Chapter 1170

ECONOMICS OF
DEVELOPMENT
AND
PLANNING
(THEORY AND PRACTICE)
ECONOMICS OF
DEVELOPMENT
AND
PLANNING
(THEORY AND PRACTICE)
V.K . Pur i S.K . M isr a (L ate)

Shyam Lal College, Hindu College,
Delhi University, Delhi University,
Delhi Delhi
SIXTEENTH REVISED AND UPDATED EDITION: 2016
MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE  LUCKNOW  AHMEDABAD
 ERNAKULAM  BHUBANESWAR  INDORE  KOLKATA  GUWAHATI
© V.K. Puri
First Edition : 1986

Fifteenth Revised and Updated Edition : 2014
Sixteenth Revised and Updated Edition : 2016
Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,
“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.
Phone: 022-23860170/23863863, Fax: 022-23877178
E-mail: himpub@vsnl.com; Website: www.himpub.com
Branch Offices :
New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,
New Delhi - 110 002. Phone: 011-23270392, 23278631; Fax: 011-23256286
Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.
Phone: 0712-2738731, 3296733; Telefax: 0712-2721215
Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar,
Race Course Road, Bengaluru - 560 001. Phone: 080-32919385; Telefax: 080-22286611
Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,
Hyderabad - 500 027. Phone: 040-27560041, 27550139; Mobile: 09390905282
Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017. Mobile: 9380460419
Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth, (Near Prabhat Theatre),
Pune - 411 030. Phone: 020-24496323/24496333; Mobile: 09370579333
Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,
Lucknow - 226 022. Mobile: 09307501549
Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,
Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847
Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi - 682011,
Phone: 0484-2378012, 2378016; Mobile: 09344199799
Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha). Phone: 0674-2532129,
Mobile: 09338746007
Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor,
Near Humpty Dumpty School, Indore - 452 007 (M.P.). Mobile: 09301386468
Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata - 700 010,
Phone: 033-32449649, Mobile: 09883055590, 07439040301
Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press,
P.O. Bharalumukh, Guwahati - 781009, (Assam). Mobile: 09883055590, 09883055536
DTP by : Sudhakar Shetty (HPH Pvt. Ltd., Bhandup)
Printed at : Geetanjali Press Pvt. Ltd., Nagpur. (On behalf of HPH Pvt. Ltd.)
PREFACE TO THE SIXTEENTH EDITION
We have immense pleasure in presenting the sixteenth edition of our book Economics of Development
and Planning which first appeared in 1986. The book has received wide acceptance amongst students of
economic development at Honours and Post Graduate level, research scholars and teachers engaged in
teaching this paper all over the country and also by a large number of candidates appearing in various
competitive examinations. Keeping in view the pattern of questions asked in various university examinations
and competitive examinations, we have been substantially revising and updating our book over the years, and
have also been adding new sections and new chapters as and when the necessity arose. The present edition of
the book continues this spirit of revision and updating further.
The organisation, structure and contents of the present edition of Economics of Development and
Planning are as follows:
Unit I on ‘Basic Concepts and Issues in Economic Development’ is divided into six chapters and
discusses the characteristics of developing nations; the difference between economic growth and development;
the relationship between economic growth and development; the relationship between growth and social
justice; the concepts of basic needs approach, entitlements and capability; the concept, components and
importance of human development; the obstacles to growth and development; and a historical perspective on
economic growth.
Unit II explains the general theories of economic growth and development like the classical theories of
growth (incorporating the views of Adam Smith, David Ricardo and Thomas Malthus); Marx’s theory of
economic development; Schumpeter’s views on growth; Rostow’s stages of economic growth; essence of
Keynes’s theory and its relevance for the developing countries; growth models in the post-Keynesian phase;
and discussion on Harrod-Domar growth model, neo-classical theory of growth, Cambridge models of growth,
and forms and models of technical change including their empirical applications and relevance for the
developing countries.
Unit III is devoted to a discussion on partial theories of development. In this unit we explain and
critically evaluate the theory of big push as propounded by Rosenstein-Rodan, Harvey Leibenstein’s theory
of low level equilibrium trap, Nurkse’s arguments in favour of balanced growth and their criticism by Albert
O. Hirschman and Hans Singer, Hirschman’s unbalanced growth doctrine, the theories of social and technological
dualism, Lewis’s model of economic development with unlimited supplies of labour, and the Fei-Ranis model
of economic growth.
Unit IV is devoted to a discussion of various domestic problems and policy responses in the developing
countries. In this Unit, all important problems that are faced by the developing countries on the domestic front
have been discussed thoroughly, the alternative policy prescriptions examined, and answers sought wherever
feasible. For example, a detailed discussion of the problem of poverty, income inequalities and unemployment
is undertaken and various policy initiatives examined in detail. This part also takes up a discussion of the
population problem in the developing countries, role of technology in economic development, the
(v)
interrelationship between agriculture and industry, importance of capital formation, and the question of
environmental protection and sustainable development.
Unit V opens up with a discussion on the relationship between trade and economic development.
Building on the arguments put forward by Prebish, Singer and Myrdal emphasizing the deteriorating terms of
trade for the developing countries, we argue that the trade prospects of the developing countries are not very
encouraging. In this context, discussion in Chapter 34 is also relevant as here we point out how in the new
international economic order that is taking shape under the aegies of WTO, conscious efforts are being made
by the developed countries to dictate terms and suppress the claims of the developing world. This Unit also
examines the oftrepeated question of trade strategy (outward oriented vs. inward oriented), arguments for and
against protection, and the issue of international transfer of technology with special focus on the role of MNCs.
Unit VI examines how economic development is financed. The obvious choices of options here are
(i) the role and importance of monetary policy, (ii) the role and importance of fiscal policy, (iii) deficit
financing, and (iv) the role of foreign investment and aid in financing development in the developing countries.
Unit VII is concerned with issues and techniques of development planning. Input-output analysis, linear
programming, shadow prices, cost-benefit analysis, and various investment criteria are discussed in this unit
and their applicability in the developing countries examined. We also discuss the role of market in the
developing economies and the importance of State intervention. Role of economic planning in the context of
the problems faced by the developing countries is also examined.
Unit VIII is the last unit of the book and is devoted to a discussion of the Indian development
experience. We have tried to critically examine the various policy initiatives undertaken by the Government
of India during the planning period in practically all important sectors of the economy. For example, the
chapter on agriculture discusses trends in agricultural growth and the government’s policy related to this
sector. The chapter on industry discusses the industrial growth trends, the government’s industrial policy, the
role of public sector and the issue of privatisation. The chapter on foreign trade discusses the foreign trade
trends and the foreign trade policy while the chapter on ‘India and the World Economy’ highlights the issue
of globalisation and the impact of WTO on Indian economy. Various other chapters deal with the issues related
to the planning exercise like the objectives and strategy of planning, resource allocation in various plans, a
critical appraisal of the five-year plans, impact of economic reforms and the policy of liberalisation, regional
planning policy, etc.
As is clear from the above listing of the issues contained in this edition, we have undertaken a
comprehensive examination and review of practically all theoretical and practical issues confronting the
developing economies. In this elaborate exercise, we have benefited immensely from the ideas and thinking
of a large number of development economists. We gratefully acknowledge our intellectual debt to all of them.
We also express our deep sense of gratitude to Dr. Divya Misra, Associate Professor in Economics, Lady Shri
Ram College, Delhi University, and Mrs. Kiran Puri for providing invaluable assistance and to our publishers
M/s. Himalaya Publishing House for their wholehearted cooperation at all stages of the preparation of the
present edition.
V.K . Pur i
(vi)
PREFACE TO THE FIRST EDITION
The problems of the Third World countries are attracting increasing attention worldwide and a vast
theoretical and empirical literature has grown over the years dealing with the various issues of their economies.
The students of Economics need to be exposed to this literature through some standard book of a semi-textual
nature. In this literature it is now generally acknowledged that the Third World countries cannot grow along
the classical capitalist path of development followed by the U.K. or some other Western countries. These
countries must evolve their own strategies of development, and in any case they cannot rely completely on the
market forces for their economic progress. It is this necessity which has compelled these countries to adopt
economic planning in one form or the other. The purpose of this book is not to present detailed analysis of the
developmental paths chosen by the various developing countries. We wish to confine our analysis to the basic
theoretical issues of growth and development, treatment of growth models, leading theories of development
and underdevelopment, policy measures widely undertaken in developing countries to accelerate the growth
process and to tackle the problems arising in the progress of development theory, techniques and the practice
of economic planning and planning practice in India.
The canvas of the book as stated above is quite extensive. It covers almost everything which the students
doing a course in “Development and Planning" are required to cover both at the Post-Graduate and the B.A.
Honours level in India. In this book we have taken particular care to cover a number of issues which are
generally glossed over in books dealing with the same subject. Books written by the Western economists on
these subjects often carry anti-Third World biases. Some of these even go to the extent of legitimizing neo-
imperialism and neo-colonialism. Therefore, we have taken particular care in critically examining the
viewpoints of these economists. An attempt has also been made to present the viewpoint of the developing
countries. This we hope will provide students of developing countries with a perspective to examine and
analyse the problems of their economies within their own framework.
The book itself is divided into seven parts. Part 1 deals with basic concepts and issues in economic
development. Part 2 entitled ‘General Theories of Economic Growth and Development’ covers growth
theories developed right from the time of the classical economists. Part 3 provides an analytical treatment of
what are generally characterized as the partial theories of development. This section also examines the various
strategies of development. Parts 4 and 5 have policy orientation. Whereas Part 4 deals mainly with domestic
policies pertaining to problems like poverty and income inequalities, unemployment, capital formation, choice
of techniques, etc. Part 5 covers mainly international economic problems and policies. Parts 6 and 7 deal with
the planning theory and techniques and the practice of planning in India.
In common with most textbooks, this book is also an amalgam of many scholars’ ideas. We accordingly
gratefully acknowledge our intellectual debt to many authors cited in the references, as well as to our numerous
unnamed professional colleagues. We wish to thank Dr. Prem Vashishtha, Senior Economist, National
Council of Applied Economic Research, Shri R. N. Lokhar, Reader, Economics Department, Allahabad
University and Ms. Divya Misra, Lecturer, Lady Sri Ram College, Delhi University, Delhi, for the stimulus
they have given to us by raising many pertinent questions and making critical comments over a period of years.
We also consider it necessary to express our deep sense of gratitude to Mrs. Kiran Puri who rendered
assistance in various forms in preparing the manuscript of this book. But we accept all responsibility for such
errors, omissions and other defects that may have remained in the text. Thanks are also due to the Publisher
for bringing out the book in its existing form.
Suggestions for further improvement of the book are welcome from all quarters.
S.K . M isr a and V.K . Pur i
(vii)
CONTENTS
Unit 1
BASIC CONCEPTS AND ISSUES IN ECONOMIC DEVELOPMENT
1. Developing Nations: Diverse Structures and Common Characteristics 3 – 18

