SCHOOL OF SOCIAL SCIENCE

DEPARTMENT OF ECONOMICS AND DEVELOPMENT STUDIES

P.O. BOX 13495 -00100
NAIROBI

Email; info@mkunirtuecampus.com

COURSE TITLE DEVELOPMENT ECONOMICS

COURSE CODE: IBM 412

COMPILED BY: ISAAC KEROR

Table of contents

Contents
COURSE TITLE DEVELOPMENT ECONOMICS..................................................................... 1
Table of contents ............................................................................................................................. 2
COURSE OUTLINE ...................................................................................................................... 5
LESSON 1: INTRODUCTION TO DEVELOPMENT ECONOMICS ......................................................... 8
Definition of development economics ........................................................................................ 8
Components of development economic..................................................................................... 8
LESSON 2: ECONOMIC GROWTH AND DEVELOPMENT ................................................................ 10
Meaning of Economic Growth and Development..................................................................... 10
CORE VALUES OF DEVELOPMENT ................................................................................... 10
Objectives of economic development ....................................................................................... 11
Causes And Indicators Of Underdevelopment .......................................................................... 12
The Colonial Extraction System ............................................................................................... 13
Indicators of Underdevelopment ............................................................................................... 14
Characteristics of an Underdeveloped Country ........................................................................ 16
LESSON 3: ................................................................................................................................... 24
STRATEGIES OF DEVELOPMENT .......................................................................................... 24
AGRICULTURE ....................................................................................................................... 24
Problems face by the agricultural sector in developing countries ............................................. 25
Policies to Improve Agricultural Sector .................................................................................... 26
Industrialization ......................................................................................................................... 27
Importance of industry in development .................................................................................... 27
Technology Transfer ................................................................................................................. 29
Participatory Development........................................................................................................ 30
Modernization ........................................................................................................................... 31
Regional integration .................................................................................................................. 31
Co-operative movements........................................................................................................... 32
LESSON 4: ................................................................................................................................... 34

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THEORIES OF UNDERDEVELOPMENT ................................................................................. 34
DEPENDENCY THEORY ....................................................................................................... 34
MODERNIZATION THEORY ................................................................................................ 38
LESSON 5: ................................................................................................................................... 40
MODELS OF ECONOMIC GROWTH AND DEVELOPMENT ............................................... 40
LEWIS STRUCTURAL CHANGE (DUAL SECTOR) MODEL ........................................... 45
ROSTOW’S MODEL ............................................................................................................... 49
LESSON 6: ................................................................................................................................... 56
ECONOMIC MEASURES OF OUTPUT AND INCOME.......................................................... 56
HUMAN DEVELOPMENT INDEX (HDI) ............................................................................. 56
LESSON 7: ................................................................................................................................... 61
THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT ............................................ 61
CLASSICAL GROWTH THEORY ......................................................................................... 61
THE NEOCLASSICAL GROWTH MODEL .......................................................................... 63
THE “BIG PUSH” THEORY ................................................................................................... 69
LESSON 8: ................................................................................................................................... 73
ALTERNATIVE THEORIES OF DEVELOPMENT (APPLICABILITY TO DEVELOPING
COUNTRIES) ............................................................................................................................... 73
MALTHUSIAN THEORY ....................................................................................................... 73
LESSON 9: GLOBALIZATION AND ECONOMIC DEVELOPMENT ................................... 76
Meaning ..................................................................................................................................... 76
Impacts of Globalization and trade ........................................................................................... 76
Economic integration ................................................................................................................ 77
Role of international financial institutions ................................................................................ 77
The structure and function of World Bank and IMF ................................................................. 79
Debt Relief .................................................................................................................................... 81
NORTH-SOUTH AND SOUTH-SOUTH CO-OPERATION ................................................. 82
LESSON 10; MILLENNIUM DEVELOPMENT GOALS .......................................................... 84
LESSON 11: ................................................................................................................................. 97
DEVELOPMENT PLANNING.................................................................................................... 97

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Definition of development planning ......................................................................................... 97
Importance of Planning in Underdeveloped Countries ............................................................. 97
Types of planning ...................................................................................................................... 98

4
Credit Hours: 42hrs

Course Purpose

This course aims to provide the students with knowledge and skills to be able identify the main
hypotheses and processes explaining economic growth and development. Students will also learn
how the economic environment shapes the behaviour of people and how in turn that behaviour
impacts on the economy.

COURSE LEARNING OUTCOMES

At the end of the course the student should be able to;

 Differentiate economic growth and economic development and identify the main
elements of classic and heterodox theories to economic development;
 Explain why some countries are poor and others are rich;
 Evaluate contemporary models of development and underdevelopment;
 Identify market failures and determine what policies can be used to fix such failures; and,
 Explain the role of population growth and fertility to economic growth of a country

COURSE OUTLINE
WEEK TOPIC SUB TOPIC
Week I Introduction to  meaning of development economics
development economics  components of development
economics
 role of development economics
Week 2 Economic growth and  meaning of economic growth and
development economic development
 Objectives of economic development;
 Courses and indicators of
underdevelopment;
 Comparative analysis of developing
countries

Week 3 Strategies of  Agricultural and industrial development

development  Technology transfer;
 Foreign private investments;
 Aid

Week 4 Theories of  Modernization Theory

underdevelopment  Dependency Theory

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Week 5 Models of Economic Harrod-Domar Growth Model:
Growth and  Lewis Structural Change (dual-sector)
Development Model:
 Rostow’s Model – the 5 Stages of
Economic Development:

Week 6 Economic Measures of

Output and Income 
Adjusting Economic Indices –
Population, Prices and Purchasing Power
 UNDP Measures of Development: (HDI,
GDI, GEM & HPI)
Week 7&8 Theories of economic Review of Economic History:
growth and development
o Classical growth theory
o The neoclassical growth model
o Endogenous growth theory
o Theory of cognitive wealth
(cognitive capitalism)
o The big push

week 9&10 Alternative theories of

development -  The Structuralist Growth Model -Bill
applicability to Gibson
developing countries  The Classical Theory of Growth and
Distribution
 Evolutionary Growth Theory
 The Post-Keynesian Theories of Growth
and Distribution: A Survey
 Growth, Instability and Cycles:
Harrodian and Kaleckian Models of
Accumulation and
Income Distribution

week 11&12 Globalization and meaning of globalization

economic development  impact of globalization and trade
 reasons for protection
 balance of payment
 economic integration
 role of international financial institutions
 International Financial Institutions and
Debt:
 The structure and function of the World
Bank and the International Monetary
Fund
 The Debt Relief process
 North-South and South –South co-

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 operation
Week 13 Millennium development meaning of millennium development goals
goals  targets
 indicators
 challenges/impacts
Week 14 Development planning
 meaning of development planning
 types of development plans
 challenges of development plans
 strategies of industrialization

Teaching Methodology
Teaching will take the form of a three hour lecture per week. The teaching methodology will
combine the use of the lecture style inputs and more participatory methods - small group
discussions, student presentations, among others.

Course Assessment

Continuous Assessments Tests 30%Final Examination 70%Total 100%

Instructional Material and Equipment

Audio-visuals devices, computers/internet services, journals, newspapers, chalk/pens and white
boards, flip charts and learning centres

Recommended Text Books

1) Todaro M.P. and S.C. Smith (2006): Economic Development. 9th edition, Pearson: Essex.
2) Michael P. Todaro (2008): Economic Development (10th Edition), Addison Wiley.

Text Books for Further Reading

1) James M. Cypher (2008): The Process of Economic Development, Routledge .

2) Don Allen Holbrook (2007): The Little Black Book of Economic Development, Xlibris
Corporation.
3) Giorgio Second (Editor) (2008): The Development Economics Reader, Routledge.
4) Jessica Cohen (Author, Editor) (2009): What Works in Development? Thinking Big and
Thinking Small , Brookings Institution Press.

ISAAC KEROR 0722 807656 keror2001@yahoo.com

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LESSON 1: INTRODUCTION TO DEVELOPMENT ECONOMICS

Definition of development economics

It’s a branch of economics that focuses on improving the economics of the developing countries.
It aims at promoting following factors
(i) Health
(ii) Education
(iii) Working condition
(iv) Domestic of international policies and market conditions.
Development economic examine both macroeconomics and microeconomics factors relating to
the structure of developing economy and how that economy can create effective domestic and
international growth.
It seeks to determine how poor countries can be transformed into prosperous one.
It also helps to determine strategies, programmes and policies that help in reducing poverty in
developed countries.
The prominent development economists include Jeggrey sacks, Hernando de Soto polar, and
Nobel Lavrates Simom Kuznets, Amartya and Joseph Stiglitz.

Wikipedia’s definition of economic development

It refers to the sustained, concerted action of policy makers and communities that promote the
standard of living and economic health of a specific area.
It can also be referred to as the quantitative and qualitative changes in the economy.

Components of development economic

(i) Human capital development
(ii) Critiled infrastructure
(iii) Regional competitiveness
(iv) Environmental sustainability
(v) Social inclusion
(vi) Health and safety
(vii) Literally
Role of development economic
(i) Increased tax base- the additional revenue provided by economic development supports,
maintaining and improves local infrastructure such as roads, libraries.
(ii) Job development- economic development provides better wages benefits and
opportunities for advancement.

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(iii) Business retention- businesses feel appreciated by the community and in turn are more
likely to stay in town contributing to the economy.
(iv) Economic diversification- a diversified economic base helps expand the local economy
and reduces a community’s vulnerability to a single business sector.
(v) Self- sufficiency- a stronger economic base means public service are less dependent on
intergovernmental influences and alliances which can change with each election.
(vi) Productive use of property- used for its highest a best use maximizes the value of that
property.
(vii) Quality of life – more tax and more job opportunities raise the economic fide for the
entire community, including the overall standard of living of the residents.
(viii) Recognition of local products – successful economic development often occurs when
locally produced goods are consumed in the local market to a greater degree.

Prof Schumpeter defines development “as discontinuous and spontaneous change in the
stationary state which forever alters and develops the equilibrium state previously existing.”
Kindleberge defines economic development ‘as both more output and changes in the technical
and institutional arrangement by which its produced and distributed.
Friedman defines development “as an innovative process leading to the structured transformation
of social system.
M.L Jhingan defines development “as growth plus Chege. It relates to qualitative changes in
economic wants, goods, incentives, institutions, productivity knowledge or the upward
movement of the entire social systems.”

Economic growth
According to Meddison economic growth, “raising of income levels.” Schumpeter defines
growth “as gradual and steady change in the long run which comes about by gradual increase in
the rate of saving and population.
Kindleberge defines economic growth as “more output.”

Questions

1. Discuss the components of development economics

2. Explain the Roles of development in poverty alienation in developing countries.
References

Todaro, Michael P. Economics For A Developing Worlds: An Introduction To Principles

Problems And Policies, Prentice Hall Press

Miller, B, and Torr, J. D, (eds), (2003), Developing Nations: Current Contraversies, Greenhawen
Press

9
LESSON 2: ECONOMIC GROWTH AND DEVELOPMENT
Meaning of Economic Growth and Development
ECONOMIC GROWTH

Economic growth is an increase in activity in an economy. It refers to the quantity of goods and
services produced; it says nothing about the way in which they are produced.

ECONOMIC DEVELOPMENT
Economic development involves reduction or elimination of poverty, inequalities and
unemployment within the context of a growing economy.
According to Michael Todero (dee), “economic development is a multidimensional process
involving changes in structures, attitude and institutions as well as acceleration of economic
growth, the reduction of inequality and eradication of absolute poverty.”
Friedman defines growth as an expansion of the system in one or more dimensions out of a
change in its structure.”
Economic growth therefore means improvement in people’s income/output which directly
influence their living standard by enabling them utilize more and variety of goods and services.
Economic development refers to social and technological process. It implies a change in the way
goods and services and produced, not only on increase in production achieved using the old
methods of production on a wider scale..

Economic development is the increase in the standard of living in a nation’s population with
sustained growth from a simple, low income economy to a modern, high income economy; also,
if the local quality of life could be improved, economic development would be enhanced. Its
scope includes the process and policies by which a nation improves the economic, political and
social wellbeing of its people.

Economic growth implies only an increase in quantitative output; it may or may not involve
development. It is often measured by rate of change of gross domestic product (e.g. percentage
GDP increase per year). Gross domestic product is the aggregate value added by the economic
activity within a country’s borders. Economic development typically involves improvements in a
variety of indicators such as literacy rate, life expectancy and poverty rates. GDP does not take
into account other aspects such as leisure time, environmental quality, freedom, or social
justices; alternative measures of economic wellbeing have been proposed.

CORE VALUES OF DEVELOPMENT

It is possible to define broadly or conceptualize what we mean when we talk about development
as the sustained elevation of an entire society and social system towards a better or ‘more
humane’ life. According to Professor Gonlet and others, believe that there are at least three basic

10
components or core values that serve as a conceptual basis and practical guidelines for
understanding the inner meaning of development. These core values are life-sustenance, self-
esteem and freedom, representing common goals sought by all individuals and societies. They
relate to fundamental human needs which find their expression in almost all societies and
cultures at all times.

LIFE-SUSTENANCE (Ability to provide basic human needs)

All people have certain basic human needs without which life would be impossible. These life-
sustaining needs include, food, shelter, health and protection. When any of these is absent or
critically short supply we may state, without reservation, that a condition of absolute hinder
development exists. A basic function of all economic activity is to provide as many people as
possible with the means of overcoming the helplessness and misery arising from a lack of food,
shelter, health and protection. This far we may claim that economic development is a necessary
condition for the improvement in the quality of life which is ‘development’.

SELF-ESTEEM (to be a person)

A second universal component of the good life is self-esteem. A sense of worth and self respect,
of not being used as a tool by others for their own ends. All people and societies seek some form
of self-esteem although they may call it authenticity, identity, dignity, respect, honour or
recognition. The nature and form of this self-esteem may vary from society to society and from
one culture to another.

FREEDOM FROM SERVITUDE (To be able to choose)

Freedom here is not to be understood in the political or ideological sense, but in the more
fundamental sense of freedom or emancipation from alienating material conditions of life and
freedom from the social servitudes of men to nature, ignorance. Other men, misery, institutions
and dogmatic beliefs. Freedom involves the expanded range of choices for societies and their
members, together with the minimization of external constraints in the pursuit of some social
goal that we call ‘development’ W. Arthm Lewis stressed the relationship between economic
growth and freedom from servitude when he concluded that the advantage of economic growth is
not that wealth increases happiness, but that it increases the range of human choice.
Objectives of economic development
1. To increase the availability and widen the distribution of basic life-sustaining goods such
as food, shelter, health and protection to all members of society.
2. To raise levels of living including in addition to higher incomes, the provision of more
jobs, better education and more attention to cultural and humanistic values. These all
serves not only to enhance material well being but also to generate greater individual and
natural self-esteem.
3. To expand the range of economic and social choice to individuals and nations by freeing
them from servitude and dependence not only in relation to other people and nation state
but also the forces of ignorance and human misery.

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Causes And Indicators Of Underdevelopment
Different researchers on the cause and indicators of underdevelopment emphasize varieties of
factors as the root cause of underdevelopment. Among these the most important ones can be
grouped into the following categories. (a) Hostile natural environment, (b) Archaic production
technology, (c) Slave trade, (d) Demographic factors, (e) Political instability and predatory
states, (f) Colonialism and its extractive institutions.

(a) Hostile natural environment

Most underdeveloped countries especially in Africa lies within the tropical climate; this has
made vast areas of Africa, South America and Asian continents to be home to Malaria and
tsetsefly which afflict humans and animals respectively. This has led some researchers in Africa
on the causes of Africa’s underdevelopment to test the hypothesis of malaria as the dominant
cause of the underdevelopment in the continent. A significant number of recent studies tent to
support the malaria view both at the macro as well as micro level. It is an established fact that
low mortality as a result of better health contributes to economic growth.
In addition to malaria, the animal disease carrying tsetsefly, which is found all over the continent
and can incapacitate draught animals, may itself explain the traditional low use of ploughs and
other animal drawn implements and hence the lower productivity of the agricultural sector.

(b) Archaic production technology

For many years, the African continents depended on archaic methods of agricultural production.
Even the use of ploughs and other animal drawn implements were limited. The agricultural
revolution and the use of iron tools cause to sub-Saharan Africa later than other parts of the
world.
An important reason for the continent’s technological underdevelopment is the geographical
obstacles to communication both internally and with rest of the world. He Sahara has been a
barrier to the north and the Atlantic coast had no contact with the rest of the world until the first
Europeans arrived around 1500. Influence from the Arab world and India came mainly through
the Nile Valley and the East African coast and had little spillover effect further inland. With the
exception of the Niger and the Nile, the continent’s rivers with their large waterfalls have not
provided a navigable route to the interior, in contrast to the rivers of Europe and Asia. The
problems of today’s land-locked states illustrate the great importance of communication for
economic and cultural development.

(c) Demographic factors

Most countries especially those in Africa has had a demographic history that has been
characterized by low density of population and continuous migration and settlement of new

12
areas. African continent with a massive land mass of over 30 million km2 has inhabitants less
than that of India at present. Migration has continued right up to the present day and there is still
more migration on this continent including migration between urban and rural areas than
anywhere else in the world. This continued migration may be due to a hostile geographical
environment that debilitates the livelihoods of the population.
However, at present the demographic picture in Africa is totally different. Rapidly growing
population with limited demographic windows of opportunity has caused further strain on the on
the development efforts and environmental sustainability in the continent. Rapid deforestation
following population explosion has further aggravated the environmental problems. The rapid
deforestation is turning desertification with its negative impacts on agricultural production in
many parts of sub-Saharan Africa. Consequently, Africa is more food insure today than the era
of wooden agricultural implements.

(d) The slave trade

The slave trade theory is one of the dominant views on the historic root causes of the Africa
underdevelopment. According to this view, Africa’s engagement of the continent over two
centuries. Furthermore, the African countries with the biggest slave exports are by and large the
countries with the lowest incomes now.
It has been shown that slave trade prevented state development, encouraged ethnic
fractionalization and wreaked legal institutions and through these channel it affected economic
development. The export of an estimated 12million people across the Atlantic and possibly a
similar number to Arab world in the course of a full millennium may have been a factor in
Africa’s lower population growth compared with that of other continents.

The Colonial Extraction System

Colonialism in African and Asia took different forms. Unlike in Asia, hostile tropical
environment prevented colonizers from setting in Africa as a result of which they erected
extractive institutional in these colonies. These colonial institutions have persisted overtime and
they continue to influence the economic performance of the colonies even long after
independence.
Research shows that colonial extraction when severe enough can cause a society to move from a
high to low production level equilibrium. Due to the stability of low level equilibrium, a society
can remain trapped in this equilibrium even after the period of colonial extraction is over.
However, many African as well non- African scholars do not agree on the link between colonial
extraction and the current underdevelopment in Africa. Ethiopia was never colonized but it is
one of the least developed countries in Africa. While many Asian countries which have achieved
development miracles since 1960s have been former European colonies.
However there is one crucial link between colonialism and underdevelopment in Africa. This is
the creation of political map that is economically irrational and dysfunctional. Colonialism
created artificial and non viable nations/states that lack legitimacy. This is the root cause of

13
continued ethnic conflicts and civil wars that ravage the continent since the day of
decolonization. Thus unless these countries does away with the current artificial colonial
boundaries either through realignment of the current state boundaries wherever there are
contestations or through more regional integration similar to the European model but not through
hasty “ United state of Africa” rhetoric, the continent will never achieve sustainable
development.

POSTCOLONIAL POLITICAL INSTABILITY

The post colonial Africa has been characterized by lack of political stability. Post independence
African. Politics was dominated by authoritarian regimes and Kpetoptocracies. These rent
seeking dictators often internationally sow seeds of ethnic conflicts by deliberate political
exclusion and marginalization of various ethnic groups that reside within the country.
Even after two decades of democratic reforms in the continents today about 50% of authoritarian
states in the world are found in Africa. About 24 out of54 states in Africa are authoritarian
regimes. Only materitius qualities as a full democracy in the continent out of about 30 full
democracies in the world while to more countries in the continent are flowed democracies.

Indicators of Underdevelopment

Underdevelopment is a term often used to refer to economic underdevelopment, symptoms of

which include lack of access to job opportunities, health care, drinkable water, food, education
and housing.

Underdevelopment takes place when resources are not used to their full social-economic
potential, with the result that local or regional development is slower in most cases than it should
be. Furthermore, it results from the complex interplay of internal and external factors that
allows less developed countries only a lap-sided development progression.
Underdeveloped nations are characterized by:-

(1) Ratio of industrial output to total output.

This may be explained as the ratio of industrial population to total population. According to this
criterion, countries with a low ratio of industrial output to total output are considered
underdeveloped. But this ratio tends to increase with the increase in per capita income. Therefore
the degree of industrialization is often a consequence rather than a cause of economic prosperity
in a country.

Another indicator of underdevelopment is the low ratio of capital to per head of population.
Nurkse defines underdeveloped countries as those which “compared with advanced countries are
under equipped with capital in relation to their population and natural resources.”

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Another indicator of underdevelopment according to Staley is poverty. Staley defines an
underdeveloped countries as one “characterized by mass poverty which is chronic and not the
result of some temporary misfortune and by absolute methods of production and social
organization which means that the poverty is not entirely due to poor natural resources and hence
could presumably be lessened by methods already proved in other countries. This definition
points towards some of the important characteristics of underdeveloped countries. That
underdeveloped countries have unexploited natural resources, scarcity of capital goods and
equipment, obsolete techniques of production and defeats in social economic organization.

