Chapter One: Economics of Development: Concepts and Approaches

1.1 Economics and Development Studies

Development economics has been defined as the study of the economic structure and behavior of poor
(or less developed) countries [W.A. Lewis (1984)].

It is generally agreed that "development" encompasses the reduction of poverty, improvements in the
health and education of the population, and an increase in productive capacity as well as rising per
capita income.

Although the core concerns of development economics are clear enough, its outer boundaries are
difficult to establish and essentially arbitrary.

The study of economic development is one of the newest, most exciting, and most challenging
branches of the broader disciplines of economics and political economy. Although one could claim that
Adam Smith was the first

“development economist “Wealth of Nations, and published that in 1776, his was the first treatise on
economic development, the systematic study of the problems and processes of economic development
in Africa, Asia, and Latin America has emerged only over the past five decades or so. Though
development economics often draws on relevant principles and concepts from other branches of
economics in either a standard or modified form, for the most part it is a field of study that is rapidly
evolving its own distinctive analytical and methodological identity.

1.2 The Nature of Development Economics

Development economics is a dynamic and multifaceted field that seeks to understand and address the economic
challenges faced by developing countries. Here are some key aspects that define its nature:

Interdisciplinary Approach

Development economics integrates insights from various disciplines such as sociology, political science, and
environmental studies to provide a comprehensive understanding of development issues.

Focus on Poverty and Inequality

A central concern is to identify and implement strategies to reduce poverty and inequality. This involves studying
income distribution, access to resources, and social mobility.
1
Emphasis on Human Capital

Improving health, education, and skills of the population is crucial. Development economists analyze how
investments in human capital can drive economic growth and development.

Structural Transformation

The field examines how economies transition from primarily agricultural to more industrial and
service-oriented structures. This includes studying the role of technology, industrialization, and
urbanization.

Policy-Oriented

Development economics is highly policy-driven, aiming to design and evaluate policies that can
foster sustainable economic growth. This includes fiscal policies, trade policies, and social welfare
programs.

Global Perspective

While focusing on individual countries, development economics also considers global factors such
as international trade, foreign aid, and global financial systems that impact development.

Sustainable Development

There is a growing emphasis on ensuring that economic development is environmentally sustainable.

This involves studying the impact of economic activities on the environment and promoting green
technologies and practices.

Theoretical and Empirical Analysis

Development economics combines theoretical models with empirical research to understand real-
world issues. This involves using data and statistical methods to test hypotheses and inform policy
decisions.

1.3. Current Interest in 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 mercantilist school,
2
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 World War II 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.

Development Studies is currently experiencing significant interest and growth, driven by various
global challenges and opportunities. Here are some of the key areas of focus:

Climate Change and Environmental Sustainability

 Climate Resilience: Developing strategies to help communities adapt to climate change.

 Sustainable Practices: Promoting environmentally friendly practices in agriculture, industry,
and urban planning.

Social Inequality and Inclusion

 Gender Equality: Addressing gender disparities in education, employment, and political

participation.

Social Inclusion: Ensuring marginalized groups have access to resources and opportunities

Economic Development and Poverty Reduction

 Inclusive Growth: Creating economic policies that benefit all segments of society.

Microfinance: Providing financial services to low-income individuals to promote

entrepreneurship and economic stability.

Technological Innovation
 Digital Divide: Bridging the gap in access to technology between developed and developing
regions.
 Tech for Development: Leveraging technology to improve healthcare, education, and
governance.

Global Health

3
  Pandemic Response: Strengthening healthcare systems to better respond to global health
crises.
 Universal Healthcare: Promoting access to healthcare for all, regardless of economic status.

Governance and Institutions

 Good Governance: Enhancing transparency, accountability, and efficiency in public
institutions.

Conflict Resolution: Addressing the root causes of conflict and promoting peacebuilding efforts

4
5
.

Migration and Urbanization

 Urban Planning: Developing sustainable cities that can accommodate growing populations.

Migration Policies: Creating policies that support the rights and integration of migrants

6
 2.Chapter two
2. Theory of Growth and Development

The meaning of economic growth is unambiguous. 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 or 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 or 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.

However, 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, 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 agricultures share of both declines 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. Many developing countries experienced relatively high rates of growth
of per capita income during the 1960s and 1970s. But the countries showed little or no improvement or
even an actual decline in employment, equality, and the real income of the poorest part of their
population. Consequently, in addition to economic growth, Dudley Seers argues on the need of looking
on what has been happening to poverty, unemployment, and inequality as a determinant of
development rather than mere growth of per capita income.
7
8
Development must therefore be conceived of as a multidimensional 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 the eradication of poverty. Development, in its essence, must
represent the whole gamut of change by which an entire social system, tuned to the diverse basic needs
and evolving aspirations of individuals and social groups within that system, moves away from a
condition of life widely perceived as unsatisfactory toward a situation or condition of life regarded as
materially and spiritually better.

