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Chapter One

1. Economics of Development: Concepts and Approaches

1.1 Basic concepts and definition of development economics
Development economics deals with development problems of developing countries. In
other words, it is about the causes and cures of mass poverty in the less developed
nations. At the outset, therefore, we should be aware of the relevant concepts and
measuring methods of development devised by different institutions and persons.

1.2 The Scope and Nature of Development Economics

Traditional economics is concerned primarily with the efficient, least-cost allocation of
scarce productive resources and with the optimal growth of these resources over time so
as to produce an ever-expanding range of goods and services. Traditional neoclassical
economics deals with an advanced capitalist world of perfect markets; consumer
sovereignty; automatic price adjustments; decisions made on the basis of marginal,
private-profit, and utility calculations; and equilibrium outcomes in all product and
resource markets. It assumes economic ―rationality‖ and a purely materialistic,
individualistic, self-interested orientation toward economic decision making.

Political economy goes beyond traditional economics to study, among other things, the
social and institutional processes through which certain groups of economic and political
elites influence the allocation of scarce productive resources now and in the future, either
for their own benefit exclusively or for that of the larger population as well. Political
economy is therefore concerned with the relationship between politics and economics,
with a special emphasis on the role of power in economic decision making.

Development economics has an even greater scope. In addition to being concerned with
the efficient allocation of existing scarce (or idle) productive resources and with their
sustained growth over time, it must also deal with the economic, social, political, and
institutional mechanisms, both public and private, necessary to bring about rapid and

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large-scale improvements in levels of living for the peoples of Africa, Asia, Latin
America, and the formerly socialist transition economies. Unlike the more developed
countries (MDCs), in the less developed countries, most commodity and resource
markets are highly imperfect, consumers and producers have limited information, major
structural changes are taking place in both the society and the economy, the potential for
multiple equilibria rather than a single equilibrium is more common, and disequilibrium
situations often prevail (prices do not equate supply and demand). In many cases,
economic calculations are dominated by political and social priorities such as unifying
the nation, replacing foreign advisers with local decision makers, resolving tribal or
ethnic conflicts, or preserving religious and cultural traditions. At the individual level,
family, clan, religious, or tribal considerations may take precedence over private, self-
interested utility or profit-maximizing calculations.

Thus development economics, to a greater extent than traditional neoclassical economics

or even political economy, must be concerned with the economic, cultural, and political
requirements for effecting rapid structural and institutional transformations of entire
societies in a manner that will most efficiently bring the fruits of economic progress to
the broadest segments of their populations.

1.3 Interests in and Evolution of Development Economics

The focus of the world to the development problems of under developed countries have
started recently. Though the study of economic development in general has attracted the
attention of economist’s right from the mercantilist school, classical school down to Marx
and Keynes, its study as a separate subject is a relatively recent phenomenon. It is also
after the end of the II world War that the majority of the international bodies with the aim
of promoting development that exist today such as the World Bank and its affiliates, and
agencies of the UN all have been established.

Before the war, there was little preoccupation with the economic and social problems of
developing countries with which we are concerned today. One of the reasons for this little
preoccupation may be that the poor countries were colonies. Moreover, the concern and
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attention of most people might be focused on depression and unemployment in the

developed countries. The situation today is different. The development of
underdeveloped countries and primarily the eradication of absolute poverty are now
regarded as one of the greatest social and economic challenges facing humankind.

1.4 Economic Growth and Economic Development

We will begin our discussion of development economics by defining the concepts of
development and economic growth. The meaning of economic growth is clear. Almost all
economists would accept the increase in the output of goods and services of a country per
unit time as its definition. Output is measured by the gross national product (GNP) or
gross domestic product (GDP). Growth in GNP/GDP can be calculated either at market
price or factor cost. In order to measure the effect of growth on the standard of living of
the population, the GNP/GDP per capital is taken, which is also known as per capital
income. Per capital income can be measured in terms of home currency and for
international comparisons in terms of US dollar.

But development is an elusive term. The concept has been understood differently in
different time periods and by different persons. Its meaning has evolved progressively to
have the present meaning. In the 1950s and 1960s, for example, development was
considered as synonymous to economic growth. Accordingly, in this period, it has been
defined as the capacity of the economy to generate and sustain fast growth rate of GDP
(per capital income).

