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Economic Development: Definition, Scope, and Measurement

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E
Economic Development:
Definition, Scope, and
Measurement
Prabha Panth
Department of Economics, Osmania University,
Hyderabad, India
Definition
The concepts “development” and “underdevelop-
ment” are ambiguous, and for decades they have
been the subject of endless debates and discus-
sions. There is no clear picture or definition of
what actually constitutes “economic underdevel-
opment” or how to achieve it, as it is an evolving
concept, and keeps altering over time.
Broadly, economic development is taken to be
the structural transformation of an economy by
introducing more mechanized and updated tech-
nologies to increase labor productivity, employ-
ment, incomes, and standard of living of the
population. Economic development should be
accompanied by improvements in infrastructure,
as well as social, political, and institutional factors
to facilitate transformation of the economy (Myint
and Krueger 2016).
Economic development is regarded as impor-
tant for a country to reduce its poverty by provid-
ing more employment, higher incomes, improved
goods and services, and latest technologies of
production. [news.orlando.org/blog/] The crux of
© Springer Nature Switzerland AG 2020
W. Leal Filho et al. (eds.), No Poverty, Encyclopedia of the UN Sustainable Development Goals,
https://doi.org/10.1007/978-3-319-69625-6_38-1
the problem however, is that the framework for
economic development – modern technology,
industrial sector, and infrastructural facilities –
has not yet been established in many countries of
the world due to various historical and political
reasons. Hence, there is a high level of inequality
among, and even within, countries.
Introduction
Economic development has greatly improved liv-
ing conditions and incomes across the world.
However, an alarming and inevitable conse-
quence of modern economic development is the
massive negative impact on the natural environ-
ment. Modern technology is highly resource
dependent, needing enormous inputs of minerals,
metals, power, fuel, timber, water, etc. At the same
time, production and consumption do not “use”
up all these materials, they are let off into the
environment in the form of pollution and wastes
(Georgescue Roegen 1971). But the capacity of
the Earth to absorb and recycle wastes and pollu-
tion is limited, leading to many environmental
disasters as pollution chokes land, air, and water
adversely affecting living systems on Earth.
[footprintnetwork.org.] For example, the phe-
nomenon of climate change due to accumulation
of Greenhouse gases in the atmosphere is one
such danger. There is sufficient proof to show
that it is threatening the very climatic structure
of the Earth, impacting precipitation and
2 Economic Development: Definition, Scope, and Measurement
agriculture, shrinking snow covers on mountains
and tundra regions, increasing sea levels, drown-
ing low level areas and islands, destroying marine
life, and with a whole lot of still unknown disas-
ters in the offing. [carbonfootprint.com (https://
www.carbonfootprint.com/warming.html Carbon
Footprint)].
If the natural environment is completely dev-
astated, it threatens the existence of life itself on
this Earth. So, there is an urgent need to review the
type of economic development that is taking place
and to ensure that the process and fruits of eco-
nomic development are not environmentally
destructive. Hence, there is the need for sustain-
able development – i.e., economic development
that does not pose a threat to the natural environ-
ment or limit future development. Sustainable
development is usually defined as “development
that meets the needs of the present generation,
without compromising the ability of future gener-
ations to meet their own needs.” (Brundtland
1987) The UN SDG goals are framed as guide-
lines to help countries achieve sustainable devel-
opment by focusing on both the economic and
environmental dimensions of growth.
In this chapter, the problem of giving a precise
definition of economic development is discussed,
as the concept has multifarious meanings which
keep changing. A short history of economic
development and underdevelopment follows,
after which the scope and features of Develop-
ment Economics are examined. Various methods
of measuring Economic Development and their
limitations are then presented, followed by Con-
clusions and References to various sources used in
this chapter.
To understand the concept of economic devel-
opment, a brief look into the historical back-
ground will be useful.
History of Economic Development
Historically, different countries of the world were
more or less developed at some point of time. In
the era before Christ, countries like India, China,
Egypt, Mesopotamia, Syria, Greece, and Rome
were more developed than the other parts of the
world (Maddison 2006). At that time, the popula-
tion in many other countries was still living in the
Stone Age, and huge tracts of land were still
unoccupied and unpopulated. So “development”
is a relative term used in a particular historical,
economic, and technological context.