The most common acceptable criteria of underdevelopment is the low per capita real income of
underdeveloped countries compared with the advanced countries. According to the United
Nations experts, the term underdeveloped countries is used to mean countries in which per capita
real income is low when compared with the per capita real income of the United States of
America; Canada, Australia and Western Europe.” But such definitions, which explain
underdeveloped countries in term of the low per capita level of income, can by no means be
considered adequate and satisfactory. For they focus attention only on one aspect of
Underdevelopment that is poverty. They do not analyze the cause of low consumption levels of
inhibited growth and of the development potential of an underdeveloped economy.

Moreover, “being underdeveloped in the technical sense means nothing in terms of the level of
civilization, culture or spiritual values”. Serious difficulties also arise while measuring per capita
national income in underdeveloped countries and their comparison with the per capita income of
the advanced countries. The data on per capita national income is often inaccurate, misleading
and unrealistic due to:-
i. There is a substantial non-monetized sector in underdeveloped countries which makes the
calculation of national income difficult. A great deal of what is produced in the substance
sector is either exchanged for other goods or is kept for personal consumption. This tends
to understate the national income.
ii. This also lack of occupational specialization in countries which makes the calculation of
national income by distributive shares or by industrial origin difficult. Besides the crops,
farmers often produce a variety of products such as eggs, milk, articles of clothing etc
that are never included in the national income estimates.
iii. In underdeveloped countries most people are illiterate and do not keep any accounts and
even if they do, they are reluctant to disclose their income correctly. In such a situation
only rough estimates and possible.
iv. National income estimates include only those goods and services which are commercially
used. But is underdeveloped countries people living in rural areas and manufacturing
articles of consumption from rudimentary goods are able to avoid many expenses. They
build their own huts, garments and other necessities. This in underdeveloped country,
relatively fewer goods are channelised through the market and therefore are not included
in the national income estimates.
v. The consumption of national income in terms of money underestimates the real income.
It does not include the real cost of producing the article, the efforts or sacrifice of leisure
forgone in the process of production. The income earned by two persons may be the
same, but if one works for longer hours than the other, there is some justification in
saying that the real income of the former is underestimated.

15
 vi. National income estimates fail to measure adequately changes in output due to changes in
price level. Indices numbers used to measure changes in the price level are simply rough
approximations. Moreover, the price levels vary in different countries. Consumers’ wants
and preferences also differ in each country. Therefore, the nation’s income figures of
different countries are often misleading and incomparable.
vii. International comparisons of national income are inaccurate due to exchange rate
conversion of different currencies into a common currency, i.e. US dollar. The use of a
single current unit for computing the total output of goods and services underestimates
the national incomes of underdeveloped countries as compared with the developed
countries. The rates of exchange are primarily based on the prices of internationally trade
goods. But there are many goods and services in underdeveloped countries that are never
traded internationally and are also priced low.
viii. The calculation of per capita income in an underdeveloped country is likely to be
understated or overstated due to unreliable and erroneous population figures. The census
data is never accurate in such countries.
ix. Above all, difficulties arise in the definition of income, in the differences in concepts
used for the computation of national income in various countries and calculating the
contribution to national income of such governmental activities as irrigation and power
projects, police and military services etc.
Despite all these limitations, per capita income is the most widely used indicator of the level of
underdevelopment.

Characteristics of an Underdeveloped Country

In order to examine the problems of an underdeveloped country, it is useful to have in mind a

general sketch of the economy of such a country. Through it is difficult to locate a representative
underdeveloped country on the world map, yet it is possible to focus attention on some of its
characteristics.

General poverty An underdeveloped country is poverty- ridden. Poverty is reflected in low GBP
per capita. Absolute poverty is used in assessing the economies. Absolute poverty is measured
not only by low income but also by malnutrition, poor health, clothing, shelter and lack of
education. Absolute poverty is reflected in low living standards of the people. In such countries,
food is a major item of consumption and about 80% of income is spent on it as compared with
20% in advanced countries. People mostly take cereals and other attitudes discourage the full
utilization of human resources. More specifically, it means that men are less likely to strive for
extra-consumption. In underdeveloped countries people are mostly illiterate, ignorant,
conservative, superstitious and fatalists. Poverty in such countries is abysmal, but it is considered
to be God- given, something pre ordained. It is never attributed to personal lack of thrift and
industry.

Lack of enterprise and initiative: Another characteristic feature of underdeveloped countries is

the lack of entrepreneurial ability. Entrepreneurship is inhibited by the social system which
denies opportunities for creative faculties. “The force of custom, the rigidity of status and the
distrust of new ideas and of the exercise of intellectual curiosity, combine to create an

16
atmosphere inimical to experiment and innovation.” The small size of private property, absence
of freedom of contact and of law and order hamper enterprise and initiative.

Besides, there exist a few entrepreneurs who are engaged in the manufacture of some consumer
goods and in plantations and mines that tend to become monopolistic and quasi monopolistic.
They develop personal and political contacts with the government officials, enjoy a privileges
position and receive preferential treatment in finance, taxation, exports, imports etc. It is they
who start new industries and thus founded individual business empires which inhibit the growth
of fresh entrepreneurship within the country.

The thin supply of entrepreneurship in such countries is also attributed to the lack of
infrastructural facilities which add to the risk and uncertainty of new entrepreneurship. LDCS
lack in properly developed means of transport and communications, cheap and regular power
supply, availability of sufficient raw materials, rained labour, well-developed capital and money
market etc. further entrepreneurship is hindered by technological backwardness in
underdeveloped countries. This reduces output per month and the products are of substandard
quality. Such countries do not possess the necessary technical know-how and capital to evolve
their own techniques which may be output increasing and labour absorbing. Mostly they have to
depend upon imported capital- intensive technique which does not fit in their factor endowment.
No wonder LDCS lack dynamic entrepreneurship which Schumpeter regarded as the focal point
in the process of economic development.
It remains constant at OQ2. The marginal productivity of labour becomes nil when more
labourers are employed beyond OL2. Turns L2L3 labourers are disguised unemployed on this
farm.

17
 S2 S3
Q2
S2 S3 P
S1
Q1
S1
T

O
L3
L1 L2
Figure 1
There are also other types of underemployed persons in such countries. A person is considered to
be underemployed if he “is forced by unemployment to take a job that he thinks is not adequate
for his purpose, or not commensurate with his training.” Further, there are those who work full
time in terms of hours but earn very little to rise above the poverty level. They are hawkers, petty
traders, workers in hotels and restaurants and in repair shops etc in urban areas. Open and
disguised unemployed in urban and rural areas are estimated at 30-35% of the total labour force
in LDCS.

(a) Economic backwardness

In underdeveloped countries particularly manifestation of economic backwardness are low
S1 immobility, limited specialization in occupation and in trade, economic
labour efficiency, factor
ignorance, values and social structure that minimize the incentives for economic change. The
basic cause of backwardness is to be found in low labour productivity as compared with the
developed countries. This low labour efficiency result from general poverty which is reflected in
low nutritional standards, ill health, illiteracy and lack of training and occupational mobility etc.
There is also occupational immobility of labour due to the joint fairly system and the caste
system. Certain cultural and psychological factors are more dominant than wage rates in
determining the supply of labour. The joint fairly system makes people lethargic and stay at
home. In many underdeveloped countries, certain occupations are reserved for members of some

18
particular caste, religion, race, tribe or sex. In Latin America, cloth making falls within the
exclusive jurisdiction of women. In India, a janitor always belongs to a particular caste.
According to Stephen Enke, “Underdeveloped countries have what might be termed uneconomic
culture. This means that traditional straches to the total absence of nutritional foods, such as
meat, eggs, fish and dairy products.
For instance, the per capita consumption and about 80% of the income is spent on it as compared
with 20% in advanced countries. For instance, the per capita consumption of protein in LDCs is
52grams per day as compared with 105 grams in developed countries. The per capita fat
consumption in LDCS is 83grams daily as against 133 grams in developed countries. As a result,
the average daily calories intake per capita hardly exceeds 2,000 in underdeveloped countries as
compared with more than 3,300 to be found in the diets of the people of advanced countries.

b) Agriculture, the main occupation

In underdeveloped countries two-thirds or more of the people in rural areas and their main
occupation is agriculture. There are four times as many people occupied in agriculture in some
underdeveloped countries as there are in advance countries. The low income countries like
China, Kenya, Myanmar and Vietnam, more that 71% of the population is engaged in agriculture
while the percentages for the USA, Canada and West Germany is 3,3 and 4 respectively. This
heavy concentration in agriculture is a symptom of poverty. Agriculture, as the main occupation
is mostly unproductive. It is carried on in an old fashion with obsolete and outdated methods of
production. The average land holdings are as low as 1 to 3 hectares which usually support 10 to
15 people per hectare. As a result, the yield from land is precariously low and the peasants
continue to live at a bare subsistence level.

c) A dualistic economy
Almost all underdeveloped countries have a dualistic economy. One is the market economy, the
other is the subsistence economy. One is in and near the towns, the other is in the rural areas.
One is developed, the other is less developed. Centered in the towns, the market economy is
ultra-modern with all the amenities of life, Vi2 the Television, the car, the bus, the train, the
telephone, the picture house, the palatial buildings, the schools and colleges. Here two
government offices, business houses, banks and a few factories are visible. The subsistence
economy is backward and is mainly agriculture oriented.
Dualism is also characterized by the existence of an advanced industrial system and an
indigenous backward agricultural system. The industrial sector uses capital intensive techniques
and produces a variety of capital goods and durable consumer goods. The rural sector is engaged
in producing agricultural commodities with traditional techniques. Both perpetuate
unemployment and disguised unemployment. This is also financial dualism consisting of the
unorganized money market charging very high interest rates on loans and the unorganized
money market with low interest rates and abundant credit facilities. This aggravates economic
dualism between the traditional sector and the modern industrial sector.
In many underdeveloped countries, there are foreign- directed enclaves thus making a triplistic
economy. They are highly capitalistic and are found in petroleum, mining and plantations. The

19
native hired labour working in these plantations and mines spend a considerable part of its wages
on imported consumer goods. The standard of living of the workers working there differs from
that of their brethrens living in the subsistence sector.
The dualistic or triplistic nature of the economy is not conducive to healthy economic progress.
The primary sector inhibits the growth of the secondary and the tertiary sectors by putting a
limitation on their expansion and development.

d) Underdeveloped natural resources

The natural resources of an underdeveloped country are underdeveloped in the sense that they
are either unutilized or underutilized or misutilized. A comfrey may be deficient in natural
resources, but it cannot be so in the absolute sense. Although a comfry may be poor in resources,
it is just possible that in the future it may become rich in resource as a result of the discovery of
presently unknown resources or because new uses may be fourd for the known resources.

Thus, instead of saying that underdeveloped countries are absolutely deficient in natural
resources, it is more appropriate to say that they have not been successful in overcoming the
scarcity of natural resources by appropriate changes in technology and social and economic
organization.

Generally speaking, they are not deficient in land, minerals, water, forest or power resources.
Africa possesses considerable reserves of copper, tin, bauxite and gold; Asia is rich in petroleum,
iron, bauxite, manganese, Mica and tin; and Latin America’s reserves of petroleum, iron, zinc
and copper are immense. The forest wealth of Africa and South America still remains un-
penetrated and unexploited. Thus underdeveloped countries do possess resources but they
remain unutilized, underutilized or misutilized due to various inhibitors such as their
inaccessibility, lack of technical knowledge, non-availability of capital and the small extent of
the market.

e) Demographic Features
Underdeveloped countries differ greatly in demographic position and trends. Diversity exists in
the size, density, age, structure and the rate of growth of population. But there appears to be one
common feature, a rapidly increasing population which adds a substantial number to the total
population every year. With their low per capita income and low rate of capital formation, it
becomes difficult for such countries to support this additional number. And when output
increases due to improved technology and capital formation, it is swallowed up by increased
population. As a result, there is no marked improvement in the living standards of the masses.
Warming about the increase in number’s Keenlayside writers. “The womb is slower than the

20
bomb but it may prove just as deadly. Suffocation rather than incineration may mark the end of
the human story.”
Almost all the underdeveloped countries posses high population growth potential characterized
by high birth rate and high but declining death rate. The advancement by medical science has
resulted in the discovery of marvelous drugs and the introduction of better methods of public
health and sanitation which have reduced mortality and increased fertility. Declining death rate
and increasing birth rate gives a very high natural growth rate of population. The average annual
growth rate of population in developing countries is 2% as compared with about 0.7% in
developed countries. This rapid increase in numbers aggravates the shortage of capital in such
economies because large investments are required to be made to equip the growing labour force
even with obsolete equipment.
An important consequence of high birth rate is that a larger proportion of the total population is
in younger age group. The percentage of population under 15years of age is about 40 in
developing countries compared with only 20% to 25% in developed countries. Moreover, 90% of
the dependents are children in LDCS whereas their percentage is only 66 in developed countries.
A large percentage of children in the population entail a heavy burden on the economy which
implies a large number of dependents who do not produce out all but do consume. With many
dependents to support, it becomes difficult for the workers to save for the purposes of investment
in capital equipment. It is also a problem for them to provide, their children with the education
and basic necessities of life that are essential for the country’s economic and social progress in
the long run.
Underdeveloped countries have also a shorter life expectantly which means that a smaller
fraction of their population is available as an effective labour force. Average life expectancy at
birth is roughly 51years in low income countries whereas in the developed countries it is 75
years. Low life expectancy means that there are more children to support and a few adults to
provide for them which inhibit the rate of economic growth.
Lastly, in the majority of underdeveloped countries the density of agricultural population is very
high in relation to the area of cultivated land. Shortage of land in relation to an excessively large
agricultural population leads to overcrowding, over cropping and soil exhaustion, thereby
impending economic progress.

f) Unemployment and disguised unemployment

In underdeveloped countries there is vast open unemployment and disguised unemployment. The
unemployment is spreading with urbanization and the spread of education. But the industrial
sector has failed to expand to expand along with the growth of labour force thereby increasing
urban unemployment. Then there are the educated unemployed who fail to get jobs due to
structural rigidities and lack of manpower planning. With the present average annual growth rate
of 4.5% in urban population, 20% of the labour force in urban area is unemployed. But
underemployed or disguised or concealed unemployment is a notable feature of underdeveloped
countries. Such unemployment is not voluntary but involuntary. People are prepared to work but
they are unable to find work throughout the year due to lack of complementary factors. Such

21
unemployed is found among the rural landless and small farmers due to the seasonal nature of
farm operations and inefficient labour and equipment to keep them fully employed.
A person is said to be disguised unemployed if his contribution to output is less than what he can
produce by working for normal hours per day. His marginal productivity is nil or negligible and
by withdrawing such labourers, farm output can be increased. Disguised unemployment is
explained in figure 1. Where TP is the total production curve. When OL1 labourers are employed
on a farm, total production is OQ1. With the employment f more labourers Ol2, production
increases to OQ2. But by employing more labourers OL2, production does not increase at all.

g) Insufficient capital equipment

Underdeveloped countries are characterized as “capital-poor, or low –saving and low investing”
economies. There is not only an extremely small capital stock but the current rate of capital
formation is also very low. In most underdeveloped countries gross investment is only 5.6% of
GNP whereas in advanced countries it is about 15-20%. Such low rate of the growth of capital
stock is hardly enough to provide rapid growing population, let alone invest in new capital
projects. The root cause of this capital deficiency is the problem of under-saving, or more
precisely that of under-investment in productive instruments capable of increasing the rate of
economic growth. The per capita income being very low, people on the bare edge of subsistence
level cannot save much thereby leaving very little for further investment.

h) Technological backwardness
Underdeveloped countries are also in the backward state of technology. Their technological
backwardness is reflected. Firstly, in high average cost of production despite low money wages;
secondly in high labour output and capital output ratios as a rule and on the average, given
constant factor prices thus reflecting a generally low productivity of labour and capital; thirdly,
in the predominance of unskilled and untrained workers; and lastly in the large quantity of
capital equipment required to produce a national output. Deficiency of capital hinders the process
of scrapping off the old techniques and the installation of modern techniques, illiteracy and
absence of a skilled labour force are the other major hurdles in the spread of techniques in the
backward economy.

i) Foreign trade orientation

Underdeveloped countries are generally foreign trade oriented. This orientation is reflected in
experts of primary products and reflected in exports of primary products and imports of
consumer goods and machinery. The percentage share of that, minerals, metals and other primary
products in the merchandise exports of the majority of LDCs, as revealed by the recent world
bank data is on an average about 80%.
This too much dependence on export of primary products leads to serious repercussions on their
economies. Firstly, the economy concentrates on the production of primary exports to the
comparative neglect of other sectors to the economy. Secondly, the economy becomes

22
particularly susceptible the fluctuations in the international prices of the export commodities.
Lastly, too much dependence on a few export commodities to the utter neglect of other
consumption goods has made these economies highly dependent on imports. Imports generally
consist of that, manufactured articles, primary commodities, machinery and transport equipment
and even food.

The foreign trade-orientation also manifests itself through the flow of foreign capital to
underdeveloped countries. It plays a dominant role in developing and expanding the export
sector. It also controls and manages those services which are ancillary to the export sector. In this
way foreign capital has tended to monopolize its position in certain selected fields like minerals,
plantations and petroleum in underdeveloped countries. The multi-national corporations (MNCs)
form the developed countries have spread themselves in developing countries in manufacturing,
export-oriented plantations, petroleum and mining. Such a widespread hold of foreign capital
drains their resources. The foreigners are interested only in maximizing their gains at the expense
of the developing countries.

Questions

1. Distinguish between economic growth and economic development

2. “Development is a multifaceted concept”. Discuss.

References

Todaro, Michael P. Economics For A Developing Worlds: An Introduction To Principles

Problems And Policies, Prentice Hall Press

Harvey J. (1981), Basic Economics, Macmillan Education

23
LESSON 3: STRATEGIES OF DEVELOPMENT
AGRICULTURE
Agriculture contributes a large proportion of the gross domestic product in many developing
countries and it is therefore relatively easier to achieve a higher rate of economic growth by
expanding agriculture. Thus, for example, if agriculture contributes 75% of Gross Domestic
Product (GDP) and industry constitutes 25% of GDP then it is easier to achieve a target rate of
economic growth by expanding agriculture.
Agriculture is a more appropriate activity to develop since most developing countries are labour
surplus economies. Agriculture therefore facilitates a fuller utilization of the resource base and
provides greater employment opportunities.
Increasing agricultural output and incomes is often a prerequisite for the expansion of the
industrial sector since as workers in the agricultural sector earn higher incomes, particularly
small holder producers, their demand for manufactured goods will increase and there will be
greater scope for establishing industries. This implies that the rate of industrialization will to
some extent depend on how rapidly agricultural income are increasing. Continuing economic
development in urban areas will considerably restrict the domestic market for manufactured
goods. Increasing the purchasing power of rural areas as a result of expanded agricultural output
will raise the demand for manufactured goods.
An increase in agricultural incomes can boost government revenue especially where the
agricultural sector forms a broad base for taxation. This revenue could enhance economic social
and infrastructural development.
A number of industries are based on agricultural raw materials such that an expansion of
industries reties on more raw materials being produced. The textile industry, for example
depends on cotton and wool production. The development of domestic agriculture would, in
addition, reduce domestic reliance on imported raw materials.
Agricultural development is an important step towards self sufficiency in food production, which
is important in keeping a growing population alive. In addition, this would save on valuable
foreign exchange being used on food imports. The increase in agricultural production should be
at a higher rate than the rate of increase in food demand in order to avoid increases in food
prices and the need to import food from abroad.
Increased agricultural production will stimulate forward linkages with other sectors of the
economy through demand for transport, services, marketing and processing as well as some
backward linkages in the form of farm inputs and equipment.
Agricultural products often constitute significant exports in developing countries. Agriculture
therefore provides the needed foreign exchange to import essential inputs especially of capital
goods. These capital goods facilitate the industrialization process and tend to be in short supply
in developing countries. As a country industrializes, the proportion of agricultural exports in its
total exports is likely to fail.
The agricultural sector also contributes on important source of savings. Since in many
developing countries a considerable proportion of national income is derived from agriculture, in

24
the short run at least, the saving potential will be in the agricultural sector. Savings are vital to
economic growth in that they are a source of vital investment funds.
The agricultural sector also provides production employment in many developing countries. This
is especially so where the agricultural production technology has remained fundamentally
labour-intensive. Increased emphasis has also been placed employment creation in the
agricultural sector given the high rate of rural-urban migration and the inability of urban-based
economic sector to create sufficient employment.

Problems face by the agricultural sector in developing countries

(i) Agricultural products from developing countries are faced by protectionist barriers
such as tariffs from developed country markets. Developed countries seeks to achieve
self-sufficiency in food production and to protect the employment of heir farmers.
Such protectionist measures limit the growth of agricultural exports in developing
countries and the potential the such benefits would provide.
(ii) Developing countries usually depend on the export of one or two main agricultural
products, which make their economies particularly vulnerable to changes in
international economic conditions. For example, if a country is heavily dependent on
coffee exports and world coffee market prices decline sharply that country’s export
revenue will also fall substantially.
(iii) Agricultural products are subject to long run declining terms of trade compared to
manufactured goods. The impact of this factor is worsened since developing countries
mainly export agricultural products and import highly priced manufactured goods.
(iv) Agricultural production is seasonal nature and hence the agricultural sector is
characterized by seasonal unemployment. The seasonal nature of agricultural
employment contributes to many individuals seeking, jobs in alternative sectors that
provide relatively stable income.
(v) Agricultural products are subject to frequent price fluctuations, which in turn lead to
fluctuations in farmers’ incomes.
(vi) Marketing channels for agricultural products in many developing countries are
inefficient and inadequate. Many products are marketed by inadequate boards, which
are often planned by managerial problems, corruption and inadequate finances to
effectively exercise their functions
(vii) The of synthetic products has contribute to some extent to the replacement of some
agricultural commodities such as sisal. This has in turn reduced the demand for those
agricultural commodities.
(viii) Many farmers in developing countries still use inefficient archaic production methods
such as land fragmentation, which severely limits increase in productivity in the
agricultural sector.
(ix) The agricultural sector is particularly vulnerable to natural disasters such as floods,
droughts, diseases and rests and this leads to wide annual fluctuations in output.
(x) Many farmers in developing countries are subsistence farmers and lack the necessary
capital and resources to effectively implement modern agricultural development such
as the use of mechanized agriculture.
(xi) The agricultural sector is particularly subject to the law of diminishing returns
especially in developing countries where population pressure on land is high leading
to disguised unemployed.