Developing Nations: Their Diverse Structures 4
Developing Nations: Their Common Characteristics 9
Suggested Readings 18
2. Conceptualising Development 19 – 34
What is Economic Development? 20
Growth and Development: A Contrast in Concepts 22
Measuring Economic Growth 23
Measuring Economic Development 25
The Development Gap 27
Modern Growth and the Rise in International Inequalities 29
Convergence of Development Levels 31
3. Economic Growth and Social Justice 35 – 52

Kuznets’ Inverted-U Hypothesis 36
Growth-Distribution Trade-offs 40
Production Versus Employment 42
Basic Needs Approach 45
Hunger, Entitlement and Capability 47
4. Human Development 53 – 73
What is Human Development? 53
Why Human Development? 54
Essential Components of Human Development 55
Human Development Index 56
HDI Ranking Versus Income Ranking 59
Gender Inequality Index 63
Multidimensional Poverty Index 65
Links Between Economic Growth and Human Development 65
Recasting Planning In Terms of Human Development 67
Appendix: Millennium Development Goals (MDGs) 70
(ix)
5. Obstacles to Growth and Development 74 – 84
Vicious Circle of Poverty and the Scarcity of Capital 74
Inappropriate Technology 77
Population Explosion 78
Political and Administative Obstacles 80
Socio-cultural Obstacles 81
External Bottlenecks 82
6. Economic Growth in Historical Perspective 85 – 95

Some Basic Concepts in the Economics of Growth 85
Characteristics of Modern Economic Growth 88
Interrelations among Growth Characteristics 91
Historical Growth Experience: Its Lessons for Developing Countries 91
Unit 2
GENERAL THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT
7. The Classical Theories of Growth and Stagnation 99 – 111

Adam Smith 99
Ricardo 102
Malthus 105
The Classical Model 107
8. Marx’s Theory of Economic Development 112 – 119

The Production Process 112
Social Evolution 113
The Course of Production 114
The Accumulation of Capital 115
The Dynamic Process 117
Critique of Marx’s Theory 118
9. Schumpeter’s Theory of Development 120 – 127

The Production Process 120
Schumpeter's View of the System 121
Growth and Development of an Economy 122
Business Fluctuations and the Process of Development 126
(x)
10. Rostow’s Stages of Economic Growth 128 – 137
The Stages of Economic Growth 128
Critical Evaluation of Rostow's Theory 134
11. Keynes’s Theory and Underdeveloped Countries 138 – 147

Essence of Keynes’s Theory 138
Relevance of Keynes’s Theory to Underdeveloped Countries 140
Keynes’s Impact on Analysis of Dynamic Problems 146
12. Growth Models – The Post Keynesian Phase 148 – 156

Steady States and Stability 149
Relaxation of the Assumption of Fixed Coefficients of Production:
The Neo-Classical Model 150
Changes in Saving Propensity: The Cambridge Models 150
Adjustment via Changes in the Rate of Population Growth 152
The Role of Technical Progress 153
Differences between Cambridge and Neo-Classical Approaches: A Note 153
13. The Harrod-Domar Growth Model 157 – 167

The Conditions Required for Steady Growth 157
Domar’s Model of Economic Growth 158
Harrod’s Model of Economic Growth 160
Harrod-Domar Analysis – A Brief Resume 162
Comparison of the Two Models 162
Critical Evaluation of Harrod-Domar Models 164
14. The Neo-Classical Theory of Growth 168 – 181

R.M. Solow’s Model 168
J.E. Meade’s Model 173
A Critical Appraisal of Neo-Classical Theory 180
15. Some Cambridge Models of Growth 182 – 203

Kaldor’s Model 182
Joan Robinson’s Model 192
Appendix to Chapter 15
Kaldor’s Model of Distribution 200
(xi)
16. Forms and Models of Technical Change 204 – 214
Various Forms of Technical Progress 204
The Models of Technical Change 209
Empirical Applications and Relevance for Underdeveloped Countries 212
Unit 3
PARTIAL THEORIES OF DEVELOPMENT
17. The Theory of the Big Push 217 – 222

The Three Indivisibilities 217
Indivisibilities and External Economies 218
Role of the State 219
A Critical Evaluation of the Big Push Theory 220
18. Critical Minimum Effort and Low Level Equilibrium Trap 223 – 233
Critical Minimum Effort Thesis 223
The Low-Level Equilibrium Trap 230
A Critical Appraisal 232
19. The Theory of Balanced Growth 234 – 244

The Size of Market and the Inducement To Invest 235
The Need and Rationale of Balanced Growth 239
How Can Balanced Growth be Accomplished? 241
A Critical Appraisal of the Balanced Growth Theory 242
20. The Strategy of Unbalanced Growth 245 – 253

Hirschman’s Strategy 246
A Critical Appraisal of Unbalanced Growth Theory 251
21. Theories of Social and Technological Dualism 254 – 262

The Theory of Social Dualism 254
The Theory of Technological Dualism 259
22. Lewis Model of Economic Growth 263 – 270

The Closed Economy 263
The Open Economy 268
(xii)
A Critical Evaluation 268
23. Fei-Ranis Model of Economic Growth 271 – 280

The Agricultural Sector 271
The Industrial Sector 273
Generation of the Agricultural Surplus 275
Agricultural Surplus as a Wages Fund 275
The Necessity of Labour Reallocation 277
Limitations of the Fei-Ranis Model 279
Unit 4
PROBLEMS AND POLICIES — DOMESTIC
24. Poverty and Income Inequalities in the Developing Countries 283 – 318
The Concept of Poverty 284
Measurement of Poverty 286
Levels of Poverty in Developing Countries 291
Nature of Poverty in Developing Countries 298
Measurement of Income Inequalities 301
Income Inequalities in Developing Countries 305
Causes of Poverty and Income Inequalities 309
Policies for Reducing Poverty and Income Inequalities 312
25. Population and Human Capital Formation in Economic Development 319 – 345
Population Growth Trends 319
Causes of the Rapid Growth of Population 322
Approaches to Population Analysis 325
Population and Economic Development 327
Population Policies for Developing Countries 330
Human Capital Formation 334
Manpower Planning 341
26. The Problem of Unemployment 346 – 360

Types of Unemployment 346
Unemployment and Underemployment Estimates 348
The Theory of Employment Determination and Developing Countries 349
Ingredients of an Employment Policy 352
(xiii)
27. Capital Formation and Economic Development 361 – 374
Importance of Capital Formation 361
The Three Stages of Capital Formation 363
Sources of Capital 364
Capital-Output Ratio 370
28. Technological Change and Development 375 – 389

Role of Technology in Economic Development 375
Contribution of Technology to Growth — Production Function Approach 377
Choice of Techniques 381
The Question of Appropriate Technology 386
29. Industrialisation and Agriculture 390 – 405

The Meaning of Industrialisation 390
The Urge for Industrialisation 391
Factors Inhibiting Industrialisation 392
State Policy and Industrialisation 393
Role of Agriculture in Economic Development 395
Agricultural Policy in Developing Countries 399
Conditions for Rural Development 402
Industry and Agriculture: Complementary 403
30. Environment and Development 406 – 425

Environmental Protection and Sustainable Development 406
Growth and Environmental Degradation 408
Externalities, Environmental Degradation and Market Failures 411
The Global Concerns 416
Unit 5
PROBLEMS AND POLICIES – INTERNATIONAL
31. Trade Theory and Development Experience of Developing Countries 429 – 442
Benefits from Trade 429
Trade and Economic Development — A Critique 433
Trade Prospects for Developing Countries 439
(xiv)
32. Commercial Policy, Balance of Payments and Trade Strategy 443 – 461
Methods of Protection 444
Nominal and Effective Rates of Protection 445
Arguments for Protection 447
The Balance of Payments Problem 451
Choice of Trade Strategy – Outward Oriented Vs. Inward Oriented 454
Cooperation among Developing Countries 459
33. International Transfer of Technology and MNCs 462 – 472

Modes and Instruments of Technology Transfer 462
Role of Multinational Corporations 463
Structure of Technology in Developing Countries 465
Basic Characteristics of Technology Transfer 465
Costs of Technology Transfer From MNCs 466
34. Globalisation and New International Economic Order Under WTO 473 – 495
The Meaning of Globalisation 473
Globalisation Trends 474
Factors Influencing Globalisation 475
New International Economic Order under WTO 477
WTO And Developing Countries 480
Singapore Issues and Doha Declaration 485
Hong Kong Ministerial Conference 489
Developments Post Hong Kong Ministerial 491
Unit 6
FINANCING ECONOMIC DEVELOPMENT
35. Monetary Policy in a Developing Country 499 – 508

Objectives of Monetary Policy 499
Limitations of Monetary Policy 503
Inflation as a Development Promotion Strategy 505
Structuralist – Monetarist Debate 505
36. Fiscal Policy in Developing Countries 509 – 524

Importance of Fiscal Policy 509
Objectives of Fiscal Policy in Developing Countries 510
Taxation: The Most Important Source of Public Revenue 512
(xv)
Role of Public Borrowing 520
Forced Saving 521
The Role of Public Expenditure 521
Case for Interrelated Monetary and Fiscal Policy 522
37. Deficit Financing and Inflation 525 – 533

Deficit Financing In Developed Countries 526
Deficit Financing In Developing Countries 527
Case for Inflationary Method of Financing 528
Evil Consequences of Inflation 529
Inflation and Growth: The Empirical Evidence 530
Deficit Financing Versus Taxation 532
38. Foreign Investment and Aid 534 – 550

Importance of Foreign Capital 534
Components of Foreign Capital 535
Private Foreign Investment 536
Foreign Aid 540
Flow of Foreign Aid to Developing Countries 542
Why Developed Countries Give Aid 543
Why Developing Countries Accept Aid 544
The Question of Absorptive Capacity 546
The Burden of Aid 547
Aid or Trade 549
Unit 7
DEVELOPMENT PLANNING: ISSUES AND TECHNIQUES
39. Market System — Functions and Shortcomings 553 – 559

Market Economy — Order and Chaos 553
Functions of the Market 554
Case Against the Market Regulated System 556
The Market Mechanism and Development 557
40. State and Economic Development 560 – 570

Role of State in Economic Development 560
Agenda for Economic Reform — Plea for Less State Intervention 566
Role of State — Need For A Balanced View 568
(xvi)
Consensus on Functions of the State 569
41. Economic Planning 571 – 585

Meaning of Economic Planning 571
The Rationale for Planning 573
Planning Practice 574
Planning by Direction and Planning through the Market 577
Financial and Physical Planning 580
Disenchantment with Planning 582
42. Controls in a Planned Economy 586 – 594

Meaning and Need for Economic Controls 586
Common Physical Controls 588
Limitations of Physical Controls 592
43. Investment Criteria 595 – 604

