Unit I Economic Development and Growth

Meaning of Economic Development and Growth

Definitions-
I) Economic growth is defined as a sustained annual increases in an economy
real national income over a long period of time.
II) Economic growth means the annual increase in real per capita income of a
country over the long period. Thus, Professor Arhtur Lewis says that economic
growth means the growth of output per head of population

Kindleberger (traditional view)- Economic growth means more output and

economic development means both more output and changes in the technical and
institutional arrangements by which it is produce.
Dudley Seers- for understanding economic development, the questions to ask
about a country development: what has been happening to poverty? What has
been happening to unemployment? What has been happen to inequality? If all
three of these have declined from high levels, then beyond doubt this has been a
period of development for the country concerned. If one of two of these central
problems have been growing worse, especially if all three have, it would be
strange to call the development even if per capita income doubled.
Sukhamoy Chakravarti- (Modern View- 1989)- the rate of growth strategy is
by itself an inadequate device to deal with the problems of generating
employment opportunities and for reducing economic disparities. Much depend
on the composition of the growth process and how growth is financed and how
benefits from growth process are distributed.
as a development theorist, Chakravarty's work can be broadly divide into two
categories.
A characteristic of much of his earlier work is its concern with the implications
of investment planning. Later,' particularly after his experience in the Planning
Commission, he was much more concerned with formulating an appropriate
theoretical framework for analysing the development process and devising an
appropriate development strategy, particularly for a labour surplus economy, such
as India (Manmohan Agarwal, 1991, epw).
Recently the concept of economic development has been further widened, so that
it now involves not only reduction in poverty, inequality and unemployment but
also requires improvement in quality of life which include clear environment,
better education, good health and nutrition.
Theories of Economic History –
As a study of the origins of economic growth, economic history allows as to
investigate those drivers of long term growth that usually remain exogenous to
formal theoretical models (Refe- Tirthankar Roy, 2000, The Economic History
of India (1857-1945).
National Income-
It is defined as the total market value of all final goods and services produced in
the economy in a year. According to Pigou, National income is that part of
objective income of the commodity, including of course income derived from
abroad which can be measured in money (Zingan).
Y=C+I, Consumption expenditure and investment expenditure, Saving, Tax
Gross National Product (GNP),
It is defined as the total market value of all final goods and services produce in a
year in a country- it is monetary measure.
What do you mean by final goods? The final goods are those goods which are
purchased for final use and not for resale or further processing. Such as raw cotton
Rs. 100 and Cotton cloths Rs.2000.
Gross Domestic Product (GDP)- it is the money value of all final goods and
services produced by normal residents as well as non- residents in the domestic
territory of a country but does not include net factor income earned from abroad.
GDP= GNP- net factor income from abroad.
Disposable income – Even whole of the incomes which are actually received by
the people are not available to them for consumption. This is because
governments levy some personal taxes such as income tax, personal property
taxes.
DI= Personal Income – Personal Taxes. DI= C+S
There are three different ways to measure GDP; Production, Income and
Expenditure Methods. It is related to NP=NI=NE
 Nominal GDP – the total value of all goods and services produced at current
market prices.
 Real GDP – the sum of all goods and services produced at constant prices.

II) Difference Between Economic Development and Growth

Economic growth is related with increase in real national income. Economic
development means an improvement in the quality of life and living standards,

II) Measurement of Economic development

1) GNP,
2) GNP per Capita- the rate of increase in real per capita income should be
higher than the growth rate of population
As per the G. M. Meier in the process of economic development the real per capita
income of the country should be increases, number of people below a poverty line
does not increase, and the distribution of income does not become more unequal.
3) Welfare- According to Okun and Richaedson, economic development is a
sustained, secular improvement in material well-being.
4) Social Indicators on Basic needs- Health, Education, food, housing etc.
III. Classification of Countries on the basis of development-

For analytical purposes, World Economic Situation and Prospects (WESP)

classifies all countries of the world into three broad categories:

A) Developed economies,

B) Economies in transition and

C) Developing economies.

Within each broad category, some subgroups are defined based either on
geographical location or on ad hoc criteria,

such as for ad hoc criteria the subgroup of “major developed economies”, which
is based on the membership of the Group of Seven.

EEC (1957)

European Economic Community was a regional organization created by the

Treaty of Rome of 1957, aiming to foster economic integration among its member
states.

OPEC 1960

Organization of the Petroleum Exporting Countries is an intergovernmental

organization of 13 countries.

OECD (1961)

- Organisation for Economic Co-operation and Development

It is an intergovernmental organization with 38 member countries, founded in

1961 to stimulate economic progress and world trade.

G7 (1975)
The Group of Seven is an inter-governmental political forum consisting of
Canada, France, Germany, Italy, Japan, the United Kingdom and the United
States.

