again to 70 per cent by the decade
beginning in the mid-1950s. It is possible to view the record as a generally upward
trend—interrupted only by the swelling of profits and the corresponding diminution
of the wage share during the war prosperity of the second decade of the century, and
more seriously, by the contraction of profits and the unusually large and temporary
expansion in the wage share during the great depression of the 1930s. (For an analysis
of cyclical changes which finds that the labor share is inversely correlated with
changes in the level of economic activity, see Burkhead 1953.)
The bulk of the increase in the share of employee compensation came at the expense
of entrepreneurial income, which declined from 24 per cent to 15 per cent, and then to
12 per cent. The upward trend in wages, or total employee compensation, and the
decline in entrepreneurial income have their beginnings in the nineteenth century. E.

C. Budd (1960) has estimated that the share of wages in private income rose from
about 43 per cent in 1869-1870 to about 48 per cent in 1909-1910.
Well over half of the relative rise in corporate profits from the 1920s and the
1930s has been
Table 2 -Percentage share of corporate profits in U.S. national income, 7979-7963

TOTAL*
Before fox After tax TAXES DIVIDEND UNDIS-TRIBUTED PROFITS*
S
*Includes inventory valuation adjustment. It should be noted that the shares of corporate profits
shown differ somewhat from those in Table 1, mainly because different sources and methods
were used in deriving the figures.
Sources: 1919-1938: Kuinets’shares of corporate dividends and corporate saving (1959, p. 217)
in national income, adjusted so as to include the federal corporate income and excess profits
taxes as shown by Schuller (1953, p. 312). 1929-1963: U.S. Office of Business
Economics, National Income 1954; U.S. Office … 1958a; Survey of Current Business.
1919-1928 8.4 6.7 1.7 5.3 1.4
1924-1933 5.9 4.7 1.2 6.4 -1.7
1929-1938 4.3 3.1 1.2 6.9 -3.8
1929-1938 4.3 2.8 1.5 6.0 -3.2
1934-1943 9.1 5.3 3.8 4.9 0.4
1939-1948 11.9 6.0 5.9 3.5 2.5
1944-1953 12.6 6.3 6.3 3.1 3.2
1949-1958 12.5 6.2 6.3 3.3 2.9
1954-1963 11.2 5.6 5.6 3.5 2.1
accounted for by the increase in tax liability. The share of dividends in the national
income has actually decreased. The implication is that property income has declined
relative to labor income in terms of income actually paid to income recipients
(personal income) even more than it has in terms of income earned (national income).
The employee share in individual sectors
When the behavior of shares in individual sectors and industries of the U.S. economy
is examined, we find that the employee share tends to conform to the movement of the
employee share in the economy as a whole (see Table 3). The typical pattern is an
initial decline, with the trough most often coming in the 1940s, and then a swing
upward, the share for the final period exceeding that for the initial one. There are,
however, some important exceptions. The corporate sector as a whole and several
industries, including manufacturing and mining, have higher employee shares at the
beginning than at the end. The initial share in each of these cases is high because of
the impact of the great depression; in some instances, periods of two or three years are
found in the early 1930s when the employee share exceeded 100 per cent (that is, the
compensation of employees was actually greater than the income originating, owing
to negative profits). For the last four entries in the table, the U-shaped pattern of the
share movements is inverted; there is a peak in the middle of the period, which falls
most frequently in the 1944-1953 decade.

The trend in other countries
The available evidence for other countries seems to indicate that the broad pattern of
the movement in shares is similar to that of the United States. (See Table 4.) At least
from the second decade of the twentieth century the share of employee compensation
has increased mainly, though not entirely, at the expense of the entrepreneurial share.
The property share also has tended to decline, not only after World War II, as in the
United States, but after
World War I as well. Kuznets, upon whose work these generalizations are based
(1959, p. 49), thinks it most likely that the property share tended to remain stable in
most countries between the third quarter of the nineteenth century and World War I.
The influence of the accounting framework
The trends in shares analyzed in the preceding sections may be challenged both on
statistical and on conceptual grounds. Statistically, the quality of the data becomes
worse as we go back in time. For the United States, they are generally accepted as
reasonably accurate for the period since 1929, somewhat less reliable for 1919 to
1929, and subject to wide margins of error for the first two decades of the century.
The basic estimates for the two early decades were in some instances derived by
estimating methods that make them unsatisfactory for the determination of relative
shares; for some industries, for example, entrepreneurial earnings were extrapolated
backward according to the movements of total wages (Lebergott 1964). Some of the
errors that have been pointed out exaggerate the tendency toward a rising wage share
and others to understate it, and it is difficult to judge their net effect. The figures in
Table 1 relating to the first two decades must therefore be regarded with great reserve.
The share figures are affected not only by the methods of estimation but more
fundamentally—at least for recent decades—by the accounting framework under
which they were produced. While there is, on the whole, widespread agreement upon
the methods of social accounting, some issues which may affect the income share
estimates remain controversial (Conference on Research …1958, especially the
papers by G. Jaszi, R. T. Bowman and R. A. Easterlin, and E. C. Budd; Kravis 1957).
In addition, even some of the conventional procedures that are followed may have
won agreement more on the ground of statistical convenience than on that of
conceptual adequacy. We are faced with the question, therefore, of whether the trend
in shares that we have observed—particularly the rise in the wage share—would
persist if the issues concerning accounting methods had been resolved in another way.
The effects of some of these factors, such as the shift of certain activities from
households to the market, the omission from the national accounts of the returns on
certain types of property (namely, property owned by government and durable goods
other than residences owned by consumers), and the exclusion from the estimates of
interest on government debt and the inclusion of the compensation of government
employees, have been discussed elsewhere (Kravis 1962). Effects of changes in tax
laws and in regulations governing depreciation allowances and the practice of using
historical rather than replacement-cost depreciation have also been studied (Brown
1963).

A threefold division of personal income
For some purposes it may be preferable to consider distributive shares in income

received by households rather than in income produced by the nation —that is, shares
in personal rather than national income. The U.S. data are set out in this manner in
Table 5.
For the period preceding 1929, transfers and corporate taxes, which constitute the
most important differences between national and personal income, were of smaller
quantitative significance, and the shares in personal income were not far different in
magnitude and direction of change from the shares in national income. After 1929,
however, government policies brought about an expansion of both transfer payments
and corporate taxes, and the share of property in personal income declined sharply,
whereas its share in national income remained roughly constant. The relative
importance of corporate profits in property income rose, while the share of corporate
profits allocated to dividends (see Table 2)—the only part of corporate profits that
enters into personal income—fell. The gap between the property share in earned
income and in income actually paid out to income recipients was further widened by a
rise in corporate saving; undistributed profits have amounted to 2 or 3 per cent of the
national income in recent decades. (For a discussion of the impact of the accounting
framework, see Kravis 1962.)
A twofold division of income
Although the threefold division into labor, entrepreneurial, and property shares is as
far as the usual accounting records of the economy can carry us, it is necessary to
attempt to divide entrepreneurial income into its labor and property components if we
are to probe some questions that arise: Has the increase in the share of labor been
attributable mainly to the shift from self-employment in the proprietorship form to
employment under the corporate form of business organization? What has happened
to the share of income representing returns to the current efforts of persons engaged in
economic activity (i.e., what we shall call the “total labor” share) as compared with
the share representing the return on past accumulations of wealth (i.e., what we shall
call the “total property” share)?
Of course, if all or virtually all entrepreneurial income could be considered as a

reward for the labor of the entrepreneur, the answer to these questions would be very
simple. In that case, our findings would be that the relative shares of labor and
property in the national income have remained almost constant for more than half a
century, except for a shift in favor of labor in the years around 1930.
The difficulty with this view is that it implicitly assumes that the returns upon the
assets of unincorporated enterprises have been zero or negligible. These assets form a
substantial, albeit declining, share of total private wealth. In 1958, unincorporated
businesses and farms accounted for 18 per cent of the nation’s total tangible assets; in
1900, they accounted for 35 per cent (Goldsmith & Lipsey 1963, p. 43). Therefore,
the assumption about the rate of return earned by these assets is critical to an
evaluation of the property share in entrepreneurial income.
All in all, the evidence thus points to an increase in the share of national income
attributable to current human effort. This may either be the result of a structural shift

brought about by, or at least coinciding with, the great depression, or it may be the
result of longer-run tendencies. The latter view is plausible if we regard the property
shares as having been artificially depressed by the great depression. Had it not been
for the unprecedented collapse of incomes, the property share might have shown a
smoother and more continuous decline from the second or third decade of the century
to the most recent decade. Obviously, this is not a trend that can continue forever, but
it requires explanation.
Reasons for decline in property share

The distribution of income among the factors of production is the net result of the
operation of the whole intricate clockwork of the economy. Nothing less than a full
set of equations setting out the general equilibrium of the system could be certain to
include all the elements at work, and even in this approach it would be difficult, if not
impossible, to take full account of shifts in resources, tastes, and technology, any of
which may affect factor shares. The practical problem therefore becomes the familiar
one of seeking to identify the key elements affecting the movement of relative shares.
The literature on this subject, which has been growing apace in recent years, has in
common only this tacit agreement on a search for the key variables. There has not
even been agreement on what it is that has to be explained. Some writers, brushing
aside the government and unincorporated business sectors, have found a striking
constancy in relative shares and have sought to explain that. Others have found that it
was an increase in the employee share that had to be explained. Nor has there been
agreement, not even within either group, on the selection of the key variables that
affect the constancy or movement of relative shares.
Theories of relative shares

It is possible to formulate a variety of tautological relationships between the wage or
the property share, on the one hand, and its various “determinants,” on the other hand.
In factor-oriented theories the independent variables are usually the prices and
quantities of the factors of production. The marginal productivity theory of
distribution, which occupies a commanding position in the literature, may be
classified under this heading. For empirical purposes, marginal productivities are
usually estimated from an aggregate production function, and shifts in factor shares
are seen to depend upon the elasticity of substitution. [SeeProduction ﾧ.]
In aggregative theories the independent variables usually include Keynesian

aggregates, particularly savings and investment. For example, a simple kind of
identity often employed is
where R is property income; Y, total income; and K, the capital stock. The property
share may easily be related directly to savings and investment propensities, as shown
in a formulation used by Kaldor:
where I is investment and sr and sw are the marginal propensities to save out of
property and wage incomes, respectively (Kaldor 1955-1956; Kaldor’s theory
assumes full employment). If, as Kaldor seems to argue, the savings propensities tend
to be constant, then the property share depends on the level of investment.