25
Policies to Improve Agricultural Sector
(i) To deal with declining terms of trade, developing countries should diversify their
economies by improving their industrial base and move into non-traditional lines in
agriculture; such as horticulture. In Kenya for example, successful diversification has
been achieved into horticulture. A greater diversification into industry has also been
achieved in Kenya with manufacturing exports becoming more important in terms of
their contribution to the export sector. Developing countries can also diversify their
economies by further processing of commodities instead of simply exporting raw
materials.
(ii) Use of buffer stocks and buffer funds where necessary in order to stabilize
agricultural prices and incomes. These policies were covered in chapter. Three
dealing with elasticities.
(iii) The use of more efficient methods of production should be encouraged by educating
farmers through extension services. Extension services will ensure that the results of
agricultural research reach many farmers. Extension workers can, therefore be
important change agents. In order to be successful extension services should avoid
being excessively bureaucratic and should also focus on providing favourable
conditions such as prices to encourage farmers to adopt technologies that have been
demonstrated. Extension workers should both transmit knowledge and promote the
adoption of new technology.
(iv) Credit facilities should be provide to farmers in terms of soft loans to enable them to
purchase needed capital inputs. Microfinance institutions can play a vulnerable role in
this regard in developing countries as can cooperatives.
(v) A more liberalized system should be introduced where the private sector plays a role
in production, marketing and processing. This will help to overcome the
inefficiencies that have been associated with marketing boards in developing
countries.
(vi) Research facilities should be developed to increase crop ouput and improve crop
quality. Agricultural research is a major factor that contributes to greater agricultural
productivity. Such research can focus on aspects such as irrigation practices. Crop
rotation and optimal planting times. Domestic agricultural research is vital in
adopting imported technology to local conditions.
(vii) Prompt payments to farmers should be facilitated since the delay of farmers payments
by the government is major disincentive to agricultural production.
(viii) Where funds are available, marginal lands should be irrigated in order to reduce
pressure on textile land to delay the operation of the law of diminishing returns.
(ix) Markets should be diversified to non- traditional markets and by regional integration
efforts. Kenya exports have for example been concentrated in the markets of the
European Union and the East African region. Economic integration efforts such as
COMESA and the East African community provide prospects for more diversified
export markets.

26
Industrialization
In its broadest sense, industry is any work that is undertaken for economic gain and that
promotes employment. The world may be applied to a wide range of activities from farming to
manufacturing to tourism. In encompasses production at any scale, from the local sometimes
known as cottage industry to multinational or transnational.
In a more restricted sense, industry refers to the production of goods,, especially when that
production is accompanied by machines. It is this limited definition of industry that is embodied
by the notion of industrialization. The process of transforming raw materials. With the aid of
factors of production into consumer goods or new capital goods which permit further production.
Broadly speaking, industrial activity includes manufacturing, mining and construction. In many
developing countries, however small scale industries engaged in activities such as handictatic
production are prevalent.
An industry is usually classified as belonging to one of the following four groups.
(i) Primary
(ii) Secondary
(iii) Tertiary
(iv) Quaternary
Primary industries are those which collected or extract raw materials and re located where the
resources are found.
Secondary industries are those that process or convert the raw materials into finished products.
Some of these manufacturing industries must be situated close to the raw materials they use,
others are tied to their largest markets and still others independent of both resources and markets
are often located wherever it is cheapest at the time.
Tertiary industries are the service industries. These include retailing, wholesaling, transport,
public administration and the professions such as law.
Quaternary industries comprise activities that provide expertise and information. Consultancy
services and research organizations belong to this category. These are generally market oriented,
but since electronic communication permits swife contact and the easy transmission of data, they
may be located almost anywhere.

Importance of industry in development

(i) Developing industry constitutes a fundamental way of achieving a diversification of
the economy. This is especially important in the case of developing countries; which
are often heavily dependent on one or two primary products. Industrial development
would reduce reliance on primary production.
(ii) The demand for primary products is income inelastic and is therefore not likely to
increase proportionally as incomes rise. The demand for industrial products on the
other hand, in more income elastic and thus developing industry is a good long run
strategy. Since world demand for industrial products is likely to increase as incomes
rise.
(iii) The output of industry is subject to fewer price fluctuations than agricultural output
essentially because the demand and supply for industrial output is more price elastic

27
 than that of agricultural products. Industrial production is therefore associated with a
more steady income for products.
(iv) Developing countries in some cases suffer from a shortage of fertile land and
agriculture already experiences diminishing returns. The scope for substantial
increases in productivity are hence limited in the agricultural sector. Industry should
therefore be developed since productivity increases are more likely in industry than in
agriculture.
(v) The establishment of export promotion industries especially in labour- intensive
manufacturing is a good way of generating foreign exchange and strengthening the
balance of payments, especially in the long run.
(vi) Industry can be an important source of employment that is not seasonal. This is
especially the cause of small scale labour intensive industries.
(vii) Industry plays an important role in the development of other sectors by the provision
of vital inputs, for example, machinery for the agricultural sector. In addition,
industry has backward linkages with sectors such as agriculture by adding values to
agricultural output as in the case of food processing.

OBSTACLES TO INDUSTRIAL DEVELOPMENT IN DEVELOPING COUNTRIES

(1) Lack of adequate financial markets.
Savings are necessary in order to facilitate physical capital formation which in turn is vital for
industrialization. Lack of developed financial markets in developing countries constitute an
impediment to industrial development. Capital markets in many developing countries are
rudimentary, thereby making it difficult to raise money through slave issues. Many people still
do not channel their savings through financial intermediaries.

(2) Limited availability of credit

Many developing countries experiences a shortage of industrial credit especially for long-term
projects. This makes it difficult to finance some critical industrial projects such as purchase of
machinery. In addition, access to short term credit from commercial banks may be restricted by
high interest rate and the need to provide substantial security for loans. Offshore borrowing or
borrowing abroad is also an unrealistic option for the majority of small industrial firms in
developing countries.

(3) Shortage of energy

This can constitute a significant obstacle to industrial development especially where energy
sources such as electricity are expensive and supply is insufficient or frequently interrupted.
Electricity, for example, is usually a significant input in thee production processes of
manufacturing firms. Importation of electricity may not be a viable option for a country in the
short run whereas use of private generator may substantially raise the cost of production.

(4) Lack of skilled labour

Developing countries often have an abundance of unskilled labour. Whole industries may use
some unskilled labour in their production processes, they also require a certain level of skilled

28
manpower in order to be effective. Skilled labour may include for examples welders and repair
specialists. When shortage are filled by less trained workers, labour productivity declines and
units of costs of production will rise. Wages for skilled labour which is in short supply are also
likely to rise compared to the general levels of wages.

(5) Lack of entrepreneurial skills

Entrepreneurship is the risk taking and organizing factor of production. This factor of production
plays an important role in the industrialization process but is often in scarce supply in developing
countries. Although it is to some extent possible to rely on foreign entrepreneurship. Many
developing countries are reluctant to do so because of the fear of foreign domination of their
economies.

(6) Inadequate development of infrastructural facilities

The infrastructural facilities in many developing countries such as roads and ports are either
inadequately developed in certain regions or are in a state of disrepair. This factor has
considerably increased the cost of doing business in these countries and has therefore reduced the
viability of many projects in the industrial sector.

Policies for industrial development

(i) Increased incentives for industries to locate in rural areas for example, tax incentives
integrated rural development.
(ii) Industrial development should be oriented towards export promotion policies.
(iii) Small scale industries should be encouraged.
(iv) Search for more markets should be encouraged for example through regional
integration.
(v) Financial assistance by the establishment of institutions like KIE (Kenya Industrial
Estates) in Kenya that assist small enterprises should be encourages.
(vi) Macroeconomic stabilization policies, couple with realistic and flexible exchange
rates and reduced budget deficits, should provide the foundation for an enabling
economic environment.
(vii) Investments rehabilitate and expand physical infrastructure should be encouraged.
(viii) Investment in human resources, in quality as well as quantity, in order to lay the
foundations for productivity gains needed to sustain development.
(ix) Financial markets must continue to be the subject of reforms, seeking increased
efficiency, greater availability of investment capital and greater flexibility.
(x) The government must seek to facilitate the workings of the market and where found
to be required, provide services and other supportive interventions to exist the private
sector.

Technology Transfer
Technology is the application for practical purposes. Technological changes are regarded as the
most important factor in the process of economic growth. They are related to changes in the
methods of production which are the result of some new techniques of research or innovation.
Changes in technology lead to increase in the productivity of labor, capital and other factors of
production.

29
There are five distinct patterns in that growth of technology in modern economy growth these
are:

 scientific discovery or an addition to technical knowledge;

 an invention
 An innovation
 An improvement
 The spread of invention usually accompanied by improvement. Innovation in economic
growth. In modern economic growth. In modern economic growth the five factors have
helped in the development of technology to accelerate their productive capacity I this
short run because they cannot wait until they themselves invent or modify the technology
of advanced countries. But as they adopt imported technology they must develop their
indigenous technical skills.

It is mismones that all modern technology is capital intrusive. Advanced countries have also low
cost capital saving, labor intensive productivity raising technology which can be transferred to
developing countries.
LDCS showed therefore benefit from the vast fund of technical knowledge of the advanced
countries. However, scientific and industrial technology to be useful in an ldc needs careful
processing and adaptation in accordance with social, economic and technical absorption
capacities and requirements.

Participatory Development
The meaning of participation is often a rendition of the organization culture dating it.
Participation has been various described as a means and an end as essential within agencies as it
is in the field and as an educational and empowering process necessary to correct power
imbalances between rich and poor. It has been broadly conceived to embrace the idea that all
stake holders should take part in decision making and it has been more narrowly described as the
extraction of local knowledge to design programs off site.
Differences in definitions and methods aside there is some common agreement concerning what
constitutes arthritic participation. participation is involvement by a local population and at times
additional stakeholders in the creation content and conduct of a program or policy designers to
change their lives. Built on a belief that citizens can be trusted to shape their own future
participatory development uses local decision making and capacities to steer and define the
nature of an intervention. Participation requires recognition and use of local capacities to steer
and define the nature of an intervention. Participation requires recognition and use of local
capacities and avoids the imposition of priorities from the outside. It increases the adds its results
will more likely be sustainable.

Ultimately, participatory development is driven by a belief in the importance of entrusting

citizens with the responsibility to shape their own future, systems and as resources, from salaries
to food parches and reconstruction materials are delivered with no awareness of social or
political concept. It is never certain if an intervention is warranted at all. And when there is blind

30
engagement, ignorance of context makes each choice ---of ronletle, potentially explosive and
liable to overview the self-development potential of the target population while undermining the
effectiveness of assistance delivery in the first place.

Studies have shown that participatory programmes often cost less in the long- run and are
consistently more effective at getting assistance where it needs to go. Participatory development
methods often extent the reach of traditional development approaches by leveraging have
resources with national and foreign assets.

Modernization
Modernization is a concept used in sinology and politics. It is the view that STD teleological (the
explanation of phenomenon a by the purpose they serve rather than by postulated cause).
Evolutionary pattern as described in the social evolutionism and people.
According to theories of modernization each society would evolve inexorably from barbarism to
ever greater levels of development and civilization. The more modern states would be wealthier
and more powerful and their citizens trees and having a higher standard of living. According to
the theorist peter wagner modernization can be processes and as offensives.
The former view suggests that it is developments such as new data technology or dated laws,
which make modernization necessary or preferable. This view makes modernization difficult,
since it implies that it is these developments which control the limits of human interaction and
not vice versa.

The latter view of modernization

As offensives argne that both the developments and the altered opportunities made available by
these developments are shaped and controlled by human agents against. The view of moderation
as offensives therefore sees it as a product of human planning and action an active process
capable of being bolt changed critized. This was the standard view in the sowed sciences for
many decades. It was also viewed as a “development of the rational and universal mind towards
self-conciseness and freedom” this theory stressed the importance of societies being open to
change and soon reactinery forces as restricting development.

Regional integration
Regional integration refers to the process by which states within a particular region increase their
level of interaction with regard to economic political and also social and cultural issues. Regional
integration arrangements are mainly stalis to integrate their economic development, decrease
conflict and build mental trust between the integration units.
Closer integration of neighboring economies is seen as a first step in creating a larger regional
market for trade and investment. This works as a spur to greater efficiency productivity gain
competitiveness, not just by lowering border barriers, but by reaching other costs and risks of
trade and investment bilateral and sub-regional trading arrangements are advocated as
development tools as they encourage a shift towards greater market openness. Such agreements
can also reduce risk of reversion towards protectionism, locking in reforms already made and
encouraging further structured adjustments.

31
Functions of regional integration:
i. The strengthening of trade integration in the region.
ii. The creation of appropriate enabling environment for private sector development.
iii. The development of infrastructure programmes in support of economic growth and
regional integration.
iv. The development of strong public sector institutions and good governance.
v. The reduction of social inclusion of the development of an inclusive civil society.
vi. Contribution to peace and security in the region.
vii. Building of environment programmes at the regional level.
viii. The strengthening of the regian’s interaction with other regions of the world.

Co-operative movements
Co-operatives are voluntary organizations that are democratically controlled by members co-
operatives are also patronized and controlled by their owners and hence the arm “owner user”
and “owner controller”. The concept of co-opertaives has for sometime been misunderstood to
the extent that co-operatives have been associated with socialism/communism as a result some
government have not allowed co-operatives to function properly.
Co-operatives provide organizational framework which enables members of the community to
handle tasks that enhances production and productivity marketing and value addition
employment creation thus enhancing incomes and meeting social needs.
For co-operatives to succeed and also benefit the owners the value of self help must be fully
embraced. However more often than not one hears a question like what has a co-operative done
to assist its members and yet the valid question would have been how the members have utilized
the co-operative s to enhance the socis-economic status? Co-operatives differ from other forms
of businesses contracts to companies where capital is at the centre in order to earn profits.

Contribution of co-operatives to development

a) Production and productivity enhances co-operatives play an important role in delivery of
agricultural inputs so that they are easily accessed by the producers. Such inputs are
required by farmers to increase productivity and good quality, increase farm income and
become more competitive ie they form a link between farmers and input dealers. Since
they are organized, they can readily afford hiring of agricultural extension services all
aimed at production and productivity improvement.
b) infrastructure development
a. through pooling resources members are able to put up infrastructure for
production agro-processing and marketing e.g establishment of ginneries
processing plants e.g. coffee hullers dairy products processing, storage facilities
market information agro processing and value addition.
c) employment creation
a. Where there is a well functioning co-operative organization at least two people
are employed directly and many others indirectly through various trades
facilitated by a co-operative.
d) investment opportunities

32
 a. By investing shares into a well reforming guideline co-operative returns are
generated on shares and depending on how one has economically parronized the
organization patronage bonus is always paid.
e) financial intermediation
Availability of financial services helps farmers In a no of ways. Farmers can be able to get
inputs in time through the available credit services. Secondly when farmers products are
bulked in the stones can borrow from their own sacios to cater for marketing of their products.

f) Social services provision

These include among others health; housing utilities e.g. rain water harvesting, solar power
screens and transport.
g) Human resource development
Dell round training is always provided to membership, staff and leaders of genuine and well
performing cooperative organization.

Questions
1. “The war on poverty starts and ends in African Agriculture” Discuss
2. Discuss and explain the main strategies employed to alleviate poverty in Kenya
Reference

1) Todaro M.P. and S.C. Smith (2006): Economic Development. 9th edition, Pearson: Essex.
2) Michael P. Todaro (2008): Economic Development (10th Edition), Addison Wiley.

33
LESSON 4: THEORIES OF UNDERDEVELOPMENT
DEPENDENCY THEORY

This theory states that the dependency of less developed countries (LDCs) and developed
countries (DCs) is the main cause for the underdevelopment of the formed. This is according to
the Latin American economists, Frank, Sunkel, Furtardo, Santos and Amin.

Dependency- Definition
According to Dos Santos, dependency is, “a situation in which the economy of certain countries
is condition by the development and expansion of another economy to which the former is
subjected.” A dependent relationship between two or more economies is one “when some
countries (the dominant ones) can expand and be self- sustaining, while other countries the
(dependent ones) can do this only as a reflection of that expansion, which can have either a
positive or a negative effect on their immediate development.”

According to the dependency economists, the whole world is divided between two sets of
countries; DC (developed countries) and LDCs (less developed countries). The former are in the
centre (western Europe, Britain and the United states) and the latter are in the periphery
relationship, whereby LDCs are dependent on DCs in trade, investment, technology etc. This
dependency results in underdevelopment of the periphery because the centre is dominated by the
powerful capitalist countries that exploit the former for their benefit.

Dependency economists belong to different school of thought and are classified as Marxists, neo-
Marxists and structuralists. Economists have, therefore tried to explain a single dependency
theory, which contains the main views of all the dependency economists in the form of features
or characteristics. It’s such, the dependency theory is explained below in terms of the following
characteristics.

1. Dependency: A historical international process

Dependency theories like Frank, Santos, Sunkel and Amin hold that the present economic and
socio-political conditions prevailing in the periphery are the result of a historical international
process. According to Dos Santos, development emerged as global historical phenomenon as a
consequence of the formation, expansion and consolidation of the capitalist system, known as
dependent capitalism. Both the DCs and LDCs are integral parts of the capitalist system. But the
global system is such that the development of the centre occurs at the expense of
underdevelopment of the periphery.

Meier therefore, characterizes underdevelopment of the periphery as the “Siamese twin” of

development at the centre. According to Frank, it is the world capitalist system which produces

34
underdevelopment in the past and generated underdevelopment in the present. This has led to
what Frank calls “the development of underdevelopment.”

2. Foreign capital
The peripheral LDC, are heavily dependent on the centre for foreign capital. Foreign capital
leads to “external orientation” of LCSs by exporting primary commodities, importing
manufactures and making them dependent for industrialization of their economies. In Sunkel’s
words “it is this aspect… which finally sums up the situation of dependence; this is the crucial
point in the mechanism of dependence.” The foreign investors exploit LDCs by insisting on the
choice of projects, making decisions on pricing, supply of equipment, know how and personnel
etc. In fact they impose a development pattern that is not compatible with local needs.

According to Amin, foreign and stunts agriculture, encourages trade and investment
dependencies and reinforces the dominance of exploitative elites of LDCs. Thus foreign
investment and aid signify dependence and as a means of exploitation of the periphery by the
centre.

3. Technological dependence

The peripheral countries use excessively capital intensive technologies imported from the
developed countries of the centre. These technologies are in appropriate to the production and
consumption needs of LDCs and are sow by multinational corporations (MNCs) of developed
countries. The technological dependence of LDCs on DCs arises because of the urgency of
importing technologies as they cannot innovate them. They lack information about the
availability of appropriate technologies which leads to exploitation of LDC’s due to their weak
bargaining power MNCs lead to economic and political distortions in LDC’s.

Both Frank and Santos explain technological development perpetrated by MNCs. The centre has
spread it’s monopoly to the peripheral countries through technological transfer. For tins, LDCs
have to borrow from the centre. This leads to repatriation of profits, royalties etc by MNCs to the
centre. This worsens BOP of LDCs. They resort to devaluation and increase in money supply
thereby leading to inflation with it’s resultant adverse effects on the economy. Thus the
peripheral countries are caught in a web of dependence structure.

4. Trade and unequal exchange.

Dependency economists contend that DCs at the centre exploit LDCs of the periphery by forcing
them to specialize in the export of primary products with inelastic demand with respect to both
price and income. So LDCs “continue to face stagnant export earnings often coupled with
disruptive short term fluctuations in prices. This has created shortage in foreign exchange and
BOP deficit in LDCs.
Santos give two reasons for BOP deficit:

35
 (a) DCs keep the prices of the exports to LDCs very high and that of their imports from
LDCs very low.
(b) Foreign capital from DCs control major sectors of LDCs with the result that there are
large outflows of profit, interest and principal.

Further, trade between the centre (DCs) and the periphery LDCs is characterized by unequal
exchange. Dependency economists attach different meanings to unequal exchange. Neo Marxists
mean by it deterioration in the terms of trade of peripheral countries. The reason is that “in the
centre the incomes of entrepreneurs and productive factors increase more than productivity,
whereas in the periphery the increase in income is less than that in productivity. This is because
monopolistic elements in product and factor markets of the centre have allowed them to keep
rising factor incomes, where as the gains in production have been distributed in price reductions
in the periphery.

According to Sutcliffe, unequal exchange means that “exporters in industrialized countries

posses more monopoly power than the exporters of underdeveloped countries” thereby leading to
unfavourable terms of trade for the latter.