Until about the seventeenth century, the then
known countries of the world were at about the
same level of development, using more or less
similar type of labor-intensive techniques and
goods. At about this time, England and other
European countries experienced a tremendous
change in their modes of production, aptly called
“The Industrial Revolution” and they witnessed
rapid economic growth. This was facilitated by a
number of interrelated political, social, technical,
and economic factors such as access to vast natu-
ral resources from their colonies and the New
World, the availability of cheap colonial labor
and markets, and the extraordinary spurt of inven-
tions and scientific discoveries during that period,
which revolutionized methods and modes of pro-
duction and consumption (Industrial Revolution
2019).
The European powers’ economic development
was at the cost of a number of other countries
particularly their colonies, which were inevitably
thrust back. These countries are now dubbed as
the “underdeveloped countries” and they are
mostly in Asia, Africa, and South America. Most
of these countries which were quite advanced up
to the eighteenth century were now exploited and
economically ruined by the European colonists.
(Rodney 2018) For instance, India was the largest
economy of the ancient and medieval world up to
the time of the Maratha Empire, i.e., until the
eighteenth century AD, controlling between one-
fourth to one-third of the world’s wealth. But after
European colonization, its economy rapidly
declined, and by the 1940s, it became one of the
world’s poorest countries (Maddison 2006).
During the 1940s and 1950s, many of these
colonies attained political independence, but with
their economies severely damaged by the exploit-
ative measures of the colonial powers, as well as
by World War II. Their economic conditions were
greatly decimated, they were deficient in modern
methods of production, their natural resources,
Economic Development: Definition, Scope, and Measurement
markets, modes of production, and labor were
exploited and destroyed, and their traditional tech-
niques and knowledge were ruined. A case in
point is the near annihilation of the muslin pro-
duction and indigo trade in India by the British,
who wanted to promote their own textile industry
in Britain, as well as to conquer the vast Indian
market at the cost of the centuries-old flourishing
Indian textile industry (Shubham 2017). Such
practices resulted in high levels of unemployment,
decline of local industries and handicrafts, low
growth, and low standards of living, thereby
resulting in widespread impoverishment of the
colonies.
What Is Underdevelopment?
The concept of economic “underdevelopment” is
ambiguous, complicated, and contentious. (Myint
and Krueger 2016) This is because “develop-
ment” is a highly dynamic process that cannot be
restricted to a fixed definition, as it involves too
many dimensions. This results in many important
variables being left out of the definition narrowing
its scope and coverage.
One difficulty in defining “underdevelopment”
is because all less developed countries are not
alike, nor are they all at the same level of “under-
development”. In the 1930s to 1940s, some coun-
tries like India had advanced traditional
knowledge and education (Sengupta 2019),
while others were still in the stage of hunting
and using bare hands production. Some countries
had well-honed social and political systems, while
others were ruled by primitive customs, taboos,
and superstition. Many countries had awe inspir-
ing histories of art, architecture, sciences, mathe-
matics, medicine, philosophy, political systems,
culture, and so on (Maddison 2006). Therefore,
it is not possible to club them all together as
“underdeveloped” countries and treat them all on
the same footing for theoretical analysis and pol-
icy matters.
As stated by Todaro (1994), “Because of the
heterogeneity of the Third World, there can be no
single Development Economics, no universal
Third World Economics applicable to any, or all
less developed countries. Rather, Development
3
Economics must be eclectic, attempting to com-
bine relevant concepts and theories from tradi-
tional economic analysis with new models and
broader multidisciplinary approaches, derived
from studying the historical and contemporary
development experience of Africa, Asia and
Latin America.”
Economic Development: Concepts
Controversy also surrounds the nomenclature
used for defining these countries. Some of the
terms used to describe these countries, and their
limitations are given below:
• Underdeveloped: Pomfret (1997) points out
that the word “development” is a value-added
concept, whose “opposite has negative conno-
tations.” Undeveloped and underdeveloped
imply an inferior status, the question being
inferior to what or whom?
Further, the term “developed countries”
gives a false impression that these countries
have already reached the zenith of develop-
ment and no further improvements can take
place. But this idea is misleading, since struc-
tural changes are constantly going on even in
the so-called “developed countries.” This con-
cept also gives a false image of a well-defined
demarcation line between the two – a line
which once crossed will suddenly turn the for-
mer into “developed countries.” Some bench
mark of “development” is needed, wherein
countries falling below this mark should be
dubbed as “underdeveloped.” The question
arises as to who sets the bench mark, and
what should be the index to measure the level
of development (van den Berg 2012).