The line separating the factor-oriented and aggregative theories is not a sharp one.
Indeed, if the explanation is pushed far enough, a factor-oriented theory reaches the
aggregative variables, and the converse is also true. In addition, some aggregates,
such as wages and income, are found in both groups of theories. However, where
there is such overlap, the factor-oriented theories are more apt to concern themselves
with explanations of the way in which the aggregates are built up from the individual
factors or products than are the aggregative theories.
No effort will be made here to review these various approaches to a theory of relative
shares, since several such surveys have recently appeared (for example, Reder 1959;
Scitovsky 1964). What follows is an attempt at an explanation of the rise in the labor
share in empirical terms, using a factor-oriented approach.
The relation of property to wage income can be regarded as the product of capital-
labor quantity and price ratios:
where R = total property income, W = aggregate wages (R + W = total income, Y),

Q - quantity, P = price, k = capital, and I = labor.
Changes in relative shares thus result from changes in the quantity and/or price ratios.
(OnceR/W is known, the property share in income, R/Y, can be calculated, since the
sum of the wage and property shares must equal 1: w + r=l, where w = W/Y and r
= R/Y; thus, (r ÷ R/W) + r = 1. The property share can be found by substituting the
numerical value of R/W and solving for r.) Since the ratio of the percentage change in
the quantity-ratio to the inverse of the percentage change in the price-ratio is equal to
the elasticity of substitution, we are dealing with the familiar proposition that changes
in relative shares depend upon the elasticity of substitution. [SeeElasticity ﾧ.]
Now, if we could assume that the price and quantity ratios would move in opposite
directions, the opportunity for factor substitution would clearly serve as a built-in
stabilizing mechanism limiting changes in relative shares. Where the opposite
percentage changes in the quantity and price ratios are equal—i.e., where the
elasticity of substitution is unity—relative shares will of course remain unchanged.
Even with fairly large departures from unity, however, factor substitution may confine
share shifts to fairly narrow limits. For example, with a 75-25 division of national
income between labor and capital, a 20 per cent increase in the ratio of the price of
labor to the price of capital would not cause the labor share to stray more than 3 or 4
percentage points from 75 were the elasticity of substitution as low as 0.25 or as high
as 2.
iii) Inequality & Absolute Poverty in Third World countries.
Third World countries are often described as “developing” while the First World,
industrialized nations are often “developed”. What does it mean to describe a nation
as “developing”? A lack of material wealth does not necessarily mean that one is
deprived. A strong economy in a developed nation doesn’t mean much when a
significant percentage (even a majority) of the population is struggling to survive.
Successful development can imply many things, such as (though not limited to):

 An improvement in living standards and access to all basic needs such that a person has enough
food, water, shelter, clothing, health, education, etc;
 A stable political, social and economic environment, with associated political, social and
economic freedoms, such as (though not limited to) equitable ownership of land and property;
 The ability to make free and informed choices that are not coerced;
 Be able to participate in a democratic environment with the ability to have a say in one’s own
future;
The World Bank notes that “the incidence of poverty in the world is higher than past
estimates have suggested. The main reason is that [previous data] had implicitly
underestimated the cost of living in most developing countries.”
The data also does not reflect the recent global food crisis and rising cost of energy,
which is feared will bring another 100 million into poverty.
Accounting for the increased population between 1981 and 2005, the poverty rate has,
however, fallen by about 25%.
While this at least sounds encouraging, it masks regional variations, and perhaps most
glaringly the impact of China:
 China’s poverty rate fell from 85% to 15.9%, or by over 600 million people
 China accounts for nearly all the world’s reduction in poverty
 Excluding China, poverty fell only by around 10%
As a result, the World Bank feels that while China is on target to reach
the Millennium Development Goals ﾧ to reduce poverty and tackle various other
issues, most other countries are not.
Inequality In Industrialized Nations

Professors Richard Wilkinson and Kate Pickett, from the Equality Trust ﾧ, produced
an informative lecture video titled Inequality: The enemy between us? based on their
recently released book, The Spirit Level; Why More Equal Societies Almost Always
Do Better (Penguin, March 2009).
In the lecture, compelling evidence is presented by the two professors that once
nations are industrialized, more equal societies almost always do better in terms
of health, well-being and social cohesion and that large income inequalities within
societies destroys the social fabric and quality of life for everyone:
As they studied the data for industrialized nations, they noticed a clear tendency for
countries which do badly (or well) on one outcome to do badly (or well) on others.
An interesting point they make is that economic growth alone — which is supposed to
raise the income of all — is not necessarily a good determinant of life-expectancy and

well-being: individuals in some developing countries can attain a level of life-
expectancy comparable to industrialized nations even when their income may be far
lower:
The following graphs (reproduced with kind permission) are just examples of the problems they
looked at, but the trends are always the same: the more unequal the society, the worse the problem
generally:
Violence is more common in more unequal societies,Evidence: Violence ﾧ , The

Equality Trust, 2009.
From the source for the above graph, the Equality Trust notes that, “The link between
inequality and homicide rates has been shown in as many as 40 studies, and the
differences are large: there are five-fold differences in murder rates between different
countries related to inequality. The most important reason why violence is more
common in more unequal societies is that it is often triggered by people feeling
looked down, disrespected and loss of face.”
The next example compares social mobility (the ability for someone to move up the
social ladder, escape poverty etc) with inequality:
Social mobility is higher in more equal rich countries,Evidence: Social Mobility ﾧ ,

The Equality Trust, 2009.
It may be surprising to see the US at the low end of social mobility when it is touted
as the land of dreams and possibilities for anyone, no matter who they are. The UK is
also surprisingly at the low end.
Interestingly, the US and UK are the biggest proponents of neoliberal economic

ideology, which has often played down concerns about inequality and instead focused
more on raising the lot for everyone (as the interview with Tony Blair noted further
below reveals). Yet, the Equality Trust finds that,
It looks as if the American Dream is far more likely to remain a dream for
Americans than it is for people living in Scandinavian countries. Greater
inequalities of outcome seem to make it easier for rich parents to pass on their
advantages. While income differences have widened in Britain and the USA,
social mobility has slowed. Bigger income differences may make it harder to
achieve equality of opportunity because they increase social class differentiation
and perhaps prejudice.
The implications of all these findings are important in many ways. For example, it is
often said that to develop and industrialize, developing nations’ carbon emissions
must increase, as industrialization implies a more energy-intensive economy.
However, what is less discussed is whether that means carbon emissions of poorer
countries must be similar to today’s industrialized nations.

Many of today’s industrialized nations are often seen as over consuming ﾧ with
respect to the planet’s health (climate change ﾧ being something largely a result of
greenhouse emissions from wealthier nations, for example).
As the next graph shows, a number of developing nations have achieved average life
expectancies that are close to industrialized nations, but with far less carbon emissions
in the process:
High life expectancy can be achieved with low CO2 emissions,The Spirit Level Slides
ﾧ, The Equality Trust, 2009 (previous link has larger image)
Addressing inequality implies tackling many, many social, political, economic and
environmental issues, for they are all inter-related in many ways.
(Interestingly, the data they used for the study came from the early 2000s, so are not
distorted by the global financial crisis that started around 2008.)
Further below there is more about poverty in industrialized nations, but first, some
more on inequality.
Inequality, Globalization And A New Global Elite

Globalization has, as noted above, benefited a new working elite globally, not just in
the US. They “have largely pulled away from their compatriots”, even in more
egalitarian countries, such as Germany and various Scandinavian countries, while
those already with large inequality in emerging developing countries are getting more
unequal too.
An analysis of over 43,000 transnational corporations (TNCs) has identified a

relatively small group of companies, mainly banks, with disproportionate power over
the global economy ﾧ. Of those companies,
 There was a core of 1318 companies with interlocking ownership

 The 1318 companies represents around 60 per cent of global revenues by collectively owning
through their shares the majority of the world’s large blue chip and manufacturing firms — the
“real” economy
 An even tighter 147 (about 1%) of these were described as “super entities” that controlled 40 per
cent of the total wealth in the network.
The problem with such super concentration is that a small minority can influence the
world system disproportionately — what is good for them is not necessarily good for
everyone else, for example. In addition, given the enormous position in the world
system, a problem in just a handful of them can, and have, had a terrible effect on the
rest of the economy as the current financial crisis ﾧ has shown.
iv) Economic characteristics of poverty Groups
Following are the economic characteristics of UDC’s:

1- General Poverty and Low Living Standard

Poverty cannot be described, it can only be felt. The most of the less developed countries
(LDC) are facing the major problem of general as well as absolute poverty and low standard of living.
Most of the people in developing nations are ill-fed, ill-housed, ill-clothed and ill-literate. In LDCs
almost 1/3 population is much poor. But in Pakistan, 21.0 % population is living below poverty.
2- Burden of Internal and External Debts
Under developed countries (UDC) are loans and grants receiving nations. Most of the
developing countries of the world are depending on foreign economic loans. An amount of foreign
loans is increasing as the years pass. Their foreign trade and political structure is also dependent on the
guidance of foreigners. The outstanding total public debts are Rs. 10020 billion (55.5 % of GDP) and
the value of external debts and liabilities is $ 59.5 billion and its services charges are $ 7.8 billion in
2010-11 in Pakistan.
3- Low Per Capita Income
Due to low national income and huge population growth rate, per capita income in developing
countries is very low. At constant prices (Base Year 1959-60) per capita income of Pakistan was Rs.
985 and according to the Economic Survey of Pakistan 2010-11 per capita income of Pakistan is $
1254.
4- Over Dependence on Agriculture
61% Population of Pakistan is living in more than 50,000 villages. Backward agriculture is the
major occupation of the population. Agriculture sector is backward due to old and traditional methods
of cultivation, in-efficient farmers, lack of credit facilities; un-organized agriculture market etc. 66.7%
population is directly or indirectly depending on agriculture sector in Pakistan. It contributes to GDP
20.9 % while in advanced nations it is less than 10 %. It employed 45.0 % of labour force while it is
less than 5 % in developed countries.
5- Backward Industrial Sector
Backward industrial sector is an additional feature of under developed countries. Industrial
sector of Pakistani economy is backward since independence. Pakistan got only 34 (3.7 % of total
industrial units) industrial units out of 921 units in sub-continent in 1947. Small and backward
industrial sector is based on low level of capital formation, technology, training and education and over
dependence on agriculture sector. 13.2 % labour force is attached with industrial sector in Pakistan. Its
share to GDP is 25.8 % and to exports is about 60 %.
6- Unemployment
An outstanding problem of developing countries is their high rate of un-employment, under-
employment and disguised-unemployment. More than 3.05 million people are unemployed in Pakistan.
There is 16 % underemployed and 20 % disguised unemployed of total labour force. Unemployment
rate is 5.6 %; it is mainly due to high population growth rate, which is 2.1 %.
7- Low level of Productivity
The productivity level is very low in under developed countries as compared to developed
countries. Low level of productivity is due to economic backwardness of people, lack of skill, illiteracy
and ill-training. Value of annual productivity of labour is about $ 100 while it is more than $ 2500 in
advanced nations in Pakistan.
8- Deficit Balance of Payment
Third world countries have to import some finished and capital goods to make economic
development, on the other hand they have no products to export but raw material. During July-March,
its exports were $ 24 billion and imports were $ 32.3 billion In case of Pakistan. So, its deficit balance
of payment was $ 8.3 billion in 2010-11.
9- Dualistic Economy
Dualistic economy refers to the existence of advanced & modern sectors with traditional &
backward sectors. Pakistani economy is also a dualistic economy as other developing countries on the
following grounds: Co-existence of modern and traditional methods of production in urban and rural
areas,
10- Deficiency of Capital
Shortage of capital is another serious problem of poor nations. Lack of capital leads to low per
capita income, less saving and short investment. Domestic saving is 9.5% of GDP and total investment
is 13.4% of GDP in Pakistan. Rate of capital accumulation is very low as 5%. On the other hand,
capital output ratio (COR) is very high which is not desirable for economic development.
11- In-appropriate Use of Natural Resources
Mostly there is shortage of natural resources in developing nations and this is also a cause of
their economic backwardness. Natural resources are available in various poor countries but they remain
un-utilized, under-utilized or mis-utilized due to capital shortage, less efficiency of labour, lack of skill

and knowledge, backward state of technology, improper government actions and limited home market.
Natural resources contribute to the GDP about 1%.
12- Market Imperfection
Market is imperfect in accordance with market conditions, rules and regulations in the most of
developing nations. There exist monopolies, mis-leading information, immobility of factors; hoarding
and smuggling etc. that cause the market to remain imperfect.
13- Limited Foreign Trade
Due to backwardness, developing countries have to export raw material because the quality of
their products is not according to international standard ISO etc. Lower developing nations have to
import finished and capital goods. Imports of Pakistan are $ 32.3 billion and exports are $ 24 billion
that cause into unfavourable balance of payment.
14- Vicious Circle of Poverty
According to vicious circle of poverty, less developed nations are trapped by their own poverty.
Vicious circle of poverty is also applied in case of Pakistani economy. Due to poverty, national income
of Pakistan is low which causes low saving and low investment. So, rate of capital formation is very
low results in “a country is poor because she is poor”.
15- Inflation
High rate of inflation causes economic backwardness in poor nations. Due to high level of
price, purchasing power, value of money and saving of the consumers tend to decrease. Rate of
inflation (CPI) is 14.1% in 2010-11 in Pakistan.
v) Kuznets Hypothesis & other tests
During the twentieth century, economists began analyzing the growth and
development of economies to determine their welfare-improving effects on citizens.
One of the ways these effects have been measured is by calculating the impact of
economic growth on a country’s income distribution. Simon Kuznets (1901-1985)
was the first economist to attempt to do this. Kuznets (1955) conducted a study into
the evolution of the distribution of personal income from 1870 to the 1950s and found
that the relative distribution of pretax income in the United States, Germany, and
England had been gradually moving toward equality. Per capita income in these
countries had been increasing over the entire period, but at some point the share of the
lower-income group began increasing more rapidly than that of the higher-income
groups. The developed countries saw increasing income inequality with growth, then
experienced decreasing income inequality. In developing countries, however, income
inequality had been increasing along with increases in per capita income.
Economic theory suggests that a higher income share among a country’s wealthy
will lead to increased savings, thus increased wealth. Economic growth also usually
leads to an increase in industrialization and urbanization, with an increasing disparity
in income between rural and urban sectors. These trends suggest that there should be
increased inequality with economic growth. Therefore, the trend toward income
equality for these developed economies was a puzzle to Kuznets.
W. A. Lewis’s (1954) dual economy model provides some explanation. According to

Lewis, an economy starts with unlimited supplies of labor in its agricultural sector. As
the economy develops, it creates another more industrialized sector—a manufacturing
sector. This change causes a movement of labor from the agricultural sector to the
new sector, and leads to worsening income inequality as the new sector enjoys better
returns. However, increased movement of labor across the two sectors will, in the
long run, reach a turning point, causing incomes in the agricultural sector to improve
and leading to greater income equality.

Another plausible explanation for the effect of development on
income inequality is its effect on education and the production of
human capital. At the initial stages of development, only the rich
may be able to afford education, augmenting their skills and thus
their income. This will increase income inequality. However, as
per capita income increases and more people are able to afford
education, the income of the poor will converge with that of the rich.
THE INVERTED-U HYPOTHESIS

The inverted-U hypothesis paradigm originated from Kuznets’s initial observation of
the growth and distribution of income inequality in the United States, Germany, and
England. Some economists argue that this theorem can be applied to all economies,
and they have been using empirical evidence to prove this theorem and to determine
the causal roots of this process. To be able to successfully test this theorem, however,
long-term income distribution data is required. The lack of such data has led to many
creative means of testing and to a lack of consensus among economists on how the
hypothesis works and what happens when there is increasing per capita growth.
Felix Paukert (1973) used cross-sectional data of countries (although he

acknowledged the need for long-term data) and found a tendency toward equality
among developed countries, as evidenced by an increase in the share of income of the
bottom 60 percent. Among developing countries, however, there is a tendency toward
inequality, although Paukert was unable to offer definitive conclusions due to the lack
of data in the sample. He therefore analyzed a cross section of forty-three countries
and found a Gini ratio of 0.467 among developing countries and 0.392 among
developed countries. Since the Gini ratio measures inequality of a distribution ranging
from 0 to 1, where 0 corresponds to perfect equality (everyone has the same income)
and 1 corresponds to perfect inequality (all but one person has zero income), Paukert’s
findings suggest that developed countries have moved toward greater equality relative
to developing countries.
Figure 1
Montek Ahluwalia (1976) followed up on the work of Paukert and determined the
relationship between income inequality and per capita growth rate using crosscountry
data. His sample included sixty countries—forty developing countries, fourteen
developed countries, and six socialist countries. Ahluwalia’s results showed that an
inverted U-shape could be fitted onto the countries at various stages of development
and income inequality. However, the slope of the fitted curve changed when he looked
at the sample of developing countries. These results were, however, obtained by
controlling for socialist countries, because their policies tend to move countries
toward development. Ahluwalia suggested that these results may be "stylized facts"
for which an explanation may not be possible.
The use of cross-country regressions with countries at different stages of

development is not an effective method for testing the Kuznets hypothesis. This
method assumes that the turn from increasing to decreasing income inequality
happens around the same level of per capita income for all countries. It also assumes
homogeneity across countries. Ashwani Saith (1983) questioned whether the

empirical work done to confirm the U-hypothesis is in vain. There exists diversity
between countries that cannot be accounted for by controlling for whether a country is
socialist or developing. A logical way to test the hypothesis may be a time series
analysis for individual economies or simultaneous equations on all countries.
Nonavailability of the necessary data has kept this project from being undertaken.
THE S-CURVE
Income inequality began increasing in the late 1960s and early 1970s in the United
States, England, and Germany, creating yet another puzzle for economists. Rati Ram’s
(1991) time series study of U.S. data on income inequality from 1947 to 1987 showed
that income inequality followed more of a U-shaped pattern than an inverted-U. His
data do not include the earlier period of increasing income inequality. This finding has
led to the S-curve hypothesis, which implies that with growth in per capita income, an
economy will begin to experience increasing and then decreasing income inequality,
and after a period of adjustments, income inequality will begin to rise again. Other
economists have argued that the inverted-U is just repeating itself, and thus we should
expect to see another period of declining inequality. However, the why and when
remain unanswered.
John List and Craig Gallet (1999) analyzed data from seventy-one countries for the
1961—1992 period to test this hypothesis, and found that countries could be placed
along all the turns of an S-curve. For example, third-world and developed countries
are located on the upward-sloping portion of the curve, while emerging economies are
located on the downward-sloping portion. Unfortunately, in addition to covering only
a short time period, their data did not include all years for all countries. What they
ultimately prove is the relationship between per capita income and income inequality
in the world. They fail to address historical change in inequality with changes in per
capita income.
Romie Tribble (1999) associated the turn from decreasing income inequality to
increasing income inequality with another change in the important sector that affects
economic growth. The first turning point in the S-curve can be attributed to
economies moving from an agricultural to a manufacturing sector. The second turning
point occurs when the service sector becomes dominant, a development characterized
by increasing returns to education, thus leading to economic growth. Using U.S. data
from 1947 to 1990, Tribble proved that the S-curve fit the data. The shifts in the
sectors matched the years considered, but he was unable to test this finding. If his
analysis is correct, it implies that some developing countries that never build up their
manufacturing sector and seemingly move directly from an agricultural sector to a
dominant service sector may never experience a period of decreasing income
inequality.
THE CURRENT STATE OF INCOME INEQUALITY