5. Dualism
The notion of dualism is explicit in the views of the dependency theorists. Internationally, the
countries are divided into DCs and LDCs, (centre and periphery). There is also domestic dualism
with the coexistence of an advanced imported capitalist system. The interrelationships between
the two systems are such that the developed region pushes down the underdeveloped region with
the result that there is “development of underdevelopment.”
Dualism at the international plane leads to the dominance of the centre and dependence of the
periphery in the following ways:
(a) By controlling scarce raw materials and natural resources in LDC.
(b) By encouraging the flow of foreign investment and capital intensive techniques into
LDCs through MNGs.
(c) By encouraging exports of primary products of LDCs and manipulating their prices to
DCs own advantages.
(d) By adopting trade and aid policies against the interest of LDCs and increasing their
dependence on DCs.
(e) By encouraging consumerism through widespread advertisement and exporting.
(f) By encouraging the elite and rich to study for professional courses in DCs and luring the
skilled and professional people to migrate in DCs by offering them high salaries, thus
leading to brain drain from LDCs.
(g) By perpetuating international dependence of LDCs by “often uniformed, biased and
ethnocentric international expert advisers” from international agencies located in DCs
that render “faulty and inappropriate advice” to LDCs. Further, by training university
intellectuals, future high level government economists and other civil servants in
developed Country institutions where they are taught “unhealthy alien concept” and
“inappropriate theoretical models”

36
Todaro calls this the false- paradigm model of international dependence.

Policy implications of dependency theory

Dependency economists have given divergent views to overcome dependency and

underdevelopment of peripheral countries.

To overcome dependency, they suggest internal structural and institution changes. Sunkel in
particular, advocates structural changes in all sectors of the economy. Increase in agricultural
production through agrarian reforms is necessary to supply farm products at lower prices to other
sectors. This will create substantial export surplus when cheap agricultural goods are exported.
This will reduce foreign dependence. He suggests diversification and increase in exports and
import substitution.

To increase productivity, reduce costs and utilize existing capacity adequately, he advocates
industrial concentration of large specialized production units. To reduce dependence on DCs,
Sunkel favours mutual cooperation among peripheral countries in the fields of trade, aid,
technical assistance and production agreements. Similarly, Santos suggests a qualitative change
in the internal production structures and external relations of LDCs.
Another remedy is to overcome underdevelopment through adoption of a socialist system in such
countries.
Frank and Santos encourage those countries to delink or snap ties with the world capitalist
system. Other dependency economists advocate mutual cooperation among LDCs in the form of
regional economic cooperation and international commodity agreements.

Critical appraisal
The main views of different dependency economists have been criticized on the following
grounds.
1) Not a complete theory.
There are varieties of dependency theory with a plurality of different views which explain
the underdevelopment of the peripheral countries. Thus it is not a coherent, systematic
and complete theory.
2) Does not explain development of underdevelopment i.e it fails to explain fully how the
external forces generated by capitalism can lead to development of DCs and
underdevelopment of LDCs.
3) Ignores production relations i.e they ignore the problems of forces of production and
relations of production in LDCs. Thus their explanation of underdevelopment is one
sided and incomplete.

37
 4) Surplus product not explained fully. It does not throw light on how surplus product is
produced and appropriated.
5) Ignores role of internal class structure. The theory is weak in that it ignores the existence
and role of different classes in the production and appropriation of economic surplus.
6) MNCs helpful to LDCs. Against the views of dependency economists, MNCs contributes
a lot to the development of LDCs when they reinvest their profit in increasing production
for domestic market and export.
7) Capitalism not always harmful critics point out that the spread of capitalism in LDCs has
led to development rather than underdevelopment of many LDCs.
8) Unequal exchange not the cause of underdevelopment wage differentials as the basis of
unequal exchange is not peculiar to trade relations between only DCs and LDCs. They
are also found between many DCs which may lead to unequal exchange but not to their
underdevelopment.
9) Characteristics of dependence not clear. This is due to the fact some characteristics of
dependence can also be found in non-dependent economies.
10) Neglect market forces. The dependency theory fails to explain the relationship between
the centre and the periphery in terms of market forces.
11) Weak empirically. There is no data to test the theory since it deals with generalities which
are vague.
12) Dependence not defined clearly
13) Does not satisfy two criteria
(a) It must lay down certain characteristics of dependent economies not found in non
dependent economies.
(b) These characteristics affect adversely the course and pattern of development of
such economies. It particular features of dependence are not related causally to
underdevelopment, the second criterion is not satisfied and we are faced with the
catalogue of social-economic indicators of underdevelopment.

MODERNIZATION THEORY
It is used to explain process of modernization within societies and it is a model of evolutionary
transition from a pre-modern to a modern society.
Historians link modernization and industrialization to the spread of education.
In sociological critical theory modernization is linked to an overarching process of
rationalization.
When modernization increased within a society individuals become important eventually
replacing community as fundamentals unit of society.
Modernization and history has explicit used as guide for countries eager to develop rapidly e.g.
China.

38
Each society can develop from traditionalism to modernity and those that make this transition
follow similar paths. More modern state are wealthier and more powerful and their citizens free
with higher standards of living according to social theorist Peter Wagner.
The view of modernization as offensiveness argues that both the development and the altered
opportunities made available by these developments are shaped and control by human agents.

Criticisms of modernization
Positive

 Has revolutionized speed of production due to presence of industries.

 New technologies have been invented.
 Has enabled economic development initiatives e.g. people can trade hence improving the
standards of living.
 Increased employment and infrastructure plus the levels of education.
Negative

 Failed to consider the poor in the community e.g. targeted who were the Africans.
 They brought in education only to read and write and not actually sustaining Africans and
their intension were to get raw materials from them.
 Lose of culture as Africans adopts the foreign culture.
 Environmental problems e.g. climate change due to gases from the industry.
 Lack of focus and inability to mange unrelated business equality well due to new ways of
doing things hence people lose focus.

Questions:

1) Using relevant examples, discuss modernization theory

2) Critically examine dependency theory of underdevelopment
References

1) James M. Cypher (2008): The Process of Economic Development, Routledge .

2) Don Allen Holbrook (2007): The Little Black Book of Economic Development, Xlibris
Corporation.

39
LESSON 5:MODELS OF ECONOMIC GROWTH AND DEVELOPMENT
Harrod-Domar Growth Models
Both Harrod and Domar are interested in discovering the rate of income growth necessary for a
smooth and uninterrupted working of an economy. Though the models in details, yet they arrive
at similar conclusions.

Assumptions of Harrod-Domar models

1. There is an initial fun employment equilibrium level of income.
2. There is the absence of government interference.
3. These models operate in a closed economy where there is no foreign trade.
4. There are no loss in adjustments between investment and creation of productive capacity.
5. The average propensity to save is equal to the marginal propensity to save.
6. The marginal propensity to save remains constant.
7. The capital coefficient i.e. the ratio of capital stock to income is assumed to be fixed.
8. There is no depreciation of capital goods which are assumed to possess infinitive life.
9. Savings and investment relates to the income of the same year.
10. The general price level is constant.
11. There are no charges in interest rates.
12. There is a fixed proportion of capital and labour in the productive process.
13. Fixed and circulating capitals are lumped together under capital.
14. There is only one type of product.
THE DOMAR MODEL
Domar builds his model around the following question:
Since investment generates income on the one hand and increase productivity capacity on the
other at what rate investment should increase in order to make the increase in income equal to
the increase in productive capacity, so that full employment is maintained?
He forge a link between aggregate supply and aggregate demand in order to answer his question.

Increase in productive capacity

Domar explains the supply side like this. Let the annual rate of investment be I, and the annual
productive capacity per dollar of newly created capital be equal on the average to S. Thus the
productive capacity of I dollar invested will be IS dollar per year. But the output of old plants
will be curtailed and the increase in the annual output of the economy will be somewhat less than
IS. This can be indicated as I 6 unit 6(sigma) represents the net potential facial average
productivity of investment =
According I 6 is less than I.S. I 6 is the total net potential increase in output of the economy and
is known as the sigma effect. Which is the increase in output which the economy
can produce?

40
Required increase in Aggregate Demand
The demand side is explained by the Keynesian multiplier. Let the annual increase in output be
donated by Y and the increase in investment by I and the propensity to save by α (alpha) =
. Then the increase in income will be equal to the multiplier ( α ) times the increase in
investment.

Y= I α

At equilibrium

I =Iα
α

Therefore

=α6

This equation shows that to maintain full employment, the growth rate of net autonomous
investment must be equal to α 6 (the mps times the productivity capital). This is the rate at
which investment must grow to maintain a steady growth rate of the economy at full
employment.

THE HARROD MODEL

Harrod tries to show in his model how steady (i.e. equilibrium) growth may occur in the
economy. Once the steady growth rate is interrupted and the economy falls into disequilibrium,
cumulative forces tend to perpetuate this divergence, thereby leading to either secular deflation
or secular inflation.
His model is based on three district growth rates.

G = Saving and capital output ration.

Gw = Warranted growth rate.
Gn= Natural growth rate.

The actual growth rate

The fundamental equation is given by GC = s where
G = rate of growth of output over a given period of time expressed as

41
C = net addition to capital represerved by

S = average propensity to save i.e s/r

Substituting this ratios to the above equation we get:

x = = or

I=S
i.e. Actual savings = post investment

The warranted growth rate

This is the rate at which producers will be content with what they are doing. It is the
“entrepreneurial equilibrium”. The equation for the warranted rate is.
GwCr = S where

Gw = warranted rate of growth. It is the value of . Cr which is the required capital output ratio.

The equation, therefore states that if the economy is to advance at the steady rate of Gw that will
fully utilize its capacity, income must grow at the per year, i.e. Gw =

Genesis of long-run disequilibrium

If G and Gw are not equal, the economy will be in disequilibrium. For instance, it G exceeds Gw
then C will be less than Cr and these reflects that there is shortages and that situation leads to
secular inflation as is illustrated in the figures below.

42
At y0 (full employment of level of income) the actual growth rate G follows the warranted
growth path Gw up to point E through period t20. But from t2 onward G deviates from Gw and is
high than the latter. This leads to secular depression and that the desired investment is less than
savings.

The natural rate of growth

According to the diagram, full employment equilibrium o is attain when Gn = Gw = G .If

G>Gw, investment increases faster than savings. G< Gw savings increases faster than
investments.
Gw >Gn shows development of secular stagnation.
C > Cr shows excess capital goods due to shortage of labour.
This instability in Harrod’s model is due to rigidity of its basic assumptions.
A comparative study of the two models
The following are the points of similarity in the two models.
The Domar model

=α6

43
α= = x

or

=
Or
The Harrod model
GC = S G=

Or = C= =

S =

Or I = S

Points of Difference
1. Domar emphasize the importance of investment in growth process while Harrod regards
income as important factor.
2. Domar model is based on growth rate α 6 while Harrod use three district growth rate G,
Gw and Gn.
3. Domar uses the reciprocal of marginal capital output ratio, while Harrod uses marginal
capital output ration.
4. For Harrod the business cycle is an integrate part of growth while for Domar it is not.

Limitations of the models

1) The propensity to save and the capital output ratio are assumed to be constant which is
not in recuity.
2) The assumption that labour and capital are used in fixed proportions is untenable.
3) The two models also fail to consider changes in the general price level.
4) The assumption that there are no changes in interest rates is irrelevant to the analysis.
5) The Harrod-Domar models ignore the effect of government programmes on economic
growth.
6) It also neglects the entrepreneurial behaviour which actually determines the warranted
growth rate in the economy.
7) They fail to draw a distinction between capital goods and consumer goods.

44
Conclusion
Despite these limitations, “Harrod Domar models are purely laissez- faire one based on the
assumption of fiscal neutrality and designed to indicate conditions of progressive equilibrium for
an advance economic “they are important because they represent a stimulating attempt to
dynamize and secularize Keynes static short-run saving and investment theory.

LEWIS STRUCTURAL CHANGE (DUAL SECTOR) MODEL

Lewis, like the classical economists, believes that in many underdeveloped countries an
unlimited supply of labour is available at a subsistence wage.

Lewis starts has theory with the assertion that the classical theory of perfectly elastic supply of
labour at a subsistence wage holds true in the case of a number of underdeveloped countries.
Such economies are overpopulated relatively to capital and natural resources so that the marginal
productivity of labour is negligible, zero or even negative.

Since the supply of labour is unlimited, new industries can be established or existing industries
expanded without limit at current wage by drawing upon labour from the subsistence sector.

The main sources from which workers would be coming for employment at the subsistence wage
as economic development proceeds are, farmers, the casuals, the petty traders, the retainers. But
the capitalist sector also needs skilled workers.

Capital surplus

So what determines the subsistence wage at which the surplus labour is available for
employment in the capitalist sector. It depends upon the minimum earnings required for
substance. To be precise, the wage level cannot be less than the average product of the worker in
the subsistence sector.

In practice, capitalist wages are more than 30% higher than subsistence wages due to:
a) A substantial increase in the output of the subsistence sector which by raising real income
might induce workers to ask for a higher capitalist wage before offering themselves for
employment.
b) If with the withdrawal of labour from the subsistence total product remains the same, the
average product and hence the real income of those remaining behind will rise and the
withdrawn might insist on a higher wage in the capitalists sector.
c) The high cost of living and some humanitarian consideration may move the employers to
raise the real wage, or government may encourage trade unions and support their wage
bargaining efforts. The supply of labour is, however, considered to be perfectly elastic at
the existing capitalist wage.

45
Capital formulation versus capitalist surplus

Capitalists aim at profit maximization. It is they who saves and automatically invest what they
save. Since the marginal productivity of labour in the capitalist sector is higher that the capitalist
wage, this results in capitalist surplus. This surplus is reinvested in new capital assets. Capital
formulation, takes place and more people are employed from the subsistence sector.

This process continues till the capital-labour ratio rises and the supply of labour becomes
inelastic and the surplus labour disappears. Thus capital formation depends on the capitalist
surplus.

The illustration of Lewis theory using a diagram

OS

Figure 2:
OS Represents average subsistence wage in the subsistence sector and OW the capitalist wage.
At OW wage in the capitalist sector, the supply of labour is unlimited, as shown by the
horizontal supply curve of labour WW. In the beginning, when ON, labour is employed in the
capitalist sector, its marginal productivity curve is P1L1 and the total output of this sector is OP1
O1N1.

46
Out of this workers are paid wages equal to the area OWQ1 N1. The remaining area WP1Q1
shows surplus output. This is the capitalist surplus or total profit earned by the capitalist sector.
When this surplus is reinvested, the curve of marginal productivity shifts upwards to P2L2. The
capitalist surplus and employment are now larger than before being WP2Q2 and ON2
respectively.
Further reinvestments raise the marginal productivity curve and the level of employment to P 3L2
and ON3 and so on, till the entire surplus labour is absorbed in the capitalist sector. After this, the
supply curve WW will slope from left to right upwards like and ordinary supply curve, and
wages and employment will continue to rise with development.

Role of the state and private capitalists.

According to Lewis, the central problem in the theory of economic development is to understand
the process by which a community which was previously savings and investing 4% or 5% of its
national income or less converts itself into an economy where voluntary saving is running at
about 12 to 15percent of national income or more.
This is the central problem because the central fact of economic development is rapid capital
accumulation. It is the state capitalist and indigenous private capitalists who create capital out of
profits earned, but the state capitalist can accumulate capital even faster than private capitalist,
since he can use for this purpose not only the profits of the capitalist sector, but also what he can
force or tax out of the subsistence sector.

Capital formation through Bank credit

Capital is created not only out of profit, but also out of bank credit. Credit creation has the effect
of raising output and employment. Credit financed capital formation, however, leads to
inflationary rise in price for sometimes. When the surplus labour is engaged in the capitalist
sector and paid out of created money, prices rise because income increases while consumer
goods output remains constant.
In the words of Lewis, inflation for the purpose of capital formation is a very different kettle of
fish. It is self destructive. Prices begin to rise by are sooner or later overtaken by rising output
and may, in the last stage, end up lower than they were at the beginning. The inflationary process
also comes to an end “when voluntary savings incase to a level where they are equal to the
inflated level of investment. Continuous increase in capital formation leads to increase in profit
and since higher profit to lead to higher savings; a time will come when savings increase for
much that new investments can be financed without resource to bank credit.

End of growth process

The theory shows that, “if unlimited supplies of labour are available at a constant real wage and
if any part of the profit is re invested in productive capacity, profit will grow continuously

47
relatively to the national income and capital formation will also grow relatively to national
income. But the growth process may stop due to the following.
a) If the capitalist sector expands so rapidly that it reduces absolutely the population in the
subsistence sector, the average productivity of labour rises in the latter sector because
there are very few people to share the product and so the capitalist wage rises in the
former sector.
b) If as a result of the expansion of the capitalist sector relatively to the subsistence sector,
the terms of trade turn against the former with rising prices of raw materials and food, the
capitalist will have to pay higher wages to the workers.
c) If the subsistence sector adopts new techniques of production, real wages would rise in
the capitalist sector and so reduce the capitalist surplus.
d) If the workers in the capitalist sector imitate the capitalist way of life and agitate for
higher wages and if successful in raising their wages, the capitalist surplus and the rate of
capital formation will be reduced.

In an open economy

When capital accumulation is adversely affected by any of these factors, it can continue by
encouraging mass immigration or by exporting capital to such countries as possess abundant
labour at subsistence wage. Both these possibilities are, however, rule out by Lewis himself.

First, mass immigration of unskilled labour is not possible because trade unions in the high wage
countries oppose it.

Second, the effect of capital exports is to reduce the creation of fixed capital at home and hence
to reduce the demand for labour and wages in the capital exporting country. But the reduction in
wages is offset if capital exports cheapen the things which workers import because their real
wages will rise.

A CRITICAL APPRAISAL
Criticism of the Lewis theory
1. Wage rate not constant in the capitalist sector.
2. Not applicable if capital accumulation is labour savings. That is, it the productive capital
is labour saving, it would not absorb labour and thus the theory break down.
3. Skilled labour is not a temporary bottleneck. Lewis assumes the existence of unskilled
labour and that skilled labour is regarded as bottleneck which can be removed by
providing training facilities to unskilled labour. It can take a long time to train and
educate these multitudes.
4. There is lack of enterprise and initiative. Lewis theory assumes that a capitalist class
exists in underdeveloped countries which may not be true.
5. Multiplier process does not operate in L C.
6. This is a one sided theory because Lewis does not consider the possibility of progress in
the agricultural sector.

48
 7. Neglects total demand. That is, Lewis does not study the problem of aggregate demand.
He assume that whatever is produced in the capitalist sector is either consumed by itself
or is exported.
8. Higher capitalist wage will not lead to the movement of surplus labour from the
subsistence sector to the capitalist sector.
9. Marginal productivity of labour is not zero as postulated by Lewis theory.
10. Productivity falls with migration of labour from the subsistence sector against Lewis
assumption.
11. Low income groups also save. It is not correct to say that only 10 percent of the people
with the largest income save.
12. Lewis view that inflation for the purpose of capital formation is self destructive is
difficult to believe in the face of acute shortage of consumer goods.
13. Lewis contention that taxation will mop up increasing income cannot be accepted
because the tax administration in underdeveloped countries is not so efficient and
developed as to collect taxes sufficient enough for capital accumulation.

Conclusion
Despite these limitations the Lewis theory has the merit of explaining in a very clear way the
process of development. This two factor theory has a great analytical value. It explains how
capital formation takes place in underdeveloped countries which have planthera of labour and
scarcity of capital. His study of the problems f credit inflation population growth, technological
progress and international trade gives the theory a touch of realism.

ROSTOW’S MODEL-THE 5 STAGES OF ECONOMIC DEVELOPMENT.

Prof. w. w. Rostow has sought an historical approach to the process of economic development in
5 stages (a) the traditional society (b) the pre-conditions for take- off (c) the age of high mass
consumption.

1. THE TRADITIONAL SOCIETY

Refers to one who’s stricture is developed within limited production functions based on Pre-
Newtonian science and technology and as pre-Newtonian attitudes towards the physical world.
In this stage, there exists a ceiling on the level of attainable output per head. It did not lack
inventiveness and innovations but lack tools and the outlook towards the physical world of the
Post-Newtonian era.
The social structure of such societies was hierarchical in which family and can connections
played in the reasons in the hands of the landed aristocracy supported by large retinue of soldiers
and civil servants. Naturally agriculture happened to the main source of income of the state and
the nobles which was dissipated on the construction of the temples and their monuments on
expensive furniture and weddings and on the prosecution of wars.

49
2. THE PRE-CONDITION FOR TAKEOFF
The pre-conditions for sustained growth were created slowly in Britain and Western Europe,
from the end of 15th and the beginning of 16th century, when the medieval age ended and when
the modern age began. This stage was limited by four forces namely (1) new monarchy, new
world and the main region. The forces led to the reasons and skepticism in place of faith and
authority brought an end to feudian and led to the rise and led the rise of the rise of the
bourgeoisies – the new mercantile cities.
Thus, these forces were instrumental in bringing about changes in social attitudes, expectations,
structure and values.
The process of creating pre conditions for take-off from traditional society follows along these
lines.
The idea spreads that economic progress is possible and is a necessary condition for some other
purpose, judged to be good, be it national dignity, private profit, the general welfare, or better
life for the children. New types of enterprising men come forward in the private economy, in
government, or both, willing to mobilize savings and to take risks in pursuit of profit to
modernization.
Banks and other institutions for mobilizing capital appear. Investment increase, materials in
which other nations may have an economic interest. The scope of commerce, internal and
external, widens. The pre conditions for sustained industrialization, according to Rostow have
usually required radical changes in three non-industrial sectors.
1. Build up of social overhead capital, especially in transport, in order to emerge the extent
of the market, to exploit natural resources productivity and to allow the state to rule
effectively.
2. A technological revolution in agriculture so that agricultural productivity increases to
meet the requirements of a rising general and urban population.
3. Expansion of imports, including capital imports, financed by efficient production and
marketing of natural resources for exports.
As Rostow puts it, the essence of the transition can be described legitimately as a rise in the rate
of investment to a level which regularly, substantially and perceptibly outstrips population
growth.