Others tried to explain development in terms of the process of structural transformation

of the economy. In this regard, development is the planned alteration of the structure of
production and employment so that agriculture’s share of both declines and that of the
manufacturing and service industries increases. Later on concerns are accorded to
poverty, unemployment, inequalities of income, and other economic, institutional, social
and political factors owing to the failure of developing countries to improve the standard
of living of the poor.

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The phenomenon of development is not merely a question of even the quantitative

measurements of income, employment, and inequality. In addition to these issues,
development has to incorporate other economic and non-economic factors. A concept of
development in general is required which embraces the major economic and social
objectives and values that societies strive for.

Presently, therefore, Todaro succinctly puts the definition of development as follows:

development is ―conceived as a multi-dimensional process involving major changes in
social structures, popular attitudes, and national institutions, as well as the acceleration
of economic growth, the reduction of inequality (and unemployment), and the eradication
of absolute poverty‖.

1.5 Three core values of Development

Is it possible, then, to define or broadly conceptualize what we mean when we talk about
development as the sustained elevation of an entire society and social system toward a
―better‖ or ―more humane‖ life? What constitutes the good life is a question as old as
philosophy, one that must be periodically reevaluated and answered afresh in the
changing environment of world society.

The appropriate answer for developing nations today is not necessarily the same as it
would have been in previous decades. But at least three basic components or core values
serve as a conceptual basis and practical guideline for understanding the inner meaning of
development. These core values— sustenance, self-esteem, and freedom—represent
common goals sought by all individuals and societies. They relate to fundamental human
needs that find their expression in almost all societies and cultures at all times. All three
of these core components are interrelated and are preferred by all peoples living in
different cultures.

Life-sustenance (the ability to meet basic needs): life-sustenance is concerned with the
provision of basic needs. No country can be regarded as fully developed if it cannot
provide its entire people with such basic needs as housing, clothing, food and minimum

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education. A major objective of development must be to raise people out of primary

poverty and to provide basic needs simultaneously without which there is absolute under
development. Hence, economic development is a necessary condition (but not sufficient
condition) for the improvement of the quality of life in providing these life sustenance
needs and bringing development.

Self-Esteem: self-esteem is concerned with the feeling of self-respect and independence.

It means to be a person, a sense of worth and self-respect, of not being used as a tool by
others for their own ends. Every society or individual strives towards self-esteem.
Without development the pride of the peoples of the developing countries on their
cultural identity and dignity are being eroded.

No country can be regarded as fully developed if it is exploited by others and does not
have the power and influence to conduct relations on equal terms. Now days, economic
wealth and technological power have become almost universal measures of worth.
Developing countries seek development for self-esteem; to eradicate the feeling of
dominance and dependence which is associated with inferior economic status.

Freedom from servitude (be able to choice): Freedom is ability of people to determine
their destiny. It involves an expanded range of choices for societies and their members
together with a minimization of external constraints in the pursuit of devolvement. No
man is free if s/he cannot choose; if s/he is imprisoned by living on the margin of
subsistence with no education and no skills. Economic prosperity expands the range of
choices that people may have. It enables to gain greater control over nature and physical
environment. It gives the freedom to choose greater leisure, to have more goods and
services or deny material wants.

Therefore, development is hardly possible without growth, but growth is possible without
development. A country may produce more of some types of its goods and services.
However, the benefits of this growth may exclusively be appropriated by a privileged
elite and small middle class. In this case the vast majority of the country’s people may be

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completely unaffected or worsened. For instance, the growth attained in the past in
countries such as South Africa, Brazil, and the oil rich countries was largely without
development.

However, growth without development is not sustainable. In the oil rich countries, for
example, their economies grow when price of oil increases. Nevertheless, this growth is
not sustainable, as prices cannot be increased indefinitely. Development, on the other
hand, is sustainable because it is a change in the structural and institutional factors, social
attitudes and customs accompanied with a secular rise in real income through a change in
output and occupational structure and improvement in the relative contribution of inputs.

1.6 Measurement and international comparison of growth and development

We have discussed in the above sections the meaning of development and the reasons for
the upsurge of great interest in solving the problems of poor nations. It is now time to
look at the major indicators of development.

Different methods of measuring development and making international comparisons have

so far been devised. Among these the Income Measures (GDP, GNP), the Physical
Quality of Life Index, the Human Development Index, and the Human Poverty Index are
the widely employed indicators.