Amartya Sens “Capability”Amartya Sen,the 1998 Approach Nobel laureate in economics, argues
thaty t matters for status as a poor or non-growth cannot be sensibly treated as an end in itself.
Development has to be more concerned with enhancing the lives we lead and the freedoms we enjoy.
That is, we should look at peoples capabilities, possibilities to live good life, ma activities, and freedom
to participate in decision making.

2.1. Three Core Values of Development

Denis Goulet (1971) distinguishes three basic components or core values in this wider meaning of
development, which he calls life-sustenance, self-esteem and freedom.

 Life sustenance- ( Ability to meet basic needs)

It is concerned with the provision of basic human needs including food, shelter, health, minimal
education and protection. This is called the Basic Need Approach of Development (initiated by
the World Bank). When any of these is absent or in a critically short supply, we cannot say that
the country is fully developed. So, economic development is necessary to provide people with
the basic needs. Rising per capita income and the elimination of absolute poverty, greater
employment opportunities and lower income inequalities are a necessary but not sufficient
condition for development.

9
1
0
 Self —esteem ( to be a person )

This is concerned with the feeling of self-respect and independence or not being used
as a tool by others for their own need. No country can be regarded as fully developed
if it is exploited by others & does not have the power & influence to conduct relations
on equal terms.

 Freedom from servitude ( to be able to choose )

This refers to freedom from ignorance, squalor and poverty, so that people are able to
determine their own destiny. No man is free if he cannot choose, if he is imprisoned
by living in the margin of subsistence with no education and skill. The advantage of
economic growth is that it expands the range of human choice open to individuals and
societies at large. Wealth gives you more leisure as well as more goods and services.
Freedom also refers to political freedom, including personal security, the rule of law,
freedom of expression and political participation on equal footing.

2.2. The Three Objectives of Development

Development is both a physical reality and a state of mind in which society has,
through some combination of social, economic, and institutional processes, secured
the means for obtaining a better life. Whatever the specific components of this better
life, development in all societies must have at least the following three objectives:

1. To increase the availability and widen the distribution of basic life-sustaining

goods such as food, shelter, health, and protection

2. To raise levels of living, including, in addition to higher incomes, the provision

of more jobs, better education, and greater attention to cultural and human
values, all of which will serve not only to enhance material wellbeing but also to
generate greater individual and national self-esteem

3. To expand the range of economic and social choices available to individuals and
nations by freeing them from servitude and dependence not only in relation to
other people and nation-states but also to the forces of ignorance and human
misery.

11
1
2
 2.3. Measurement and International Comparison of Growth and Development

2.3.1. 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 c 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 (labour and capital) less
payments made to nonresidents who contribute to the domestic economy.

These two national income 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.

This income measure of development is also used to compare the economic performance of different
countries. Thus, the level of national income or per capita income and their growth rates can be
compared internationally. The poverty datum line, as the measure of the critical minimum level of
per capita income below which individuals are deemed to be living in absolute poverty, is also
derived from the income measure of development.

13
  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, 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.

 Another difficulty arises as a result of differences in the rate of inflation among countries such
that those with high rates of inflation can post very high levels of national income. National
income deflators can moderate this problem if appropriately applied.

 The other problem in international comparison relates to the problem of conversion of national
incomes measured in national currencies into the US dollar at the official exchange rate. The
concern is the underestimation of the living standard of developing countries. If the US dollar
is used as a unit of account, the national per capita income of a given country in US dollar is
given by GNP/Population x exchange rate.

14
15
2.3.1. 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. The most important factor influencing the search for alternative
indictors has been the marked shift in thinking among development economists, organizations and
practitioners since the beginning of the 1970s about the meaning of development and the processes
leading to it.

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.

16
17
 A. The Physical Quality of Life Index (PQLI)

The Physical Quality of Life Index (PQLI) is an attempt to measure the quality of life or well-being of
a country. PQLI is considered as a measurement of quality of life in a quantitative way. The level of
physical quality of life determines the level of economic development. If any country's physical
quality of life is higher than that of the other country, then that country is considered as more
developed. It was developed by M.D. Morris in 1979. He constructed a composite PQLI relating to 23
developing countries for a comparative study. He combined three component indicators of infant
mortality, life expectancy at age one and basic literacy at age 15 to measure performance in meeting
the most basic needs of the people. The PQLI shows improvement in the quality of life when people
enjoy the fruits of economic progress with increase in life expectancy (LE), fall in infant mortality rate
(IMR) and rise in basic literacy rate (BLR).