An example of whether Kuznets’s hypothesis can be translated to other developing
countries can be found in the economic growth of Asian countries, especially the
"tigers." The four big East Asian tigers—Singapore, Taiwan, Hong Kong, and South
Korea—achieved high growth rates between the 1960s and the 1990s through export-
driven economies. They were able to maintain this growth rate by an increasing shift

to the manufacturing sector, industrialization, and improvements in education.
However, armed with the experiences of developed nations, these economies offered
protection for their agricultural sector in the form of better property rights and
subsidies. A graph of income inequalities as measured by the Gini-coefficient over
this period shows Hong Kong with a U-shaped curve, and its minimum inequality
occurring in 1980 at a Gini of 0.39. Taiwan experienced declining income inequality
up to the 1980s, and its Gini of about 0.29 remained fairly constant thereafter.
Singapore and South Korea’s income inequality also appears to have remained fairly
constant over the time period (data obtained from the UNU/WIDER World Inequality
Database, Version 2.0, developed from the Deininger and Squire [1996] dataset).
vi) The Range of Policy Options
Across the nation, states are identifying and analyzing a variety of climate change and
clean energy policies and programs as they decide which options to implement to
meet their environmental, energy, and economic goals.
Identifying Policy Options

There are a range of climate and clean energy policy options states can and do
implement to advance energy efficiency and renewable energy depending on their
goals, priorities and circumstances. States typically identify a range of potential policy
options that may serve their needs and warrant further analysis by:
 Exploring climate and clean energy options that other states have implemented
 Considering the approaches states have taken to successfully implement options:
o EPA's Clean Energy-Environment Guide to Action ﾧ provides information about states'
experiences in designing and implementing 16 clean energy and climate change policies
and programs.
o EPA's Clean Energy Lead by Example (LBE) Guide ﾧ and Lead by Example Case Studies
ﾧ identify best practices and state examples of policies and programs to advance clean
energy and address climate change within state government operations.
o Register for EPA's State Climate and Energy Newsletter ﾧ to receive weekly summaries
of state climate and energy policy news.
Analyzing Policy Options
The tools and approaches available for evaluating the impacts of options range from
basic screening methods to sophisticated dynamic simulation models. In selecting the
most appropriate tools or method, states can consider many factors, including purpose
of analysis, impact(s) of interest, time constraints, cost, data requirements/availability,
as well as internal staff expertise. States can either conduct the evaluation themselves
or hire consultants. Regardless of who conducts the analysis, states should understand
the methods and assumptions used in the analyses as they dramatically affect the
results of the analyses. TheDetermining Results ﾧ page provides more detailed
information about possible state approaches.
States may use policy analyses to:
 Demonstrate how policies and programs can help achieve multiple state energy, environmental,
and economic goals in a cost-effective way
 Design or select options that offer greater energy, environmental, and economic benefits
 Build support for clean energy and climate change mitigation policies and programs

For climate and clean energy policies, a starting point for screening and evaluating
options is to understand the potential energy savings or renewable energy generation
output that would be expected to result from the policies. These data can then be used
to estimate prospective energy system, environmental, and/or economic impacts (costs
and benefits) of the policies under consideration.
Relationship Between Energy Savings & Other Benefits of

Clean Energy Initiatives
While options are typically analyzed by comparing potential costs to potential
benefits, the benefits captured in such analyses are typically limited to energy (kWh)
and demand (kW) impacts. By including the full set of energy and non-energy costs
and benefits, states can get a more complete picture of the costs and societal net
benefits of potential policies in areas such as energy systems, the environment, public
health and macroeconomics.
Tools and Resources

Guidance and Methods ﾧ | Economic Impacts ﾧ | Emissions Impacts ﾧ | Energy
Impacts ﾧ | Health Impacts ﾧ
Guidance and Methods

Assessing the Multiple Benefits of Clean Energy
Assessing the Multiple Benefits of Clean Energy: A Resource for States ﾧ provides an
overview of the multiple benefits of clean energy and their importance. It includes
information on
 The importance of and approaches to calculating or estimating energy savings as the foundation
for deriving multiple benefits
 A range of tools and approaches to estimating energy systems, environmental, and economic
benefits across varying levels of rigor
 How states have supported the use of clean energy through the estimation of multiple benefits
Economic Impacts
Building Life Cycle Cost (BLCC) Programs
BLCC ﾧ computer programs conduct economic analyses by evaluating the relative
cost-effectiveness of alternative buildings and building-related systems or
components. Typically, BLCC software is used to evaluate alternative designs that
have higher initial costs but lower operating-related costs over the project life than the
lowest-initial-cost design. It is especially useful for evaluating the costs and benefits
of energy and water conservation and renewable energy projects. BLCC also
calculates comparative economic measures for alternative designs, including net
savings, savings-to-investment ratio, adjusted internal rate of return, and years to
payback.
Cash Flow Opportunity Calculator

The Cash Flow Opportunity Calculator (XLS)ﾧ (415K, About XLS ﾧﾧ
ﾧ ), developed for the ENERGY STAR program, uses building-specific data to help
decision-makers quantify the financial benefits of energy efficient investments. The

calculator estimates how much new energy efficiency equipment can be purchased
with anticipated savings, compares financing options for energy efficiency purchases,
and evaluates project economics under different interest rates.
Job and Economic Development Impact (JEDI) Models

JEDI ﾧ models are easy-to-use models that analyze the economic impacts of
constructing and operating power generation and biofuel plants at the local and state
level. First developed to model wind energy development impacts, JEDI now includes
models to analyze the job and economic impacts of biofuel plants and concentrating
solar power, coal and natural gas power plants.
Top of page ﾧ
Emissions Impacts
AVoided Emissions and geneRation Tool (AVERT)
AVERT ﾧ is a free tool with a simple user interface designed to meet the needs of
state air quality planners and other interested stakeholders. Non-experts can easily use
AVERT to evaluate county, state and regional levels of NOx, SO2 and CO2 emissions
displaced by energy efficiency, wind and solar policies and programs. AVERT uses
public data, which is accessible and auditable.
Emissions & Generation Resource Integrated Database (eGRID)

eGRID ﾧ contains a comprehensive inventory of environmental attributes of electric
power systems including air emissions data for nitrogen oxides, sulfur dioxide, carbon
dioxide, and mercury. The data are organized in a series of Microsoft Excel files that
state governments can use to find data on emissions from electricity generation within
their state.
Power Profiler
States can use this tool to evaluate the environmental benefits of choosing cleaner
sources of energy. The Power Profiler ﾧ is a Web-based tool that allows users to
evaluate the air pollution and greenhouse gas impact of their electricity choices. Using
only a ZIP code, the tool generates a report describing the characteristics of one's
electricity use.
WAste Reduction Model (WARM)

EPA created the WAste Reduction Model (WARM)ﾧ to help solid waste planners and
organizations track and voluntarily report greenhouse gas emissions reductions from
several different waste management practices. WARM calculates and totals GHG
emissions of baseline and alternative waste management practices-source reduction,
recycling, combustion, composting, and landfilling.
Top of page ﾧ
Energy Impacts
Cool Roofing Comparison Calculator

States considering policies promoting the use of solar reflective (or "cool") roofing
can estimate the energy savings associated with various roofing types using this
online calculator developed for ENERGY STAR. The Cool Roofing Comparison
Calculator ﾧﾧﾧ estimates energy cost savings for air-conditioned
residential, office, or commercial buildings with at least 3,000 square feet of roof area
and heated by either natural gas or an electric heat pump. The calculator provides
estimates of building-specific energy savings by taking site- and structure-specific
factors into account. The tool calculates the net energy savings that would result from
a different type of roofing, taking into account potential increases in heating costs
along with reduced cooling costs.
E-Calc
E-Calc ﾧﾧﾧ is a Web-based calculator that allows government and
building industry users to design and evaluate a wide range of projects for energy
savings and emissions reduction potential. This tracking tool was developed by Texas
A&M University's Energy Systems Laboratory in response to legislative incentives to
quantify emissions reductions from building energy savings and distributed renewable
technology. E-Calc evaluates residential, commercial, retail, and municipal buildings
energy and emissions savings, as well as savings from renewables like solar heating,
solar PV, and wind power.
ENERGY STAR Energy Savings Calculators

ENERGY STAR's Purchasing & Procurement page provides spreadsheet tools that
calculate the cost benefits of ENERGY STAR appliances. Energy Savings Calculators
ﾧ are available for a wide range of product categories including dishwashers,
refrigerators and freezers, vending machines, heat pumps, computers, computer
monitors, and copiers.
ENERGY STAR Target Finder