Poor countries: This definition sounds
derogatory, as if denoting some kind of inferior
status. It is inappropriate to dub those countries
so, for many are often culturally richer and
more endowed with natural resources com-
pared to the so-called rich countries. Further,
some of the richest men in the world were in
“poor” countries, like the King of Brunei
(Baker 2012) and the Nizam of Hyderabad
(Mehta 2013). In recent years, the Forbes Mag-
azine [forbes.com https://www.forbes.com/bil
lionaires/18-3-2020. The Richest in 2020.]
4 Economic Development: Definition, Scope, and Measurement
points out that India stands at third place in the
world with 131 billionaires, even though it
suffers from widespread poverty.
• Poverty stricken: This is also a derogatory term
since, as mentioned above, many of these
countries were rich in the past, but due to
colonial exploitation and economic destruction
of their industries, they became poor. Also,
poverty is a relative term, as there is a sizeable
population that is poor, even in the so-called
“rich” countries (Banerjee and Duflo 2011).
• Backward countries: In the 1940s, these coun-
tries were called “backward countries” – a term
that was again resented by those whose civili-
zations were older and more established than
the European and New World countries. Fur-
ther, development and knowledge do not move
only from the so-called “developed countries”
to the “less developed countries,” as the devel-
oped countries have also gained from the
knowledge, customs, medicines, way of life,
etc., of the less developed countries. For
instance, the decimal system, high level math-
ematics, astronomy, medicine, yoga, etc., that
emanated from India (Sengupta 2019) have
contributed vastly to the growth of the “devel-
oped countries.” The same applies to the other
ancient civilizations of the world as well.
• Developing countries: This is also not always
regarded as an appropriate term because many
of these countries are not developing continu-
ously and are often characterized by stagnation
or even recession. Also, all countries, even the
so-called “developed countries,” are still
developing in one way or the other due to
continuous technical progress and changing
political and social conditions. (Acemoglu
and Robinson 2012).
• Low growth economies: Again, this is not
appropriate, as many underdeveloped coun-
tries such as Rwanda with 8.6% had the highest
rate of GDP (constant US $) growth rate in
2018, while Bangladesh and Libya occupied
the third place with 7.9% growth rate. But
some of the most “advanced” countries had
very low rates of growth in 2018 (Japan
0.8%, UK 1.4%, USA 2.9%) (https://knoema.
com/search?query¼gdp%20growth%20rates,
GDP Growth Rates 2019).
Further, merely taking the ‘rate of growth’ as
an indicator is misleading because percentage
growth depends on the base that is growing; for
example, an increase from $100 to $200 will give
a growth rate of 100%, but an increase from
$100,000 to $120,000 will show a growth rate of
just 20%. But in money terms, the increase is
$20,000 as compared to a mere $100 increase in
the former case. So, even a 1% to 1.5% increase in
a trillion-dollar economy will be larger in actual
terms compared to two-digit growth figures of
countries that have low initial incomes to start
with.
• Third World countries: Another term used
often is “Third World,” but though it is the
least value-laden term, it has become outdated
after the decline of the Cold War and the virtual
disappearance of the “Second World” – the
Communist countries.
• North-South: Another value-free term is
“North” and “South”, but these are geograph-
ically incorrect, as many developed countries
such as Australia lie in the Southern Hemi-
sphere and many underdeveloped countries
are in the Northern Hemisphere. The same
applies to the terms “West” and “East”, as
countries in the East such as Japan are well
developed, while some countries in the West
are not.
• Low-income countries and high-income coun-
tries: These terms are commonly used, but
again not representative, since China now
occupies the top rank in terms of GDP (in
current PPP $) in the world and India occupies
third place (World Development Indicators
2018). Added to this is the fact that underde-
veloped countries are highly heterogeneous
and have different levels of development and
growth.
• Less developed and more developed: These
terms seem to be more acceptable terms,
although there is no limit to development,
because new techniques, goods, and informa-
tion are being added every day, and all coun-
tries have to keep up with the knowledge and
technological revolution. So, no country can be
regarded as having reached the pinnacle of
Economic Development: Definition, Scope, and Measurement
development; the process of development is
endless and continuous.
• More industrialized and less industrialized:
These terms are less objectionable as they
denote the relative economic status of different
countries and their relative position in terms of
some quantifiable economic variable, without
putting a ceiling to development. However,
even this is not quite relevant because agricul-
ture still provides high levels of employment in
many “industrial” countries such as Australia,
USA, and Russia. (World Development Indi-
cators 2018).
• Primary product producing countries: This is
another definition of underdevelopment.
Although natural resources production and
agriculture do form a large part of the national
income of most of these countries, many ‘rich’
countries also have large reserves of natural
resources, which they produce and export.