1.6.1 Conventional Measures of Development and their Limitations

Conventional Measures of Development: The dominant conventional measures of growth
and development are the Gross National Product (GNP) or Gross Domestic Product
(GDP) and their corresponding per capital values. GNP is calculated as the total domestic
and foreign value added claimed by a country’s residents without making deductions for
depreciation of the domestic capital stock. The GDP measures the total value for final use
of output produced by an economy, by both residents and non-residents. Thus GNP
comprises GDP plus the difference between the income residents receive from abroad for
factor services (labor and capital) less payments made to nonresidents who contribute to
the domestic economy.

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These national income (GNP/GDP) measures are used for the measurement of economic
development in several ways. For a given country over two or more years, the absolute
value of national income or per capital income is compared for different years. The
difference between the values for various years then reflects the growth rate over the
period. The level of per capita income is taken as a measure of the average standard of
living of the population, while the growth rate measures improvements in the standard of
living.

Limitations of conventional income measures: Development is much broader term than

economic performance, although the latter is essentially a part of it. In essence,
development ultimately refers to the quality of life and of human welfare. Thus, in
essence income indictors are incomplete and limiting measures of development. Aside
from their defects as indicators of development, the calculations of the GNP/GDP based
measures suffer from a number of shortcomings. These include the following.
 The GNP/GDP measure excludes non-market activities, transactions and
subsistence production. Since these occur to a significant degree in developing
countries, this means that a sizeable part of economic activities are left
unrecorded. This leads to the distortions of the GNP/GDP figures.
 National income accounting is also subject to a number of statistical problems.
These include the risk of double counting of intermediate inputs; the
underestimation and exclusion of unrecorded transactions, which are rampant in
developing countries, particularly across borders; the statistical problems arising
from the non- quantifiability of important economic variables and activities. The
less developed an economy, the more serious these problems are likely to be.
 The use of national income data for the purpose of international comparisons also
engenders a number of additional complications.
Generally, the basis for comparison must be identical and up to date. In spite of all
efforts, statistical definitions are not uniformly used, applied or interpreted by different
countries.

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1.6.2 Alternative development Indicators

By the beginning of the 1970s a momentum started to gather around the need for an
earnest search of alternative indicators of development. Aside from the aforementioned
deficiencies encountered in measuring income itself, this search has been prompted by
the following considerations:
 The failure of the GNP/GDP measures to reflect the impact of growth on the
pattern of income distribution
 The inability of the GNP/GDP measures to reflect the welfare impact of the goods
and services produced as well as the likely costs to society of certain patterns of
growth.
 The invalidity of the GNP/GDP indicator as a measure of well being in situations
where growth has actually deepened poverty and income inequalities, increased
unemployment and affected the environment adversely.

Attempts to construct alternative indicators have followed different routes. Some evolved
around the modification of GNP/GDP based measures to incorporate some of their
glaring omissions, e.g. environmental impact, health conditions, activities in the non-
monetized sector, etc. Some others tried to construct an explicit index of welfare to
replace the use of income measures. And others gave up the idea of a single indicator or
index in favor of a set of indictors that show the different elements of welfare separately.
Among the developed alternative indicators the major are the physical quality of life
index (PQLI) developed by Morris (1979), the Human Development Index (HDI)
developed by UNDP, and the Human Poverty Index. These are to be discussed one by
one below.

A. The physical Quality of Life Index (PQLI)

This composite index is based on three simple indicators: Infant mortality, life
expectancy, and literacy. This measure gives equal weight to each of the three indictors.
For each indicator, the performances of individual countries are rated on a scale of 1 to
100, where 1 represents the worst performance and 100 the best performance.
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For life expectancy the upper limit of 100 was assigned to 77 years (achieved by Sweden
in 1973) and the lower limit of 1 was assigned to 28 years (the life expectancy of Guinea
Bissau in 1950). Within the limits, each country’s life expectancy figure is ranked from 0
to 100. Similarly, for infant mortality, the upper limit was set at 9 per 1,000 (achieved by
Sweden in 1973) and the lower limit at 229 per 1000 (Gabon 1950). Literacy rates
measured as percentages from 0 to 100 provide their own direct scale. The PQLI of each
country is given by the following formula.

(Literacy Rate + INDEXED Infant Mortality Rate + INDEXED Life Expectancy)

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The PQLI indirectly reflects the effects on human development of investment in health
service, water and sewage systems, quality of food and nutrition, education, housing, and
changes in income distribution. One positive aspect of the PQLI is, therefore, that it
helped redirecting attention away from growth, toward a broader concept of human
development.

