Fundamentals of Economic Development

UNIT 1
1. Introduction and Relevant Concepts.
2. Concept of Economic growth and development;
3. Measurement: Traditional Measures,
4. The new economic view of development - Sen’s Capabilities Approach;
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5. Development and Happiness and other recent measures;
6. Core values and objectives of development;
7. Environmental sustainability and sustainable development: Concept and recent
Strategies
8. Common characteristics of developing nations and difference between low-income
countries today and developed countries in earlier stages.
According to Joseph Schumpeter “ Development is a sudden and discontinuous changes in
the circular flow, which alters and displaces the existing equilibrium; growth is a
continuous and steady changes in the long-run which comes about by changes in savings
and population. Development implies growth plus structural changes. In this sense
Development is more important than the growth. There can be growth without
development that there cant not be development without growth. Development is a
qualitative change. According to Freedman :Growth is an expansion of a system without
any change in the system. Development is a innovative process leading to structural
transformation
Measurement of Economic Development
Per capita Income is commonly used as an Index of Economic development because
percapita income indicates the standard of living in a country. However it as some
limitations as an index of development. Proper accounting of per capita income is difficult
due to the following reasons
1.A large number of goods and services do not come to the market for sale. But National income
includes only goods and services sold in the market.
2. The existence of non monetised sector in the many less developed countries, there is a
non-monetised sector, where market value in money terms can not be estimated.
3. Price bias: Goods with high prices grow faster than goods with low prices
4. Illiteracy of the people especially in the agriculture sector

5. Purchasing power parity: It does not give correct purchasing measure of

development.
 What are PPPs?

PPPs measure the total amount of goods and services that a single unit of a country’s currency can buy in
another country. The PPP between countries A and B measures the amount of country A’s currency
required to purchase a basket of goods and services in country A as compared to the amount of country
B’s currency to purchase a similar basket of goods and services in country B. PPPs can thus be used to
convert the cost of a basket of goods and service into a common currency while eliminating price level
differences across countries. In other words, PPPs equalize the purchasing power of currencies.
Suppose that there is a basket of goods and services that costs 50 United States dollars (USD). 50
USD would be equivalent to 363 South African Rand (ZAR) when using a market exchange rate of
7.26. However, due to South Africa’s lower price level in relation to the United States, the cost of a
similar basket is actually 239 ZAR. Therefore, 50 USD would buy a larger basket of goods and
services in South Africa than it would in the United States; the PPP of South Africa to the United
States would be 239 ZAR/50 USD, which is equal to 4.77.
 Why PPP?
Due to large differences in price levels across economies, market exchange rate- converted GDP does not
accurately measure the relative sizes of economies and the levels of material well-being. PPPs make it
possible to compare the output of economies and the welfare of their inhabitants in ‘real’ terms, thus
controlling for price level differences across countries. For example, if market exchange rates were used in
converting GDP, India would be ranked 9th or 10th in the share of world GDP. When PPPs are used
instead, it is ranked third, which is a more accurate reflection of its share of world GDP.
 Physical Quality of Life Index (PQLI)
It was developed for the Overseas Development Council in the mid-1970s by M.D Morris.
The creation of PQLI was due to the dissatisfaction with the use of GNP as an indicator of
development.
PQLI s an attempt to measure the QUALITY or well-being of a country. The value is the
average of three statistics:
1.Basic literacy rate at the age of 15 years
2.Infant mortality
3.Life expectancy at age one, all equally weighted on a 1 to 100 scale.
PQLI might be regarded as an improvement but shares the general
problems of measuring quality of life in a quantitative way. It has also
been criticized because there is considerable overlap between infant
mortality and life expectancy
Human Development Index (HDI)
 Equation
1.Life expectancy:
2.Literacy Rate: Measured by a combination of adult literacy ⅔ weight and tertiary education by ⅓
weight.
3. Per Capita Income: As index of standard of living and purchasing power parity
HDI = Actual value - Minimum Value/Maximum value - Minimum Value
Life expectancy - 20-85 years
Literacy rate - Expected years of schooling 0 to 18
Mean years of schooling 0 to 15
Per capita income $100 - $ 75000
Taking an average of these three value, we get HDI Index.
The HDI is the geometric mean of the three dimensional indices:
HDI = (IHealth . IEducation . IIncome ) 1/3
Very high human development = 0.800 and above
High human development = 0.700 to 0.799
Medium human development = 0.55 to 0.699
Low human development = Below 0.550
 Data sources

● Life expectancy at birth: UNDESA (2019).