Marginal Rule for Resource Allocation 595
The Rate of Turnover Criterion 597
The Social Marginal Productivity Criterion 598
The Marginal Per Capita Reinvestment Quotient Criterion 599
The Marginal Growth Contribution Criterion 601
The Time Series Criterion 602
44. Project Evaluation and Cost-Benefit Analysis 605 – 618
Project Evaluation 605
Cost-Benefit Analysis 607
Costs and Benefits to Be Considered 607
Valuation of Costs and Benefits 608
Measures of Profitability 610
Limitations of Commercial Profitability 614
Uncertainty and the Evaluation of Public Projects 616
Relevant Constraints 617
45. Shadow Prices 619 – 632

Meaning of Shadow Prices 619
Need for Shadow Prices 620
Methods of Deriving Shadow Prices 623
The Principles of Shadow Prices 624
(xvii)
Limitations of Shadow Prices 631
46. Input-Output Analysis 633 – 644

Input-Output Analysis — Main Features 633
Uses of Input-Output Analysis 634
The Assumptions of Input-Output Analysis 635
The Input-Output Table 636
The Viability Test 641
The Feasibility Condition 642
The Dynamic Input-Output Model 642
Limitations of Input-Output Model 643
47. Linear Programming 645 – 654

The Programming Approach to Development 645
Linear Programming 646
Programming Technique – Its Use in Solving Some Planning Problems 648
Conclusion 653
Unit 8
DEVELOPMENT AND PLANNING IN INDIA
48. Evolution of Economic Planning in India – Rationale,

Features and Objectives 657 – 673
Meaning of Economic Planning 657
The Rationale for Planning 657
Important Features of Indian Plans 658
Objectives of Economic Planning 659
Evaluation of the Objectives of Economic Planning 670
49. The Strategy of the Development Plans in India 674 – 692

Development Strategy in the Earlier Phase 674
The Second Five Year Plan Model 675
Departures from the Mahalanobis Strategy 683
Agricultural Development-Led Growth Strategy 684
The New Development Strategy 686
The Tenth Plan Development Strategy 688
The Eleventh Plan Development Strategy 689
The Twelfth Plan Development Strategy 691
(xviii)
50. Resource Allocation — Investment Pattern in Indian Plans 693 – 703
Resource Allocation: 1951-85 Period 693
Resource Allocation: 1985-2007 Period 698
Sectoral Allocation of Resources in the Eleventh Plan 701
Sector Allocation of Resources in the Plans — An Overall View 702
51. Financing of Five Year Plans 704 – 720

Financing of the First Seven Plans 704
Financing of the Eighth Plan 711
Financing of the Ninth Plan 712
Financing of the Tenth Plan 713
Financing Pattern of the Eleventh Plan 715
Ways to Inrease Revenue and Control Expenditure 718
52. Regional Planning in India 721 – 737

Regional Planning Conceptualised 721
Magnitude of Regional Imbalances in India 722
Regional Planning Policy in India 730
Lack of Genuine Regional Planning in India 734
53. Economic Growth: National Income Trends and Structural

Changes in India 738 – 751
Economic Growth – the National Income (NNP) Trends 738
Services Led Growth 744
Per Capita National Income 746
National Product by Industry of Origin 748
54. Unemployment and Poverty 752 – 772

Nature and Estimates of Unemployment In India 752
Causes of Unemployment 755
Government Policy for Removing Unemployment 757
Incidence of Poverty in India 760
Human Poverty 766
Safety Nets for Poor — Poverty Alleviation Programmes 768
Strategy of Poverty Alleviation 769
55. Income Inequalities in India 773 – 784

The Pattern of Income Distribution in India 773
Disequalising Growth during the Economic Reform Period 776
(xix)
Causes of Income Inequalities in India 778
Government Policy and Measures 780
56. Capital Formation in India 785 – 797

India’s Capital Requirements for Economic Growth 785
Domestic Saving 786
Domestic Capital Formation 793
57. Assessment of Indian Planning 798 – 813

Targets and Achievements of Plans 798
Accomplishments of Economic Planning 803
An Appraisal of the Planning Process 805
Disillusionment with Plannng 810
58. Economic Reforms and Liberalisation 814 – 831

The Origin of Economic Crisis in the Early 1990s 814
Economic Reforms in India 815
Macroeconomic Stabilisation 816
Structural Reforms 821
An Appraisal of Economic Reforms 826
59. Twelfth Five Year Plan 832 – 845

Vision and Strategy for the Eleventh Plan 832
Macroeconomic Framework 834
The Financing Pattern 836
The Employment Perspective 838
Sectoral Issues 840
60. Agricultural Development During the Planning Period 846 – 869

Role of Agriculture in Indian Economy 846
Trends in Agricultural Production and Productivity 848
Green Revolution 849
Policies for Agricultural Development: An Overview 862
61. Industrial Development and Industrial Policy 870 – 891

Trends in Industrial Production 870
Industrial Policy Prior To 1991 878
Review of Pre-1991 Industrial Policy and Liberalisation Trends 881
New Industrial Policy, 1991 885
(xx)
Appraisal of New Industrial Policy 888
62. India's Foreign Trade: Trends and Trade Policy 892 – 917
Value of Exports and Imports in the Planning Period 893
Composition of Foreign Trade 895
Direction of Trade 902
Trade Policy of the Government of India 905
Import Policy: The Pre-Reform Period 906
Export Policy: The Pre-Reform Period 908
New Trade Policy: The Reform Period 910
Foreign Trade Policy (2009-14) 914
63. India and The World Economy 918 – 928

Globalisation 918
India and WTO 924
Subject Index 929 – 938
(xxi)
TABLES
Table 1.1 : Occupational Structure in Some Developing Countries, 2009-12 7

Table 1.2 : GNI Per Capita in US Dollars (2013) 11
Table 1.3 : Incidence of Poverty in Developing Countries 12
Table 1.4 : Agriculture in Some Selected Developing Countries 14
Table 2.1 : Per Capita GNP and the Physical Quality of Life Index (PQLI) for Selected
Developing Countries, 1981 27
Table 4.1 : Goalposts for Constructing the HDI according to HDR 2014 58
Table 4.2 : HDI Ranking of Selected Developed and Developing Countries, 2013 60
Table 4.3 : Similar HDI, Different Income, 2013 61
Table 4.4 : Similar Income, Different HDIs, 2013 62
Table 10.1 : Tentative Take-off Dates for Selected Countries 132
Table 10.2 : Tentative Maturity Years for Selected Countries 133
Table 24.1 : Calculation of Multidimensional Poverty Index (MPI) 290
Table 24.2 : Income Poverty in Developing Countries 292
Table 24.3 : Multidimensional Poverty Index 294-7
Table 24.4 : Cumulative Shares of Household Incomes, By Quintiles Classes of Households 303
Table 24.5 : GNI Per Capita, 2013 (U.S. Dollars) 306
Table 24.6 : Inequalities in Income Distribution (Percentage Shares by Population Groups) 307
Table 24.7 : Inequalities in Income Distribution in Some Developing Countries (Percentage Share
in Income or Consumption by Percentile Group of Households) 308
Table 25.1 : Population Statistics 320
Table 28.1 : Decomposition of Cross-Country Variance in Growth Rates 380
Table 28.2 : Contribution of Factor Inputs and TFP to Economic Growth in Developing
Countries, 1960-87 380
Table 28.3 : Sources of Growth by Region of the World, 1960-94 381
Table 34.1 : Global Private Financial Flows 475
Table 38.1 : Top 10 Recipients of Foreign Capital Flows Among Low and Middle Income
Economies 536
Table 38.2 : Fifteen Largest Recipients of ODA in 2012 542
Table 38.3 : External Debt Indicators for Selected Developing Countries 547
Table 46.1 : Composition of the Input-Output Table 636
Table 46.2 : Input-Output Table 637
Table 46.3 : Input Coefficients 640
Table 50.1 : Development Outlays under the First Six Five Year Plans 695
Table 50.2 : Sectoral Allocation of Resources under Seventh to Tenth Plans 700
Table 50.3 : Public Sector Outlay and Expenditure by Major Heads of Development in Eleventh Plan
(2007-12) 701
Table 51.1 : Financing of the First Seven Plans 705
Table 51.2 : Projected vis-a-vis Realised Financing Pattern of the Public Sector Outlay in the
Eighth Plan 711
Table 51.3 : Financing of the Ninth Plan 713
Table 51.4 : Projected and Realised Financing Pattern of the Plan Outlay of the Centre
(including UTs) 714
Table 51.5 : Core Tenth Plan Resources of States and UTs 715
Table 51.6 : Projected and Realised Financing Pattern of the Plan Outlay of the Centre in
Eleventh Plan 716
(xxii)
Table 51.7 : Eleventh Plan Resources of States and UTs 717
Table 52.1 : Per Capita State Net Domestic Product in 15 Major States of India (At current prices) 723
Table 52.2 : Comparative Growth Rates of Selected Low-Income States 724
Table 52.3 : Disparity in PCI (Per Capita NSDP) at 2004-05 prices 725
Table 52.4 : Percentage of People below the Poverty Line 726
Table 52.5 : Disparities in Human Development Indicators 727
Table 52.6 : Human Development Index for States (1999-2000 and 2007-08) 728
Table 53.1 : Net National Product at Factor Cost (i.e., National Income) 1950-51 to 2013-14 742
Table 53.2 : Sectoral Composition of Growth 745
Table 53.3 : GNP Per Capita and PPP estimates of GNP Per Capita in U.S. Dollars (2013)
(Selected Regions/Countries) 747
Table 53.4 : Estimates of Net Domestic Product by Industry of Origin — Percentage Distribution 749
Table 54.1 : Unemployment Rates by Sex, Residence and Status (Per cent) 754
Table 54.2 : Employment and Unemployment (by UPSS) 755
Table 54.3 : Percentage of Population Below the Poverty Line 761
Table 54.4 : Some Other Estimates of Poverty in India (Headcount Ratios) 762
Table 54.5 : Poverty Estimates Based on the 55th NSS Round (Year – 1999-2000) 763
Table 54.6 : Poverty Estimates Based on the 61st NSS Round (Year – 2004-2005) 764
Table 54.7 : Multidimensional Poverty Index 767
Table 55.1 : Planwise Average Gini-Lorenz Ratio 775
Table 55.2 : Percentage Share of Household Expenditure by Percentile Groups of Households 776
Table 55.3 : Percentage Share of Household Expenditure by Percentile Groups of Households 777
Table 56.1 : Incremental Gross Capital-Output Ratio in the Indian Economy 786
Table 56.2 : Gross Domestic Savings (As per cent of GDP at current market prices) 789
Table 56.3 : Gross Domestic Capital Formation (Investment) (As per cent of GDP at
current market prices) 794
Table 58.1 : Growth Rates of GDP by Sector, at Constant Prices 826
Table 59.1 : Average Annual Growth Rate of GDP by Industry of Origin 835
Table 59.2 : Macroeconomic Parameters 835
Table 59.3 : Financing Pattern of the Twelfth Plan 837
Table 59.4 : Public Sector Outlay by Major Heads of Development in Twelfth Plan (2012-17) 838
Table 59.5 : Sectoral Employment (in million): Business-as-usual Scenario 839
Table 59.6 : Sectoral Employment (in million): Twelfth Plan Scenario 840
Table 60.1 : Trends in Agricultural Production, 1950-51 to 2013-14 850
Table 60.2 : Yield Per Hectare of Major Crops 851
Table 60.3 : All-India Compound Growth Rates of Production and Yield of Some Crops,
1949-50 to 2013-14 854
Table 60.4 : State and Regionwise Growth Rate of Agricultural Output 858
Table 61.1 : Annual Compound Growth Rates in Index Numbers of Industrial Production,
1951 to 1980 871
Table 61.2 : Rate of Growth of Industrial Production (Use-Based) During Phase III (Base 1980-81) 873
Table 61.3 : Average Annual Growth Rate of Industrial Production (Use Based) in Pre-Reform
Decade and Post-Reform Period 875
Table 62.1 : Value of Exports and Imports in the Planning Period 893
Table 62.2 : Composition of Commodity Imports 897
Table 62.3 : Imports of Services in India, 2002-03 to 2013-14 899
Table 62.4 : Composition of Commodity Exports 900
Table 62.5 : Exports of Services from India, 2002-03 to 2013-14 902
Table 62.6 : Direction of India’s Trade 904
(xxiii)
BOXES
Box 4.1 : Measuring Human Development and Deprivations 66
Box 30.1 Lima Accord Highlights 422
Box 40.1 : Functions of the State 569
Box 48.1 : Rationale, Features and Objectives of Planning in India 660
Box 53.1 : Growth Performance in the Five Year Plans 741
Box 58.1 : Economic Reforms in India 817
Box 59.1 : Twelfth Five Year Plan at a Glance 844-5
(xxiv)
UNIT 1
BASIC CONCEPTS AND ISSUES IN
ECONOMIC DEVELOPMENT
1. DEVELOPING NATIONS: DIVERSE STRUCTURES AND

