LECTURE 3 AND 4:

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APPROACHES TO ECONOMIC

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DEVELOPMENT

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 Content of Lecture 3

Approaches to economic development (Part 1)

1. Purely Income based- Total Income and Per-capita
Income

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2. Economic Welfare Criteria

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3. Basic Need Approach
Approaches to economic development (Part 2)

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Lecture 4 :

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4. Composite Index based development (Socio-
economic Wellbeing)
◦ Physical Quality of Life Index (PQLI)
◦ Human Development Index (HDI)

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 First: Income based approach of ED
Indicator- GDP Growth per capita (annual %)

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Source: World Bank Group. (2017). World development indicators 2017:
World Bank, cited in Naqvi (2015)
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 First: Income based approach of ED
◦ Concepts of National Income (Gross Net, National
Domestic) and Per capita Income
◦ Time Period: 1950’s – 1960’s
◦ Scholars- G M Mayer and Robert E. Baldwin’s (Meier & Baldwin, 1957)

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◦ ED is a process where a country’s real national income rises over

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a long period of time

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◦ Limitations of National Income

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◦ Not reliable data, particularly in 3rd world countries

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◦ Possibility of double counting so overestimation (especially intermediate
goods)

◦ Comparison Difference- Different methods of estimating National

Income by different countries
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First: Purely Income based approach of ED…contd
𝑵𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆
𝑷𝒆𝒓 𝑪𝒂𝒑𝒊𝒕𝒂 𝑰𝒏𝒄𝒐𝒎𝒆 =
𝑷𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏

◦ Limitations of Per Capita Income (PCY)

◦ PCY Not Satisfactory Measure of ED

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◦ National Income (NI) is rising but because of some natural

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calamities, a large proportion of population dies. Then PCY will
increase. Can we label this as ED?

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◦ Suppose NI increases, but Population increases much faster. So,

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PCY will decline. Can we label this case as economic
underdevelopment?

◦ That is why, Chenery, Ahluwalia, Duloy, Bell, & Jolly, (1974)

improvised and formulated
◦ Growth and Distribution aspects of ED
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 Major Limitation of PCY
◦ While international comparisons of SOL, PCY of countries have to be
converted in domestic currency into a common unit of account (Eg., US
dollars).
◦ Measure: Purchasing-power parity estimates of PCY

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◦ Refer- Video https://www.youtube.com/watch?v=iOxYbH5XyG8,

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accessed on 14 August, 2020

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◦ More Video- https://www.youtube.com/watch?v=WpJbVitlInM

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 Second: Economic Welfare Criteria

◦ Father Scholar/Title- The Economics of Welfare (Pigou, 1920)

‘……that part of social welfare that can be brought

directly or indirectly into relation with the measuring-rod

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of money. This part of welfare may be called economic
welfare’ (pp.30)

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◦ If any part of social welfare cannot be measured in terms of

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money, then that is out o purview of economic welfare.

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 How ED is measures in terms of Economic Welfare?

◦ Economic welfare is yardstick of measuring ED?

◦ Notional Aspects of Economic Welfare

1. Welfare is connected with utility (utilitarianism)

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2. Economic welfare is affected through the making of the national
dividend and expenditure (spending)

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◦ Saving is a personal and public virtue as per classicals.

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Measurement Aspects of Economic Welfare

◦ Transfer of Income from rich to bottom promotes ED

• Reduction in Inequality

• Reduction in Poverty
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 GINI Index, 1980s to 2010s

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◦ Source: Naqvi (2015), collected from various Human Development Report and World
Development Report

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 Poverty Headcount Ratio at $1.90 a day (2011
PPP; % of Population)
1980s to 2010s

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Source: Naqvi (2015), collected from World development indicators
2017
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Limitations: Economic Welfare Criteria
◦ Concept and use of Economic Welfare is defective
◦ Economic welfare is subjective concept (differs from country to
country, place to place, time to time). When the meaning of

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welfare is contention, it cannot be used for measuring ED.

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◦ ED is relative

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◦ It is not easy to ascertain the level of income at which

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economic welfare is maximum

◦ Non-monetary measures cannot be taken or included

as welfare
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 Evidence suggest that
“Lower Income Inequality leads to Higher
Economic Growth”
GDP VS Gini in Developing Countries, 1970-2016

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Source: Naqvi (2015), pp. 78
Third: Basic Need Approach
(BNA)
◦ Time period- 1970’s onwards

◦ Organisations/Economists
◦ Club od Rome

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◦ Overseas Development Council

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◦ First Economics Nobel Laureate Ragnar Frisch and Jan Tinbergen suggest

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Need Based Approach

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◦ Emphasis on Need Based approach, Maslow’s Hierarchy of Needs

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◦ Have access to basic minimum needs – Food, Shelter, and Clothing

◦ Have minimum SOL

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 Bibliography
◦ Meier, G. M., & Baldwin, R. E. (1957). Economic Development: Theory, History, Policy.
John Wiley and Sons.
◦ Meier, G. M., & Seers, D. (1984). Pioneers in development. The World Bank.
◦ Naqvi, S. N. H. (2015). Economics of Development: Toward Inclusive Growth. SAGE
Publications.
◦ Pigou, A. C. (1920). The Economics of Welfare. The Online Library of Liberty.

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http://oll.libertyfund.org/EBooks/Pigou_0316.pdf

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◦ UNDP. (1990). Human Development Report 1990: Concept and Measurement of
Human Development. O. U. Press.
http://www.hdr.undp.org/en/reports/global/hdr1990

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◦ UNDP. (2019). Human Development Report 2019: Beyond income, beyond

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averages, beyond today: Inequalities in human development in the 21st century.

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◦ World Bank Group. (2017). World development indicators 2017. World Bank.
◦ World Bank Group. (2015). World Development Report 2015 : Mind, Society, and
Behavior. Washington, DC Ray, D. (2012). Development Economics (19 ed.). Oxford
University Press.
◦ Thirlwall, A. (2009). Growth & Development: With Special Reference to Developing
Economies (8 ed.). Palgrace Macmilan.
◦ Todaro, M. P., & Smith, S. C. (2015). Economic Development (12 ed.). Pearson. 14