(World Development Indicators 2018).
From the above discussion, it should be clear
that there is no single correct “definition” of
underdevelopment or development. However, all
these terms continue to be in use and are used
interchangeably in Economics as well as in gen-
eral discussions.
Traditional Economic Theory (dealing largely
with micro- and macroeconomics of Western
countries) did not encompass or explain the eco-
nomic conditions of such countries nor could it
suggest policy measures for their improvement.
Hence new theories had to be formulated that
could analyze their special features and suggest
policies required to bring about their economic
development, leading to the emergence of the
Economics of Development or Development Eco-
nomics in the 1940s–1950s.
Scope of Development Economics
“Development Economics needs to have a practi-
cal orientation – to prepare grounds for immediate
action,” says Leys (1996). This outlook was gen-
erated by the desire of some economists in
5
developed countries to do something for their
ex-colonies and for the governments of these
countries to improve their own economic
conditions.
Economic development thus does not deal with
mere analysis, but it contains practical sugges-
tions and guidelines to initiate development.
Hence, other than abstract and theoretical reason-
ing of “what is”, Development Economics con-
tains a large element of “applied” economics as
well.
According to Grabowski and Shields (1996),
“Development Economics tries to question the
nature of the apparent transformation from back-
ward to modern economies.” For this, it is neces-
sary to study the growth process of the developed
countries to identify those factors that could be
duplicated for their own development. Basically,
the authors suggest that Development Economics
should address itself to the following questions:
• How did the present advanced countries
achieve their own level of economic
development?
• Can poor countries follow the same path?
• Are present world conditions conducive to
such growth or have they been irreversibly
changed?
• Can the theoretical framework used in the
developed countries be used to analyze the
situation in the developing countries, or should
a new methodology be fashioned for these
countries’ problems?
Theories of development have attempted to
answer some or all of these questions. (https://
news.orlando.org/blog/top-6-reasons-that-
economicdevelopment-isimportant-to-a-regions-
economy-infographic)
Features of Development Economics
Because of the distinctive features of less devel-
oped countries, it was found that most of the
traditional economic theories of the Western
countries could not explain the causes of
6 Economic Development: Definition, Scope, and Measurement
underdevelopment nor offer solutions to their
problems. Hence, the scope of Development Eco-
nomics had to differ from other branches of Eco-
nomics in the following ways: (Lal 1985)
• The Political economy of the concerned coun-
try is important in the analysis of development.
This is because the historical, political, eco-
nomic, and social factors of each less devel-
oped country are different from those of the
“developed countries” and also from each
other. For instance, the economic, social, and
political conditions of countries in South
America differ from those in Africa or Asia.
(Acemoglu and Robinson 2012) So, it became
necessary to include these non-economic fac-
tors in analyzing development, for there can be
no single theory or policy that can be used as a
blanket cover to suit the heterogeneous and
diverse requirements of all less developed
countries. Unlike the developed countries that
had profited from the market and wealth gar-
nered from their colonies or could exploit the
virgin territory of the New World, the less
developed countries have to depend on their
own resources, to raise themselves with their
“own bootstraps”. Being dependent on the for-
mer for their requirements of technology, cap-
ital inputs, training of labor, and financial
resources, their debt to world financial institu-
tions and lenders has been increasing. This has
further impoverished many countries, leading
to further deterioration of their economies.
[imf.org/en2018 https://www.imf.org/en/Publi
cations/Policy-Papers/Issues/[2018] Macro-
economic Developments and Prospects in
Low-Income Developing Countries].
• Theories of Economic Development usually
advocate the role of State intervention in eco-
nomic development. This is in contravention to
the usual neoclassical assumption of laissez
faire. In the 1940s and 50s, theories of Eco-
nomic Development were influenced by
Keynesian Economics. State intervention had
helped the post-war restoration of many war-
ravaged economies. The success of the Mar-
shall Plan was in many ways a model for “aid”
to developing countries. These theories held
broad “socio-democratic” views and were
committed to planning. This was based on the
assumption that the State will be a “benevolent
State, armed with sufficient supplies of capital,
and armed with good economic analysis.”
(Leys 1996).
• Normative aspects and value judgments are an
integral part of Development Economics. Eco-
nomic Development is regarded as being good
for the economy and its people, since it leads to
increase in economic welfare. Though econo-
mists may disagree on what is good for the
people, they all agree that development itself
is good, as it basically improves the lot of the
population. Hence the subject does not only
enquire into “what is” but also “what ought to
be” as well as “how it ought to be” in the
developing countries.