States can use this Web-based tool to assist with energy management planning during
the design phase of building construction.Target Finder ﾧ allows planners to set an
aggressive energy performance target for building design and compare estimated
energy consumption to the established target. The tool can provide direction during
the design process and facilitate the evaluation of a range of energy efficiency
measures to achieve energy and cost goals.
MARKet ALlocation (MARKAL) Model

MARKAL ﾧﾧﾧ , developed by the International Energy Agency, is a
model that assists users in selecting appropriate technologies for maximum emissions
control and cost effectiveness. Because the model gives results in terms of cost per
unit of emissions abatement, this tool can be useful in determining the costs
associated with certain policy measures. EPA has a nine region MARKAL technology
database ﾧ (EPANMD) in electronic format available to the public upon request.
National Energy Modeling System (NEMS)

NEMS ﾧ is a general equilibrium energy-economic model of the United States. It
projects the production, import, conversion, consumption, and prices of energy,
subject to assumptions on macroeconomic and financial factors, world energy
markets, resource availability and costs, behavioral and technological choice criteria,
cost and performance characteristics of energy technologies, and demographics. The

modeling system is unique in its comprehensive treatment of supply-side technologies
(particularly in the electricity sector), and its detailed treatment of energy demand at
the end-use level.
Projected Impacts of State Energy Efficiency and Renewable Energy Policies ﾧ

EPA has projected the energy impacts of energy efficiency and renewable energy state
policies not included in the Energy Information Administration's Annual Energy
Outlook 2013. These projections are intended for use by states developing State
Implementation Plans (SIPs) for ozone and other criteria air pollutants under the
National Ambient Air Quality Standards (NAAQS). States may also use EPA's draft
methodology to develop their own estimates of EE/RE policy impacts and associated
emissions reductions. Jurisdictions not currently preparing a SIP but interested in
better understanding the energy and emissions impacts of EE/RE policies may
likewise use EPA's methodology and estimates to identify strategies for staying in
attainment with NAAQS.
Incomes and equity policies
The importance of taxation in affecting incentives to use resources in a more or less

sustainable way has been discussed in 6.1.1 above. A second consideration in setting
taxes, however, relates to the distribution of income and wealth. Taxing the rich and
stripping them of some of their assets to meet the needs of the poor of this generation,
or to invest for the benefit of poor people in the future, can obviously be one way of
attaining the goal of sustainable development. Unfortunately, it is seldom politically
feasible on any substantial scale! However, where wealth or income comes from
economic rents that result from public investments, such as increased value or
productivity of land due to public infrastructure construction, it may be more
acceptable to tax away at least a part of those gains.
Policies can also be adopted that specifically target the poor, such as famine relief
programs, food for work schemes, or provision of free or subsidized services. Most
industrialized countries have extensive social welfare programs in place to help the
disadvantaged, such as the sick, the old or the unemployed. Because such programs
are very expensive, in most less developed countries they are of much more limited
scope, or are even totally absent.
Fiscal and monetary policies
Fiscal policies include government expenditure, taxes and subsidies. Direct impacts
on SARD arise from expenditure on such things as agricultural research and
extension, and public works in rural areas. Taxes, on the other hand, may be targeted
to help regulate resource use, such as resource rent taxes or taxes on polluters. Some
specific examples of targeted expenditures and taxes are discussed under later sub-
headings.
Many governments, especially in industrialized countries, raise the majority of their

taxes from progressive income taxes. If net incomes of workers are to rise with
general economic growth, labour costs to employers must rise more steeply to cover
the extra tax. Faced with a higher wages bill, firms will find it profitable to substitute
other, less heavily taxed natural resources for labour. Clearly, such a taxation system

will lead to a too high utilization of natural resources, renewable or otherwise, relative
to labour. Biasing the taxation system more strongly towards resource taxes should
help promote more sustainable development. In the many developing countries where
income taxes are not that pervasive, the issue will be less the tradeoff between income
and natural resource taxation than between the latter and other forms of taxation.
More generally, in the short to medium term, prudent fiscal management is important
for SARD. The reason is that, without it, economic instability may be created that is
likely to discourage private investment, and frequent budget crises may disrupt the
provision of important public services. In the longer term, a too large public sector,
with high rates of taxation and high government spending, may 'crowd out'
development in private sector activities, of which agriculture is usually one. Also in
the longer term, the way the government allocates expenditure among sectors and
activities, and the way taxes are levied differentially on various sources of income,
activities and assets, influences both the sectoral make-up of GDP and the distribution
of income. Thus, governments that allocate resources mainly to the urban areas, and
tax agriculture, directly or indirectly, will discourage SARD, whether wittingly or not
(Markandya and Richardson 1994).

V. POPULATION, GROWTH AND ECONOMIC DEVELOPMENT
INTRODUCTION
The rapid growth of the world's population over the past one hundred years results from a difference
between the rate of birth and the rate of death. The human popula-tion will increase by 1 billion people
in the next decade. This is like adding the whole population of China to the world's population. The
growth in human population around the world affects all people through its impact on the economy and
environ-ment. The current rate of population growth is now a significant burden to human well-being.
Understanding the factors which affect population growth patterns can help us plan for the future.
The purpose of this unit is to examine some important factors about overpopula-tion.
This unit addresses: (1) the definition of overpopulation (2) the causes of rapid
population growth, (3) the consequences of rapid population growth, and (4) ac-tions
and strategies that can be developed to solve problems caused by overpopula-tion.
This unit consists of core knowledge about the causes and consequences of overpopulation, lesson
plans, teacher resources, student reading list, a list of speak-ers and a bibliography. Although this unit is
intended primarily for students in grades 5-8, teachers in both elementary and high school can use this
unit to explore key ideas and concepts about the population explosion.
THE DEFINITION OF OVERPOPULATION

In the past, infant and childhood deaths and short life spans used to limit popula-tion growth. In today's
world, thanks to improved nutrition, sanitation, and medical care, more babies survive their first few
years of life. The combination of a continu-ing high birth rate and a low death rate is creating a rapid
population increase in many countries in Asia, Latin America and Africa and people generally lived
longer. Over-population is defined as the condition of having more people than can live on the earth in
comfort, happiness and health and still leave the world a fit place for future generations.1 What some
people now believe that the greatest threat to the future comes from overpopulation.
It took the entire history of humankind for the population to reach 1 billion around
1810. Just 120 years later, this doubled to 2 billion people (1930); then 4 billion in
1975 (45 years). The number of people in the world has risen from 4.4 billion people
in 1980 to 5.8 billion today. And it is estimated that the population could double again
to nearly 11 billion in less than 40 years. 2 This means that more people are now
being added each day than at any other time in human history.
Looking ahead, world population is projected to exceed 6 billion before the year
2000. And according to a report by the United Nation Population fund, total popu-
lation is likely to reach 10 billion by 2025 and grow to 14 billion by the end of the
next century unless birth control use increases dramatically around the world within
the next two decades.3
Both death rates and birth rates have fallen, but death rates have fallen faster than
birth rates. There are about 3 births for each death with 1.6 births for each death in
more developed countries ( MDCs) and 3.3 births for each death in less de-veloped
countries( LDCs). The world's population continues to grow by 1 billion people every
dozen years.4

On one hand, some politicians call for countries, especially MDCs to increase their
population size to maintain their economic growth and military security. On the other
hand, critics denote that one out of five people living here today is not properly
supported and believe that the world is already limited in resources.
These critics maintain that slowing world population growth is one of the most ur-gent issues Those
who believe that the world is overpopulated argue that if we don't sharply lower birth rates, we are
raising death rates by default5
THE CAUSES OF RAPID POPULATION GROWTH

Until recently, birth rates and death rates were about the same, keeping the population stable. People
had many children, but a large number of them died before age five.6 During the Industrial Revolution,
a period of history in Europe and North America where there were great advances in science and
technology, the success in reducing death rates was attributable to several factors: (1) in-creases in food
production and distribution, (2) improvement in public health (water and sanitation), and (3) medical
technology (vaccines and antibiotics), along with gains in education and standards of living within
many developing nations.7 Without these attributes present in many children's lives, they could not
have survived common diseases like measles or the flu. People were able to fight and cure deadly
germs that once killed them. In addition, because of the technology, people could produce more and
different kinds of food. Gradually, over a period of time, these discoveries and inventions spread
throughout the world, lowering death rates and improving the quality of life for most people.8
Food Production Distribution
The remarkable facts about the last 150 years has been the ability of farmers to increase food
production geometrically in some places. Agricultural practices have improved in the United States in
the last two centuries. Much of the world experi-enced agricultural success, especially in the last 50
years. Between 1950 and 1984, for example, the amount of grain harvested worldwide increased from
631 million tons to 1.65 billion tons. This represents a gain of 2.6 times at a time when the world
population increased by only 1.9 times.9
In more recent years, the technology has produced a broader variety of tech-niques:
new kinds of seed, chemical fertilizers, pesticides, and more sophisticated machinery.
The use of technology has made possible the rapid expansion of agri-culture in the
United States and other MDCs and LDCs. The use of pesticides in LDCs, for example
was expected to increased between 400 to 600% in the last 25 years of the twentieth
century. 10
During the past 10 years, the world's food production has increased by 24 per cent,
outpacing the rate of population growth.11 However, this increase was not evenly
distributed throughout the world. For example, in Africa, food pro-duction decreased,
while population increased. And world cereal production fell in 1993, according to the
FAO, which predicted a food shortage in 20 countries during 1994. 12 However, most
experts agree that there is no shortage of food, and that equitable distribution should
be sufficient to meet all needs for the future. Lack of money to buy food is the
problem of malnourishment. Pov-erty, in effect translates the world adequacy into
national and local shortages. Within households, men and boys have priority for
whatever food is available, while women and children, especially girl children are the
first to suffer malnu-trition. Few resources are available to women, even though they
are often re-sponsible the for food supply.13
Improvement in Public Health