COMMON CHARACTERISTICS
2. CONCEPTUALISING DEVELOPMENT
3. ECONOMIC GROWTH AND SOCIAL JUSTICE
4. HUMAN DEVELOPMENT
5. OBSTACLES TO GROWTH AND DEVELOPMENT
6. ECONOMIC GROWTH IN HISTORICAL PERSPECTIVE
1
DEVELOPING NATIONS:
DIVERSE STRUCTURES
CHAPTER 1
AND COMMON
CHARACTERISTICS
Until the World War II rarely any interest was shown in the problems of the present day Third World
countries. In fact, anyone who attempted to analyse the specific problems of these countries earned the
distinction of being known as a heretic in academic circles and was denied any respectability. However, since
the World War II there has been a prolific growth of literature on the development problems of these countries.
This contrast in the approach of economists before and after the World War II is not at all surprising. Before
the World War II most of the present day developing countries of Asia and Africa were colonies of the West
European countries. Though Latin American countries were politically free, yet their economies remained
integrated with those of the metropolitan countries, more specifically with that of the United States. Under the
circumstances, the existence of these countries was recognised either because they were the sources of raw
materials and the capital required by the metropolitan countries or on account of the market they provided for
the finished products of the latter. It was not difficult to perceive the relationship that existed between the
development of the metropolitan countries of the West and the underdevelopment of the colonies. However,
no academic risked his reputation by treading this sensitive area.
The position radically changed after the World War II. Asian and African countries succeeded in
winning freedom one after another. Once these countries got independence, they decided to embark on the
developmental path. At this juncture the academics in the West could not ignore their existence. In doing so
there was a risk that economists with nationalist bend of mind in these countries could have independently
analysed the causes of their underdevelopment and would have suggested a development path which might not
have suited the interest of the West. This would have been disastrous for the Western colonialism. Hence, the
issues pertaining to the economies of former colonies suddenly became favourite subjects for study in the
U.S.A. and other Western countries and over the past seven decades considerable work has been done in this
area. Most of it, however, underplays the role of colonialism in the underdevelopment of Asian, African and
Latin American countries. In fact, in most of these studies one does not find any reference to the historical past
of these countries. Taking a partial view of the present day reality, policy recommendations have been made
in an ideologically biased framework. In addition, some economists have attempted to work out growth models
for the underdeveloped countries. In this book, it is not our purpose to survey whole of this literature. We shall
confine ourselves to the main issues in economic development.
3
4 Economics of Development and Planning
DEVELOPING NATIONS: THEIR DIVERSE STRUCTURES
The poor countries of the Third World are variously described in development economics. They are
alternatively called as ‘backward’, ‘underdeveloped’, ‘less developed’ and ‘developing’. Jagdish Bhagwati
rightly asserts, “The choice of word depends largely on sensitivity of the audience and the sensibility of the
analyst.”1 It is precisely this reason why the word ‘backward’ that gets closest to the essence of the problems
of poor countries is not preferred to the other three words. The word ‘underdeveloped’ also hurts the pride of
the people in poor countries, and as a result by sheer elimination, the word developing has become the most
favoured term though it inadequately describes the nature of the economy in poor countries. We will also,
without going into the merit of the term, describe poor countries as ‘developing.’2
In its annual publication World Development Indicators, the World Bank classifies economies according
to their gross national income (GNI) per capita. Economies are classified as low-income, middle-income
(subdivided into lower-middle and upper-middle), or high income. World Development Indicators 2014
classifies the economies according to GNI per capita in 2012 as follows:
1. Low income economies — $ 1,035 or less
2. Middle income economies — $ 1,036 – $ 12,615
A. Lower middle income economies — $ 1,036 – $ 4,085
B. Upper middle income economies — $ 4,086 – $ 12,615
3. High income economies — $ 12,616 and above
Of the 187 countries for which data for the year 2013 are provided in the Report, 31 fall in the category
of low income economies, 100 fall in the category of middle income economies (48 in lower middle income
group and 52 in upper-middle income group) while 56 fall in the category of high income economies.3 At
times, low income and middle income economies are jointly referred to as developing economies. However,
it may be pointed out here that some high income economies also fall in the category of developing economies
due to overall underdeveloped backward economic structure despite high income.
A number of development economists have in recent years argued that GNP or GNI per capita is not a
correct measure of development. Their argument is that the ultimate objective is human development and not
just increase in per capita income.4 The Human Development Report published by the United Nations
Development Programme (UNDP) has, ever since its launch in 1990, been ranking countries according
to the level of human development achieved. The Human Development Report 2014 has calculated HDI
for 187 countries and has classified them into the following four categories: very high human development,
high human development, medium human development, and low human development. There are 49 countries
in very high human development category (the country occupying the first position being Norway with HDI
of 0.944 in 2013), 53 countries in high human development category, 42 countries in medium human
development category and 43 countries in low human development category (the country at the last position
being Niger with HDI of 0.337 in 2013).
While in terms of per capita income almost all developing countries are poor, they are diverse in
physical resource endowments, economic conditions, size of population, levels of human development
1. Jagdish Bhagwati, The Economics of Underdeveloped Countries (London: World University Library, Weidenfeld and Nicolson,
1971), p.9.
2. In the text, however, for expository convenience and in order to avoid semantic confusion, we shall use the words ‘developing’,
‘underdeveloped’, and ‘less developed’ interchangeably to refer to the Third World countries. This has now become a standard
practice with economists dealing with the problems of the Third World economies.
3. Computed from World Bank, Word Development Indicators 2014, (Washington DC., 2014), Table 1.1.
4. For details of this argument, see chapter 4 on “Human Development”.
Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st

proof Correction\ch-1 Dt.: 13-6-12
Developing Nations: Diverse Structures and Common Characteristics 5
achieved, historical past and social and political structures. Among the less developed countries some are
richly endowed with physical resources, some are quite large with massive population having an advantage of
large domestic market, and some others have large geographical area with sparsely inhabited population.
Countries falling in any of these categories have one advantage or the other from the point of view of
development. In contrast there about 13 developing countries, including Bhutan, Guyana, Maldives, Comoros
and Vanuatu having population less than 1.0 million each.5 Thus, in terms of size of population these countries
are much smaller than the metropolitan cities of India, itself a less developed country. Small countries
generally suffer from the problem of limited resource endowment. Further, the limited size of the domestic
market often inhibits the growth of large-scale modern industries. In addition to these economic problems,
small countries face a number of political problems, the most important being their vulnerability to external
political pressures. Thus, the task of development is far more difficult in smaller countries.
Let us now examine the following major components of the structural diversity of developing nations.
l The size of the country in terms of geographical area, population and income.
l Historical background.
l Resource endowments, both physical and human.
l The nature of economic planning and the relative importance of public and private sectors.
l Occupational structure.
l External dependence.
l Economic inequalities and the extent of poverty.
l Political structure, power and interest groups.
1. Size and income level. Geographical area, size of population and income level of a country determine
to a great extent, its development potential. Large geographical area often ensures availability of diversified
resources. Similarly big population, if it is also accompanied by a modest GNI, offers a reasonably large
market which in turn provides inducement to invest. Thus, development potential of big countries like China,
India, Brazil, Indonesia, Pakistan, Bangladesh and Nigeria is certainly greater than that of relatively smaller
countries of the Third World. All the big countries referred to above have vast geographical area, and the
smallest of these had a population as large as 156.6 million in 2013.6 In terms of GNI per capita, India and
China rank pretty low, yet because of their large population they have reasonably extensive domestic market
which can sustain development of most of the industries. Smaller countries like EI Salvador, Togo, Burundi,
Honduras, etc., do not have extensive geographical areas. They have limited natural resources and thus feel
constrained in their development effort. Some smaller countries in the Middle East are, however, exceptionally
rich in oil. They have managed to develop rapidly during the last three decades on the basis of their earnings
from the export of oil. Large population without extensive geographical area and diverse resource endowments
may prove to be a major obstacle to development. This is precisely the problem of Bangladesh. With a
population of 156.6 million in 2013 which is almost two and a half times the population of France, its
geographical area is merely one-fourth of France’s area. Moreover, it does not possess any resources which
could contribute to its economic development. Some Third World countries, particularly in Latin America and
Africa, are sparsely populated. Their extensive land and diverse resource endowments indicate their development
potentials. So far these countries have failed to take advantage of these factors because of their past colonial
exploitation. In future, how far they will manage to develop is difficult to predict.
5. Computed from data on 187 developing countries as presented in Human Development Report, 2014 (New Delhi, 2014), Table
15 on ‘Population Trends’.
6. Ibid., Table 15, pp. 216-9.