• Development Economics tries to trace out the
pattern and form of development that the less
developed countries have to follow. For this,
what has to be achieved and in what time
interval, have to be specified. Vague objectives
like “increasing the standard of living” are not
precise enough for policy decisions to be
made. A workable development scenario
should be able to trace out (other things
remaining constant) the path of development
of the economy, the goods and techniques to be
used, and the objective of development.
(Mathur 1973).
Measurement of Economic Development
Although the broad scope of Development Eco-
nomics is clear, there are a number of ambiguities
in the precise definition and the measurement of
“Economic Development”. Based on what they
thought was important for development, different
yardsticks or indices have emerged that try to
measure the extent of economic development
and to rank countries in terms of their economic
achievement.
Per Capita Income (PCY)
Economic Development is assumed to take place
when there is a rise in the standard of living of the
Economic Development: Definition, Scope, and Measurement
population. Real per capita income is assumed to
be the best index for depicting the average stan-
dard of living of the population, and so it is widely
used as an index of economic development.
According to the UN, “We had some difficulty
in interpreting the term underdeveloped countries.
We use it to mean countries in which PCY is low
when compared with the PC real income of USA,
Canada, Australia, and W. Europe.” (Higgins
1963). Arthur Lewis (1955) also considered per
capita output to be the best single measure of
development.
The World Bank classifies countries based on
their Gross National Income per capita https://
www.un.org/development/desa/dpad/least-devel
oped-country-category/ldcs-at-a-glance.html. Least
Developed country category. Earlier gross national
income (GNI or GNP) was estimated using simple
exchange rates to convert the currencies of various
countries into US $. At present, the World Bank
uses the Atlas conversion factor instead of simple
exchange rates, mainly to reduce the impact of
exchange rate fluctuations in the cross-country com-
parison of national incomes. The Atlas conversion
factor for any year is the average of a country’s
exchange rate for that year and its exchange rates
for the two preceding years, adjusted for the differ-
ence between the rate of inflation in the country and
international inflation; the objective of the adjust-
ment is to reduce any changes to the exchange rate
caused by inflation (Table 1).
Limitations of PCY as an Indicator of Economic
Development
However, there are certain disadvantages in using
PCY as a measure of development. Being an
Economic Development: Definition, Scope, and Mea-
surement, Table 1 World Bank classification of econo-
mies based on income, July 1, 2019
Threshold GNI/Capita (current US$)
Low income <1,026
Lower-middle income 1,026–3,995
Upper-middle income 3,996–12,375
High income Greater than 12,375
https://blogs.worldbank.org/opendata/new-country-classi
fications-income-level-2019-2020
7
aggregate figure, it does not indicate which
goods and services are growing, or who is benefit-
ing from the rising income. Countries with mas-
sive military buildup, or those with investment in
inessential sectors, will show high PCY, but not
necessarily development. Also, the distribution of
income and the standard of living of the common
man are not apparent with PCY because they
increase when the incomes of a few rich increase,
without any change in the income of the rest of the
population. The PCY is jacked up if, for instance,
the incomes of the top 10% of the population
increased, without “trickling” down to the poor.
Oxfam’s survey (2019) showed that India’s
richest 1% held 58% of the country’s total wealth
compared to the global figure of 50%. Further, the
group’s wealth increased by over Rs 20.9 lakh
crore during this period, which equaled the Indian
Union Budget 2017, while the wealth increase of
the country’s poorest half citizens (67 crore) was
merely 1%.
Another confusion is that countries’ PCY rank-
ing differs according to the index used by different
world organizations. For instance, Luxembourg
emerged with the top rank in 2018 in terms of
GDP PC in current US dollars according to the
IMF World Economic Outlook, but in PCY PPP
terms, Qatar ranked first in 2018 [https://knoema.
com/atlas/ranks/GDP-per-capita-based-on-PPP
Ranks GDP per capita PPP 2019]. Similarly, the
World Bank ranks Qatar first, while CIA ranks
Liechtenstein at the first position [https://en.
wikipedia.org/wiki/List_of_countries_by_GDP_
(PPP)_per_capita].
Other than the difficulties of estimating it, PCY
cannot always capture the real conditions in the
economy and does not depict the actual standard
of living of the population. Also, in many coun-
tries, the daily requirement (the consumption bas-
ket) of the population is different from those of the
‘rich’ countries, and prices may be lower than in
developed countries, so that people can continue
to have a decent life in spite of lower incomes.