● Expected years of schooling: UNESCO Institute for Statistics (2020), ICF Macro
Demographic and Health Surveys (2008–2020), United Nations Children’s Fund
(UNICEF) Multiple Indicator
Cluster Surveys (2008–2020) and OECD (2019).
● Mean years of schooling: UNESCO Institute for Statistics (2020), Barro and Lee
(2018), ICF Macro Demographic and Health Surveys (2008–2020), UNICEF Multiple
Indicator Cluster Surveys
(2008–2020) and OECD (2019).
● GNI per capita: World Bank (2020), IMF (2020),
United Nations Statistics Division (2020).
 Calculation of HDI - Case of Sudan

Life expectancy at birth (years) = 65.3

Expected years of schooling (years) = 7.9
Mean years of schooling (years) = 3.8
Gross national income per capita (2017 PPP $)= 3829
Health index = 65.3 – 20/ 85 - 20 = 0.6971
Expected years of schooling index = 7.9 – 0 /18 – 0 = 0.4380
Mean years of schooling index = 3.8 – 0/15 – 0 = 0.2513
Education index = 0.4380 + 0.2513 = 0.3447 2
Income index = ln(3,829) – ln(100)/ln(75,000) – ln(100) = 0.5506
Human Development Index = (0.6971 . 0.3447 .
0.5506)1/3 = 0.510
 Core values of Development

Three core values

1. Life sustenance: The ability to provide basic needs - They include food,
shelter, health, and protection.
2. Self esteem: The second universal component of the good life is self-esteem-
a sense of worth, and self respect, of not being used as a tool for their own
ends. The nature and form of this self -esteem may vary from society to
society and from one culture to another.
Freedom from servitude: A third universal value is the concept is the concept of freedom.
Freedom here is understood as a fundamental sense of emancipation from alienating material
conditions of life; freedom from misery, institutions and dogmatic beliefs.
According to Arthur Lewis : The advantage of economic growth is not wealth increases
happiness, but that it increases the range of human choice.
Wealth can enable a person to gain greater control over nature and his physical environment,
than if he remained poor. It also gives him the freedom to choose greater leisure, to have more
goods and services, or to deny the importance of those material wants and live a life of spiritual
contemplation. In short development is both a physical and state of mind in which a society has,
through some combination of social, economic, and institutional processes, secured the means
for obtaining better life.
 Development and happiness

The relationship between development and happiness is multi dimensional.

1. Development refers to the improvement in economic, social, and human well-being of a society
2. Happiness, on the other hand, is a subjective and emotional state of well-being.

Simon Kuznets, one of the fathers of the system of national accounts, showed remarkable prescience in identifying the
potential for GDP to be misused as a yardstick for national progress, particularly by those who did not fully understand it.
In 1934, he wrote that “the welfare of a nation can scarcely be inferred from a measurement of national income.”

In 1964 US Senator Bobby Kennedy famously observed that the GDP

“measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion
to our country; it measures everything, in short, except that which makes life worthwhile.”
Income and Happiness: Research suggests that there is a positive correlation between income
levels and happiness, particularly in low-income societies. However, once basic needs are met,
the relationship between income and happiness becomes less straightforward. Beyond a certain
threshold, the impact of additional income on happiness diminishes.

Income Inequality: High levels of income inequality within a society have been linked to lower
overall happiness. A more equitable distribution of resources tends to contribute positively to
the well-being of a population.
 Social Development and Happiness
Social Capital: Strong social relationships and community ties are often associated with higher
levels of happiness. Social capital, which includes trust, social networks, and community
engagement, can have a significant impact on individual and collective well-being.

Education and Health: Access to quality education and healthcare are key components of
development. These factors not only contribute to improved economic prospects but also have
direct positive effects on health and happiness.
 Environmental Sustainability and Happiness

Quality of the Environment: Sustainable development recognizes the importance of a healthy

environment. People tend to be happier in societies where there is a balance between economic
growth and environmental conservation.

Cultural and Psychological Factors:

Cultural Values: Cultural factors play a crucial role in shaping perceptions of happiness.
Different societies may prioritize various aspects of life, such as individual achievement, family,
or community, which can impact overall well-being.
Psychological Well-being: Development is not only about material progress but also about
psychological well-being. Factors like autonomy, a sense of purpose, and personal growth
contribute to individual happiness.

Policy Implications: While economic indicators like Gross Domestic Product (GDP) are
important, policymakers are increasingly recognizing the need for measures that consider
broader well-being, such as the Human Development Index (HDI) or Gross National
Happiness (GNH).
Policies that focus on social development, education, healthcare, and social inclusion can
contribute significantly to overall happiness.