2. Historical background. All developing nations do not have the same historical background. Most of
them were the colonies of West European countries, particularly Britain and France. Belgium, Netherlands,
Germany, Spain and Portugal were other European countries which had colonies in Latin America, Africa and
Asia. Since Latin American countries have enjoyed political independence for a much longer period, they have
reached a somewhat higher level of economic development than their counterparts in Asia and Africa. In Asia,
countries of the Indian subcontinent and South-East Asia had suffered from the worst type of colonial
exploitation. These countries got independence only after the World War II. Since then they have recorded
some growth, but are still among the most backward nations of the world. Among the Asian countries, Japan
had the unique distinction of not being a victim of colonial exploitation and this explains why it managed to
develop along the capitalist path, while other countries with their colonial heritage remained underdeveloped.7
Moreover, different colonial heritages and diverse cultural legacies of the indigenous people in the Third
World countries have combined so differently that altogether different institutional and social patterns have
emerged in countries such as India, Sri Lanka, Indonesia, Vietnam, Philippines, Algeria and Angola. In fact,
this diversity is so important that all these countries cannot hope to proceed along the same path of
development.
3. Resource endowments — physical and human. Until the 1930s most economists explained
development and underdevelopment of different countries in terms of their physical resource endowments.
The position has now changed considerably. Now richness of resource endowments is regarded as just one
factor in the economic development of a country and that too of secondary importance. We are now aware of
a number of countries which have failed to reach a high level of development in spite of a relatively favourable
ratio of cultivable land to population and an endowment of significant raw materials. Resource availability is
thus not a sufficient condition for economic change. Nonetheless without a minimum of resources there is little
hope for economic development. Keeping this fact in view, if we compare the resource endowments of the
various countries, we notice that all of them have not been gifted equally by nature. Latin America, for
example, has impressive reserves of important minerals, natural gas and petroleum. A number of African
countries are rich in lead, chrome, cobalt, uranium, bauxite, phosphate, tin, manganese, oil, etc. Persian Gulf
countries possess large petroleum reserves. Obviously development potential of these countries is considerably
larger than that of all those countries where endowment of minerals and other raw materials is minimal.
Judging by this criterion, countries like Bangladesh, Bhutan, Nepal, Lao PDR and Ethiopia are unfavourably
placed. In the realm of human resources we consider size, skill levels and social-cultural characteristics of the
population. These are important determinants of the pace and level of economic development. However,
developing countries differ from one another in all these respects. Density of population which often
determines the pressure on resources is also not the same everywhere. Countries like Bangladesh, Indonesia
and India are densely populated while Zambia, Mozambique, Ethiopia and Angola have thinly distributed
population. But most of the countries where density of population is relatively low have not reached even a
modest level of development. Developing countries also differ in the spread of education and its quality. This
explains the migration of skilled labour from countries like India and Pakistan to Persian Gulf and African
countries.
4. The nature of economic planning and the relative importance of public and private sectors. All
underdeveloped countries have not chosen to develop along the capitalist path. For a considerable number of
years, China, Vietnam, Cuba, North Korea, Angola and some other backward countries followed the socialist
path of development and, with this end in view, adopted comprehensive economic planning. One common
feature of all these economies was that private sector was almost non-existent in them. However, the technique
7. C. Furtado seems to be right in his approach when he argues that underdevelopment is “a discrete historical process through which
economies that have already achieved a high level of development have not necessarily passed.” Development and Underdevelopment
(California: University of California Press, 1963), p. 128.

of planning adopted in these countries was not the same. They also drifted away considerably from what is
known as the Soviet model of economic planning. In most of the non-socialist underdeveloped countries both
public and private sector now co-exist. In this sense these are countries of ‘mixed’ economic system. Some
of these countries have also decided not to rely entirely on the market mechanism. Having opted for what is
often characterised as democratic economic planning these countries are struggling hard to break their ‘low
level equilibrium trap.’8 In Latin American countries, on account of the U.S. influence, public sector is too
small. In the private sector foreign money seems to be well entrenched. The experience of these countries
clearly suggests that foreign private investment in developing countries can at best be a mixed blessing. Some
African and Asian countries in their effort to speed up their development have placed great reliance on the
public sector. However, widespread economic failures of many public enterprises in countries such as Kenya,
Tanzania, Ghana and Senegal have raised serious doubts about the capabilities of these enterprises. Growth
of public sector permits the government to participate directly in the productive activity, while in a predominantly
market economy it operates through a system of incentives and controls. Now with greater stress on
liberalisation the dominant view in developing countries is that the role of the public sector and the
discretionary controls should be minimised.
5. Occupational Structure. Although developing nations are by and large agrarian in character, yet it
would be wrong to think that the occupational structure in all these countries is exactly the same. Table 1.1
provides information on percentage distribution of labour force in 16 developing countries. The contrasts
Table 1.1
Occupational Structure in Some Developing Countries, 2009-12
Country GNI per capita Agriculture Industry Services

in 2013
(US $) Male Female Male Female Male Female
% of male % of female % of male % of female % of male % of female
employment employment employment employment employment employment
Liberia 410 50 48 14 5 37 47
Cambodia 950 49 53 19 18 32 29
Pakistan 1,380 36 75 23 11 38 13
India 1,570 43 60 26 21 31 20
Honduras 2,180 49 9 19 21 31 70
Moldova 2,460 30 23 26 13 45 64
Bhutan 2,460 49 75 10 7 41 18
Philippines 3,270 39 21 19 10 42 69
Indonesia 3,580 35 34 25 16 39 49
Thailand 5,370 41 38 23 18 36 44
Azerbaijan 7,350 32 44 22 6 46 50
Colombia 7,560 24 7 24 17 52 76
Costa Rica 9,550 19 4 24 11 56 85
Mexico 9,940 19 4 29 16 51 80
Malaysia 10,400 15 8 33 20 52 72
Source: World Bank, World Development Indicators 2014 (Washington DC, 2014, Table 1.1 and Table 2.3.
8. ‘The low-level equilibrium trap’ refers to a stable equilibrium level of per capita income at or close to subsistence requirements.
See Richard R. Nelson, “A Theory of the Low Level Equilibrium Trap”, American Economic Review, December 1956, p. 894.

among the occupational structures of these countries is striking. Almost all low income and low middle income
economies, irrespective of their size, are predominantly agricultural. In some of these countries, agriculture
accounts for more than 40 per cent of the labour force. For instance, it can be seen from Table 1.1 that in
Cambodia (with a per capita income of only $950 in 2013), 49 per cent of the male and 53 per cent of the
female workforce was employed in agriculture during the period 2009-12. In India (with a per capita income
of only $1,570 in 2013), 43 per cent of the male and 60 per cent of the female workforce was employed in
agriculture during the period 2009-12. In upper middle income economies, the dependence on agriculture in
much less. As is clear from Table 1.1, only 19 per cent of the male and 4 per cent of the female workforce
was employed in agriculture in Mexico over the period 2009-12. This percentage was still less in economies
like Chile and Venezuela where per capita income was higher in 2013 vis-à-vis Mexico. Declining importance
of agriculture in upper middle income economies clearly distinguishes their economic structures from those
existing in low income economies like Bangladesh and Kenya and lower-middle income economies like India,
Sri Lanka and Philippines, where agriculture is not merely an occupation, but is also a way of life for the
people. Further, agrarian systems and patterns of land ownership greatly differ in developing countries. In
some countries meaningful land reforms have been carried out, while in many others feudal and semi-feudal
agrarian relations still persist.
Developing countries greatly differ in terms of the relative importance of manufacturing and service
sectors in their economies. Among the Third World countries, India has one of the largest manufacturing
sector, but in relation to its enormous size of population, it is relatively small. Latin American countries, which
have enjoyed independence for a longer period than the countries of Africa and Asia, have managed to develop
their industrial structure far more than the latter. During the last few decades, some smaller countries of Asia,
particularly Taiwan, Hong Kong, Republic of Korea and Singapore have recorded impressive industrial
growth. In these countries massive inflow of private foreign capital under ‘congenial’ political conditions has
speeded up the industrialization process. This model of development is, however, not appropriate for countries
which do not wish to bargain their political freedom for some short-term economic gains in the form of foreign
dominated industrialization.
6. External dependence. According to T. Dos Santos, “dependence is a conditioning situation in which
the economies of one group of countries are conditioned by the development and expansion of others. A
relationship of interdependence between two or more economies or between such economies and the world
trading system becomes a dependent relationship when some countries can expand through self-impulsion
while others, being in dependent position, can only expand as a reflection of the expansion of the dominant
countries, which may have positive or negative effects on their immediate development.”9 The relationship of
dependence as defined by Santos developed between the West European countries, such as England, France,
Netherlands, Portugal and Spain and the countries of Asia, Africa and Latin America with the colonisation of
the latter by the former in the eighteenth and nineteenth centuries. Interestingly, this relationship exists even
now though colonies have won political freedom. Dependence of the underdeveloped countries on developed
countries is multidimensional and its exact nature depends on the specific history of a country. Thus, the nature
of Sri Lanka’s dependence on other countries is not the same as India’s or Angola’s dependence on foreign
countries. Some developing countries cannot hope to develop unless they receive massive financial and
technological aid, while others can manage modest growth even if they fail to receive any external assistance.
Even the foreign trade relations between the developed and underdeveloped countries are of great importance
from the point of view of the development of the latter. It has been noticed that greater the dependence of a
country on others, whether in respect of the importation of capital, technology and industrial raw materials or
9. T. Dos Santos, “The Crisis of Development Theory and the Problem of Dependence in Latin America”, in Henry Bernstein (ed.),
Underdevelopment and Development (Harmondsworth: Penguin 1976), p. 76.