Still, in the absence of an alternative measure,
PCY continues to be in use as an index of devel-
opment (Hicks and Streeten 1981).
8 Economic Development: Definition, Scope, and Measurement
Structural Change
GNP is an aggregate figure and does not depict
structural change. So, it is necessary to have a
breakup to show which sectors are growing and
which are not (Clark 1957, Chenery 1960). Also,
a rise in PCY may be due to mere replication of
the existing set of goods and services leading to
increase in GDP, or it could be due to heavy
military expenditure, which does not reflect in
higher living standards of the population. Further,
many goods and techniques may be used only by a
certain section of the population and may not be
available to the rest. (Syrquin 1988). It is therefore
necessary to distinguish between economic
growth and economic development.
Economic Growth: refers to a rise in national or per
capita income with or without structural changes in
the economy.
Economic Development: implies more than eco-
nomic growth. According to Gillis et al. (1983),
“Economic development, in addition to rise in
PCY, implies fundamental changes in the structure
of the economy.” Economic development implies a
change in the capital structure, institutional frame-
work, as well as infrastructure in order that the
majority of the population can achieve a high stan-
dard of living at the goal. The spectrum of goods
used by the population of a developed economy is
very different from that of less developed econo-
mies. If the latter’s population has to achieve similar
standards of living, then changes in capital structure
are essential. Development therefore calls for
changes in the structure of capital goods, as this is
basic for the transformation of primary producing
economies, using labor-intensive techniques in gen-
eral, with large scale unemployment and poverty, to
a fully employed and developed economy using the
latest capital-intensive methods of production.
Industrialization and capital formation are
often taken as synonymous. The structural
changes in production methods imply the use of
capital-intensive methods of production in place
of the hitherto used labor-intensive techniques.
With more capital-intensive techniques, the pro-
ductivity of labor increases, leading to increase in
output and growth. Most theories of development
deal with various methods by which growth of the
capital base of less developed countries can be
achieved. A number of studies have been under-
taken historically to estimate the changing struc-
ture of developing economies, by comparing the
growth of different sectors of the economy such as
primary, secondary, and tertiary sectors.
(Herrendorf et al. 2013).
However, “capital” is not homogenous and has
a large number of connotations. Capital encom-
passes both physical and financial capital, and the
two cannot be interchanged. This is because once
finance is invested into say, a thermal plant, it
cannot be used to build a railway line. In tradi-
tional neoclassical theory, capital is assumed to be
homogeneous and malleable, which is highly mis-
leading when applied to both theoretical and pol-
icy analyses of real-world conditions. The
difference between “financial capital” and “phys-
ical capital goods” should be made clear (Sub-
ramaniam and Panth 1995).
Gautam Mathur (1973) distinguishes between
heavy sector capital and light sector capital.
Heavy sector capital consists of a vector of indus-
tries that produce capital that can produce other
heavy sector capital or can reproduce themselves.
For example, steel industry produces steel that can
be used to produce more steel, or railways, or
dams, or other heavy sector equipment, or it can
be used to make tractors, mechanical looms, etc.
The light sector capital machines are the light
machines or light capital goods used to produce
consumer goods and should not be confused with
heavy sector capital that is needed to initiate and
sustain economic development. The growth of the
heavy sector is important for economic develop-
ment since it feeds the growth of the light sector,
which is needed to produce consumer goods.
However, most theories of development and plan-
ning concentrate on the growth of only the light
sector (assuming all capital is homogeneous),
ignoring the establishment of the heavy sector.
According to Mathur (1973), investing in only
the light sector capital industries will only divert
scarce capital inputs into final consumption, with-
out creating the base for future industrial devel-
opment, thus leading to inequalities and delaying
the time required to reach the target of
development.
Full Employment
Less developed countries are characterized by
large-scale unemployment and disguised
Economic Development: Definition, Scope, and Measurement 9

unemployment. So, levels of employment are initiatives. Thus, along with changing economic
taken as another index of development. However, framework, their social framework is also
full employment by itself cannot be a goal, and it affected, and traditional societies find it difficult
has to be achieved along with industrial growth to accept and follow the Western beliefs and atti-
and structural change. The employed population tudes being imposed on them.
should be in a position to contribute materially to Changes in attitudes are brought about by
the economy, not merely get employment for its changes in education patterns, increasing literacy,
own sake. exposure to modern scientific thought, and so on.