3. THE TAKE OFF

The take-off is the great watershed in the life of a society “when growth becomes it’s normal
condition, forces of modernization contend against the habits and institutions. The value and
interests of the traditional society make a decisive break through and compound interest gets
built into the society’s structure. By the phrase “compound interest” Rostow implies that growth
normally proceeds by geometric progression, such as a saving account if interest is left to
compound with principal.

50
Rostow defines the take-off as an industrial revolution, tied directly to radical changes in the
methods of production, having their decisive consequence over a relatively short period of time.

Conditions for take off

1) A rise in the rate of productive investment from, say 5% or less to over 10% of national
income or net national product.
2) The development of one or more substantial manufacturing sectors with a high rate of
growth.
3) The existence or quick emergence of a political, social and institutional framework which
exploits the impulses to explosion in the modern sector and gives to growth an outgoing
character.

(1) Rate of net investment over 10 percent of national income

One of the essential conditions for takeoff is that the increase in per capita output should outstrip
the growth of population to maintain a higher level of per capita income in the economy. Rostow
explains that if we take the marginal capital/output ratio for economy in its early stages of
economic development at 3:5:1 and if we assume as is not abnormal a population rise 1-1.5% per
annum it is clear that something between 3.5 and 5.25% of
NNP must be regularly invented if NNP per capita is to be sustained.

(2) Development of leading sectors

Rostow regards the development of leading sectors as the ‘analytical bone structure’ of the stages
of economic growth. That is, primary growth sectors, supplementary growth sectors and the
derived growth sectors. However, there is clearly no one sectoral sequence to take-off, no single
sector constitutes the ‘magic key.’
According to Rostow, the rapid growth of the leading sectors depends upon the presence of 4
basic factors.
1) There must be an increase in effective demand of their products generally brought about
by dishoarding, reducing consumption, importing capital or by a sharp increase in real
incomes.
2) A new production function along with an expansion of capacity must be introduced into
these sectors.
3) There must be sufficient initial capital and investment profits for the take-off in these
leading sectors.
4) These leading sectors must introduce expansion of output in other sectors through
technical transformations.

51
Cultural framework that exploits expansion
A necessary condition here is the ability of the economy to mobilize larger savings out of an
expanding income to raise effective demand for the manufactured products and to create external
economies through expansion of leading sectors.
Take off requires a definite social, political and cultural victory of those who would modernize
the economy over those who would either cling to the traditional society or seek other goals.
The take-off stage is explained in the figure below.

K1
S

T2
T2
Saving, net investment capital

K0

T1
I1

I0
T

Y2

0 Y0 Y1
NNP
Figure 3
The horizontal axis represents NNP and vertical axis the amount of savings, net investment and
capital. S is the saving schedule, K0Y0 and K1Y1 are curves of capital- output ration brawn as
downward sloping to simply the figure. They are drawn parallel to each other to signify a
constant capital- output ration i.e.

O K0 /OY0 = OK1/ OY1. TY0/Y0Y1 is the marginal capital – output ratio.

52
To start with, the society has a very flat saving curve and a very steep capital-output ratio curve
in the pre take-off stage. It implies that the people save little out of their income and the capital-
output ratio is very high.

In the period O, as OI0 net investment is made it tends to increase the capital stock which
becomes productive in time period 1 and raises NNP to OY1. Then in the take off stage when OI1
(= T1Y1) investment takes place, some major stimulus leads to the growth of the productive
capital more quickly leading to a fall in the capital-output ration to T1Y1/ Y1Y2. As a result, the
investment pattern changes and the capital-output ratio curve become flatter. It is T1Y2.NNP
increases to OY2 which further raises net investment to OI2 = T2Y2. The economy has taken off,
and if this pattern of growth is continued it will become self sustained.

4. THE DRIVE TO MATURITY

Refers to the period when a society has effectively applied a range of modern technology to the
bulk of its resources, as Rostow define it. It is a period of long sustained growth economically
and extending well over four decades. New production techniques takes the place of old ones.
New leading sectors are created. Rate of net investment is well high over 10 percent of national
income. And the economy is able to withstand unexpected shocks.
When a country is in the stage of technological maturity, 3 significant changes take place.
a) The character of working force changes. It primarily becomes skilled. People prefer to
live in urban areas rather than in rural. Real wages start rising and the workers organize
themselves in order to have greater economic and social security.
b) The character of entrepreneurship changes. Rugged and hardworking masters give way to
polished and polite efficient managers.
c) The society feels bored of the miracles of industrialization and wants something new
leading to further changes.

5. THE AGE OF HIGH MASS CONSUMPTION

These is characterized by the migration to Suburbia, the extensive used of the automobile, the
durable consumers goods and household gadgets. In this stage, “the balance of attention of the
society is shifted from supply to demand, from problems of production to problems of
consumption and or welfare in the widest sense.
However, three forces are discernible that tend to increase welfare in this post maturity force.
a) The pursuit of national policy to enhance power and influence beyond national frontiers.
b) To have a welfare state by a more equitable distribution of national income through
progressive taxation, increased social security and leisure to the working force.
c) Decision to create new commercial centres and leading sectors like cheap automobiles,
houses and innumerable electrically operated household devices etc.

53
The tendency towards mass consumption of durable goods, continued full employment and the
increasing sense of security has led to a higher rate of population growth in such societies.

Historically, the US was the first to reach the age of high mass consumption in 1920’s followed
by Britain in 1930’s, Japan and Western Europe in 1950’s and the Foviet union after the death of
Stalin.

Criticism of the stages of economic growth

1) Traditional society not essential for development, since a number of nations such as US,
Canada, since a number of nations such as US, Canada, New Zealand and Australia were
born free of traditional societies and they derived the pre conditions from Britain, a
country cuready advanced.
2) Pre conditions may not necessarily precede the take off stage.
3) Over napping in stages. The experience of most countries tells us that development in
agriculture continued even in take-off stage.
4) Criticism of the take-off. Some historians are of the view that the take-off stage are
doubtful. Further, that the growth rate of investment is Arbitram, some specific industries
cannot be the leading sectors and that, little difference exist between the first and third
condition.
5) The stage of drive to maturity is puzzling and misleading and that no growth is purely
self sustaining or self limiting.
6) The stage of high mass consumption is not chronological. Certain countries like Australia
and Canada have entered this stage before reaching maturity.

Importance of limitations of take-off for underdeveloped countries.

It helps in the understanding of the process of economic development of underdevelopment
country. Of the three necessary conditions for take-off, the first two, namely, capital formation
over 10% of national income and the development of one or more leading sectors, are helpful in
the process of industrialization of underdeveloped countries. For these countries, the leading
sectors can be in agriculture or in the production of primary products for exports. The last
condition is more important in the context of underdevelopment countries where monetary and
political institutions and skilled and technology are at a low level whereby they retard the
expansion of the modern sector.

Limitations to underdeveloped countries

1) Capital output ratio not constant. This is valid to advanced economies but not
underdeveloped countries.

54
 2) Silent over the removal of unemployment. It is imperative for an over populated country,
for example India, to have elimination of unemployment as one of the conditions for
take-off.
3) Element of ambiguity, especially when applied to underdeveloped country. During the
take-off investment increases with a rise in the national income without reducing the
average propensity to consume. Technically speaking, there is an “excess of the marginal
rate of saving over the average rate of savings so that the average rate keeps on rising.
According to Dasgupta, this does not seem to be a sensible interpretation.
4) Economic development is not spontaneous as postulated by the take-off concept.
5) Aeronautical concept that is a symbolic presentation of take-off is not correct.
Questions

1) Distinguish between Harrod-Domar growth model and Lewis structural change model
2) Using relevant examples discuss Rostow’s model of economic development

References

1) Giorgio Second (Editor) (2008): The Development Economics Reader, Routledge.

2) Jessica Cohen (Author, Editor) (2009): What Works in Development? Thinking Big and
Thinking Small, Brookings Institution Press.

55
LESSON 6: ECONOMIC MEASURES OF OUTPUT AND INCOME
HUMAN DEVELOPMENT INDEX (HDI)
Lord Meghnad Desai and Nobel Laureate Amartya sen invented the Human Development index
and UNDP incorporated it into its first human development report in 1990.
The HDI value of a country is calculated by taking three indicators.
1) Longevity, as measure by life expectancy at birth.
2) Educational attainment, as measured by a combination of adult literacy and combined
primary, secondary and tertiary enrolment ratio.
3) Decent standard of living, as measured by real GNP per capita based on purchasing
power parity in terms of Dollar (ppp£).
Before the HDI is calculated, an index is created for each of these dimensions. Life expectancy
index, education index and GDP index, to calculate these indices, minimum and maximum
values or gocu posts are chosen for each indicator as shown in the table below.

Grocu posts for calculating the HDI

Indicator Maximum value Minimum value

Life expectancy at Birth (years) 85 25

Adult literary rate (%) 100 0

Combined Gross Enrolment ration 100 0

GDP per capita (ppp us £) 40,000 100

Performance in each dimension is expressed as a value between 0 and 1 by applying the

following formula:

Dimension index = Actual value – Minimum value

Maximum value – Minimum value
The HDI is then calculated as a simple average of the three dimension indices.

The HDI value for each country indicates the distance it has traveled towards the maximum
possible value of 1 and how far it has to go to attain certain defined goals: an average life span of
85 years, access to education for all and a decent standard of living. HDI ranks countries in
relation to each other. A country’s HDI rank is within the world distribution i.e. it is based on its
HDI value in relation to each developed and developing country for which the particular country
has traveled from minimum HDI value of 0 towards the maximum HDI value of 1.

56
Countries with an HDI value below 0.5 are considered to have a low level of human
development, those between 0.5 to 0.8 a medium level, and those above 0.8 a high level. In the
HDI, countries are also ranked by the GDP per capita.

The limitations of HDI

1) It is a crude index which attempts to catch in one simple number a complex reality about
human development and deprivation.
2) The three indicators are not the only indicators of human development. There can be
others like infant mortality, nutrition etc.
3) The HDI measures relative rather than absolute human development so that is all
countries * improve their HDI value at the same rate; the low HDI countries will not get
recognition for their improvement.
4) The weighted scheme for calculating the four components of HDI seems arbitrary.
5) Even giving equal (1/3 rd) weight to each of the very different three indices for calculating
the HDI is arbitrary.
6) A country having high HDI may shift the focus from the high inequality, unemployment
and poverty found within it.

Conclusion
Despite these weaknesses, by measuring average achievements in health, education and income,
the HDI provides a better picture of the state of a country’s development that its income alone.

Constructing the HDI

The HDI is based on three indicators; longevity, as measured by life expectancy of birth,
educational attainment, as measure by a combination of adult literacy (2/3 rd) weight and
combined primary, secondary and tertiary enrolment ratios (1/3 rd) weight and standard of living,
as measured by real per capita (ppp£).
For construction of the index, fixed minimum and maximum values have been set for each of
these indicators:
(i) Life expectancy at birth: 25 years and 85 years for calculating the life expectancy index.
(ii) Adult literacy: 0% and 100% for calculating the education index.
(iii)Combined gross enrolment ration (0% and 100%).
(iv) Real GDP per capita (ppp£): £ 100 and £ 4,000 (ppp Us £) for calculating GDP index.

For any component of the HDP, individual indices can be computed by applying the formula.

57
Dimension index = Actual value – Minimum value
Maximum value – Minimum value

1) Life expectancy index. If the life expectancy at birth of a country is 78 years, then the life
expectancy index for that country would be

Life expectancy = 78 – 25 = 0.884

85 – 25

2) Education index. The education index is the combination of adult literacy, index and gross
enrolment index. If the adult literacy rate of this country is 92, then it’s adult literacy index
would be:

Adult literacy index = 92 – 0 = 0.920

100 – 0

If the combined gross enrolment in this country is 60, then its gross enrolment index would be.

Gross enrolment index = 62 – 0 = 0.600

100 – 0

Education index = (2/3) Adult literacy index + (1/3) Gross enrolment index
= 2/3 (0.920) + 1/3 (0.600) = 0.813
3) GDP index. The GDP per capita (ppp Us£) of this country is £ 8,840, then the GDP index
would be;

GDP index = log (8,840) – log (100) = log 8740 = 0.748

Log (40,000) – log (100) log 39900

58
4) Human development index. The HDI is a simple average of the life expectancy index,
education index and adjusted GDP per capita (ppp£) index. It is derived by dividing the sum of
these three indices by 3.

HDI = 1/3 (0.884) + 1/3 (0.813) + 1/3 (0.784)

= 0.295 + 0.271 + 0.249 = 0.815

This country comes under the category of high human development.

Measurement of economic development by using Gross National Product (GNP)

This measures economic development in terms of an increase in the economy’s real national
income over a long period of time.

Y yb

E ya

0 T
Time

The curve ya shows the level of GNP in country A and the curve yb in country B. development
process in country B, GNP increases at a faster rate than in country A. but this is not a
satisfactory definition due to the following reasons.
1) “Real national income” refers to the country’s total output of final goods and services in
real terms rather than in money terms.
2) This measure fails to take into consideration changes in the growth of population.

59
 3) The GNP figure also does not reveal the costs to society of environmental pollution,
urbanization, industrialization and population growth.
4) Further, it tells us nothing about the distribution of income in the economy.

Conclusion
The emphasis on GNP as the index of economic development is based on the application of
experience of the developed countries on the underdeveloped countries which differ radically
from the socio economic set up of the former.

Questions:
1. Briefly explain the following methods of measuring output and income of a country
a) HDI
b) GDI
c) GEM
d) HPI
References

1. Todaro, Michael P. Economics For A Developing Worlds: An Introduction To Principles

Problems And Policies, Prentice Hall Press
2. Griesgraber, J. M, and Gunter, B. G (eds) 1996), Development New Paradigms and
Principles for the 21st Century, Pluto, Masssachuset

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LESSON 7: THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT
CLASSICAL GROWTH THEORY
The classical theory, as stated by Smith, Malthus, Mill and Ricardo, can be explained as follows:

Lassez – Faire policy

The classical economist believes in the existence of an automatic free market in a perfectly
competitive economy which is free from any government interference. It is the “invisible hand”
which maximizes the national income.

Capital accumulation, the key to progress

All classicists regard capital accumulation as the key to economic progress and they lay
emphasis on larger savings. According to them, only capitalists and landlords are capable of
saving. The working class is incapable of saving because it gets wages equal to the subsistence
level. Out of total production after paying rent to landlords and subsistence wages to workers, the
surplus goes to capitalists as profits.

Profits the incentive to investment

According to classicists, profits induce investment. The larger the profit, the greater the capital
accumulation and investment.

Tendency of profits to decline

Profits tend to decline when competition increases for larger capital accumulation among
capitalists. Whereas, according to Ricardo, when wages and rent rises with the increase in the
price of corn, profits decline.

Stationary stage
All classical economists visualize the stationary state as the end of the process of accumulation
of capital. When once profits starts declining, this process continues till profits become zero,
population and capital accumulation stop increasing and the wage rate reaches the subsistence
levels.

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An illustration of stationary stage

The curve OP is the production function which shows total production minus rent as the function
of the population. As population increases, the Op curve flattens out due to the operation of the
law of diminishing returns. The ray through the origin OW measures the constant real wage rate.
The vertical distance between the horizontal axis and the wage rate line OW measures the total
wage bill at different levels of population.

Thus W1N2, W2N1 and W3N3 are the total wage bills at ON1, ON2 and ON3 levels of population.
When the wage bill is W1N1, the profits are P1W1, i.e. P1N1 ÷ W1N1 = P1W1. When profits are
P1W1, investment is encouraged. The demand for labour increases to ON2, which pushes up the
wage bill to W2N2 but profits decline to P2W2. This will encourage further investment and
technical progress and raise the demand for labour to ON3 and the wage bill will also increase to
W3N3.

But the profits will decline to P3W3. This process of capital accumulation, increase in population
and the wage bill will continue till profits disappear altogether at point S from where the
stationary state sets in.

Its criticisms
1) The classical theory ignores the middle class. It assumes the existence of a rigid division
of society between capitalist and labourers. It neglected the role of the middle class which
provided the necessary impetus to economic growth.

62
 2) It neglects the public sector, that perfect competition and institution of private property
were the essential prerequisites for economic development.
3) Gives less importance to technology. They assumed technical knowledge to be given and
unchanging overtime. But they fail to visualize the important impact science and
technology had on the rapid economic development of the now developed nations.
4) Unrealistic laws. The pessimistic view of the classical economists like Ricardo and
Malthus that “the end result of capitalist development is stagnation” was based on two
assumptions: application of diminishing returns to land and the Malthusian theory of
population. This has been disapproved by reality of events.
5) Wrong notions about wages and profits. Wages have not tended to be at the subsistence
level. These has been continuous increase in money wages without a corresponding
decline in profit rates.
6) Unrealistic growth process. The classical theory assumed a stationary state in which there
was change, but around a point of equilibrium; there was progress, but steady and
continuous like a tree. This is however, not a satisfactory explanation of the process of
economic growth. For economic growth, as it is understood today, does not proceed
steadily and continuously, but by “fits and starts.”

THE NEOCLASSICAL GROWTH MODEL

THE MEADE MODEL
His model is designed to show the way in which the simplest form of economic system would
behave during a process of equilibrium growth.

Assumptions
(i) There is a laissez- Faire closed economy where there is perfect competition.
(ii) There are constant returns to scale.
(iii) Two commodities- consumption goods and capital goods- are produced in the economy.
(iv) Machines are the only form of capital in the economy.
(v) All machines are assumed to be alike.
(vi) It is assumed that there is a constant money price of consumption goods
(vii) There is full use of land and labour.
(viii) The ratio of labour to machinery can be changed both in the short and the long run.
(ix) It is further assumed that there is perfect substitutability in production between capital goods
and consumption goods.
(x) There is the assumption of depreciation by evaporation, that is, each year, some percentages
of machines wears out which requires replacement.

The model
In the economy visualized above, the net output produced depends upon four factors.
(i) The net stock of capital available in the form of machines.
(ii) The amount of available labour forces
(iii)The availability of land and natural resources.

63
(iv) The state of technical knowledge which continues to improve through time.
This relationship is expressed in the form of the production function as,
Y = f (K1L1N1t)
Where,
Y = net national income.
K = existing stock of capital (machines)
L = labour force
N = natural land
t = time.
Assuming the amount of land or natural resources to be fixed, net output can increase in any one
year with the growth in K1L and t. i.e.

Y=V K+W L+ Y

Where represents an increase.

V is the marginal product capital,

W is the marginal product of labour
Y is used in place of t.
Thus, the annual proportionate growth rate of output is

= X

Where is the proportionate growth rate of output and is proportionate growth rate of
stock of capital, the proportionate growth rate of labour force and the proportionate
growth rate of technical progress during a year.
Let this proportionate growth rates be expressed as y1K1 L and r respectively, the proportionate
marginal product of capital as u and the proportionate marginal product of labour as Qx.
Now the basic relationship is
y = uk + QL + r
this shows that the growth rate of output (y) is the weighted sum of three other growth rates, first,
the sum of the growth rate in the stock of capital (k) weighted by the proportional marginal

64
product of capital (u) plus the growth rate of population (l) weighted by the marginal product of
labour (Q) plus the growth rate of technology (r).
But the real index of the growth of the economy is the growth rate of real income per head given
by;
y – l = uk + Ql + r – l
= uk – l + Ql + r
= uk – (L-Q) + r
This equation reveals that the growth rate of real income per head is raised in two ways;
1) By an increase in the real capital (k) weighted by its proportional marginal product (u).
2) By an increase in the rate of technical progress (r).
On the other hand, it is depressed by the growth rate of population (L) weighted by one minus
the proportional marginal product of labour (1 – Q). This part of the equation
[-(1-Q) 1] shows the tendency for diminishing returns as the quantity of labour is increased on a
given amount of land on capital.
One of the important factors contributing to the growth rate of output is the annual rate of capital
accumulation in the economy. This fact is implied in the element uk. u = and k = , but K
the addition to the stock of capital is equal to the savings out of the net national income.
Therefore K = SY, and k = =

Where SY represents the amount annually added to the stock of capital through savings,

Hence, uk = x = VS and the basic growth relationship can be expressed as.

y – l = VS – (1 – Q)l + r.
Prof Meade also examined the conditions which may lead to changes in the rate of economic
growth over time. Assuming L and r to be given and constant, changes in growth rate would be
determined by the behavior of V1S and Q over time. If there is no change in population (L) and
technical progress (r), an increase in the rate of savings (s) would raise capital per head and bring
a decline in the marginal product of capital (v). This decline in v will, however, be less if it is
possible to substitute capital for land and labour.
If technical progress takes place, v will tend to rise instead of declining. But the amount of land
and labour being fixed in the economy, more capital per head will be used and at the same time
technical progress will tend to raise v.
We may conclude that with a constant population (L = 0), real income per head depends upon the
rate of capital accumulation (Vs) and technical progress (r). The equation is
y- 1 = Vs – (1 –Q) L + r since L = 0

65
 y = Vs + r
The effect of technical progress on total national output (income) can be shown using a figure.

The effect of technical progress on total national income (output)

F2
D
B

C F1
Total annual output

O
K K1
Total stock of machinery

OF1 is the production function which shows the quantity of output, produced in one year with the
given quantity of machinery when the technical knowledge is given. If in year 1 the quantity of
machinery is OK, the production in that year will be KA. The slope of the curve at point A
shows the marginal productivity of machinery which declines as we move towards the right
along the curve. This is because the law of diminishing returns applies to machinery too.

Thus the marginal productivity of machinery at point C will be less than at point A. In year 2, the
new production function becomes OF2 due to technical progress. As a result, production
increases from KA to KB by using the same machinery OK. Similarly, by use of OK L machinery
the production increases from K1C in year 1 to K1D in year 2. Thus technical progress leads to
increase of total annual output.