Each indicator of the three components is placed on a scale of zero to 100 where zero represents an
absolutely defined worst performance and 100 represents an absolutely defined best performance. The
PQLI index is calculated by averaging the three indicators giving equal weight to each and the index is
also scaled from 0 to 100.

Infant mortality rate is defined as the number of babies died per 1000 new babies born. Maximum and
minimum values of Infant Mortality Rate are 229 and 9 respectively.

Maximum and minimum values of Life Expectancy are 77 years and 38 years respectively.

18
Maximum and minimum values of Basic Literacy Rate are 100% and 0% respectively.

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, it helped
redirecting attention away from growth, toward a broader concept of human development.

However, the PQLI has been criticized because.

 The availability of data is limited

 It gives equal weight to each indicator arbitrarily without obvious rationale

 It treats economic and social indictors separately, instead of combining them in a

composite index.

19
 B. The Human Development Index (HDI)

The Human Development Index (HDI) was created to emphasize that people and their capabilities
should be the ultimate criteria for assessing the development of a country. The index (HDI) is a
summary measure of average achievement in key dimensions of human development: a long and
healthy life, being knowledgeable and have a decent standard of living.
The health dimension is assessed by life expectancy at birth, the education dimension is measured by
mean of years of schooling for adults aged 20 years and more and expected years of schooling for
children of school entering age. The standard of living dimension is measured by gross national
income per capita. Therefore, HDI is calculated as a composite index of life expectancy, education,
and per capita income indicators. It was developed by Pakistani economist Mahbub ul Haq and was
introduced by the United Nations Development Programme (UNDP) in its first Human Development
Report (HDR) published in 1990. Value of HDI ranges from 0 to 1.

In its 2010 Human Development Report, the UNDP began using a new method of calculating the HDI.
The following three indices are used:

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. It is based on three variables:-

 Longevity:- as measured by life expectancy at birth

 Educational attainment: - as measured by a condition of adult literacy.

 Standard of living measured by real per capita income at PPP.

20
21
LEI is 1 when Life expectancy at birth is 85 and 0 when Life expectancy at birth is 20.
LE = Life Expectancy at birth. Maximum value of LE is 85 and minimum value is 20. For example, if
the actual value of the LE is 65 years, then the value of LEI is

Fifteen is the projected maximum of this indicator for 2025.

MYS: Mean years of schooling (i.e. years that a person aged 25 or older has
spent in formal education).

ii) Expected Years of Schooling Index (EYSI)

22
Eighteen is equivalent to achieving a master's degree in most countries.

EYS: Expected years of schooling (i.e. total expected years of schooling for
children under 18 years of age). It is the number of years a child of school
entrance age can expect to spend in a given level of education .

For example ,if EYS=5,then EYSI=5/18=0.28

Therefore ,the value of education index(EI)=0.47+0.28/2=0.37

GNIpc: Gross National Income at purchasing power parity per capita.

II is 1 when GNI per capita is $75,000 and 0 when GNI per capita is
$100.

Finally, the HDI is the geometric mean of the previous three normalized

indices:
23
Therefore, the value of HDI is = √𝟎.𝟔𝟗∗𝟎.𝟒∗𝟎.𝟕𝟎𝟑=𝟎.𝟎𝟔𝟒

The index thus ranges from 0 to 1. Accordingly, the HDI ranks countries into four groups:

 Low human development (0.0 to 0.499),

 Medium human development (0.50 to 0.799),

 High human development (0.80 to 0.90), and

 Very high human development (0.90 to 1.0).

Nevertheless, HDI has been criticized on grounds such as:-

 Gross enrollment in many cases overstates the amount of schooling

because in many countries a student who begins primary school is
counted as enrolled without considering whether the student drops out at
some stage.

 Equal (one third) weight is given to each of the three components, which
clearly has some value judgment behind it, but it is difficult to determine
what this is.

 No attention given to the role of quality (such as quality of life,

schooling, etc.)

The New Human Development Index

In November 2010, the UNDP introduced its New Human Development Index (NHDI),
intended to address some of the criticisms of the HDI. The index is still based on standard of
living, education, and health. But it has some notable changes.

 Gross national income (GNI) per capita replaces gross domestic product (GDP) per
capita.

 The education index has been completely changed. Two new components have been
added: the average actual educational attainment of the whole population and the
expected attainment of todays. Children.

24
25
  The upper goalposts (maximum values) in each dimension have been increased to the
observed maximum rather than given a predefined cutoff.