People have concerns about surviving daily living, such as meeting basic needs: food, water, and
housing. First, access to safe drinking water was related to the incidence of epidemic diseases such as
cholera and child survival. Less than 50% of the population had access to safe drinking water before
1990. By 1990, access to safe drinking water had increased by 75 per cent. But between 1990 and 2000
the numbers of people without access to safe water are projected to increase. 14 An increasing number
of countries both developed and develop-ing are approaching the limits of sustainable water use based
on their own re-newable resources.15
Second, the pressure to provide adequate housing increases as the population grows.
More than half of the developing world's population will be living in urban areas by
the end of the century. This growth outstrips the capacity to provide housing and
services for others. In some countries, finding a place to live is hard, especially for
women. Some women and children are forced to live in the poorest community where
they are open to exploitation and abuse.16
The priorities for getting rid of poverty, improving food supply, ending malnu-trition,
and providing adequate housing coincide at all points with those required for balanced
population growth.
Conquest of Disease
The biggest population story of the last hundred years has been the conquest of disease. Scientists have
learned a great deal about the ways to prevent and cure many types of disease. Thus, millions of people
who would have died of disease a century ago are more likely to live to old age. The most effective
tools in the con-quest of disease have been improved knowledge about nutrition, vaccinations, bet-ter
public health practices and the development of new medicines17
In the late 80s, a baby born in Iceland was 32 times more likely to live to the age of
one year as a baby born in Afghanistan.18 The major reason for this large differ-ence
in survival rate is nutrition. When young children get enough of the right kinds of
food, they are likely to live to be adults. In many nations the people know about
proper nutrition for young children and adults. Unfortunately, in many LCDs the
people lack the money and skills that would allow them to use the knowledge about
nutrition they already have. As a result, infant death rates and therefore, overall death
rates, remain high in many LDCs. 19
The second most important factor is vaccinations. As far back as 1800, scien-tists
knew how to use vaccines to protect people from infectious disease. Use of that
knowledge has reduced the rate of diseases like influenza, smallpox, polio and rubella
in MDCs. Again, lack of resources has prevented many LDCs from mak-ing similar
use of vaccinations to reduce the rate of infectious disease and death rates in their
countries. Moreover, vaccines are still not available for some dis-eases-malaria is the
most obvious example and the greatest concern in LDCs.20
Third, better public health practices-- the germ theory of disease, discovered by Louis
Pasteur in the 1870s clearly demonstrated that a person's health was also a community
problem. Sewage dumped into a public water supply could cause dis-ease throughout
the community. With this understanding, the science of public health was born. Today,
public health measures like waste treatment, water purifi-cation, vaccination, and
nutritional education are well developed in MDCs. How-ever, public health measures
are still absent in many LDCs. As a result, disease continues to spread and cause high
death rates.21

And finally, with the advent of new medicines, disease was less of a problem in
MDCs because medical science has invented a whole range of new medicines with
which to treat everything from infections to pneumonia. In many LDCs, new drugs
and medicines are simply not available. 22
As stated earlier, death rates in MDCs have fallen largely because of improved health
and medical knowledge and because of better health and medical practices based on
that knowledge. Death rates in many LDCs remain high because the money, personnel
and facilities needed to put that knowledge into practice are not available.23
THE CONSEQUENCES OF RAPID POPULATION GROWTH

Rapid human population growth has a variety of consequences. Population grows fastest in the world's
poorest countries. High fertility rates have historically been strongly correlated with poverty, and high
childhood mortality rates. Falling fertility rates are generally associated with improved standards of
living, increased life expectancy, and lowered infant mortality. Overpopulation and poverty have long
been associated with increased death, and disease. 25 People tightly packed into unsanitary housing are
inordinately vulnerable to natural disasters and health problems.
However, most of the world's 1.2 billion desperately poor people live in less
developed countries ( LDCs). 26 Poverty exists even in MDCs. One in five Soviet
citizens reportedly lives below the country's official poverty line. In the United States,
33 million people - -one in eight Americans are below the official poverty line. The
rapid expansion of population size observed since the end of World War II in the
world's poorest nations has been a cause of their poverty. 27
Poverty is a condition of chronic deprivation and need at the family level. 28 Poverty,
is a major concern of humankind, because poverty everywhere reduces human beings
to a low level of existence. Poor people lack access to enough land and income to
meet basic needs. A lack of basic needs results in physical weak-ness and poor health.
Poor health decreases the ability of the poor to work and put them deeper into poverty.
Instead of allowing poverty to persist, it is important to limit our number be-cause in

dense populations too many lack adequate food, water, shelter, education and
employment. High fertility, which has been traditionally associated with pros-perity,
prestige, and security for the future, now jeopardizes chances for many to achieve
health and security. 29
Rich and poor countries alike are affected by population growth, though the
population of industrial countries are growing more slowly than those of develop-ing
one. At the present growth rates, the population of economically developed countries
would double in 120 years. The Third World, with over three quarters of the world's
people, would double its numbers in about 33 years. This rapid dou-bling time reflects
the fact that 37 percent of the developing world's population is under the age of 15
and entering their most productive childbearing years. In the Third World countries
(excluding China), 40 percent of the people are under 15; in some African countries,
nearly half are in this age group. 30
ACTIONS AND STRATEGIES THAT CAN BE DEVELOPED TO SOLVE

THESE PROBLEMS

There is controversy over whether population growth is good or bad. Over-population and continuing
population growth are making substantial contributions to the destruction of Earth's life support
systems. In the past, human populations have rarely been subject to explosion. In numbers. The
powerful long-term mo-mentum that is built into the human age structure means that the effects of
fertility changes become apparent only in the future. For these reasons, it is now conven-tional practice
to use the technology of population projection as a means of better understanding the implications of
trends.
Population projections represent the playing out into the future of a set of as-
sumptions about future fertility and mortality rates. More public education is needed
to develop more awareness about population issues. Facts like the size or the growth
rate of the human population should be in the head of every citizen. Schools should
inform students about population issues in order for them to make projections about
the future generations.
Action plans and strategies can be developed to increase public understanding of how
rapid population growth limits chances for meeting basic needs. The spirit of open
communication, and empowerment of individual women and men will be key to a
successful solution to many population problems. Collective vision about health care,
family planning and women's education at the community level build a basis for
action. The creation of action plans help to meet challenges to find coop-erative
solutions. Free and equal access to health care, family planning and educa-tion are
desirable in their own right and will also help reduce unwanted fertility.
Individual choice, human rights and collective responsibility are key to al-lowing
families to plan the size and spacing of their children. It is essential to achieve a
balance between population and the available resources. Teachers, par-ents,
community workers and other stakeholders should extend the range of choices about
available resources to individuals, especially women, and by equal-izing opportunities
between the genders from birth onwards.
Teachers, parents, other educators, politicians and other concerned citizens can
practice how to make good decisions in everyday life. Decisions about family size,
and resource will affect the future generations. Through commu-nity forums, specific
issues about the population growth can be discussed and possible action plans can be
developed.
Teachers, as well as students can use the information super highway to gain
knowledge about other countries' population and resources. Teachers can help
students with problems and decision making on a daily basis. The investigation of
world population will raise the level of awareness, so that we can learn to handle
problems based on data. This data can help us to analyze our situations in a practical
way.
iv) Goals & objectives: Some Policy Approaches.
2. The first Development Plan (1974/75-1978/89) drew attention to the drag on the
development process caused by rapid population growth as early as in 1974 and even
visualized the need for an institutional machinery such as the National Population
Commission. The draft Second Development Plan further elaborated on this theme
with special reference to women, education, migration etc. During 1978-82 the

Government designed and implemented a project with UNFPA financial support and
ILO technical co-operation to integrate population concerns in development planning
and policy which led the way to the setting up of the National Population Commission
in 1982 whose terms of reference include, 聽 inter alia, 聽 co-ordinating, promoting
and integrating population activities in the development process and formulating a
national population policy. Careful preparatory multi-disciplinary technical work has
been carried out by national experts towards this end over the last few years.
Basic Principles
3. In adopting a national population policy, basic principles contained in paragraphs 4-

9 below should be regarded as fundamental.
4. Population policy is no panacea or substitute for development policy. National

development should be pursued vigorously and action in regard to population should
be viewed as supportive in nature. Population and development should be viewed as
two sides of the same coin and both sets of policy measures should be fully integrated.
5. Population policy does not address the issue of the carrying capacity of Sierra
Leone land and other resources i.e. whether the country is over or under-populated on
which views may diverge widely. Its main focus is on current and prospective rapid
population growth which poses additional serious problems to economic development
and social progress, which have to confront at the same time, acute resource
constraints.
6. Family Planning is usually an important component of population policy but it

should not be equated with population control. Access to family planning services
enhances the health and welfare and enlarges the options open to families, especially
women.
7. It is the sovereign prerogative of the Government and the people of Sierra Leone to
deal with and resolve their population problems in the best way possible. This
principle shall be scrupulously upheld in accepting external population assistance.
8. Population policy should be humane and responsible, fully respecting individual

freedoms and rights as well as religious beliefs and cultural values.
9. The national policy should recognize that all couples and individuals have the basic
right to decide freely and responsibly on the number and the spacing of their children
and to have information, education and the means to do so. Only those means or
methods deemed morally acceptable, scientifically-sound, culturally appropriate and
economically feasible should, in practice, be made available in the implementation of
the policy.
IV. NATIONAL POPULATION POLICY GOALS OBJECTIVES AND GUIDE