in respect of market for its primary products, greater are the chances of its underdevelopment (particularly if
it is not willing to sacrifice its political independence).
7. Political structure, power and interest groups. In the final analysis it is necessary to underline the
fact that economic policies, more specifically the development strategies, are rarely decided in any country on
merit. It is the power structure and the interests of the dominant classes which ultimately decide the policy
framework of the government. The high level civil servants and the politicians operate within the parameters
of the given policy framework and thereby faithfully serve the interests of the ruling classes. Sometimes
military officers taking advantage of the prevailing chaotic conditions in the country, capture State power, but
even they oblige the dominant classes, such as large landowners, planters, big industrialists and traders by
serving their interests through State policies. In return, these classes lend support to military regimes, whereby
they consolidate their position. Except in a few countries everywhere in Latin America, Africa and Asia,
authoritarian military regimes have come to power. No doubt, under some of these regimes impressive growth
has taken place, but it cannot be said that common people have benefited from it. Economic growth without
economic development is a natural outcome of the policies which are meant to serve the interests of the ruling
elites.10
DEVELOPING NATIONS: THEIR COMMON CHARACTERISTICS
From the above description of the diverse structures of developing countries, it is quite possible for a
student of the development economics to infer that no generalisation can be made about these countries. The
fact, however, remains that most developing countries have some common characteristics which clearly
distinguish them from developed countries. Most developing countries are poor and their present level of
productivity is neither good enough to ensure a satisfactory level of consumption, nor does it generate
an economic surplus that may be adequate for sustained development. For the past few decades, in all
these countries the population has been growing rapidly and dependency burdens have been high. Rapid
growth of population has also resulted in chronic unemployment. As far as the nature of the economy in these
countries is concerned, it is essentially agrarian and the dependence on agricultural production and primary
product exports is substantial. It would thus be a folly to think that each developing country is to be treated
as a specific case. Most observers now agree that developing countries of Asia, Africa and Latin America in
spite of their diversities have some common features which make them a distinct category. Todaro and Smith
have rightly remarked, “Despite the obvious diversity of these countries, most developing nations share a set
of common and well-defined goals. These include a reduction of poverty, inequality and unemployment; the
provision of minimum levels of education, health, housing and food to every citizen; the broadening of
economic and social opportunities; and the forging of a cohesive nation-state. Related to these economic,
social and political goals are the common problems shared in varying degrees by most developing countries:
widespread and chronic absolute poverty, high levels of unemployment and underemployment, wide and
growing disparities in the distribution of income, low and stagnating levels of agricultural productivity, sizable
and growing imbalances between urban and rural levels of living and economic opportunities, serious and
worsening environmental decay, antiquated and inappropriate educational and health systems, severe balance
of payments and international debt problems, and substantial and increasing dependence on foreign technologies,
institutions, and value systems.”11
10. Economic growth and economic development are distinct concepts. While economic growth refers to a rise in per capita real
income over time, economic development is generally defined to include improvements in material welfare, especially for persons
with the lowest incomes. Economic development thus implies alleviation of poverty, reduction in income inequalities and removal
of unemployment. See Charles P. Kindleberger and Bruce Herrick, Economic Development (New York: McGraw Hill, 1977), pp.
1-4. Also Dudley Seers, ‘The Meaning of Development’, paper presented at Eleventh World Conference of the Society for
International Development (New Delhi, 1969).
11. Michael P. Todaro, and Stephen C. Smith, Economic Development (Pearson Education Asia, Eighth edition, 2003), p. 37.

The most common characteristics of the developing countries are as under:
l Low levels of gross national product (GNP) or gross national income (GNI) per capita
l Larger income inequalities
l Widespread poverty
l Low levels of productivity
l Great dependence on agriculture with a backward industrial structure
l High proportion of consumption expenditure and low savings rate
l High rates of population growth and dependency burdens
l High levels of unemployment and underemployment
l Technological backwardness
l Dualism
l Lower participation in foreign trade
l Dependence
1. Low levels of GNI per capita. The gross national product (GNP) per capita or gross national income
(GNI) per capita is often considered to be a good index of the economic welfare of the people in a country.
Judging developing nations by this criterion one finds them in an extremely miserable position. The GNI per
capita in these countries is very low. According to the estimates of the World Bank, in 2013 there were 31 low
income economies where the GNI per capita at current prices was $ 1,035 or less. This low level of GNI per
capita is sufficient to reflect the plight of common people in these countries. On world scale, income
inequalities between the developed and developing countries are quite large. But what is more distressing is
that the economic distance between the two groups of countries increases with every year that passes. In 2013,
the average GNI per capita of the high income economies was estimated at $ 39,312 while it was only $ 664
in low income developing economies.12 All Third World countries are, however, not equally underdeveloped
in terms of GNI per capita. Developing middle income countries such as Argentina, Malaysia, Brazil and
Mexico are far more well off than African and South-East Asian countries like Zambia, Ghana, Lao PDR,
India, Kenya, Mali, Vietnam, Bangladesh and Ethiopia. Data given in Table 1.2 are quite revealing.
2. Larger income inequalities. In developing countries apart from GNP per capita being considerably
lower, income inequalities are also larger than in developed countries. Recent data published in the World
Development Indicators 2014, lends credence to the view that income inequalities are far greater in developing
countries than in the developed countries. For example, we find that in as many 19 low income economies (of
the 31 low income economies for which data are given), the poorest 60 per cent people accounted for one-third
or less of the national income. Comoros, Haiti and Central African Republic in low-income economies,
Guatemala, Honduras, Marshall Islands, Micronesia and Zambia in lower-middle-income economies and
Botswana, Namibia, Colombia, South Africa and Seychelles in upper-middle income economies are the
countries where the share of the top 20 per cent in the national income is more than 60 per cent. As against all
this, only in the case of six high income economies (out of the 54 countries for which data are provided), the share
of the poorest 60 per cent people in national income is one-third or less. Moreover, in no high income economy
(with the exception of Chile, Hong Kong and Qatar) the share of the top 20 per cent in national income exceeds
50 per cent.13
According to Simon Kuznets, inequalities are much larger in the developing countries than indicated by
the data. The comparison of income distribution in developed and developing countries is generally made for
12. World Bank, World Development Indicators, 2014, Table 1.1.

13. Computed from World Development Indicators, 2014 (Washington DC, 2014), Table 2.9.

Table 1.2
GNI Per Capita in US Dollars (2013)
GNI GNI GNI GNI
Countries Per Capita Per Capita Countries Per Capita Per Capita
(measured (measured
at PPP) at PPP)
High income economies 39,312 40,324 Lower middle income

Greece 22,530 25,630 economies 2,068 5,970
Korea, Rep. of 25,920 33,440 Pakistan 1,380 4,920
Italy 34,400 34,100 India 1,570 5,350
United Kingdom 39,110 35,760 Congo, Rep. 2,660 4,720
France 42,250 37,580 Gautemala 3,340 7,130
Belgium 45,210 40,280 Indonesia 3,580 9,260
Germany 46,100 44,540 El Salvador 3,720 7,490
Japan 46,140 37,630 Low income economies 664 1,780
United States 53,670 53,960 Burundi 280 820
Denmark 61,110 44,440 Congo Dem. Rep. of 400 680
Switzerland 80,950 53,920 Niger 410 910
Upper middle income Ethiopia 470 1,350
economies 7,540 13,318 Mali 670 1,540
Thailand 5,370 13,510 Burkina Faso 670 1,560
China 6,560 11,850 Nepal 730 2,260
Bulgaria 7,030 15,200 Bangladesh 900 2,810
Mexico 9,940 16,110 Kenya 930 2,250
Malaysia 10,400 22,460
Brazil 11,690 14,750
Venezuela 12,550 17,890
Source: World Bank, World Development Indicators, 2014 (Washington DC, 2014), Table 1.1.
incomes prior to levying of direct taxes and the free benefits from the government also remain excluded. He
thus rightly asserts, “since the burden and progressivity of direct taxes are much greater in developed countries
and since it is in the latter that substantial volumes of free economic assistance are extended to low income
groups, a comparison in terms of income net of direct taxes and excluding government benefits would only
accentuate the wider inequality of income distributions in the underdeveloped countries.”14
3. Widespread poverty. The extent of absolute poverty is an important dimension of the problem of
income distribution in the developing countries. At relatively lower levels of GNP per capita large income
inequalities as they exist in the developing countries of Asia, Africa and Latin America, have resulted in
widespread poverty. The poverty problem could perhaps be overcome in these countries with a more equitable
income distribution. China’s case lends credence to the view that in near future if developing countries wish
to wipe out poverty they have no choice except to improve the income distribution so as to ensure a minimum
standard of living in terms of calorie intake and nutrition levels, clothing, sanitation, health, education and so
on.
14. Simon Kuznets, Economic Growth and Structure - Selected Essays (New Delhi: Oxford and IBH, 1965), pp. 278-91.

Table 1.3
Incidence of Poverty in Developing Countries
(Poverty Line at $ 1.25 a day per person, 2005 PPP US $)
Region or People below the Number of poor

country group poverty line people
(per cent) (per cent) (in million)
1990 2005 2008 2011 1990 2005 2011
East Asia and Pacific 58.2 16.7 13.7 7.9 957.1 324.1 160.8
Eastern Europe and
Central Asia 1.5 1.3 0.4 0.5 7.1 6.0 2.3
Latin America and
the Caribbean 12.0 7.4 5.4 4.6 52.7 41.0 27.6
Middle East and North
Africa 5.8 3.0 2.1 1.7 13.1 9.0 5.6
South Asia 53.2 39.3 34.1 24.5 603.2 589.0 399.0
Sub-Saharan Africa 56.6 52.8 49.7 46.8 287.1 399.1 415.4
Total (developing world) 43.5 24.8 21.8 17.0 1920.1 1368.1 1010.7
Source: World Bank, Global Monitoring Report 2014/2015, (Washington DC, 2014), Table 1, p. 19.
Poverty is, however, not easy to define, and whatever be the approach, there is bound to be an element
of arbitrariness in it. Till recently, the World Bank used a poverty line of $ 1 a day in 1993 PPP
(Purchasing Power Parity) terms. This has now been revised to $ 1.25 a day in 2005 PPP terms (which
represents the mean of the poverty lines found in the poorest 15 countries ranked by per capita consumption).
Information on the basis of this poverty line is presented in Table 1.3. It is clear from this Table that in the
developing world as a whole, 43.5 per cent of the people were below the poverty line in 1990 and 17.0 per
cent were below the poverty line in 2011. The number of poor people in the developing countries as a whole
was 1,010.7 million in 2011. Of this, 415.4 million (41 per cent) were in Sub-Saharan Africa and 399 million
(39.5 per cent) were in South Asia. India alone was home to 30 per cent of the poor people of the world in
2011 (living on less than $1.25 a day).
As is clear from Table 1.3, the number of poor people has declined significantly during the period of
the last two decades — from 1,920.1 million in 1990 to 1,010.7 million in 2011. This was basically due to
massive reduction in poverty levels in China and, to some extent, in India. In fact, according to Global
Monitoring Report 2014/2015 of World Bank, China and India together lifted 232 million people out of
poverty in a span of just three years — from 2008 to 2011.15 However, a word of caution is necessary here.
In its latest Human Development Report 2014, UNDP has pointed out that, “despite recent progress in poverty
reduction, more than 2.2 billion people are either near or living in multidimensional poverty. That means more
than 15 per cent of the world’s people remain vulnerable to multidimensional poverty.16 Moreover, nearly
80 per cent of the global population lack comprehensive social protection. About 12 per cent (842 million)
suffer from chronic hunger, and nearly half of the workers — more than 1.5 billion — are in informal or
precarious employment. Three-quarters of the world's poor live in rural areas, where agricultural workers
suffer the highest prevalence of poverty. They are caught in intractable cycles of low productivity, seasonal
unemployment and low wages. Also, as correctly pointed out by Human Development Report 2014, sizeable
15. World Bank, Global Monitoring Report 2014/2015, (Washington DC, 2014), p. 20.
16. UNDP, Human Development Report, 2014, p. 3.