Geographical regions for developing economies are as follows: Africa, East

Asia, South Asia, Western Asia, and Latin America and the Caribbean.

The geographical distribution of the economies presents an interesting picture.

Most of the low income economies are in Sub-Saharan Africa (consisting of

Eastern and Southern Africa and West Africa), Asia, Eastern Europe and Central
Asia.

The middle income economies are spread in all major regions of the world.

Most of the high income economies are in Europe and Central Asia, Americas,
East Asia and Pacific, and the Middle East.

Sub-Saharan Africa, North Africa and South Asia hardly have any high income
economy while East and Southern Africa, Eastern Europe and Central Asia had
just a few.

The low income economies are sometimes referred to as the third world countries.

the high income and middle income economies representing the first and second
worlds.

In parts of the analysis, a distinction is made between fuel exporters and fuel
importers from among the economies in transition and the developing countries.
An economy is classified as a fuel exporter if the share of fuel exports in its total
merchandise exports is greater than 20 per cent and the level of fuel exports is at
least 20 per cent higher than that of the country’s fuel imports.

This criterion is drawn from the share of fuel exports in the total value of world
merchandise trade.
Fuels include coal, oil and natural gas. (WESP 2014), p.143-144.

For other parts of the analysis, countries have been classified by their level of
development as measured by per capita gross national income (GNI).

As per the World Banks classification the counties in the has been classified into
four world's economies groups, based on gross national income per capita:

Income criteria (Refer Report- World Economic Situation and Prospects 2021, p.
124).

1) Low income countries

- I) Countries with less than $1,036 GNI per capita are classified as low-
income countries, Afghanistan,
2) Lower-middle income

- II) those with between $1,036 and $4,045 as lower-middle-income

countries, (India), Shri Lanka, Bangladesh, Nepal
3) Upper-middle countries –
-
- III) those with between $4,046 and $12,535 as upper-middle-income
countries, and
4) High Income counties-
- IV) those with incomes of more than $12,535 as high-income countries.
-
IV) Comparison between Developed and underdeveloped countries-

Developing and Developed Economies

(Ref - Cherunilam)
Developing and developed economies/countries are often used terms. The use of
these terms is convenient; it is not, however, intended to imply that all economies
in the group of developing are experiencing similar development or that other
economies have reached a preferred or final stage of development.
Low income and middle income economies are developing economies.
It may be noted that the term third world does not cover all developing economies
it covers only the low income economies.
The developed economies as a group are sometimes referred to as the North as
they, with some exceptions such as Australia and New Zealand, are in the
northern hemisphere and the developing economies are referred to as the South
as most of them are in the southern hemisphere.
Classification by income does not necessarily reflect development status.
In the group of high income economies, the industrial economies are developed
economies; but all the high income economies are not developed economies (for
example, countries such as Kuwait and UAE, though high income economies, are
regarded as developing economies).
Besides income, some other criteria such as the sectoral distribution of the income
and employment generation, social development indicators etc. are applied to
consider whether an economy is a developed or developing one.
Sometimes the terms less developed countries (LDCs) and more developed
countries (MDCs) are used to refer to the developing and developed countries.
The use of the term underdeveloped to refer to the developing countries is also
common.
The United Nations Economic and Social Council has identified a special
category of low income economies known as the least developed countries
(LDCs as the same short form is used for both the less developed and least
developed countries it could sometimes create confusion).
A number of criteria are used as the basis for the identification such as a,
i) very low GNP per capita,
ii) low levels of human development (a combined health, nutrition and education
index) and
iii) economic vulnerability (a composite index based on indicators of instability,
inadequate diversification and the handicap of small size).
According to the Human Development Report 2007, there were 50 least
developed countries or areas, including Bangladesh, Bhutan, Nepal, Maldives,
Mali, Uganda, Myanmar, Sudan, Zambia, Zimbabwe and Yemen. The least
developed countries are home to about 10 per cent of the worlds population.
(Refer Current WESP Report 2021)

Newly Industrialising Economies

The newly industrialising economies are those developing economies which have
been experiencing rapid industrialisation such as Hong Kong, South Korea,
Singapore and Taiwan (i.e. Taipei, China)the Asian Tigers.
Transition Economies
The term transition economies refers to those economies which are in a transition
from the centralised economic system to the market economy. The transition
economies, thus, are the former communist/socialist economies like erstwhile
USSR, (i.e. the present CIS) and East European countries which are undergoing
an economic (system) transition. They also represent a transition from
authoritarianism to democracy.
First world – African, Asian, and the Latin American member counties of the
UN called.
Second world – socialistic counties
Third World- economically advanced capitalist counties