The state of steady growth

A state in which the growth rate in total output (income) is constant and so is the growth rate in
income per head. It is assumed that population growing at a constant proportionate rate (L) and
the rate of technical progress does not change.

66
Three conditions for steady economic growth are as follows.
(a) All elasticities of substitution between the various factors are equal to unity.
(b) Technical progress is neural towards all factors.
(c) The proportions of profits saved, of wages saved and of rent saved are all constant.

If the let these savings out of profits (U), wages (Q) and rents (Z) be represented by Sv, Sw and
Sg respectively, so that total savings.

S = Svu + SwQ + SgZ. Since all the elements in this equation are constant vide conditions (a),
(b) and (c), it follows that the ratio of total savings to total national income (s) will also be
constant.

The growth rate of income is represented by the basic relationship y = u + QL + r where in u, Q,

L r are assumed to be constant, therefore, for y, to be constant, K should be constant as seen in
the preceding para. So K will be constant if y/k is constant, and that the growth rate of income
will be constant if the growth rate of capital stock (k) is equal to the growth rate of national
income (y).

Critical growth rate

According to Meade, there is a critical growth rate, of the capital stock which makes the growth
rate of income equal to the growth rate of capital stock. A more or less growth rate in the capital
stock that this “critical growth rate” will not bring about the equality of y and k. If we put (a) for
the ‘critical growth rate’ then the basic relationship will be

a = ua + QL + r or

a = Qi + rx

1–u

It is this critical rate which will make y = k, and keep the growth rate of national income constant
at the steady growth level. If at any given time there is any deviation from this level of steady
growth, forces will set in to bring the growth rate of the capital stock at the equilibrium level of
Suppose k or >

Then income will be growing at lower rate than the capital, stock, as a result savings
will decline, so will the growth rate of capital, thereby bringing towards the critical level.

Conversely, if > then income will increase more rapidly than the capital stock,
savings would increase and so would the capital stock, as a result would rise towards critical
level .

67
 An illustration of the model of steady growth

The U curve represents the proportional marginal product of capital, the curve Ay the total
growth rate of national income and the 450 k the growth rate of the capital stock. At OE, the
growth rate of national income will be BE. But BE = BD + DE, where BD = OA = QL + r. B
point y is greater than k i.e. BE > CE. As a consequent, k will start rising till point F on the X-
axis is reached which brings about the equality of y and k (the 450 line) at H. This represents the
state of steady economic growth where the critical growth rate brings y = k.
The ‘critical growth rate’ can also be derived from the diagram.
y = UK + QL + r
H = GF x HF + GH QL + r = GH
HF – GF x HF = GH
HF (1-GH) = GH
HF =

68
Or OF =
( HF = OF )

Or k =

A critical Appraisal
1) The model is steeped in the classical tradition of a perfectly competitive economy where
all production units are assumed independent of each other. But there are unrealistic
assumptions for neither is there a perfect competition nor are the production units
independent of each other.
2) The assumption of the neo-classical theory that there are only constant returns to scale is
also defective, since there are increasing returns to scale rather than constant returns in
the growth process.
3) The model is pseudo- causal, because it merely sates that monetary policy keeps the
prices of consumption goods constant, while money wages rates ensure full employment.
4) The assumptions that all machines are alike and there is perfect malleability of machines
is unrealistic.
5) According to Prof. Butterick, there is no place fro all variables have been regarded as
certain.
6) The assumption of a closed Laise- Faire economy is also unrealistic because it neglects
the importance of foreign trade in economic development.
7) It completely neglects the role of institutional factors in development process.

Conclusion
Despite these defects, the Meade model has the chief merit of demonstrating the influence of
population growth, capital accumulation and technical progress on growth rate of national
income and per capita real income over time.

THE “BIG PUSH” THEORY

This theory was forwarded by Prof Paul Rosenstein who said that indivisibilities and external
economies flowing from a minimum quantum of investment are a prerequisite for launching
economic development successfully.
He distinguishes between three kinds of indivisibilities and external economies.

(1) Indivisibilities in the production function

According to Rosenstein, indivisibilities of inputs, outputs or processes lead to increasing
returns. He regards social overhead capital as the most important instance of indivisibility and
hence of external economies on the supply side. The services of social overhead capital

69
comprising basic industries like power, transport and communications are indirectly productive
and have a long gestation period. They cannot be imported.
Their installations require a “sizeable initial lump” of investment. For excess capacity is likely to
remain in then for some time. They also possess “an irreducible minimum industry mix of
different public utilities, so that an undeveloped country have to invest between 30-40% of it’s
total investment in these channels.
(a) It is irreversible in time and therefore, must precede other directly productive
investments.
(b) It has a minimum durability, thus making it very lumpy.
(c) It has a long gestation period.
(d) It has an irreducible minimum industry mix of different kinds of public utilities.
These indivisibilities of supply of social overhead capital are one of the principal obstacles to
development in underdeveloped countries.

Indivisibility of Demand

The indivisibility of demand requires simultaneous setting up of interdependent industries in

underdeveloped countries. This is because individual investment projects have high risks because
low incomes limit the demand for their products.
To illustrate, Rosenstein takes first a closed economy where a hundred disguised unemployed
workers are employed in a shoe factory whose wages constitute an additional income. If these
workers spend all their income on shoes they manufacture, the shoe market will have a regular
demand and thus succeed. But the fact is that they would not like to spend all their additional
income on shoes, human wants being diverse. Nor will the people outside the factory buy
additional shoes when they are poor.
Thus, the new factory will be abandoned for want of an adequate market. To vary the example,
suppose ten thousand unemployed workers are engaged in one hundred factories who produce a
variety of consumer goods and spend their wages on buying them. The new producers will be
each others customers and thus create market for their goods. The complementary demand
reduces the risks of finding a market and increases the incentives to invest in other words, it is
the indivisibility of demand which necessitates a high minimum quantum of investment in
interdependent industries to emerge the size of the market.

70
Rosenstein’s example of the shoe factory is explained in the figure below.

A
C
R
P4 MC ATC

P1 B

T S D4
E1
Price

MR4

D1
MR1

O
Q1 Q4
Quantity

Indivisibility in the supply of savings

A high income elasticity of saving is the third in indivisibility in Rosenstein’s theory. A high
minimum size of investment requires a high volume of savings. This is not easy to achieve in
underdeveloped countries because of low incomes. To overcome this, it is essential that when
income increases due to an increase investment, the marginal rate of saving should be very much
higher than the average rate of saving.

Given these three indivisibilities and the external economies to which they give rise, a “big push”
or a minimum quantum of investment is required to overcome the obstacles to development in
the underdeveloped countries. These may be finally a phenomenon of indivisibility in the vigour
and drive required for a successful development policy” writes Rosenstein. But proceeding bit by
bit in an isolated and small way does not lead to a sufficient impact on growth. A climate of
development is only created when investment of a minimum speed or size is made within an
underdeveloped economy.

71
Limitation to this theory
(a) Negligible economies from investment in export and import substitutes. That is,
underdeveloped economies realize greater economies from world trade independent of home
investment.
(b) Negligible economies even from cost-reducing investments. Even in the production of local
consumer goods and most public utilities, potential external economies can be realized in a
limited way.
(c) It neglects investment in the agricultural sector, yet it is important as investment in other
industries.
(d) Generates inflationary pressure. Even the launching of high minimum amount of investment
on social overheads is highly expensive. Moreover, overhead capital has a high capital-output
ratio and a very long gestation period.
(e) Low investment leads to large increase in output and thus there is a prerequisite for the
economic development of underdevelopment countries.
(f) Administrative and institutional difficulties, more so in drawing up plans for various projects
and also in their execution.
(g) Rosenstein’s theory does not show an historical explanation of how development takes place.

Questions

1. Using relevant examples, discuss the difference between classical growth theory and
neoclassical growth model
2. Discuss the big bush theory and explain its relevance in alleviating poverty in developing
countries

References

1. Miller, B, and Torr, J. D, (eds), (2003), Developing Nations: Current Contraversies,

Greenhawen Press
2. Harvey J. (1981), Basic Economics, Macmillan Education.

72
LESSON 8: ALTERNATIVE THEORIES OF DEVELOPMENT (APPLICABILITY TO
DEVELOPING COUNTRIES)

MALTHUSIAN THEORY
This was put forward by Thomas Robert Malthus.
The theory was named the Malthusian theory of population.

The theory
 Malthus did not regard the process of economic development as automatic but rather it
required consistent efforts on the population of the people.
 He believes that the process of development was ups and downs of economic activity
rather than smooth.
 Malthus was concerned with the “process of wealth of country” progress of wealth
according to him meant economic development which could be achieved by increasing
the wealth of country.
 Wealth of a country depend partly upon the quantity of production obtained by its labour
and partly upon the valuation of this produce.
PILLARS
1) POPULATION GROWTH AND ECONOMIC DEVELOPMENT
Population growth in the context of economy
Increase in population cannot take place without proportionate increase of wealth.
As the rate of capital accumulation increases, the demand for labour increases
Population growth increases wealth only if it increases effective demand.
2) ROLE OF PRODUCTION AND DISTRIBUTION
Production according to Malthus need to be combined in right proportions which will increase
the wealth of a country in a short time.
Malthus emphasizes maximum production optimum allocation of resources for increasing the
wealth of a country during the short run.
Factors in economic developments
The size of potential gross national product (GNP) depends upon land, labour, capital and
organization. When these factors are employed in right proportions, they maximize production in
the two minor sectors of the economy that is the agricultural and industrial sector.
3). PROGRESS OF CAPITAL ACCUMULATION
Capital accumulation is one of the most imported determinants of development.
The sum of capital of the high profits that come from the savings of capitalists because workers
are too poor to save.
Malthus suggested the concept of “optimum proposing to save.” i.e saving from the stock which
might have been destined for immediate consumption.
4) DEFICIENCY OF EFFECTIVE DEMAND
According to Malthus a great portion of commodities is exchanged directly for labour. Further
then commodities and since workers who are consumers, receive less than the value of the
produce they produce, they cannot buy all the commodities.
This scenario creates excess supply of commodities in the market in relation to the demand
(deficiency in demand).
MEASURES TO PROMOTE ECONOMIC DEVELOPMENT
Policies to promote development

73
(a) Balanced growth
There should be a balance in growth between two factors namely; Agriculture and Industrial
sector, the law of diminishing reforms will decrease the productivity of land in the long-run and
therefore Malthus favoured balanced growth of both Agricultural and industrial sector for
economic development of the country.
5) RAISING EFFECTIVE DEMAND
Development will be enhanced if the economy raise the effective demand.
This is done through the following ways:
i. Having equal distribution of wealth and land.
ii. Expansion of natural and external trade.
iii. Maintenance of unproductive consumers.
“Unproductive consumers” are those persons who did not produce material objects
therefore production can be raised by increasing consumption.
iv. Public works schemes to remove unemployment and increase effective demand.
This will create employment opportunities to the poor in construction of roads and other public
works.
Stationary Rate
Whenever the wage rate is more than the minimum, the working population will increase at a
fast rate because the labour power will grow and the living standard will be high.
The tendency of diminishing reform will apply and the demand and supply sustenance level.
When the population increases, wages reduced the profitability of investment fill the propensity
to invest does not end and the economy realizes the stationary state.

M
Standard of living

S
D W

L1

P P1

Fig 1 Population

Explanation

74
Malthus stationary state is depicted in fig 1 where SW is the standard of living line and the curve
<L1 is the real living standard which reflects quantity of population in reception to constant
quantity of other resources.
The shape of <L1 curve shows that in the initial stage population increases along with wage
which lads to high standard of living. The highest level of this curve is M where the optimum
population is OP while PM is high living standard.
After point M, the <L curve slopes downward. This is because when population increase along
with constant other resources, there is a tendency of diminishing returns.

WEAKNESS OF MALTHUSIAN THEORY

1) Secular stagnation prof inherent in capital accumulation
Malthus argues that the process of capital accumulation leads inherently to secular stagnation.
This is wrong notion which arise from his interpretation of Say’s law.
2) Negative view of capital accumulation
In reality capital accumulation does not lead to reduction in the demand for consumer goods and
fall in profits.
As capital accumulation increases the share of wages of profits in aggregate ‘income increases
and so does the demand for consumer goods.
3) Commodities not exchanged for commodities directly
Malthus believes that commodities are measured of labour which is not always correct in the real
world because commodities are measured by real tangible prices and not by labour.
4) Unproductive consumer retard progress
Malthus suggests spending by “unproductive consumers” to overcome under consumption an
increase effective demand. Since a measure slow down the rate of capital accumulation.
5) One-sided saving Base
He believed that it is only the land lords who save like Adam Smith which is not true.

Questions

1. What is Malthusian Theory of development?

2. With relevant examples, discuss the weaknesses of Malthusian theory of development

References

1) Todaro M.P. and S.C. Smith (2006): Economic Development. 9th edition, Pearson: Essex.
2) Michael P. Todaro (2008): Economic Development (10th Edition), Addison Wiley

75
LESSON 9: GLOBALIZATION AND ECONOMIC DEVELOPMENT
Meaning

The term globalization encompasses a range of social, political, and economic changes. Within
the section Defining Globalization, we provide an introduction to the key debates. The materials
ask what is new, what drives the process, how it changes politics, and how it affects global
institutions like the UN.

Globalization expands and accelerates the exchange of ideas and commodities over vast
distances. It is common to discuss the phenomenon in highly generalized terms, but
globalization's impacts are often best understood at the local level. Cases of Globalization
explore the various manifestations of interconnectedness in the world, noting how globalization
affects real people and places.

Impacts of Globalization and trade

Over the past decades, trade and financial flows have played an increasingly important role in the
world economy by contributing significantly to economic growth both at the global level and
within individual countries. However, trade and financial openness increase interdependence and
therefore expose countries, workers and businesses to external shocks and volatility with
possibly severe consequences for employment, as illustrated during the recent global financial
and economic crisis.

The greater interconnectedness and openness of the world provides opportunities for
employment generation and improvement of working conditions. This interconnectedness also
poses challenges for a more equitable distribution of resources and inclusive growth. The design
and implementation of solutions to these challenges deserve ILO’s continuous attention.

Trade and foreign investment have important effects on employment and labor market
conditions. Fostering fair working conditions and respecting the rights of workers are crucial for
ensuring that workers benefit from trade and openness. The challenge is to better understand how
trade and investment policy options affect decent work opportunities and to assist policy makers
at global and national levels to design policy solutions that optimize the positive effects of trade
and finance on employment. The ILO is working with our constituents to expand these
opportunities and address these challenges.

The ILO emphasizes the need for trade and financial flows to take place within a well-regulated
global framework. Effective crisis management also requires strong social dialogue between
employers, workers and governments. The ILO is working to increase knowledge and
understanding of the social and economic impacts of globalization to assist in the formulation of
effective national employment strategies.

76
Economic integration
An economic arrangement between different regions marked by the reduction or elimination of
trade barriers and the coordination of monetary and fiscal policies. The aim of economic
integration is to reduce costs for both consumers and producers, as well as to increase trade
between the countries taking part in the agreement.
There are varying levels of economic integration, including preferential trade agreements (PTA),
free trade areas (FTA), customs unions, common markets and economic and monetary unions.
The more integrated the economies become, the fewer trade barriers exist and the more
economic and political coordination there is between the member countries.
By integrating the economies of more than one country, the short-term benefits from the use of
tariffs and other trade barriers is diminished. At the same time, the more integrated the
economies become, the less power the governments of the member nations have to make
adjustments that would benefit themselves. In periods of economic growth, being integrated can
lead to greater long-term economic benefits; however, in periods of poor growth being integrated
can actually make things worse.

Role of international financial institutions

Transforming Global Scenario
Since the World Bank and the International Monetary Fund (IMF) were launched at Bretton
Woods more than 55 years ago, and the regional development banks in subsequent decades, the
global economy has undergone transformation in several important respects1. Two fundamental
transformations have taken place in the role of the international financial institutions (IFIs); both
of which are of high significance for the global financial architecture. These changes are: First,
globalisation has progressed a great deal over the preceding quarter century. This implies that
foreign trade and private capital now play a far greater role in economic development than ever
before. Second, the poor performance of statist models of development—so popular in the past—
led to a re-examination of the role of the state, which in turn motivated a strong shift towards
private, market-based approaches. As a result of these transformations, the private sector and
private international finance have become prime agents of economic development.
The role of IFIs in the changing market place11
In general terms the objectives of IFIs have always been poverty alleviation, economic growth
and protection of the environment.12 Traditionally, IFIs have promoted these objectives by
working with governments and government agencies. This reflects the ideas and the capital
structures which prevailed at the time of their creation. Broadly speaking, the IFIs have pursued
these objectives with loans for public sector projects or programmes, technical assistance, and
policy-based lending. IFI loans have generally been made to, or guaranteed by, the borrowing
states. The EBRD is different from the other IFIs. Its later foundation and the special
circumstances of this foundation pointed to a rather specific objective, namely to foster the
transition of its countries of operations to open market economies. The founders took it that the
transition would indeed raise living standards over time as well as expanding basic choices and
rights of the population.
In the new economic environment, the importance of IFIs and bilateral aid as sources of funds
has decreased. While private flows are rising, official flows are constrained by tight budgets
following fiscal laxity in the 1970s and 1980s.

77
As budgets get squeezed, official aid, both bilateral and multilateral, has been a vulnerable target.
Furthermore, the collapse of centrally planned economies and the poor performance of heavily
distorted economies in Africa, Latin America and the Middle East have led to a re-examination
of the role of the state in economic development. As a result, there is a growing understanding
among developing countries that to achieve market-oriented economic growth, they must create
the conditions in which a strong private sector can flourish.
Since the importance of IFIs as a source of funds has decreased while the potential role of the
private sector has increased, a central challenge for IFIs is to find ways of fostering development
through expanding opportunities for the private sector. They should view the private sector as a
prime vehicle for the achievement of development goals. In so doing they must seek to ensure
that the poor participate in the growth process and that growth is environmentally sustainable.
There are two complementary ways in which the IFIs can pursue these objectives:
i) They can help governments create the conditions for the right kind of market-oriented
growth;
ii) They can become participant investors, working with the private sector to expand and
improve private capital flows
The first of these embodies some of the more traditional IFI roles. This involves promoting
macroeconomic stability and ensuring the provision of the necessary physical, institutional, legal
and regulatory infrastructure. While these basics are crucial to investment and growth,
participation in growth requires adequate provision for health and education, which in turn
enhance growth itself. Poverty alleviation, however, calls for more than fostering participation. It
also involves protecting those who are not in a position to provide for themselves by establishing
a social safety net. In the past, the IMF, the World Bank and regional IFIs have played a major
role in the establishment of macroeconomic stability, in the assistance with tax, legal and sectoral
reform and in the creation of a social safety net through policy based lending.13 These are all
areas that continue to be important for market oriented growth. The second approach represents
territory that has been less well explored by the IFIs. The IFIs must ask how they can assist more
directly in establishing the conditions for the expansion of the private sector. In doing so, they
must recognise the increasing - and understandable - reluctance of governments to provide
sovereign guarantees; a reluctance that stems from the pressures on public finances and the
requirement for hard budget constraints if market-based incentives are to function effectively.
While recognising that there will be important projects (particularly environmental and some
infrastructure) for which sovereign guarantees will be necessary, the IFIs should support this
resolve and avoid sovereign guarantees wherever possible. This means the IFIs must find new
ways of operating; ways that harness private sector finance for broader development goals. The
way to do this is for IFIs to work in partnership with the private sector and to become
participants in the investment process.

IFIs as participants in the process of private sector development

Partnership with the private sector implies that IFIs must, in important respects, act and think
like the private sector and subject themselves to the shifting opportunities and constraints of the
market. There are also a host of other practical implications of partnerships between IFIs and the
private sector that will need to be considered. It is likely, for instance, that procedures of most
IFIs would have to adapt to the flexibility and confidentiality required of private sector
operations. This does not always sit easily with public sector accountability. A move away from

78
sovereign guaranteed lending will also call for a new risk culture and the know-how required for
the analysis of commercial risk.

The structure and function of World Bank and IMF

The International Monetary Fund
Governance
The IMF is controlled by its 187 member-countries, each of whom appoints a representative to
the IMF's Board of Governors. The Board of Governors, most of whom are the finance ministers
or heads of the central bank of the members, meet once per year to discuss and possibly achieve
consensus on major issues. In the meantime, day-to-day operations are managed by a 24-person
Executive Board. The world's major economic and political powers—the United States (the
IMF's largest shareholder), Great Britain, Japan, Germany, France, China, Russia, and Saudi
Arabia—each have permanent seats on the executive board, while the 16 other directors are
elected for two-year terms by groups of countries divided roughly by geography, e.g., Caribbean,
Africa, Southeast Asia, etc. The executive board, in turn, is run by the managing director, who is
elected for renewable five-year terms.
The IMF also has an International Monetary and Financial Committee of 24 representatives of
the member-countries that meets twice yearly to provide advice on the international monetary
and financial system to the IMF's staff. In all of its operations, voting power is weighted based
on the size of the economy and therefore the quota allocation of each country. Decisions are
usually taken by consensus, but the United States, as the IMF's major shareholder, has the most
influence in the institution's policy-making.
Organization
The IMF's current managing director is Ms. Christine Lagarde of France, who took office on
June 28, 2011. Each members of the executive board runs a particular department of the IMF.
There are offices devoted to
a) particular regions of the world, such as Europe, Africa, Middle East, Western
Hemisphere, and Asia/Pacific;
b) functions, such as finance, technical assistance, fiscal planning, capital markets,
research, and statistics; and,
c) administrative functions of the IMF itself.