Also, unemployment is not a characteristic of Removing superstition and religious and social
only underdeveloped countries. During recession, taboos and changing primitive attitude to life and
“developed” countries also experience huge work are other methods to “modernize” societies.
amounts of unemployment. So, the type of unem- However, many less developed countries take
ployment is important – as there are different exception to the cultural invasion of the West, at
types of unemployment, such as voluntary or the expense of their own ancient civilization,
involuntary unemployment, technical unemploy- values, and culture.
ment (i.e., labor using older technology being
replaced by mechanized technology, such as typ-
Improvement in Human Status
ists replaced by computers), structural unemploy-
According to some economists, other than mere
ment, when the structure of the economy
increase in material output, development should
changes and the traditional modes of production
also improve the human status of the population
and consumption are replaced by the modern e.g.
(Todaro 1994). For example, Goulet (1971) iden-
cars replacing horse-drawn carts, or educated
tifies three basic and interconnected components
unemployment vs. unemployment of menial
or core values in the wider meaning of develop-
labor, and so on.
ment. They are as follows:
Normative Values
• Life sustenance: to satisfy the basic needs of
Some authors have stressed on the importance of
the population – income, food, clothing, hous-
changes in the social structure of less developed
ing, minimal education, and health facilities –
countries in the process of economic develop-
to raise the people above the poverty line.
ment. Modernization of production has to be
• Self-esteem: countries that are exploited by
accompanied by modernization of social and cul-
other countries, or dominated by them, cannot
tural outlook. Streeten (1972) envisages develop-
maintain their self-respect. They need to free
ment as the transformation of human beings also;
themselves from such dependence and achieve
he states: “development as an objective and devel-
self-respect and independence.
opment as a process, both embrace a change in
• Freedom: from the three evils of want, squalor,
fundamental attitudes to life and work, and in
and ignorance. Development allows choice as
social, cultural, and political institutions.”
it expands the range of human activity – of
In the more developed countries, the process of
education, employment, livelihood, mobility,
economic development was a long and continu-
as well as material goods.
ous one, spanning nearly two and a half centuries,
during which time immense social changes also
took place. As this development was from out of Some of these concepts have been used in
various indices of development such as PQLI
its own roots, the social structure is well ingrained
into the Western character (such as entrepreneur- and Human Development Index. Some of these
ship and competitive spirit). The social and cul- alternative measures of Economic development
are discussed below.
tural aspects of Eastern nations (such as rigid
societal groups, fatalism, or religious beliefs and
taboos) may act as obstacles to development
10 Economic Development: Definition, Scope, and Measurement
Economic Development: Definition, Scope, and Measurement, Fig. 1 Components of HDI. (Source: hdr.undp.
org›content›human-development-index-hdi)
Physical Quality of Life Index (PQLI)
This index was devised by Morris (1977) for the
Overseas Development Council. Three indicators
were used, all with equal weightage, in an attempt
to measure the fulfillment of minimum human
needs. They were life expectancy at age one,
infant mortality rate, and literacy. Morris felt that
these indicators would show the basic needs of the
poor better than mere nutritional inputs.
However, Streeten (1981) feels that Quality of
Life is a misnomer, since what is being measured
is reduction of mortality and increase in literacy.
He also questions the need to give equal
weightage to all three items of the index. Longer
life and higher literacy do not automatically
ensure a ‘better life’. Also, there are problems of
high correlation between the three items, as there
is high negative correlation between literacy and
infant mortality. Anyway, other important basic
needs, such as clean drinking water, are not
included in the index. It is also argued that devot-
ing all an economy’s resources to providing basic
needs will divert resources from developmental
activities and capital formation. Hence, it is nec-
essary to strike a balance between providing both
basic needs and developmental investment.
Human Development Index (HDI)
Following the PQLI, Mahbul Haq and Amartya
Sen in 1990 developed the HDI, which UNDP
adopted as an alternative measure of economic
development [hdr.undp.org › content ›human-
development-index-hdi]. It combines a measure
of income per head, with measures of life expec-
tancy, and adult literacy. Sen (1983) points out
that education and health should be given greater
priority because they directly increase people’s
capability to control their own lives. Increased
capabilities may be better reflected, he says, by
indicators such as literacy rates or higher life
expectancy rather than by a higher PCY (Fig. 1).
The HDI shows how the ranking of countries
according to their actual social and economic con-
ditions differs from their PCY rankings. For
instance, although Luxembourg ranked first in
GDP PC in current prices in 2019, it ranked 121
in the HDI index. Norway ranked first in terms of
HDI in 2018, but ranked ninth in terms of PCY
PPP $. [hdr.undp.org]. Therefore, it does not
always follow that higher PCY implies better
human and social conditions of life and vice versa.