CHARACTERISTICS OF DEVELOPED ECONOMIES

As indicated earlier, income is not the only criterion to consider a country as
developed. There is indeed some important difference between economic growth
and development.
An increase in income is an indication of economic growth.
Economic development, besides growth, has some qualitative dimensions too,
such as the distribution of income, standard of living, composition of output,
characteristics of working conditions and over all improvement in economic
welfare.
The UNCTAD (United Nations Conference on Trade and Development) in its
annual publication Human Development Report uses some composite indices,
like human development index (HDI), human poverty index (HPI), and gender
related development index (GDI) to indicate the level of welfare or deprivation
in an economy.
CHARACTERISTICS OF DEVELOPING ECONOMIES

Characteristics of an Underdeveloped Country

DIFFERENT CRITERIA OF UNDERDEVELOPMENT
1. The first criterion of underdevelopment is the ratio of population to land
area.
Though, there are many underdeveloped countries in Africa and Latin America
where there are “empty spaces” signifying a low ratio.
2) ratio of industrial output to total output- though it is not valid indicator
3) low ratio of capital to per head of population -
Nurkse defines underdeveloped countries as those which “compared with the
advanced countries are underequipped with capital in relation to their population
and natural resources”
4) towards poverty as the main cause of underdevelopment- vicious circle of
poverty by R. Nurkse
5) low per capita real income-
Based on
a) Economic –
General Poverty
- GNI per capita as per the UN report,
Large population of world (60%) lives in low income economy, now low middle
income economy
Relative poverty-
Absolute poverty- including low income, malnutrition, poor health, clothing,
shelter, and lack of education

b) Demographic –
Very poor countries are characterized by both high birth rates and high death
rates. As development proceeds, death rates plummet downward, High
population growth has two effects,
1) It means that overall income must grow faster to keep per capita growth at
reasonable levels. the fact that population is growing helps income to grow,
because there is a greater supply of productive labor. However, it is not clear who
wins this seesaw contest: the larger amount of production or the larger population
that makes it necessary to divide that production among more people.
2) A second effect of high population growth (or high birth rates, to be precise)
is that the overall population is quite young. It is easy to get an intuition for this:
high birth rates mean that a proportionately larger number of children are always
entering the population at any given point of time.
See the stages of eco development and Population -
(Ray,p41)
Demographic and Distributional Processes (J. p.145)
a. Labour allocation - (a) share of primary labour; (b) share of industry labour;
and (c) share of service labour.
b. Urbanization - urban percent of total population
c. Demographic transaction - (a) birth rate, and (b) death rate
The theory of demographic transition is based on the actual popluation trends of
advanced countries of the world.
This theory states that every country passes through different stages of population
development.
According to C.P. Blacker, they are :
(i) the high stationary phase marked by high fertility and mortality rates;
(ii) the early expanding phase marked by high fertility and high but declining
mortality;
(iii) the late expanding phase with declining fertility but with mortality declining
more rapidly;
(iv) the low stationary phase with low fertility balanced by equally low mortality;
and
(v) the declining phase with low mortality, lower fertility and an excess of deaths
over births
d. Income distribution- (a) share of highest 20%, and (b) share of lowest

Migration/ Immigration- good or bad?

Technological-
The process of economic growth is determined by two types of factors, economic
and non-economic. Economic growth is dependent upon its natural resources,
human resources, capital, enterprise, technology, etc. These are economic factors.

entrepreneurship is hindered by technological backwardness in underdeveloped

countries. This reduces output per man and the products are of substandard
quality.
Underdeveloped countries are also in the backward state of technology. Their
technological backwardness is reflected,
- firstly, in high average cost of production despite low money wages;
secondly, in high labour-output and capital-output ratios as a rule, and on the
average, given constant factor prices thus reflecting a generally low productivity
of labour and capital
thirdly, in the predominance of unskilled and untrained workers
lastly, in the large quantity of capital equipment required to produce, a national
outpu
-Technological backwardness is due to technological dualism -
which implies the use of different production functions in the advanced sector
and the traditional sector of the economy.
technological backwardness is not only the cause of economic backwardness, but
it is also the result of it
Socio-cultural characterises-
economic growth is not possible so long as social institutions, political conditions
and moral values in a nation do not encourage development.
As Nurkse has said: “Economic development has much to do with human
endowments, social attitudes, political conditions and historical accidents.
Capital is a necessary but not a sufficient condition of progress.”
The family is the primary economic and social unit. Family attitudes are
responsible for population pressures and attachment to land.
1979 Nobel Prize in Economics
W. A. Lewis-
T. W. Schultz-
References:
1) Jhingan M.L and B. K 2019. The Economics of Development and
Planning.
2) Ray, Debraj (1998). Development Economics,
3) World Economic Situation and Prospects Report 2021,