portions of the population of the developing countries are close to the poverty threshold (the ‘near poor’) and
any ‘shocks’ could easily push a large number of people back into poverty.17
4. Low levels of productivity. Labour productivity in developing countries is invariably low. It is both
a cause and effect of low levels of living in these countries. Todaro and Smith assert that “low levels of living
and low productivity are self reinforcing social and economic phenomena in Third World countries, and
as such, are the principal manifestations of and contributors to their underdevelopment.”18 Mydral has
also developed his well-known theory of “circular and cumulative causation” in terms of these interactions
between low levels of living and low productivity of labour.19 Obviously at low levels of productivity the
shareable cake will also be small and people cannot hope for an overall prosperity in the country. Of course,
some groups constituting a microscopic minority can succeed in achieving a good living standard, but this they
can manage only by sacrificing the interests of the vast mass of the population. Therefore, a considerable
increase in labour productivity is the only way of raising the living standards of the mass of people in the
developing countries.
Labour productivity depends on a number of factors, particularly the availability of other inputs to be
combined with labour — health and skill of workers, motivation for work and institutional flexibilities. The
two inputs, viz., capital and managerial skill raise the productivity of labour considerably when they are
combined with it. But developing countries (without exception) lack both of these inputs. Hence, it is quite
natural to advocate that this deficiency should be overcome as early as possible by improving the domestic
supply of these inputs, and if need be, also by supplementing it from foreign sources. Though there are
difficulties in increasing the supplies of capital and managerial skills from domestic sources, yet one must
admit that at the existing level of development most Third World countries can augment the supplies of these
inputs without further tightening the belts of the poor. Malnutrition, inadequate health care and living in
unhygienic conditions are the main causes of the poor health of workers, and one would note that there
are clear linkages between the physical health of workers and their productivity. Poverty of the workers
also prevents them from acquiring skills to perform specific jobs. In addition to this, workers lack motivation
to raise their productivity in exploitative less developed capitalist economies. In agriculture, unorganised
manufacturing and tertiary activities, wages are determined traditionally and are not easily allowed to rise
above the subsistence level. This factor takes away all motivations which workers might have to raise their
productivity. Institutional changes are also necessary to build up the stock of human capital. Apart from
creating a network of educational and training facilities, the State should eliminate oppressive land tenure
system, improve tax, credit and banking structures and restructure administrative system with a complete break
from its colonial past.
5. Great dependence on agriculture with a backward industrial structure. Harvey Leibenstein
asserts that developing economies are basically agrarian in their character.20 In these countries agriculture
and allied activities generally account for 30 to 70 per cent of the labour force. This is true of most of
the Asian and African countries. As would be clear from Table 1.4, on account of large employment in
agriculture a considerably large portion of the national income also originates in this sector. In Latin America,
however, there are a number of developing countries where proportion of labour force employed in agriculture
has declined to 20 per cent or even less of the total work force. As compared to overall labour productivity,
labour productivity in the agricultural sector is lower in the developing countries than in the developed
countries. Making his observations on this phenomenon Simon Kuznets remarks, “One major implication of
the relatively low per worker production in agriculture in the underdeveloped countries is that a large
17. Ibid., p. 19.
18. Michael P. Todaro and Stephen C. Smith, op. cit., p. 64.
19. Gunnar Myrdal, Asian Drama (New York: Pantheon, 1968), Appendix 2.
20. Harvey Leibenstein, Economic Backwardness and Economic Growth (New York: Wiley, 1958), p. 40.

proportion of the population is attached to a sector with low productivity operating under conditions of rural
life and isolation that cannot easily be penetrated by modern economic methods.”21
The industrial sector in the developing countries is both small and backward. While the extended
industrial sector in these countries accounts for about a fifth of the total product in these countries, less
than 10 per cent is allocable to manufacturing proper. Interestingly, in many countries small scale factories
and handicrafts are also included in manufacturing. The backwardness of the industrial structure is also
reflected in the composition of the industrial output. The major manufactures in the developing countries are
food and textiles which together account for over half of the industrial output. Most of these countries even
now do not have much ability to produce their own producer goods, particularly capital equipment. Considering
the industrial structure by the size of producing units and the form of management, we notice that there is a
predominance of small individually owned and managed producing units in the developing countries.
Table 1.4
Agriculture in Some Selected Developing Countries
Country Employment in Agriculture (2009-12) Percentage of GDP

Male Female originating in
% of male % of female agriculture (2012)
employment employment
Cambodia 49 53 36
Indonesia 35 34 15
India 43 60 18
Liberia 50 48 39
Moldova 30 23 13
Pakistan 36 75 24
Paraguay 30 23 18
Philippines 39 21 12
Sri Lanka 42 35 11
Thailand 41 38 12
Source: World Bank, World Development Indicators 2014, Table 2.3 and Table 4.2.
6. High proportion of consumption expenditure and low saving rate. On examining the major use
structure of gross national product in the standard national accounts, Kuznets has observed that “the
underdeveloped countries differ from developed countries in several respects: a large share for private
consumption (73 to 75 per cent compared with 64 to 66 per cent for developed countries); a slightly lower
share for government consumption (11 to 12 per cent compared with 12 to 14 per cent); a distinctly lower share
for gross domestic capital formation (15 to 16 per cent, compared with 22 to 23 per cent); and an even lower
share of gross national capital formation (14 to 15 per cent, compared with 22 per cent).”22 On replacing
government consumption by truly final component in it — direct services in education and health, the share
of total ultimate consumption in purer and less duplicated gross national product is about 84 per cent for the
underdeveloped countries as against 76 per cent for the developed countries. On the assumption that capital
consumption is 0.4 per cent of gross capital formation, Kuznets estimates that “the shares in net national
21. Simon Kuznets, Modern Economic Growth — Rate, Structure and Spread (New Delhi: Oxford & IBH, 1979),
p. 411.
22. Ibid., p. 426.

product are 90 per cent for ultimate consumption and 10 per cent for net national capital formation in
underdeveloped countries; and 84 and 16 per cent respectively in developed countries.”23
It is not at all surprising why the savings rate is lower in the developing countries. If the income level
is low, the propensity to consume will be high, and as a consequence capital formation will be low.
Ragnar Nurkse has contended that since the underdeveloped countries are caught in a vicious circle of
poverty they do not have much capacity to save. Furthermore, on the demand side the market
constraint operates as a disincentive and the potential savers (faced with a situation in which demand for
loanable funds is not enough to induce them to save) indulge in wasteful consumption. It seems that Nurkse
has overemphasised the market constraint, nonetheless the fact remains that developing countries are
characterized by a shortage of capital.
7. High rates of population growth and dependency burdens. Population has been rising in most
developing countries at rates varying between 2 and 3.5 per cent per annum for the past few decades. This
demographic trend is unprecedented in the history of mankind. Due to increased medical facilities there has
been a sudden decline in the mortality rates in these countries. However, in most developing countries birth
rate remains very high, in the range of 25 to 50 per thousand, while in developed countries, nowhere
it exceeds 15 per thousand.24 A high rate of population growth in the Third World countries is both a cause
and an effect of their underdevelopment. People struggling to survive under sub-human conditions have
practically no interest in restricting the size of their families, as they have virtually no stakes in their life. This
attitude of indifference causes still more hardships to the people and creates conditions which are hardly
conducive to economic growth in these countries.
A major implication of high birth rates in the developing countries is that it results in a greater
dependency burden than that in the developed countries. At present the proportion of children below 15
years is 39 per cent in low income economies as against only 17 per cent in high income economies. Of course
on account of greater longevity of life in the developed countries, dependency burden of older people is much
greater in these countries. However, the overall dependency burden (i.e., both young and old) in the developing
countries is about one-half of the population as against about one-third of the population in the developed
countries. This implies that the proportion of productive population to unproductive population is much lower
in the developing countries than in the developed countries. This factor explains to some extent why in some
of the less developed countries there has been an actual decline in the living standards of common people.
8. High levels of unemployment and underemployment. Unemployment in both rural and urban areas
is widespread in the developing countries. The traditional agriculture characterised by outmoded techniques
of production and low level of productivity lacks labour absorption capacity. Thus, with rapidly growing
population in these countries, pressure of population on agricultural land has been increasing and with it the
problem of disguised unemployment is becoming increasingly serious. Rural people are aware of this malady,
and therefore quite often they migrate to cities in search of jobs where not many employment opportunities
exist for them. This part of urban unemployment in the developing countries is a spillover of unemployment
in the countryside. Another reason for unemployment in cities is inadequate growth of industries. In developing
countries, markets for manufactures are quite small due to widespread poverty. Faced with the problems of
lack of adequate demand, industries grow at a snail’s pace and fail to provide jobs in sufficient number to
absorb the growing population. Current rates of open unemployment in urban areas in most developing
countries average from 10 to 15 per cent of the urban labour force. Unemployment among educated people
23. Ibid., p. 427.

24. For low income economies as a group, birth rate was 32 per thousand in 2012 while it was 23 for lower middle income economies,
15 for upper middle income economies and only 12 for high income economies in that year. See World Bank, World Development
Indicators 2014, Table 2.1.

aged 15 to 24 years is also considerable in the urban areas. This unemployment is not to be interpreted as an
indicator of over-investment in education. Since it is caused by market imperfections the appropriate remedy
might involve an active ‘manpower policy’ designed to improve the functioning of labour markets.25 The
overall unemployment position in the developing countries is quite grave. Whatever we have said about it
represents only the tip of the iceberg of labour underutilization in these countries. According to Michael P.
Todaro, “When the underemployed are added to the openly unemployed and when “discouraged
workers” — those who have given up looking for a job — are added in, almost 35 per cent of the
combined urban and rural labour forces in Third World nations is unutilised.”26
9. Technological backwardness. In developing countries, production techniques are inefficient over a
wide range of industrial activity (whole of agriculture, small-scale units and handicrafts). This sorry state of
affairs cannot be explained in terms of one or two factors. Lack of research and development (R&D), weak
communication system between the research institutes and industries, abundance of labour and capital scarcity
are some obvious reasons for the use of techniques which have otherwise become obsolete. Developing
countries generally do not have large effective institutions working for discovering appropriate technology.
Under the circumstances, an attempt is made to import technology from developed countries which often fails
to adapt to local conditions. Moreover, whatever limited research is undertaken in industrial technology, its
results fail to reach producers due to weak communication system. But these factors do not explain wholly the
continuance of outmoded techniques. In most cases it is not the ignorance which prevents producers from
adopting modern techniques. In many cases technological choice of producers is dictated by their poverty. In
India, for example, farmers are well aware of the merits of new farm techniques requiring increased use of
fertilisers and water, and yet many of them still persist with traditional farming due to their inability to raise
resources required by the new technology. In the industrial sector, workers’ unions often oppose introduction
of labour displacing technology. This organised attempt on the part of workers may be a retrogressive act from
the point of view of industrial development, yet it is justified because modern technology will certainly render
many workers jobless at least temporarily.
10. Dualism. Economists talk of various types of dualism existing in the developing economies. During
the colonial and post colonial period the concept of ‘social dualism’ was quite popular with the Western
economists and they used it extensively to explain the problems of underdeveloped economies. J.K. Boeke in
his study of the Indonesian economy argued that social dualism arises in a backward economy with the import
of an alien progressive system. In Indonesia, it had emerged with the import of capitalism, in that country under
the Dutch rule. The imported system, according to the exponents of social dualism, comes in conflict with the
indigenous system of another style. It, however, cannot speed up the process of development. Boeke asserts
that industrial or agricultural development in these countries has to be a ‘slow process’, small scale and
adapted to a dualistic system.27 Benjamin Higgins while rejecting Boeke’s theory of social dualism contends
that “dualism is more readily explained in economic and technological terms.”28 He uses the concept of
technological dualism to explain the labour employment problems. In his model of an underdeveloped
economy there are two compartmentalised sectors, viz., the traditional rural sector and the modern sector. The
traditional rural sector has variable technical coefficients of production in contrast to modern sector’s fixed
technical coefficients of production. The implication of these is that the rapid growth of population (if not
accompanied by a sufficient accumulation of capital) results in unemployment of excess supply of labour or
it must seek employment in the traditional sector where marginal productivity eventually falls to zero.
25. M. Blaug, P.R.G. Layard and M. Woodhall, The Causes of Graduate Unemployment in India (London: Allen Lane, 1969),
p. 234.
26. Michael P. Todaro, Economic Development, (Seventh edition, 2000), p. 56.
27. J.H. Boeke, Economics and Economic Policy of Dual Societies (Hoarlem, The Netherlands: Tjeenk Willnik, 1953).
28. Benjamin Higgins, Economic Development (Allahabad: Central Book Depot, 1966), p. 281.