Goals:
1) Facilitate the cooperation of countries on monetary policy, including providing the
necessary resources for both consultation and the establishment of monetary policy in
order to minimize the effects of international financial crises.
2) Assist the liberalization of international trade by helping countries increase their real
incomes while lowering unemployment.
3) Help stabilize exchange rates between countries. Especially after the global depression of
the 1930s, it was considered vital to establish currencies that could hold their value, serve
as mediums of international exchange, and resist any speculative attacks.
4) Maintain a multilateral system of payments that eliminates foreign exchange restrictions.
Countries are thus free to trade with each other without worrying about the effects of
interest rates and currency depreciation on their payments.
5) Provide a safeguard to members of the IMF against balance of payments crises, i.e., when
governments cannot balance the money they have with the money they owe to other
79
 countries. IMF members can have the confidence to adjust the imbalances in their
national accounts without resorting to painful measures that would hamper their
prosperity, such as devaluing their currency in relation to other countries'.
6) Try to reduce the effects of volatility in countries' balance of payments accounts, the IMF
helps assure that global trade and financial relationships can continue at a steady rate
without the risks of global depressions like that of the 1930s.members and in the
elimination of foreign exchange restrictions that hamper the growth of world trade.
World Bank
Structure
The World Bank is the name that has come to be used for the International Bank for
Reconstruction and Development (IBRD) founded at Bretton Woods. As the World Bank
expanded beyond its initial scope and purpose of rebuilding Europe after the Second World War,
the World Bank grew through the creation of four additional organizations. Together, these five
financial organizations comprise the World Bank Group, namely the IBRD, the International
Development Association (IDA), the International Finance Corporation (IFC), the Multilateral
Investment Guarantee Agency (MIGA), and the International Center for Settlement of
Investment Disputes (ICSID). The IBRD and the IDA focus mainly on public sector monetary
policy and provide low-interest loans, interest-free credit, and grants to developing countries.
Additionally, they work to affect the policies of governments by providing macroeconomic
policy advice, research, and technical advice. The remaining three institutions that belong to the
World Bank Group focus more on private market interactions, providing funding, insurance, and
dispute resolution for private sector projects. The sections below discuss with each part of the
World Bank Group in turn.

Governance
The governance of the World Bank is almost identical to that of the IMF. It is directed by a board
of governors composed of one representative from each member country, and the governors
direct the IBRD based on weighted voting rights that are determined by each country's agreed
annual contributions to the World Bank. As in the IMF, the United States is the largest
contributor and has the most weighted voting power, though as a practical matter, decisions are
made by consensus.
Twenty-four executive directors oversee the daily operations of the World Bank, including five
permanent spots given to the United States, Japan, Great Britain, Germany, and France. The
remaining 19 directors are elected by all member nations. The World Bank is led by its president,
currently Robert Zoellick, former under Secretary of State and former U.S. Trade Representative.
Vice presidents manage World Bank affairs in six regions—Africa, East Asia & Pacific, Europe
and Central Asia, Latin America & the Caribbean, Middle East and North Africa, and South
Asia—and in other functional units such as Finance, Poverty Reduction, Infrastructure, and
Private Sector Development.
goals:
i. Eradicate extreme poverty and hunger.
ii. Achieve universal primary education.
iii. Promote gender equality and empower women.
iv. Reduce child mortality.
v. Improve maternal health.
vi. Combat HIV/AIDS, malaria, and other diseases.

80
 vii. Ensure environmental sustainability.
viii. Develop a global partnership for development.

Debt Relief
Many of the world’s poorest countries accumulated debt in the 1970’s and 1980’s, after suffering
from worldwide oil shocks, high interest rates, weak commodity prices and recessions that
marked this period of history. At the time, development experts recommended that governments
of poor countries should borrow money from the World Bank and the IMF, among others, to
industrialize their economies by investing in industry and infrastructure, and by replacing goods
and services from abroad with goods and services produced within the country. Unfortunately
weak commodity prices decreased the value of poor country exports and high oil prices increased
the price of imports, both further increasing debt. In addition, many low and middle income
countries were living beyond their means, with high trade and budget deficits, as well as low
saving rates. Weak public sector management and corruption contributed to improper or
inefficient use of loans, further decreasing the capability of these countries to pay back the
borrowed money. Problems, such as droughts, civil war, weak economic policies, all exacerbated
the situation. Eventually poor countries were taking out new loans to pay back old ones.
The World Bank and IMF were the main lenders to these poor countries because private lenders
believed that these countries were too risky. Realizing the magnitude of the problem, in 1988, the
World Bank began to forgive some debt. In the 1990’s, some major industrial countries started to
cancel bilateral debt payments as well. By 1994, more than $15 billion of Africa debt was
forgiven. Nonetheless the region still owed $235 billion to foreigners, including donor countries,
regional banks and multilateral institutions.
In 1996, the World Bank and IMF created the Debt Relief for Heavily Indebted Poor Countries
(HIPC) Initiative, recognizing the need for debt relief from multilateral institutions. Through
this initiative, eligible countries are required to introduce specific economic reforms, such as
restructuring and privatization of state-run enterprises and creating a sound legal system, in
return for debt relief. The Initiative requirements were quite stringent and, by 1998, only two of
the 40 eligible countries received actual debt cancellation. In 1999, the World Bank enlarged the
program to encompass more countries and take into account other ongoing efforts for poverty
reduction in eligible countries. Critics were still not satisfied. Rallies, concerts and campaigns,
sponsored by U2’s Bono, and by NGOs, such as Oxfam, raised public awareness and pressured
countries to respond. The G-8 meeting in 2005 brought 100 percent cancellations of debt owed to
the African Development Fund, the World Bank, and the IMF by 18 countries who were eligible
for the HIPC initiative.

The IFIs are pillars of globalization. Designed to help manage the international financial system,
they have taken on major roles as drivers of closer economic integration of all of the world’s
countries, from the advanced to the least developed. They have provided funds and advice to
assist countries with their economic development and policy-making. At the same time, they are
criticized on many levels—for intrusiveness into the economic and political sovereignty of
nations dependent on their aid, lack of transparency, and impact of their policies on societies and
the environment.

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NORTH-SOUTH AND SOUTH-SOUTH CO-OPERATION
In the very early years of the Agency's Research Contract Programme contracts were awarded
principally to well-equipped laboratories in the industrialized countries for work concerning
radioactive waste management, radiation protection, radiobiology, and methods to be used in
applying safeguards over nuclear materials. The programme expanded rapidly, however, to
include an increasing number of contracts relating to the application of isotopes and radiation
techniques, particularly in the fields of agriculture and medical applications in the developing
countries. By the mid-1960s on-going Agencysupported projects were being carried out at
institutes in more than fifty Member States.
It has been the policy of the Agency to assign the highest priority to projects oriented toward
resolving problems in the developing countries, and to support projects at institutes in such
countries whenever such institutes are capable of carrying out research of high quality.
Over the life of the programme more than three-quarters of research contract funds have been
awarded to institutes in developing countries.
During the mid-1960s it also became evident that the Research Contract Programme provided an
excellent means to bring together scientists at institutes throughout the world to co-operate on
common research problems; and the concept of Agency Co-ordinated Research Programmes was
developed to provide a basis for close cooperation and co-ordination between researchers
undertaking related research projects at institutes in both advanced and developing countries. Co-
ordinated programmes are developed in relation to a well-defined research theme relevant to the
Agency's own programme and of high priority to at least a group of developing countries. The
subject areas in which the
Agency provides financial support are reviewed by its Scientific Advisory Committee and each
proposed programme is reviewed by an Agency standing committee of scientists appointed
specifically for this purpose. The Agency plays a strong role in defining the nature of the work to
be undertaken and in the selection of institutes participating in each programme. Such
programmes normally cover a five-year period and include research teams at institutes in 12 to
14 Member States. Regardless of the theme of the planned research, each programme has in
common three major aspects:
a) Scientists in advanced laboratories play a leading role in assisting and advising
researchers in the developing countries;
b) Research teams at institutes in the developing countries are encouraged to carry out work
which will produce new research results and also serve as the basis for them to gain
experience in their own fields; and
c) Co-operation between institutes in advanced countries and developing countries, and
between institutes in the developing countries, is strongly encouraged. To this end, the
Agency organizes and supports research co-ordination meetings for each co-ordinated
programme at appropriate intervals. During such meetings each co-operator is given the
opportunity to present the results of his work. The progress of the programme toward its
initial goals is reviewed carefully, and the direction of the work for the coming period is
established. Although the Agency normally does not provide financial support for
institutes in advanced countries, a great many scientists and institutes in these countries
offer their services to the Agency within the framework of the programme under the
terms of an Agency Research Agreement, which has been developed specifically for this
purpose. Under such agreements, the institute agrees to provide one report each year on
work related to the programme which it supports, and participates in all exchanges of

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 information between the participating institutes. The Chief Scientific Investigator is also
invited to attend all co-ordination meetings at Agency expense, and lends expertise to the
programme by giving guidance and assistance to other participating groups.

The tasks undertaken within the framework of such programmes vary greatly, as does the
Agency's role in individual programmes. It has been the policy of the Agency not to establish a
rigid pattern for the implementation of co-ordinated programmes, but rather to design the
approach to each programme to suit best the specific research problem and the needs of the
countries concerned

Questions

1) Discuss the impacts of globalization and trade on development

2) Discuss the structure and the functions of World Bank and International Monetary Fund

References

1) Miller, B, and Torr, J. D, (eds), (2003), Developing Nations: Current Contraversies,

Greenhawen Press.
2) Hyden, G. Olowu, Okoth-Ogendo, H.W.O (2000), African Perspectives on Development,
African World Press Inc., Nairobi

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LESSON 10; MILLENNIUM DEVELOPMENT GOALS

The Millennium Development Goals (MDGs) are eight international development goals that
were officially established following the Millennium Summit of the United Nations in 2000,
following the adoption of the United Nations Millennium Declaration. All 189 United Nations
member states and at least 23 international organizations have agreed to achieve these goals by
the year 2015. The goals are:

1. Eradicating extreme poverty and hunger,

2. Achieving universal primary education,
3. Promoting gender equality and empowering women,
4. Reducing child mortality rates,
5. Improving maternal health,
6. Combating HIV/AIDS, malaria, and other diseases,
7. Ensuring environmental sustainability, and
8. Developing a global partnership for development.[1]

Each of the goals has specific stated targets and dates for achieving those targets. To accelerate
progress, the G8 Finance Ministers agreed in June 2005 to provide enough funds to the World
Bank, the International Monetary Fund (IMF), and the African Development Bank (AfDB) to
cancel an additional $40 to $55 billion in debt owed by members of the Heavily Indebted Poor
Countries (HIPC) to allow impoverished countries to re-channel the resources saved from the
forgiven debt to social programs for improving health and education and for alleviating poverty.

Debate has surrounded adoption of the MDGs, focusing on lack of analysis and justification
behind the chosen objectives, the difficulty or lack of measurements for some of the goals, and
uneven progress towards reaching the goals, among other criticisms. Although developed
countries' aid for achieving the MDGs has been rising over recent years, more than half the aid is
towards debt relief owed by poor countries, with much of the remaining aid money going
towards natural disaster relief and military aid which do not further development.

Progress towards reaching the goals has been uneven. Some countries have achieved many of the
goals, while others are not on track to realize any. A UN conference in September 2010 reviewed
progress to date and concluded with the adoption of a global action plan to achieve the eight anti-
poverty goals by their 2015 target date. There were also new commitments on women's and
children's health, and new initiatives in the worldwide battle against poverty, hunger, and
disease.

Government organizations assist in achieving those goals, among them are the United Nations
Millennium Campaign, the Millennium Promise Alliance, Inc., the Global Poverty Project, the
Micah Challenge, The Youth in Action EU Programme, "Cartoons in Action" video project, and
the 8 Visions of Hope global art project.

1. Background The aim of the MDGs is to encourage development by improving social and
economic conditions in the world's poorest countries. They derive from earlier
international development targets and were officially established following the

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Millennium Summit in 2000, where all world leaders in attendance adopted the United
Nations Millennium Declaration The Millennium Summit was PEEd with the report of
the Secretary-General entitled We the Peoples: The Role of the United Nations in the
Twenty-First Century Additional input was prepared by the Millennium Forum, which
brought together representatives of over 1,000 non-governmental and civil society
organizations from more than 100 countries. The Forum met in May 2000 to conclude a
two-year consultation process covering issues such as poverty eradication, environmental
protection, human rights and protection of the vulnerable. The approval of the MDGs
was possibly the main outcome of the Millennium Summit. In the area of peace and
security, the adoption of the Brahimi Report was seen as properly equipping the
organization to carry out the mandates given by the Security Council. The MDGs
originated from the Millennium Declaration produced by the United Nations. The
Declaration asserts that every individual has the right to dignity, freedom, equality, a
basic standard of living that includes freedom from hunger and violence, and encourages
tolerance and solidarity.The MDGs were made to operationalize these ideas by setting
targets and indicators for poverty reduction in order to achieve the rights set forth in the
Declaration on a set fifteen-year timeline.An Introduction to the Human Development
and Capability Approach: Freedom and Agency' The Millennium Summit Declaration
was, however, only part of the origins of the MDGs. It came about from not just the UN
but also the Organization for Economic Cooperation and Development (OECD), the
World Bank, and the International Monetary Fund. The setting came about through a
series of UN-led conferences in the 1990s focusing on issues such as children, nutrition,
human rights, women and others. The OECD criticized major donors for reducing their
levels of Official Development Assistance (ODA). With the onset of the UN's 50th
anniversary, then UN Secretary General Kofi Annan saw the need to address the range of
development issues. This led to his report titled, We the Peoples: The Role of the United
Nations in the 21st Century which led to the Millennium Declaration. By this time, the
OECD had already formed its International Development Goals (IDGs) and it was
combined with the UN's efforts in the World Bank's 2001 meeting to form the
MDGs."The Political Economy of the MDGs: Retrospect and Prospect for the World's
Biggest Promise", The MDG focus on three major areas: of valorising human capital,
improving infrastructure, and increasing social, economic and political rights, with the
majority of the focus going towards increasing basic standards of living."The Millennium
Development Goals Report:The objectives chosen within the human capital focus include
improving nutrition, healthcare (including reducing levels of child mortality, HIV/AIDS,
tuberculosis and malaria, and increasing reproductive health), and education. For the
infrastructure focus, the objectives include improving infrastructure through increasing
access to safe drinking water, energy and modern information/communication
technology; amplifying farm outputs through sustainable practices; improving
transportation infrastructure; and preserving the environment. Lastly, for the social,
economic and political rights focus, the objectives include empowering women, reducing
violence, increasing political voice, ensuring equal access to public services, and
increasing security of property rights. The goals chosen were intended to increase an
individual’s human capabilities and "advance the means to a productive life".The MDGs
emphasize that individual policies needed to achieve these goals should be tailored to
individual country’s needs; therefore most policy suggestions are general.

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The MDGs also emphasize the role of developed countries in aiding developing countries, as
outlined in Goal Eight. Goal Eight sets objectives and targets for developed countries to achieve
a "global partnership for development" by supporting fair trade, debt relief for developing
nations, increasing aid and access to affordable essential medicines, and encouraging technology
transfer. Thus developing nations are not seen as left to achieve the MDGs on their own, but as a
partner in the developing-developed compact to reduce world poverty.

Goals

Goal 1: Eradicate extreme poverty and hunger

 Target 1A: Halve, between 1990 and 2015, the proportion of people living on less
than $1.25 a day
o Proportion of population below $1.25 per day (PPP values)
o Poverty gap ratio [incidence x depth of poverty]
o Share of poorest quintile in national consumption
 Target 1B: Achieve Decent Employment for Women, Men, and Young People
o GDP Growth per Employed Person
o Employment Rate
o Proportion of employed population below $1.25 per day (PPP values)
o Proportion of family-based workers in employed population
 Target 1C: Halve, between 1990 and 2015, the proportion of people who suffer from
hunger
o Prevalence of underweight children under five years of age
o Proportion of population below minimum level of dietary energy consumption

Goal 2: Achieve universal primary education

 Target 2A: By 2015, all children can complete a full course of primary schooling,
girls and boys
o Enrollment in primary education
o Completion of primary education

Goal 3: Promote gender equality and empower women

 Target 3A: Eliminate gender disparity in primary and secondary education

preferably by 2005, and at all levels by 2015
o Ratios of girls to boys in primary, secondary and tertiary education
o Share of women in wage employment in the non-agricultural sector
o Proportion of seats held by women in national parliament
o For girls in some regions, education remains elusive
o Poverty is a major barrier to education, especially among older girls
o In every developing region except the CIS, men outnumber women in paid
employment
o Women are largely relegated to more vulnerable forms of employment

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 o Women are over-represented in informal employment, with its lack of benefits and
security
o Top-level jobs still go to men — to an overwhelming degree
o Women are slowly rising to political power, but mainly when boosted by quotas
and other special measures

Goal 4: Reduce child mortality rates

 Target 4A: Reduce by two-thirds, between 1990 and 2015, the under-five mortality
rate
o Under-five mortality rate
o Infant (under 1) mortality rate
o Proportion of 1-year-old children immunized against measles

Goal 5: Improve maternal health

 Target 5A: Reduce by three quarters, between 1990 and 2015, the maternal
mortality ratio
o Maternal mortality ratio
o Proportion of births attended by skilled health personnel
 Target 5B: Achieve, by 2015, universal access to reproductive health
o Contraceptive prevalence rate
o Adolescent birth rate
o Antenatal care coverage
o Unmet need for family planning

Goal 6: Combat HIV/AIDS, malaria, and other diseases

 Target 6A: Have halted by 2015 and begun to reverse the spread of HIV/AIDS
o HIV prevalence among population aged 15–24 years
o Condom use at last high-risk sex
o Proportion of population aged 15–24 years with comprehensive correct
knowledge of HIV/AIDS
 Target 6B: Achieve, by 2010, universal access to treatment for HIV/AIDS for all
those who need it
o Proportion of population with advanced HIV infection with access to
antiretroviral drugs
 Target 6C: Have halted by 2015 and begun to reverse the incidence of malaria and
other major diseases
o Prevalence and death rates associated with malaria
o Proportion of children under 5 sleeping under insecticide-treated bednets
o Proportion of children under 5 with fever who are treated with appropriate anti-
malarial drugs
o Incidence, prevalence and death rates associated with tuberculosis
o Proportion of tuberculosis cases detected and cured under DOTS (Directly
Observed Treatment Short Course)[12]

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Goal 7: Ensure environmental sustainability

 Target 7A: Integrate the principles of sustainable development into country policies
and programs; reverse loss of environmental resources
 Target 7B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in
the rate of loss
o Proportion of land area covered by forest
o CO2 emissions, total, per capita and per $1 GDP (PPP)
o Consumption of ozone-depleting substances
o Proportion of fish stocks within safe biological limits
o Proportion of total water resources used
o Proportion of terrestrial and marine areas protected
o Proportion of species threatened with extinction
 Target 7C: Halve, by 2015, the proportion of the population without sustainable
access to safe drinking water and basic sanitation (for more information see the
entry on water supply)
o Proportion of population with sustainable access to an improved water source,
urban and rural
o Proportion of urban population with access to improved sanitation
 Target 7D: By 2020, to have achieved a significant improvement in the lives of at
least 100 million slum-dwellers
o Proportion of urban population living in slums

Goal 8: Develop a global partnership for development

 Target 8A: Develop further an open, rule-based, predictable, non-discriminatory

trading and financial system
o Includes a commitment to good governance, development, and poverty reduction
– both nationally and internationally
 Target 8B: Address the Special Needs of the Least Developed Countries (LDCs)
o Includes: tariff and quota free access for LDC exports; enhanced programme of
debt relief for HIPC and cancellation of official bilateral debt; and more
generous ODA (Official Development Assistance) for countries committed to
poverty reduction
 Target 8C: Address the special needs of landlocked developing countries and small
island developing States
o Through the Programme of Action for the Sustainable Development of Small
Island Developing States and the outcome of the twenty-second special session of
the General Assembly
 Target 8D: Deal comprehensively with the debt problems of developing countries
through national and international measures in order to make debt sustainable in
the long term
o Some of the indicators listed below are monitored separately for the least
developed countries (LDCs), Africa, landlocked developing countries and small
island developing States.
o Official development assistance (ODA):

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  Net ODA, total and to LDCs, as percentage of OECD/DAC donors’ GNI
 Proportion of total sector-allocable ODA of OECD/DAC donors to basic
social services (basic education, primary health care, nutrition, safe water
and sanitation)
 Proportion of bilateral ODA of OECD/DAC donors that is untied
 ODA received in landlocked countries as proportion of their GNIs
 ODA received in small island developing States as proportion of their
GNIs
o Market access:
 Proportion of total developed country imports (by value and excluding
arms) from developing countries and from LDCs, admitted free of duty
 Average tariffs imposed by developed countries on agricultural products
and textiles and clothing from developing countries
 Agricultural support estimate for OECD countries as percentage of their
GDP
 Proportion of ODA provided to help build trade capacity
o Debt sustainability:
 Total number of countries that have reached their HIPC decision points
and number that have reached their HIPC completion points (cumulative)
 Debt relief committed under HIPC initiative, US$
 Debt service as a percentage of exports of goods and services
 Target 8E: In co-operation with pharmaceutical companies, provide access to
affordable, essential drugs in developing countries
o Proportion of population with access to affordable essential drugs on a
sustainable basis
 Target 8F: In co-operation with the private sector, make available the benefits of
new technologies, especially information and communications
o Telephone lines and cellular subscribers per 100 population
o Personal computers in use per 100 population
o Internet users per 100 Population

Debate surrounding the MDGs

Drawbacks of the MDGs include the lack of analytical power and justification behind the chosen
objectives. The MDGs leave out important ideals, such as the lack of strong objectives and
indicators for equality, which is considered by many scholars to be a major flaw of the MDGs
due to the disparities of progress towards poverty reduction between groups within nations. The
MDGs also lack a focus on local participation and empowerment (excluding women’s
empowerment) [Deneulin & Shahani 2009]. The MDGs also lack an emphasis on sustainability,
making their future after 2015 questionable. Thus, while the MDGs are a tool for tracking
progress toward basic poverty reduction and provide a very basic policy road map to achieving
these goals, they do not capture all elements needed to achieve the ideals set out in the
Millennium Declaration.