B. The Human Development Index (HDI)

HDI is ranking various countries according to the relative success they have had with the
human development of their population. UNDP is offering the HDI as an alternative to
the GNP for measuring the relative socio-economic progress of nations. HDI has also
attempted to take account of some of the limitations of the PQLI. HDI is based on three
variables:
 Longevity:- as measured by life expectancy at birth
 Educational attainment:- as measured by a condition of adult literacy
(two third weight) and a combined primary, secondary, and tertiary school
enrollment ratios (one third weight)
 Standard of living measured by real per capita income at PPP.

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To construct the index fixed minimum and maximum values are taken for each of the
variables. For life expectancy at birth the range is 25-85 years. For adult literacy, the

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range is 0 – 100 percent. For real per capita income the range is $100 – 40,000. For any
component of the HDI, the individual indices can be computed according to the general
formula of:

Thus,

The index thus ranges from 0 to 1. If the actual value is equal to maximum the index is
one. The HDI ranks countries into three groups: low human development (0.0 to 0.49),
medium human development (0.50 to 0.79) and high human development (0.80 to 1.00).
For any given year, HDI measures relative not absolute level of human development and
that its focus is on the ends of development (longevity, educational achievement and
standard of living).

One of the major innovations of HDI over the past few years has occurred through
disaggregating the country’s overall HDI into separate components to distinguish
between Man and Women, different social classes reflecting skewed income

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distributions, and different regions and ethnic groups. Hence, the UN HDI has made a
major contribution in improving our understanding of what constitutes development,
which countries are succeeding and the share of different groups and regions within
countries.

By combining social and economic data also, the HDI allows nations to take a broader
measure of their development performance, both relatively and absolutely and thus to
focus their social and economic policies more directly on those areas in need of
improvement.

C. The Human Poverty Index (HDI): Human Poverty Index (HPI) is An index
measuring deprivation in basic human development in a country, based on the percentage
of people expected to die before age 40, the adult illiteracy rate, the percentage of people
without access to health services and safe water, and the percentage of underweight
children at age 5. The United Nations has constructed human poverty indices for
developing countries.

The composite measure focuses on dimensions of deprivations. The HPI for developing
countries is based on three main indices:
 The percentage of the population not expected to survive to the age of 40 (P1)
 The adult illiteracy rate (P2)
 A deprivation index based on an average of three variables: the percentage of the
population without access to safe water; the percentage of population without
access to health service; and the percentage of the underweight children under five
years old (P3). The formula is given by:

1.7 Basic Requirements for and Obstacles to Development

There are different factors that could the barrier for economic development. These factors
can be classified in the broad categories; economic and non economic factors.

Economic factors:
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 Capital( physical and human capital)

 Labor (skilled labour)
 Lack of Natural resources (land locked, oil, water….)
 Technology
 Established markets (labor, financial, goods)
Non-economic factors (institutional, social, values):
 Attitudes toward life and work
 Public and private structures
 Cultural traditions
 Systems of land tenure, property rights (land fragmentation)
 Integrity of government agencies
1.7.1 Requirement for development
Infrastructure Investment
Sufficient energy, road and railway infrastructure helps countries develop industry and
attract foreign direct investment (FDI). A good road network gives people access to
schools and clinics and enhances job opportunities.

Human Capital development: Investment in education and health to develop human

capital: In most countries, primary school enrollment has improved, but low graduation
rates and the variable quality of secondary and tertiary schools remain challenges.

Macroeconomic Stability: In countries that suffer from inflation exceeding 10 percent,

large fiscal deficits and high interest rates, it is obvious that savings and investment for
the future are hampered.

Open Trade & Investment Regimes

In the past, even some countries such as India and Indonesia though not formally
classified as centrally controlled economies, adopted import substituting industrialization,
price controls and nationalization of key industries. The catalyst was an ideological
pursuit of socialism combined with anticolonial sentiment. These policies seriously
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damaged their economic growth. In today’s more integrated global economy, FDI and
technology transfer from overseas play an even greater role than in the past.

Public Governance
Corruption is not only unjust; it smothers growth by diverting people’s energy to
unproductive activities. Good governance also means better transparency and
accountability among governments and state-owned enterprises. The effectiveness of
government in delivering its services and the quality of regulations closely correlates to
the performance of its economy. In this regard, competent public officials and managers
are essential.