In short, the relationship between development and happiness is intricate and involves a
combination of economic, social, cultural, and psychological factors. Sustainable development
that considers not only economic growth but also social and environmental well-being is more
likely to contribute to lasting happiness within a society.
 Environmental sustainability and sustainable development

Environmental sustainability and sustainable development are steadily interconnected concepts

that address the need to balance economic, social, and environmental considerations to ensure
the well-being of current and future generations. The relationship between these two concepts
lies in their shared goal of promoting long-term viability and harmony between human activities
and the natural environment
Sustainable Development: This broader concept encompasses not only environmental
considerations but also social and economic dimensions. Sustainable development aims to meet
the needs of the present without compromising the ability of future generations to meet their
own needs. It involves integrating environmental, social, and economic policies to achieve a
balanced and holistic approach to development.
 Definitions
Environmental Sustainability: This refers to the responsible use of natural resources and the
protection of ecosystems to maintain their health and resilience over time. It involves
minimizing negative impacts on the environment, conserving biodiversity, and promoting the
efficient use of resources.
 Mutual dependence
Environmental sustainability is a crucial component of sustainable development. The health of
the environment directly affects the well-being of communities and economies. Degradation of
natural resources or ecosystems can have far-reaching consequences on social and economic
systems, impacting food security, water availability, and overall human health.
 The Triple Bottom Line
The world is full of uncertainty. Monumental challenges—including climate change, poverty,
and inequality—are at the forefront of daily life and seemingly becoming ever more urgent.

The triple bottom line is a business concept that states firms should commit to measuring their
social and environmental impact—in addition to their financial performance—rather than
solely focusing on generating profit, or the standard “bottom line.”
 THREE P’S

The triple bottom line can be broken down into “three P's”: profit, people, and the planet.
Firms can use these categories to conceptualize their environmental responsibility and determine
any negative social impacts to which they might be contributing.

From there, companies can integrate sustainable practices into every facet of their business
operations—including supply chains, business partners, and renewable energy usage—to
positively impact society and the environment in addition to turning a profit.
 Interconnected Goals:

Economic Prosperity: Sustainable development recognizes that economic growth should not
come at the expense of environmental degradation. Environmental sustainability ensures that
economic activities are conducted within the carrying capacity of ecosystems, promoting
long-term economic prosperity.
Social Equity: Both concepts prioritize social well-being and inclusivity. Sustainable
development aims to eradicate poverty, promote education, and improve healthcare, recognizing
that a healthy society is a crucial component of long-term sustainability.
Environmental Protection: Environmental sustainability is a key component of sustainable
development. Preserving ecosystems, reducing pollution, and mitigating climate change are
critical to ensuring a stable and healthy environment for current and future generations.
 Strategies for Integration:

Policy Alignment: Governments and organizations need to develop policies that integrate
environmental sustainability into broader development strategies. This might involve setting
regulations and incentives that promote green technologies, sustainable agriculture, and
responsible resource management.

Public Awareness and Education: Raising awareness about the interconnectedness of

environmental sustainability and sustainable development is crucial. Educating communities
about the importance of preserving natural resources and adopting sustainable practices can lead
to more informed and responsible decision-making.
Technological Innovation: Sustainable development often relies on technological advancements to
decouple economic growth from environmental degradation. Investing in and adopting green
technologies can contribute to both environmental sustainability and economic development.

Global Cooperation:
Achieving sustainable development and environmental sustainability requires international
collaboration. Issues like climate change, biodiversity loss, and pollution transcend national
borders, necessitating coordinated efforts to address shared challenges.
Challenges:
● Trade-offs: Striking a balance between economic development and environmental
preservation can be challenging. Decision-makers often face trade-offs where
short-term economic gains may conflict with long-term sustainability goals.
● Inequality: Sustainable development emphasizes social equity, but achieving this goal
globally remains a significant challenge. Bridging the gap between developed and
developing regions is essential for a truly sustainable future.
In summary, environmental sustainability and sustainable development are interconnected and

mutually reinforcing concepts. Balancing economic, social, and environmental considerations is

essential for building a resilient and equitable global society that can thrive in the long term.
Questions
1.How do the developing countries differ from the developed countries in their earlier stages?
2. Discuss the relationship between development and happiness.
3. Explain any five common characteristics that the developing countries have.
4. Discuss the merits and demerits of Physical Quality of Life Index (PQLI) for measuring
development.
5. For one to get a sense of the concept of human well being you need to understand 'functionings',
according to Amartya Sen. What do the 'functionings' mean?
6. Is there any difference between economic development and economic growth? Justify your stand.
7. State and explain the Sen’s Capabilities Approach and how it relates to the well-being of the
society.
8. Give the meaning of purchasing power parity measure of per capita income.
9. Development in any society must have some key objectives. Discuss.
10. Critically analyse the central role that women have in the process of development.
11. What would an improvement in the quality of life involve to bring about economic development?
12. There are three basic components or core values which serve as a conceptual basis and practical
guideline for understanding the inner meaning of development. Explain them.
13. Development is perceived as a multidimentional process. What does it mean?
14. Discuss the connection between Environmental Sustainability and Sustainable Development.
Unit 2
1. Explain critically how Solow growth model is an improvement over Harrod-Domar model with suitable examples.
2. Discuss the relevance of Romer model in the context of development problems confronting the developing countries. Also, give your
opinion on how spillover of technology and externalities bring the development especially in UDCs.