Researchers also point out some important gaps in the MDGs. For example, agriculture was not
specifically mentioned in the MDGs even though a major portion of world's poor are rural

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farmers. Again, MDG 2 focuses on primary education and emphasizes on enrollment and
completion. In some countries, it has led to increase in primary education enrollment at the
expense of learning achievement level. In some cases, it has also negatively affected secondary
and post secondary education, which have important implication on economic growth.

Another criticism of the MDGs is the difficulty or lack of measurements for some of the goals.
Amir Attaran, an Associate Professor and Canada Research Chair in Law, Population Health,
and Global Development Policy at University of Ottawa, argues that goals related to maternal
mortality, malaria, and tuberculosis are in practice impossible to measure and that current UN
estimates do not have scientific validity or are missing. Household surveys are often used by the
UN organisations to estimate data for the health MDGs. These surveys have been argued to be
poor measurements of the data they are trying to collect, and many different organisations have
redundant surveys, which waste limited resources. Furthermore, countries with the highest levels
of maternal mortality, malaria, and tuberculosis often have the least amount of reliable data
collection. Attaran argues that without accurate measures of past and current data for the health
related MDGs, it is impossible to determine if progress has been made toward the goals, leaving
the MDGs as little more than a rhetorical call to arms.

Proponents for the MDGs argue that while some goals are difficult to measure, that there is still
validity in setting goals as they provide a political and operational framework to achieving the
goals. They also assert that non-health related MDGs are often well measured, and it is wrong to
assume that all MDGs are doomed to fail due to lack of data. It is further argued that for difficult
to measure goals, best practices have be identified and their implication is measurable as well as
their positive effects on progress. With an increase in the quantity and quality of healthcare
systems in developing countries, more data will be collected, as well as more progress made.
Lastly the MDGs bring attention to measurements of well being beyond income, and this
attention alone helps bring funding to achieving these goals.

The MDGs are also argued to help the human development by providing a measurement of
human development that is not based solely on income, prioritizing interventions, establishing
obtainable objectives with operationalized measurements of progress (though the data needed to
measure progress is difficult to obtain), and increasing the developed world’s involvement in
worldwide poverty reduction. The measurement of human development in the MDGs goes
beyond income, and even just basic health and education, to include gender and reproductive
rights, environmental sustainability, and spread of technology. Prioritizing interventions helps
developing countries with limited resources make decisions about where to allocate their
resources through which public policies. The MDGs also strengthen the commitment of
developed countries to helping developing countries, and encourage the flow of aid and
information sharing. The joint responsibility of developing and developed nations for achieving
the MDGs increases the likelihood of their success, which is reinforced by their 189-country
support (the MDGs are the most broadly supported poverty reduction targets ever set by the
world).

Progress

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Progress towards reaching the goals has been uneven. Some countries, such as Brazil, have
achieved many of the goals, while others, such as Benin, are not on track to realize any. The
major countries that have been achieving their goals include China (whose poverty population
has reduced from 452 million to 278 million) and India due to clear internal and external factors
of population and economic development. The World Bank estimated that MDG 1A (halving the
proportion of people living on less than $1 a day) was achieved in 2008 mainly due to the results
from these two countries and East Asia.

However, areas needing the most reduction, such as the sub-Saharan Africa regions have yet to
make any drastic changes in improving their quality of life. During the same time frame as
China, sub-Saharan Africa reduced its poverty by a mere one percent and is at a major risk of not
meeting the MDGs by 2015. Even though the poverty rates in sub-Saharan Africa decreased in a
small percent, there are some successes regarding millennium development goals in sub-Saharan
Africa. In the case of MDG 1, sub-Saharan region started to eradicate poverty by strengthening
the industry of rice production. Originally, rice production was one of the main problems since
its production rate could not catch up the rapid population growth by mid-1990s. This caused
great amount of rice imports and great costs for the governments reaching nearly $1 billion
annually. In addition, farmers in Africa suffered from finding the suitable species of rice that can
well-adapt in their conditions with high-yield characteristic. Then, New Rice for Africa
(NERCA) which is high-yielding and well adapting to the African conditions was developed and
contributed to the food security in sub-Saharan regions including Congo Brazzaville, Côte
d'Ivoire, the Democratic Republic of the Congo, Guinea, Kenya, Mali, Nigeria, Togo, and
Uganda. Now about 18 varieties of the hybrid species are available to rice farmers and, for the
first time, many farmers are able to produce enough rice to feed their families and to gain profit
at the market. Sub-Saharan region also show improvement in the case of MDG 2. School fees
that included Parent-Teacher Association and community contributions, textbook fees,
compulsory uniforms and other charges were highly expensive in sub-Saharan Africa, taking up
nearly a quarter of a poor family’s income. This was one of the barriers for enrollment and, thus,
countries like Burundi, the Democratic Republic of the Congo, Ethiopia, Ghana, Kenya, Malawi,
Mozambique, Tanzania, and Uganda have eliminated school fees. This resulted in the increase in
student enrollment in several regions. For instance, in Ghana, public school enrollment in the
most deprived districts soared from 4.2 million to 5.4 million between 2004 and 2005. In Kenya,
enrollment of primary school children surged significantly with 1.2 million extra increase of
children in school in 2003 and by 2004, the number had climbed to 7.2 million. Fundamental
issues will determine whether or not the MDGs are achieved, namely gender, the divide between
the humanitarian and development agendas and economic growth, according to researchers at the
Overseas Development Institute (ODI).

Achieving the MDGs does not depend on economic growth alone and expensive solutions. In the
case of MDG 4, some developing countries like Bangladesh have shown that it is possible to
reduce child mortality with only modest growth with inexpensive but effective interventions,
such as measles immunisation. It has also been found that total government expenditure would
not, in most cases, be enough to meet the agreed spending targets in a number of sectors
highlighted by the MDGs. Research on health systems and MDGs suggests that a "one size fits
all" model will not sufficiently respond to the individual healthcare profiles of developing
countries; however, the study does find a set of similar constraints in scaling up international

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health, including the lack of absorptive capacity, weak health systems, human resource
limitations, and high costs. The study argues that the emphasis on quantitative coverage obscures
the measures required for scaling up health care. These measures include political,
organizational, and functional dimensions of scaling up, and the need to nurture local
organizations.

According to some experts, MDG 7—to halve the proportion of the population without
sustainable access to safe drinking water and basic sanitation—is still far from being reached.
Since national governments often cannot provide the necessary infrastructure, civil society in
some countries started to organise and work on sanitation themselves, says the magazine D+C
Development and Cooperation. For instance, in Ghana there is an umbrella organisation called
CONIWAS (Coalition of NGOs in Water and Sanitation), which today has more than 70 member
organisations focusing on providing access to water and sanitation.

Goal 8 of the MDGs is unique in the sense that it focuses on donor government commitments
and achievements, rather than successes in the developing world. The Commitment to
Development Index, published annually by the Center for Global Development in Washington,
D.C., is considered the best numerical indicator for MDG 8. It is a more comprehensive measure
of donor progress than official development assistance, as it takes into account policies on a
number of indicators that affect developing countries such as trade, migration, and investment.

To accelerate progress towards the MDGs, the G-8 Finance Ministers met in London in June
2005 (in preparation for the G-8 Gleneagles Summit in July) and reached an agreement to
provide enough funds to the World Bank, the IMF, and the African Development Bank (AfDB)
to cancel an additional $40 to $55 billion in debt owed by members of the Heavily Indebted Poor
Countries (HIPC). This would allow impoverished countries to re-channel the resources saved
from the forgiven debt to social programs for improving health and education.

Backed by G-8 funding, the World Bank, the International Monetary Fund, and the AfDB each
endorsed the Gleaneagles plan and implemented the Multilateral Debt Relief Initiative (MDRI)
to effectuate the debt cancellations. The MDRI supplements HIPC by providing each country
that reaches the HIPC completion point 100% forgiveness of its multilateral debt. Countries that
previously reached the decision point became eligible for full debt forgiveness once their lending
agency confirmed that the countries had continued to maintain the reforms implemented during
HIPC status. Other countries that subsequently reach the completion point automatically receive
full forgiveness of their multilateral debt under MDRI.

While the World Bank and AfDB limit MDRI to countries that complete the HIPC program, the
IMF's MDRI eligibility criteria are slightly less restrictive so as to comply with the IMF's unique
"uniform treatment" requirement. Instead of limiting eligibility to HIPC countries, any country
with annual per capita income of $380 or less qualifies for MDRI debt cancellation. The IMF
adopted the $380 threshold because it closely approximates the countries eligible for HIPC.

The International Health Partnership (IHP+) also aims to accelerate progress towards the MDGs
by putting international principles for effective aid and development cooperation into practice in
the health sector. In developing countries, money for health comes from both domestic and

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external sources, and governments must work in coordination with a range of international
development partners. As these partners increase in number, variations in funding streams and
bureaucratic demands also increase. As a result, development efforts can become fragmented and
resources can be wasted. By encouraging support for a single national health strategy or plan, a
single monitoring and evaluation framework, and a strong emphasis on mutual accountability,
IHP+ builds confidence between government, civil society, development partners, and other
stakeholders whose activities affect health.

As 2015 approaches, however, increasing global uncertainties such as the economic crisis and
climate change have led to an opportunity to rethink the MDG approach to development policy.
According to the In Focus policy brief from the Institute of Development Studies, the "After
2015" debate is about questioning the value of an MDG-type, target-based approach to
international development, about progress so far on poverty reduction, about looking to an
uncertain future and exploring what kind of system is needed after the MDG deadline has passed.

Further developments in rethinking strategies and approaches to achieving the MDGs include
research by the Overseas Development Institute into the role of equity. Researchers at the ODI
argue progress can be accelerated due to recent breakthroughs in the role equity plays in creating
a virtuous circle where rising equity ensures the poor participate in their country's development
and creates reductions in poverty and financial stability Yet equity should not be understood
purely as economic, but also as political. Examples abound, including Brazil's cash transfers,
Uganda's eliminations of user fees and the subsequent huge increase in visits from the very
poorest or else Mauritius's dual-track approach to liberalisation (inclusive growth and inclusive
development) aiding it on its road into the World Trade Organization. Researchers at the ODI
thus propose equity be measured in league tables in order to provide a clearer insight into how
MDGs can be achieved more quickly; the ODI is working with partners to put forward league
tables at the 2010 MDG review meeting.

The effects of increasing drug use have been noted by the International Journal of Drug Policy
as a deterrent to the goal of the MDGs.

Other development scholars, such as Naila Kabeer, Caren Grown, and Noeleen Heyzer, argue
that an increased focus on women’s empowerment and gender mainstreaming of MDG-related
policies will accelerate the progress of the MDGs. Kabeer argues that increasing women’s
empowerment and access to paid work will help reduce child mortality. To illustrate, in South
Asian countries, which have high levels of gender discrimination, babies often suffer from low
birth weight due to limited access to healthcare and malnutrition. Since low-birth weight babies
have limited chances of survival, improving women’s health by increasing their bargaining
power in the family through paid work, will reduce child mortality. Another way empowering
women will help accelerate the MDGs is the inverse relationship between mother’s schooling
and child mortality, as well as the positive correlation between increasing a mother’s agency
over unearned income and health outcomes of her children, especially girls. Increasing a
mother’s education and workforce participation increases these effects. Lastly empowering
women by creating economic opportunities for women decreases women’s participation in the
sex market which decreases the spread of AIDS, an MDG in itself (MDG 6A).

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Grown asserts that the resources, technology and knowledge exist to decrease poverty through
improving gender equality, it is just the political will that is missing. She argues that if donor
countries and developing countries together focused on seven "priority areas": increasing girl’s
completion of secondary school, guaranteeing sexual and reproductive health rights, improving
infrastructure to ease women’s and girl’s time burdens, guaranteeing women’s property rights,
reducing gender inequalities in employment, increasing seats held by women in government, and
combating violence against women, great progress could be made towards the MDGs.

Kabeer and Heyzer believe that the current MDGs targets do not place enough emphasis on
tracking gender inequalities in poverty reduction and employment as there are only gender goals
relating to health, education, and political representation. To encourage women’s empowerment
and progress towards the MDGs, increased emphasis should be placed on gender mainstreaming
development policies and collecting data based on gender.

Review Summit 2010

A major conference was held at UN headquarters in New York on 20–22 September 2010 to
review progress to date, with five years left to the 2015 deadline.

The conference concluded with the adoption of a global action plan to achieve the eight anti-
poverty goals by their 2015 target date. There were also major new commitments on women's
and children's health, and major new initiatives in the worldwide battle against poverty, hunger
and disease.

Challenges

Although developed countries' aid for the achievement of the MDGs has been rising over recent
years, it has shown that more than half is towards debt relief owed by poor countries. As well,
remaining aid money goes towards disaster relief and military aid which does not further the
country into development. According to the United Nations Department of Economic and Social
Affairs (2006), the 50 least developed countries only receive about one third of all aid that flows
from developed countries, raising the issue of aid not moving from rich to poor depending on
their development needs but rather from rich to their closest allies.

Many development experts question the MDGs model of transferring billions of dollars directly
from the wealthy nation governments to the often bureaucratic or corrupt governments in
developing countries. This form of aid has led to extensive cynicism by the general public in the
wealthy nations and hurts support for expanding aid.

Controversy over funding of 0.7% of GNI

Over the past 35 years, the members of the UN have repeatedly made a "commit[ment] 0.7% of
rich-countries' gross national income (GNI) to Official Development Assistance". The
commitment was first made in 1970 by the UN General Assembly.

The text of the commitment was:

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Each economically advanced country will progressively increase its official development
assistance to the developing countries and will exert its best efforts to reach a minimum net
amount of 0.7 percent of its gross national product at market prices by the middle of the decade.

However, there has been disagreement from the United States as well as other nations over the
Monterrey Consensus that urged "developed countries that have not done so to make concrete
efforts towards the target of 0.7 per cent of gross national product (GNP) as ODA to developing
countries".

Support for the 0.7% target

The UN "believe[s] that donors should commit to reaching the long-standing target of 0.7
percent of GNI by 2015". In 2005 the European Union reaffirmed its commitment to the 0.7%
aid targets, noting that "four out of the five countries, which exceed the UN target for ODA of
0.7%, of GNI are member states of the European Union".

Many organizations are working to bring U.S. political attention to the Millennium Development
Goals. In 2007, The Borgen Project worked with then Senator Barack Obama on the Global
Poverty Act, a bill requiring the White House to develop a strategy for achieving the goals. As of
2009, the bill has not passed, but Obama has since been elected president.

Challenges to the 0.7% target

Many Organisation for Economic Co-operation and Development (OECD) nations, including
key members such as the United States, are not progressing towards their promise of giving 0.7%
of their GNP towards poverty reduction by the target year of 2015. Some nations' contributions
have been criticized as falling far short of 0.7%.

John Bolton argues that the United States never agreed in Monterrey to spending 0.7% of GDP
on development assistance. Indeed, Washington has consistently opposed setting specific
foreign-aid targets since the UN General Assembly first endorsed the 0.7% goal in 1970

The Australian government has committed to providing 0.5% of GNI in International

Development Assistance by 2015-2016.

Improvements

To meet the challenge of overcoming global health inequalities and make foreign aid more
effective in attaining the Millennium Development Goals, more health services are suggested to
be provided to the developing countries. Since the living condition of the developing countries
are not organized well and getting worse, many health workers removed from the poor countries
to other places which offer a better paid and good living environment. Even though the health
workers who are willing to stay, they are not trained well. As a result, these health care workers
infected disease when they worked at the poor countries. Cuba, a small, low-income country,
played a significant role of providing medical services to developing nations; it has trained more
than 14,500 medical students from 30 different countries at its Latin American School of

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Medicine in Havana since 1999. Moreover, Cuba had 36000 health physicians worked in 72
countries, from Europe to Southeast Asia, 31 African countries, and 29 countries in the America.
Countries such as Honduras, Guatemala, and Nicaragua depend on Cuban assistance to improve
their living conditions. It is noted that the training of health care workers should be counted as a
budget consideration of developed countries.

Furthermore, in order to achieve the MDGs, it is important to make services more accessible to
people living in lower-income countries. Wealthy countries should cooperate with low- and
middle-income countries by operating programs both in the short and long run. Besides that,
some researchers suggested that developed countries should treat global health inequalities and
humanitarian issue as a part of national strategy.

Post 2015 development agenda

At the September 2010 MDG Summit, UN Member States initiated steps towards advancing the
Post-2015 Development Agenda and are now leading a process of open, inclusive consultations
on the post-2015 agenda. Civil society organizations from all over the world have also begun to
engage in the post-2015 process, while academia and other research institutions, including think
tanks, are particularly active.

The United Nations International Strategy for Disaster Reduction started a process of
consultations as the disaster risk reduction community heads toward the end date of the current
blueprint for global disaster risk reduction, the Hyogo Framework of Action 2005-2015: Building
the Resilience of Nations and Communities to Disasters.

On 31 July 2012, Secretary-General Ban Ki-moon appointed 26 civil society, private sector, and
government leaders from all regions to a high-level panel to advise on the global development
agenda beyond 2015.

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LESSON 11:

DEVELOPMENT PLANNING
Definition of development planning
According to M.L Jhigen planning is a techniques, a means to an end being the realization of
certain pre-determined and will defined aims and objects laid down by a central planning
authority.”
Professor Lewis referred to six different senses in which term planning is used in economic
literature.
(i) It refer only to the geographical zoning of factors, residential buildings, cinemas
and the takes- called town and country planning.
(ii) Planning means only deciding what money the government will spend in the
future if it has the money to spend.
(iii) ‘Planned economy’ is one in which each production unit (or firm) uses only the
resumes of men, materials and equipment allocated to it by quata and disposes of
its product excursively to persons or firms indicated to it by central order.
(iv) It means any setting of production targets by the government, whether for private
or public enterprise.
(v) Here targets are set for the economy as a whole, purporting to allocate all the
country’s labour, foreign exchange, raw materials and other resources between the
various branches of the economy.
(vi) It is used to describe the means which the government uses to try to enforce upon
private enterprise the targets which have been previous determined.

Ferdynard Zweig- planning does not mean piecemeal planning does not mean piecemeal
planning but over all planning of the economy. It implies and leads to centralization of the
nationed economy.
Professor Ribbing: it’s a collection control or supervision of private activities of production and
exchange.”
Hayek- planning means “ the direction of productive activity by a central authority.”
Dalton. “economic planning in the widest sense is the deliberate direction by persons in charge
of large resources of economic activity towards chosen ends.”
Mj. Jhnlan. Its implies deliberate control and directions of the economic by a central authority
for the purpose of achieving definite targets and objectives within a specified period of time.”

Importance of Planning in Underdeveloped Countries

1. To increase the role of economic development.
2. To improve and strengthen market mechanism
3. To remove unemployment

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4. Balanced development of the economy.
(i) Balanced development of the economy is achieved through the following
(ii) Development of agricultural and industrial sectors
(iii) Development of infrastructure
(iv) Development of money and capital markets
5. Removing poverty and inequalities

Plan formulation and requisites for successful planning

The formulation and success of a plan require the following:
(i) Planning commission
(ii) Satisfied date
(iii) Objectives
(iv) Fixation of targets and priorities
(v) Mobilization of resources
(vi) Balancing in the plan
(vii) Incorrupt and efficient administration
(viii) Proper development policy
(ix) Economy in administration
(x) An education base
(xi) A theory of consumption
(xii) Public cooperation.
Problems of development planning
(i) Inadequate satisfied data
(ii) Problems of macroeconomic estimates
(iii) Limitations of the use of models
(iv) Constant prices. Plan is made on the assumption that prices remain constant during
the plan period.
(v) No control over private sector plan
(vi) Constant capital-output ratio- its an important element on which the projections of a
plan are based.
(vii) Problems of fixed relations between factor inputs and outputs. i.e the inputs in
underdeveloped countries are scarce.
(viii) Lack of coordination between plan policies and annual budgets.
(ix) Problem of balancing the plan.
(x) Uncertainties e.g. inflationary pressures, international recession, internal unrest etc.

Types of planning
(1) Planning in market economies
Planning hare consists of the conscious effort by the government to attain rapid economic growth
with high employment and stable prices through its various fisted and military policies.
The market forces plays a key role in planning.

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The policy instruments used are primarily those in the fields of monetary, fisted and foreign trade
relations.

(2) Planning in command economies

Its associated mainly with the soviet union and the economies of eastern Europe.
The government actively and directly controlled the movements of the economy through a
central decision making prices. A specific targets predetermined by central planners formed the
basis of a complete and comprehensive nationed economies plan. Resources both material and
financial, were allocated in accordance not with market prices and conditions of supply and
demand as in idealized market economics.

(3) Planning in mixed developing economics

It is being used in many Third world countries.
These economics are characterized by existence of an institutional setting in which part of the
productive resources are privately owned and operated while the other part is controlled by the
public sector.
Components of development planning in mixed economies.

(i) the government’s deliberate utilization of domestic saving of foreign finance to carry
out public investment projects and to mobilize and channel scarce resources into areas
that can be expected to make greatest contributions.
(ii) Government economic policy i.e taxation, licensing, import quates, wages and price
policy to stimulate, direct and in some cases even control private economic activities
in order to ensure a harmonious reception ship between the desires of private
businessmen and the social objectives of the central government.

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