POSTS
Goals

29. Population policy should reinforce and enrich national development, especially
human resource development, improve the quality of life of the people and enhance
human welfare and dignity. Special emphasis should be laid on regulating population
quantity enhancing population quality and on improving the health and welfare of
women and children. The mutual interplay between population and development
should be constantly borne in mind.聽
30. In more specific terms, the goals of the national population policy include the
following:
(a) to make development planning and policy more comprehensive and effective by
the incorporation of the demographic dimension;
(b) to achieve a rate of growth of the population that would be sustainable by the
economy;
(c) to contribute towards meeting the basic needs of the people and enhancing the
quality and utilisation of the nation's human resources;
(d) to promote the health and welfare of the people especially those in the high risk
groups of mothers and children;
(e) to moderate initially the expected rise in and later to reduce progressively
population growth rates through the spread of voluntary family planning and small
family norms so as to facilitate the attainment of national economic and social targets;
(f) to guide rural-urban migrations, so as to minimise socio-economic problems and

optimize benefits to migrants and non-migrants alike in rural as well as urban areas.聽
Objectives
31. In order to achieve these goals, the objectives of the national population policy
should include the following:聽
(a) to improve the demographic knowledge base, i.e. data collection, processing,
analysis, projections and research on population, and development interaction on
regular basis;
(b) and to actively promote and facilitate the utilization of the knowledge base in
social and economic planning, policies and projects etc.
(c) to promote, clarify and sharpen the awareness and understanding among leaders
and the public at large of population and development problems and issues;
(d) to provide men and women with information and education on the value of
reasonable family size and child spacing to improve the welfare of the family and its
members, the community and the nation;

(e) to pay special attention to selected groups such as young persons and women of
reproductive age, members of organised groups in providing information and
education relating to family life, fertility regulation, etc.
(f) to improve the quality and availability of maternal and child health care services so
as to reduce infant, child and maternal morbidity and mortality;
(g) to make family planning means and services to all couples and individuals easily
accessible at affordable cost and to actively promote the acceptance of contraceptive
practice;聽
(h) to design and implement programmes of integrated rural and urban development,
to moderate and orient rural urban migration;
(i) to review the existing legislation as it pertains to key areas of population policy
and provide for the improved quality of life so as to enhance the welfare of men,
women and children.
Guide Posts
32. In view of the weaknesses in available population, health and other relevant
statistics, the current socio-economic situation and the stage of policy and programme
development, it would be premature at present to attempt to set quantitative targets for
the national population policy. However, to facilitate implementation of the policy in
the spheres of family planning and related information and educational activities the
norms below are set forth to serve as indicative guide posts:
(a) Women should be encouraged to have a small family say, 3-4 children;
(b) Age at first pregnancy should preferably be 16 years or higher;
(c) The birth interval should preferably be 24 months or more.
V. STRATEGIES AND PROGRAMME OF ACTIVITIES
33. Population growth and other parameters influence and are influenced by different
development programmes to varying extent. Under the national population policy, the
utilisation of demographic data, projections etc. in various development processes will
be further . . . intensified. For moderating population growth, for the present the
primary focus of the policy will be on developing family planning and related mother
and child health and educational activities, raising the status of women etc. As more
insights are gained on the interplay between demographic and socio-economic factors,
the scope of population policy to moderate fertility will be broadened.
34. Family planning and related information and education components are at the
centre of the national population policy in three ways: improving the health and
welfare of mothers, children and the family; raising the status of women; and reducing
fertility and population growth which facilitate socio-economic and human resource
development. Family planning should be closely integrated with health services,
especially its maternal and child health component, and be fully supported by

vigorous, imaginative and many sided programmes of education and information.
Effective health measures and better education and living conditions directly affect
morbidity, mortality and fertility, improvement in women's role, and status in the
family, society and economy through such means as better education, income
generating opportunities etc. [and] hold the key to the success of national and human
resource development as well as of family planning. Broadening access to education
and expanding employment opportunities can contribute towards fertility reduction
less directly but they are at the same time vital to the development of human
resources.
Family Planning
35. Family planning programmes should be developed and expanded progressively

within the context of primary health care and related system.
36. The integration of family planning service delivery with maternal and child health
care provides an appropriate channel of entry into the national primary health care
strategy.
37. Family planning should be supported by appropriate measures in spheres of law,

education, social services etc. to protect and promote the family as the basic unit of
society.
38. Family planning services should include services to sterile and sub-fertile couples
and individuals, subject to available resources.
39. National family planning programmes should endeavour to make available a

variety of contraceptive methods to allow free choice to users.
40. Appropriate health personnel should receive orientation in family planning

techniques through pre-service or in-service training. Family planning matters should
be incorporated in the curricula of medical, nursing and other health professions. The
training should include communication approaches more responsive to local cultural
values and individual couples' preferences.聽
41. Adequate arrangements should be made for the provision of Staff, supplies,
equipment and other facilities for the promotion and delivery of family planning
services. This should also include:
(a) expansion of static and mobile maternal and child health family planning clinics;
(b) intensification of community-based delivery systems of contraceptives to cover

those not reached by the conventional delivery channels;
(c) distribution of conventional non-prescriptive contraceptives, i.e. those not

requiring medical prescriptions, through the extension staff of appropriate sectoral
ministries e.g. extension workers responsible for rural development, social welfare
adult education, etc.;

(d) where feasible, the provision by appropriate sectoral ministries of family planning
motivation and referral arrangements for counselling and service to health outlets
equipped for family planning.
42. Voluntary organizations, such as the Planned Parenthood Association have been
pioneers in the national family planning movement. Such organizations should be
provided with the appropriate encouragement and support to enable them to continue
to make their due contribution to national efforts.
43. Adolescent fertility constitutes a serious health, social and economic risk to young
girls. Educational and information activities should be backed up by readily accessible
family planning counselling and services oriented towards both girls and boys. There
is need for research on the incidence of adolescent fertility.聽
44. Relevant legislation should be reviewed with a view to liberalising the sale,
distribution and advertising of contraceptives and access to family planning services.
The special needs of young people should be borne in mind in this review.
Health/Maternal and Child Health
45. Primary health care as the national strategy to ensure health for all should be
strengthened and expanded and proper emphasis should be laid on its component
relating to maternal and child health, including family planning, as well as that of
community participation.
46. Health and family planning manpower base should be broadened to include, after
appropriate training, nursing aids (SCHM) the traditional birth attendants (TBA),
traditional healers/herbalists and other community volunteers (VMAs). Research in
traditional health care including family planning should be intensified to establish
elements of scientific basis that may exist and to extend utilisation of valid elements
of such care in the health services.聽
47. Special attention should be paid to health and nutrition education of mothers
complemented by effective food and nutrition programmes for mothers and children.
Particular emphasis should be laid on the promotion of breast feeding. Local weaning
foods, at reasonable price, should be identified and their use should be actively
encouraged.
48. In maternal and child health/family planning services child spacing should be
systematically promoted.
49. Wherever feasible, specific programmes should be devised and put into effect to
reduce the incidence of high risk births which occur below the age of 18 years, over
the age of 35 years, at intervals of less than two years and more than four children in
number. Special emphasis should be laid on the education of these women in family
planning as a preventive and promotional health measure.
50. The expanded programme of immunization for women and children should aim at
achieving universal coverage as early as possible.

Information, Education and Communication
51. Information and Education strategy must play a key role in dispelling
misconceptions, doubts, traditional attitudes etc. in population and family formation
issues. This requires multipronged and sustained action which is a pre-requisite to
firm commitment to national population policy by leaders and the public at large and
the translation of the policy into practice through adoption of contraceptive practice
and the small family norm by many couples. Numerous channels of communication
should be utilized and various target audiences should be addressed with multiple
educational contents and messages adapted to different needs.
52. Communication strategies which would be used through the most suitable forms
of media should be [devised] and utilized, to sensitize leaders and the public opinion
to population and family welfare issues. This would need to be followed up by
education and information processes oriented towards smaller groups, families and
individuals to promote better understanding of the issues.
53. Seminars and meetings should be held to further sensitize, to promote

understanding of and to build consensus among leadership groups on the population
policy. The target group may include political leaders; religious leaders; leaders drawn
from industry, labour, co-operative and other organised economic entities;
representatives of medical, legal professions; paramount chiefs; leaders of traditional
secret societies etc.聽
54. Seminars of an in-depth nature or with greater technical contents would be

organised for policy makers, professionals, senior executives etc. from various
ministries, the University and professional institutes for promoting better
understanding of and enlisting their co-operation and support for the population
policy and its implementation.
55. Population education, including family life education, should be incorporated in

the educational activities of various ministries such as those in the spheres of
education, information, rural development, social welfare, agriculture, labour, etc. In
this context, it would be most desirable to provide for education/orientation of the
relevant professional and extension staff of the ministries concerned.
56. Special efforts should be made to incorporate family life education in the
programmes of adult education, functional literacy for the benefit of new literates, etc.
57. The organised sectors of the economy such as mines, industry, trade unions, co-
operatives etc. should receive special attention since their existing educational and
welfare facilities or programmes can be readily adapted and uitlized at low cost with
good result in short and medium term for the propagation of population and family
life education among the population groups concerned. The educational efforts should
be linked with family planning counselling and services from health services of
industrial undertakings wherever feasible.
58. Consideration should be given to entrust the responsibility to a central unit with
expertise in developing prototype training modules and educational and
communication materials for integrating population and family life elements in the

educational programmes for adult audiences. The instructional packages should be
flexible for adoption for use for different target audiences by the educational specialist
of the implementing agencies and institutions. Arrangements should be made for the
training of trainers in the use of these materials.
59. Family life education and family planning counselling should be directed equally
towards men as well as women to inculcate the sense of joint responsibility in matters
of sexual relations and family formation.
60. Population education which has been incorporated into secondary schools as part
of social studies should be intensified and its extension in appropriate forms to
primary schools, technical and vocational training institutions the university etc.
should be progressively carried out with a view to inculcating responsible sexual
behaviour, marriage and parenthood among the younger generation. The integration of
population education into Science, Home Economics, Biology and other subjects will
also be intensified.
61. Special educational programmes in family welfare planning may be designed for
out-of-school youths as well as for parents and guardians as specific target groups.
62. Non-government organizations with primary focus of interest elsewhere such as