According to Myint, the dualism in economic organisation and production methods between the peasant
sector and the mining manufacturing sector is paralleled by the financial dualism. In the colonial period in
most underdeveloped countries domestic financial institutions co-existed with modern financial institutions
oriented towards export production. After these underdeveloped countries got independence, they developed
modern manufacturing industries oriented towards domestic market. This required development of modern
financial institutions also giving rise to a different kind of financial dualism.29
11. Lower participation in foreign trade. It is commonly believed that developing countries rely
excessively on foreign trade, in the sense that their proportions of exports and imports to domestic product are
much higher than those of the developed countries. On careful scrutiny, this widespread belief is found to be
wrong. Simon Kuznets after examining this question finds that the extent of participation of a country in
foreign trade cannot be measured directly because the proportion of foreign trade to total output is affected
by the size of a country. He, therefore, suggests that the effects of size should be measured and eliminated first.
“Once this adjustment is made, it becomes clear that the extent of participation in foreign trade by underdeveloped
countries is distinctly lower than that of developed countries.30 Thus, if the average foreign trade proportions
expected on the basis of size were the same for the two groups of countries, viz., developed and developing,
the average actual trade proportion for developing countries would be considerably lower than that for the
developed countries. As a matter of fact, underdevelopment of a country cannot, in itself, induce large foreign
trade. The inadequate development of transportation system and trade organisation and backwardness of
production technology are some such factors that would make large exports and imports impossible.31
12. Dependence. The process of underdevelopment in the Asian, African and Latin American countries
had begun with the integration of their economies with those of the West European capitalist economies. This
relationship between the colonies and the metropolitan countries gave rise to an international division of labour
which allowed industrial development to take place only in the latter. Though the economies of the colonies
remained backward yet they were part of the world capitalist system. They were in fact made subservient to
metropolitan interests and were forced to specialise in primary producing activities. The pattern and direction
of trade in the colonial period was also determined by the basic fact of the integration of colonies with the
metropolitan countries. On the one hand colonies depended on the metropolitan countries for almost all the
capital goods, industrial raw materials and most of the manufactured consumer goods, while on the other hand
their exports constituted of one or two primary products. India, for example, depended on exports of tea and
jute for most of the colonial period. Similarly, Malaysia’s exports of rubber, Brazil’s exports of coffee, Sri
Lanka’s exports of tea and Cuba’s exports of sugar reflected their great dependence on the markets they got
for these primary products in the metropolitan countries.
After the World War II most of these colonies got political independence, but because of the integration
of their economies with the metropolitan economies, they could not get rid of the dependence which they had
developed in the latter. Even now the industrial structure in these countries is quite backward, and therefore
for all their development requirements they continue to remain dependent on the developed countries. Further,
the trade pattern and direction of trade between the former colonies and metropolitan countries has not
undergone any significant change.
Apart from the above mentioned common characteristics there are a few other distinguishing features
of the developing countries. In the first place, social life in most of these countries is tradition bound and the
attitudes of the people are orthodox which hamper any kind of change in outdated social-economic relations.
Secondly, in the social organisation some obvious negative features are present. We may mention only a few,
29. H. Myint, The Economics of the Developing Countries (New Delhi: B.I. Publications, 1977), pp. 55-8.
30. Simon Kuznets, Modern Economic Growth, op. cit., p. 430.
31. Ibid., p. 431.

such as, high degree of illiteracy, extensive prevalence of child labour, general weakness or absence of middle
class, and inferiority of women’s status and position. Lastly, as Gunnar Myrdal says, almost all the developing
countries are ‘soft States’. Their characterisation as soft States implies that they lack social discipline. The
legal system is also defective and quite often legislative measures are scuttled at the implementation level. This
happens because bureaucracy is both corrupt and anti-people. Its connections with elite groups are firm and
obvious.
SUGGESTED READINGS
Todaro, Michael P., and Smith, Stephen C., Economic Development (Pearson Education Asia, Eighth edition, 2003),
Chapter 2. The authors attempts to identify some of the most important structural differences among developing
countries and then provide relevant data to delineate some of their common characteristics.
Herrick, Bruce and Kindleberger, Charles P., Economic Development (Tokyo: McGraw-Hill Book Company, 1983).
Appendix to Chapter 1 provides basic facts about poor countries.
Higgins, Benjamin, Economic Development: Principles, Problems and Policies (Allahabad: Central Book Depot,
1966). Chapter 1. Apart from discussing the characteristics of underdeveloped countries, this chapter also
classifies them into four categories.
Kuznets, Simon, Modern Economic Growth — Rate, Structure and Spread (New Delhi: Oxford and IBH Publishing
Co., 1979). Chapter 8. This is perhaps one of the most authentic treatment of the economic and social structure
of underdeveloped countries.
Pearson, Lester et al., Partners in Development: Report of the Commission of International Development (New York:
Praeger, 1969). Annex, 1. pp. 231-353. A concise but very informative summary of the diverse structures and
the major economic characteristics of Third World countries.
Singer, Hans W. and Ansari, Javed A., Rich and Poor Countries (London: George Allen & Unwin 1982). Chapter 3
While describing the economic structure of the poor countries, the authors underline unity in the diverse
structures of the LDCs.
Gillis, Malcolm, Perkins, Dwight H., Roemer, Michael and Snodgrass, Donald R., Economics of Development (New
York: W.W. Norton & Company, Fourth edition, 1996). See particularly Chapter 2 ‘Starting Modern Economic
Growth.’
Ghatak, Subrata, Introduction to Development Economics, (Routledge, London and New York, 1995), Chapter 1. Refer
to Sections 1.1, 1.2 and 1.3. These sections deal with characteristics of the less developed countries.
Ray, Debraj, Development Economics (Oxford University Press, New Delhi, 1998, eleventh impression 2007), See
Chapter 2 ‘Economic Development: Overview’ particularly Section 2.5 on ‘Some Structural Features’.
iiiii


Chapter 1170

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 1170

Uploaded by

Copyright:

Available Formats

ECONOMICS OF

V.K . Pur i S.K . M isr a (L ate)

SIXTEENTH REVISED AND UPDATED EDITION: 2016

First Edition : 1986

1. Developing Nations: Diverse Structures and Common Characteristics 3 – 18

3. Economic Growth and Social Justice 35 – 52

6. Economic Growth in Historical Perspective 85 – 95

7. The Classical Theories of Growth and Stagnation 99 – 111

8. Marx’s Theory of Economic Development 112 – 119

9. Schumpeter’s Theory of Development 120 – 127

11. Keynes’s Theory and Underdeveloped Countries 138 – 147

12. Growth Models – The Post Keynesian Phase 148 – 156

13. The Harrod-Domar Growth Model 157 – 167

14. The Neo-Classical Theory of Growth 168 – 181

15. Some Cambridge Models of Growth 182 – 203

17. The Theory of the Big Push 217 – 222

19. The Theory of Balanced Growth 234 – 244

20. The Strategy of Unbalanced Growth 245 – 253

21. Theories of Social and Technological Dualism 254 – 262

22. Lewis Model of Economic Growth 263 – 270

23. Fei-Ranis Model of Economic Growth 271 – 280

26. The Problem of Unemployment 346 – 360

28. Technological Change and Development 375 – 389

29. Industrialisation and Agriculture 390 – 405

30. Environment and Development 406 – 425

33. International Transfer of Technology and MNCs 462 – 472

35. Monetary Policy in a Developing Country 499 – 508

36. Fiscal Policy in Developing Countries 509 – 524

37. Deficit Financing and Inflation 525 – 533

38. Foreign Investment and Aid 534 – 550

39. Market System — Functions and Shortcomings 553 – 559

40. State and Economic Development 560 – 570

41. Economic Planning 571 – 585

42. Controls in a Planned Economy 586 – 594

43. Investment Criteria 595 – 604

45. Shadow Prices 619 – 632

46. Input-Output Analysis 633 – 644

47. Linear Programming 645 – 654

48. Evolution of Economic Planning in India – Rationale,

49. The Strategy of the Development Plans in India 674 – 692

51. Financing of Five Year Plans 704 – 720

52. Regional Planning in India 721 – 737

53. Economic Growth: National Income Trends and Structural

54. Unemployment and Poverty 752 – 772

55. Income Inequalities in India 773 – 784

56. Capital Formation in India 785 – 797

57. Assessment of Indian Planning 798 – 813

58. Economic Reforms and Liberalisation 814 – 831

59. Twelfth Five Year Plan 832 – 845

60. Agricultural Development During the Planning Period 846 – 869

61. Industrial Development and Industrial Policy 870 – 891

63. India and The World Economy 918 – 928

Subject Index 929 – 938

Table 1.1 : Occupational Structure in Some Developing Countries, 2009-12 7

1. DEVELOPING NATIONS: DIVERSE STRUCTURES AND

3. ECONOMIC GROWTH AND SOCIAL JUSTICE

5. OBSTACLES TO GROWTH AND DEVELOPMENT

6. ECONOMIC GROWTH IN HISTORICAL PERSPECTIVE

Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st

Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st

Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st

Country GNI per capita Agriculture Industry Services

Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st

Y:\DTP\Himalaya\Pending\MEGHA_b7\Himalaya\Pending book\Economics of Development and Planning_Misra & Puri_Revised\1st