Social Inclusiveness
In a society with great disparities between rich and poor, economic growth goals may not
be shared by citizens. Income inequality nullifies the incentive to improve one’s
prospects by getting an education or vocational training and limits the quality of the labor
force. To avert this scenario, decisive steps are needed to strengthen public education,
redistribute income by tax reforms, reduce rural-urban inequality and provide farmers as
well as small and midsize enterprises with access to finance.

Political Stability
Political stability, security and good relations with neighbors are among the basic
requirements for development: for instance Sri Lanka’s economy has expanded by 7.5
percent annually since its civil conflict ended in May 2009. Myanmar, thanks to efforts to
pursue democratization and reconcile with ethnic minorities together with economic
reforms, has successfully reengaged with the international community and attracted
prodigious amounts of foreign investment.

1.8 Development Gap

What is the development gap?, and how is it measured?

The development gap refers to the widening gap between the richest (most developed)
and poorest (least developed) countries of the world. Development in this sense can be
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referred to as either economic development where the county has an increase in wealth,
or human development where quality of life is improved for the people who live there.

Economic development is measured either by GDP (Gross Domestic Product) per capita
or GNI (Gross National Income) per capita. GDP refers to the total value of all goods and
services produced by a country in a year. GNI is similar to GDP except that as well as
taking into account the total value of goods and services produced by a country; it also
includes the income that the country earns as a result of investments in other countries.
On the other hand Human development is measured by using the Human Development
Index (HDI) which takes into account life expectancy, literacy and GDP per capita.

The following points highlight the main factors affecting the development gap
between the rich and the poor countries.

1. Geography: Some countries are well endowed with an abundant supply of natural
resources such as petrol, iron ore, tin and gold.

Access to the outside world is facilitated by navigable waterways—and access to these

waterways is radically different in different parts of the world. The enormous importance
of rivers and harbor to economic (and cultural) development is indicated by the fact that
nearly all the world’s great cities developed on rivers and harbors long before railroads
and automobiles lowered the cost of land transport. Favorable climate is also a factor.
The natural resources required for modern industry are less abundant and, in many
places, virtually non-existent.

2. The State of Agriculture: History amply demonstrates that settled agriculture laid the
foundation for industrial development in most countries. In fact, the industrial revolution
in England was preceded by an agrarian revolution. The increase in agricultural
productivity in England in the 18th century not only laid the basis for, but also sustained,
the first industrial revolution. The agriculture sector promotes industrial growth in
various ways. It provides the purchasing power over industrial goods.

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3. Population Size:
In most LDCs population size presents a problem, in the sense that high birth and death
rates lead to perpetuation of poverty. This is a form of ‘accommodation to poverty’
which then perpetuates low living standards in a circular process. Growing population
pressure leads fall in the per capita land availability and accounts for low agricultural
productivity and less surplus generation from the agricultural sector for industrial
development.

4. Low Levels of Human Capital Formation:

Most people in LDCs are illiterate. They do not know how to use modern technology.
They find it difficult to adopt western technology. As a result LDCs remain
technologically backward. People in LDCs do not spend much money on education and
human capital formation.

5. Dependency and Unequal Exchange: External relations among countries also play a
part in the perpetuation of poverty. According to structuralism and dependency theories
of underdevelopment, advanced capitalist countries denude the backward economies of
capital and skilled labour and the former make disproportionate gains by trading with the
latter.

6. Colonialism: Colonialism is an extreme form of dependency. Most of the countries of

Asia and Africa were British colonies for more than two centuries. They were exploited
in more ways than one. Many of these countries so exploited are still poor today. For
instance, colonization led to various adverse consequences, including deindustrialization
(decline of handicrafts) in India.

7. Institutional Factors: The role of the government may be crucial. The presence or
absence of effective government can be a major factor in economic development or
retrogression.
8. Corruption: Corruption hints the poor the hardest—in health and education services.

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9. Economic Policies and Institutions:

Economic development depends on the formulation and effective implementation of
sound economic policies. Such policies are to be designed, implemented and monitored
by strong institutions which ensure high quality governance, to reduce the degree of
corruption, to ensure efficiency of the public sector and to protect private property rights.
Macroeconomic stabilization and adjustment programs, foreign aid and foreign
investment are unlikely to spur a country’s economic development if economic and
political institutions are poorly developed.

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