trade unions, workers education bodies, co-operatives etc. should be encouraged and
assisted in taking up or incorporating in their on-going programmes population and
family life education. Established organization active in population and family life
education should also be appropriately assisted. They should benefit from and
contribute to common facilities and services set up by public authorities. As
appropriate, they should be used for the delivery of conventional contraceptives to
their target audiences.
63. Since a multiplicity of public agencies and other bodies would be involved in
information and education activities relating to population and family welfare
education, arrangements should be made for pooling and sharing of experience and
expertise and working out ways and means of mutual collaboration.
Women in Development
64. Improvement in women's roles in the family society and economy and women's
effective practice of fertility regulation are mutually reinforcing since high fertility is
rooted in large measure to women's socio-economic status, marital instability and
insecurity in old age. Purposeful involvement of women in rational development
therefore contributes directly to fertility reduction.
65. Census, survey and service statistics in spheres such as health, education,
employment should provide whatever feasible, separate data sets for women.
Women's participation in economic activities and contribution to national income are
grossly underestimated in labour force statistics and national accounts. Efforts should
be made, including field research, to ensure better documentation of women's
economic contribution in future.

66. Women's education should be promoted at all levels and in various forms. Parents
should be encouraged to send their girls to school and try to ensure they complete this
schooling. Young women should be encouraged and assisted in taking up technical
and vocational study and training. Girls dropping out from the school due to early
pregnancy and child care responsibility should be enabled to re-enter formal and
nonformal education streams. Special efforts should be made to enable women to
benefit fully from adult education and functional literacy programmes.
67. Women should be enabled to benefit fully from the various public extension
services such as in the spheres of agriculture, credit and marketing, rural
development, social welfare etc. and their specific needs and interests should be
adequately met. In particular, to lighten the heavy burden of work of rural women, the
application of appropriate labour-saving technology should be promoted in
agriculture, cottage industry and domestic chores through ready access to potable
water, fuel and other energy sources etc.
68. In recognition of the dual role of women as mothers and workers, day-care centres
for infants and children should be provided on a voluntary basis wherever feasible.
69. Programmes designed to promote skill formation and income generating

opportunities for women should be intensified. In this context, women co-operatives
and other groups should be organised and strengthened to further defend their
interests and facilitate their access to credit, raw materials, technology, marketing, etc.
70. Socio-economic, family and personal status laws should be reviewed with a view
to eliminating unjust, unfair or discriminatory treatment of women. Special attention
may be paid in this context to laws relating to child marriage, child legitimacy and
guardianship rights and responsibilities, adoption family relations, inheritance and
property rights and labour. Consideration should be given to fixing 16 years as the
minimum legal age at marriage for girls. Support would be provided for the Women
Bureau at the Ministry of Rural Development, Social Services Youth and Women [and
for] the Women Association for National Development (WAND).
Education
71. Education is the major means to develop the capacity of the human mind, alter
individual perceptions, induce change in the value system and behaviour and
transform the society including norms of family formation as integral part of the
social system as a whole. The educational process is of a long-term nature. But the
incorporation of population issues in this process referred to earlier has effects in the
short and medium-term on norms and values relating to family size etc. General
educational development issues considered here influence the latter indirectly but are
vital for national and human resource development.
72. Every effort should be made to attain the national goal of universal primary
education as soon as possible. The problem of high drop-out rates should be tackled
keeping in mind the socio-economic content and the needs of the labour market.
Primary education should become effectively available, free and compulsory, matched
by legislation on the prohibition of child labour and its effective enforcement. This

may remove an inducement to large family size when children would no longer
supplement family income.
73. Special attention should be attached to increasing the enrollment rate for girls and
achiev[ing] reduction in their high drop-out rate to enable their further participation in
national development.
74. There should be an increasing technical and vocational bias in education at the
secondary and higher levels. Current and prospective high unemployment prevalent
among the educated reflects,聽 inter alia,聽 the mismatch between the output of the
education system and the needs of the labour market. Education and manpower
planning should be dovetailed.
75. Continuing high priority should be attached to programmes of adult education and
functional literacy undertaken by various bodies. Spread of literacy and education is
conducive to national development and cohesion and, as a by-product, would
facilitate access to and the understanding of population and family welfare education
and information.
Labour and Employment
76. Productive work is the main source of livelihood of the vast majority of the people
of Sierra Leone and largely determines their living standards. Indirectly, employment
and income from work provide the frame of family resources to meet the needs of
family members and hence an important factor in pointing to the size of the family
which can be afforded a decent living. However, the general level of employment and
income that the national economy can sustain hinges significantly on the world
economic context as well as broad national development policies and programmes. It
would be out of place here to enter into the issues of national employment strategy or
its international dimension. However, a few general observations may be in order for
greater development and utilisation of labour.
77. There would appear to be scope for the development of self employment and
income generating activities. For this purpose, technical managerial and
entrepreneurial skills would need to be developed and appropriate support in regard to
training common services for power, transport, credit and marketing facilities etc.
would be needed.
78. Comprehensive manpower labour force planning should be initiated without

delay. Employment and manpower planning can provide some indicators for
development and education strategy. As regards the latter, emphasis should be laid on
vocational and technical education tailored to the needs of the labour market for this
purpose, vocational guidance and counselling services should be increased. Outside
the educational systems, there should be accelerated training for skills where current
and prospective labour supply would not otherwise be able to match the demand of
the employment market.

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Economic Development

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ECONOMIC DEVELOPMENT

DIRECTORATE OF DISTANCE EDUCATION

MUHAMMAD ISMAIL 03147963120 1 ASSIGNMENTS AND COMPOSING

History of Economic Development:

MUHAMMAD ISMAIL 03147963120 2 ASSIGNMENTS AND COMPOSING

MUHAMMAD ISMAIL 03147963120 3 ASSIGNMENTS AND COMPOSING

According to Prof. Winston:

"Economic Development shows the excess of consumption and production of a

According to Prof. Williamson:

"Economic Development is a process whereby the people of a country utilize the

According to Prof. Higgins:

According to Prof. Arthur Lewis:

"Economic Development represents the per capita increase in the production of a

According to Prof. Meir and Baldwin:

"Economic Development is a process whereby the real NI of a country increases over

It is expressed Mathematically as:

In case d(Y/P) = dP , it would represent economic stagnation.

While if d(Y/P) < dP or dP > d(Y/P) , it will represent backwardness.

MUHAMMAD ISMAIL 03147963120 4 ASSIGNMENTS AND COMPOSING

The changes on supply side are as:

(a) Discovery of new Resources, (b) Capital Accumulation, (c) Changes in

The changes on demand side are as:

MUHAMMAD ISMAIL 03147963120 5 ASSIGNMENTS AND COMPOSING

MUHAMMAD ISMAIL 03147963120 6 ASSIGNMENTS AND COMPOSING

Being underpriced, nature is overexploited. So, an economy could enjoy growth in

(a) Quantifying economic failure

In a study in Costa Rica on pollination services, Ricketts et al. (2004) ﾧ discovered

MUHAMMAD ISMAIL 03147963120 7 ASSIGNMENTS AND COMPOSING

(b) Eliminating nature's subsidies

Market-based systems have attracted much attention among ecologists and

MUHAMMAD ISMAIL 03147963120 8 ASSIGNMENTS AND COMPOSING

5. Measuring sustainable development

A famous 1987 report by an international commission (widely known as the

(a) Shadow prices as social scarcities

MUHAMMAD ISMAIL 03147963120 9 ASSIGNMENTS AND COMPOSING

(b) The wealth of nations

(c) An empirical exercise

MUHAMMAD ISMAIL 03147963120 10 ASSIGNMENTS AND COMPOSING

Methods to Measure Economic Development:

There are following methods to measure the economic development:

(1) Increase in Real GNP as a Criterion of Economic Development:

(2) Increase in Real Per Capita Income as a Method of Economic Development:

MUHAMMAD ISMAIL 03147963120 11 ASSIGNMENTS AND COMPOSING

Formula for Per Capita Real GDP and its Growth:

Thus, the real per capita GDP (y) is as:

gy = gY - (gPop + gP) = gY - gPop - gP

Merits of Real GNP-ism and Per Capita-ism:

MUHAMMAD ISMAIL 03147963120 12 ASSIGNMENTS AND COMPOSING

Demerits of Real GNP and Per Capita Method:

(ii) Increase in Population: According to GNP per capita method, economic

(iii) International Comparison: According to GNP per capita method, development is

MUHAMMAD ISMAIL 03147963120 13 ASSIGNMENTS AND COMPOSING

MUHAMMAD ISMAIL 03147963120 14 ASSIGNMENTS AND COMPOSING

Accordingly, in 70s a change in emphasis occurred amongst economists and policy

According to Todaro, Development must, therefore, be conceived of as a multi-

MUHAMMAD ISMAIL 03147963120 15 ASSIGNMENTS AND COMPOSING

ecuring economic development, social equity ﾧ and justice, and environmental

The aim of sustainable development is to balance our economic ﾧ , environmental

Sustainable development encourages us to conserve and enhance our resource base,

MUHAMMAD ISMAIL 03147963120 16 ASSIGNMENTS AND COMPOSING

i) Classification of Developing Countries.

A developing country, also called a less developed country or underdeveloped

Measure and concept of development

MUHAMMAD ISMAIL 03147963120 17 ASSIGNMENTS AND COMPOSING