Poverty Index
The absolute levels of poverty, i.e., the absolute
income level of the lowest 41%, are sometimes
taken as indicators of development. For this index
to be meaningful, it is necessary to have a standard
minimum income to compare the incomes of the
poor. In India, a “poverty line” was constructed,
measuring the level of income at which the aver-
age family consumes a nutritious diet defined in
terms of calories. (Dandekar and Rath 1971).
The World Bank’s International Poverty Line,
1981, takes the number of people consuming “less
than $1 per person, per day” as an indicator of
poverty levels. In 2013, this was increased to
$1.90 per day (https://datahelpdesk.worldbank.
org Help Desk). Recent estimates for global pov-
erty state that 8.6% of the world, or 736 million
people, live in extreme poverty on $1.90 or less a
day, according to the World Bank (https://
borgenproject.org). The Multidimensional Poor
Index (MPI) aims to identify poverty on the
basis of three key dimensions: health, education,
Economic Development: Definition, Scope, and Measurement
and standard of living, comprising 10 indicators.
People who experience deprivation in at least one-
third of these weighted indicators fall into the
category of multidimensionally poor. (World
Bank website 2019).
However, poverty indices ignore the distribu-
tion of food within the family. Usually the female
members (who work harder than males) receive
less food. Nor does it measure how far the families
lie below the poverty line, or improvements in
those below the line, and distribution of food
between different families. Sen (1973) proposed
weighting of individuals on the basis of how far
they fall below the poverty line, thus combining
poverty and income distribution.
A uniform world-wide calorie-based diet is not
required either, since the physical structure, age,
and anthropological characteristics differ from
one race to another. Their staple food also differs,
so this index may give misleading information
when used for international comparisons. Other
factors such as availability of food to those below
the poverty line, its composition, and artificial
controls imposed on them also affect dietary
levels.
Gautam Mathur (1975) shows that the two
objectives – development and basic needs
(which he calls ‘social justice’) – need not be
conflicting objectives. As development proceeds,
new sectors are opened up providing employment
and income to the population. If there is balanced
investment between investment in capital forma-
tion and investment in providing the basic neces-
saries of life (the Balanced Allocation Ratio), then
development can take place without the standard
of living of the workers being affected. By keep-
ing the real wage rate constant on the path of
development, resources need not be frittered
away on inessential goods and services.
Sustainable Development
Although economic development is needed, its
present form is impacting the local and world
environment in many negative ways. There is
massive depletion of natural resources and rise
in pollution levels, mostly emanating from the
“developed countries.” Historically, these coun-
tries have consumed huge quantities of mineral
11
and other natural resources in the course of their
development. They have also contributed the
maximum toward the buildup of various pollut-
ants in the environment, ranging from carbon
dioxide to solid and nuclear wastes, as well as
destroyed the pristine environment around the
world. The negative impacts of this environmental
destruction are being felt worldwide, again affect-
ing the less developed countries the most, as they
are the most vulnerable to climate change, loss of
forests, and biodiversity, etc. In that respect, many
poor countries that have not yet developed have
conserved their local environment by using tradi-
tional renewable and eco-friendly methods of pro-
duction and consumption. The modern mode of
economic activity is being viewed with misgiv-
ings, and there is serious effort to change the
concept of economic development to that of sus-
tainable development. Various measures of sus-
tainable development such as Ecological
Footprint (www.footprintnetwork.org Ecological
Footprint – Global Footprint Network), and Envi-
ronmental Performance Index (Panth 2013) are
other indices of sustainable development paths.
Conclusion
In this chapter, the various concepts, definitions,
and indices of development and underdevelop-
ment were discussed. It was seen that these are
neither easy to define or to measure. Nor do they
entirely encompass the gamut of problems faced
by “underdeveloped countries.” Further compli-
cations arise due to the deteriorating environmen-
tal conditions of the world caused by the present
type of unhampered industrial and technological
development. Therefore, there is need to review
the concept of “underdevelopment” and what it
incorporates in its scope and application. There is
a further need to move to an environmentally safe
development path, where importance is given to
both economic and environmental sectors, to be
applied to all countries of the world regardless of
their developmental status. The Sustainable
Development Goals are guidelines as well as sign-
posts that help countries to identify and
12 Economic Development: Definition, Scope, and Measurement
implement such development paths that will com-
bine the welfare of the people with that of the
planet.
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