 The lower goalpost for income has been reduced. This is based on estimates for
Zimbabwe in 2007 that, if the data and their interpretation hold up, represent a
historic low for recorded income.

 Rather than using the common logarithm (log) to reflect diminishing marginal benefit
of income, the NHDI now uses the natural log.

 Possibly the most consequential change is that the NHDI is computed with a
geometric mean.

NHDI= H 1/3E1/3I1/3

Where, H stands for the health index, E stands for the education index, and I stands for the
income index. This is equivalent to taking the cube root of the product of these three
indexes.

C. Human Poverty Index (HPI)

The Human Poverty Index (HPI) was first introduced into the Human Development Report by the
United Nations Development Programme (UNDP) in 1997. The index brings together the different
features of deprivation in the quality of life to arrive at an aggregate judgement on the extent of
poverty in a community. The HPI looks at deprivations in the three basic dimensions captured in the
Human Development Index: a long healthy life (longevity), knowledge and a decent standard of
living. The first deprivation (longevity) is measured by the probability of not surviving past the age of
40. Knowledge or exclusion from it is measured by adult illiteracy rate. Decent standard of living or
lack of essential services relates to deprivation with regard to the percentage of the population not
using an improved water source and the percentage of children underweight for their age.

 HPI as a composite index measuring deprivation in the above mentioned three

basic dimensions is calculated as follows:-

26
𝑃1: Probability at birth not surviving to age 40.
𝑃2: Adult illiteracy rate

𝑃3: Arithmetic average of 3 characteristics:

i (i) The percentage of the population without access to safe water.

ii (ii) The percentage of population without access to health

services.

iii (iii) The percentage of malnourished children under five

Multidimensional Poverty Index (MPI)

The Global MPI was developed in 2010 by the Oxford Poverty and Human Development
Initiative (OPHI) and the United Nations Development

Programme for Human UNDPsDevelopment Reports. It is the first international measure to

reflect the intensity of poverty —the number of deprivations each person faces at the same
time. The index identifies deprivations across the same three dimensions as the HDI and
shows the number of people who are multi-dimensionally poor (suffering deprivations in
33% of weighted indicators) and the number of deprivations with which poor households
typically contend with.

The MPI is the product of two components:

 Incidence: the percentage of people who are poor (or the headcount ratio, H);

 Intensity: the average share of indicators in which poor people are deprived (A).
27
28
MPI = H x A

Who is poor? A person experiencing at least one third (i.e. 33% or more) of the weighted
deprivations is said to be poor.

29
Example Calculation
Step 1: Define the Population
Let's consider a hypothetical community of 5 individuals (A, B, C, D, E) and their deprivations.
Individua Child Nutritio Years of School Electricit Sanitatio Drinking Floorin Deprivation
Assets
l Mortality n Schooling Attendance y n Water g Count

A 1 1 1 1 1 1 6

B 1 1 1 1 1 1 4

C 1 1 1 1 1 1 5

D 1 1 1 1 4

E 1 1 1 1 1 5

Step 2: Identify the Poor

Assuming the deprivation cut-off is 3, we can see that individuals A, C, E (each with a deprivation
count of 6, 5, and 5, respectively) are considered multidimensional poor.

Step 3: Calculate (H)

Out of 5 individuals, 3 are poor: [ H = {Number of Poor}\Total Population}} = 3/5 = 0.6
Step 4: Calculate (A)
We find the total deprivations among the poor:
A: 6 deprivations
C: 5 deprivations
E: 5 deprivations
Total deprivations among the poor = (6 + 5 + 5 = 16\)
Average deprivations for the poor: A = {Total Deprivations/Number of Poor Individuals} times \
{Total Indicators} = 16/3 * 10= 16/30 = .5333
Step 5: Calculate the MPI
MPI= H *A = 0.6 * 0.5333 = .32

30
The MPI in this hypothetical community is .32, indicating that 32% of the total deprivations
experienced by the population can be attributed to multidimensional poverty.

CHALLENGES OF DEVELOPMENT

The challenges of development encompass a wide range of economic, social, political, and
environmental issues that can hinder progress in various regions and countries. Here are some key
challenges:
1. Poverty and Inequality: - Significant gaps in wealth distribution can limit access to resources,
education, and healthcare.
Social Inequality: Marginalized groups may face discrimination, limiting their opportunities for
development.
2. Infrastructure Deficiencies:-Transportation: Poor road networks, inadequate public transport, and
limited access to rural areas can impede economic growth.
Utilities: Lack of access to reliable electricity, clean water, and sanitation facilities can hinder quality
of life and productivity.
3. Education and Skills Gap
Access to Education: Limited access to quality education can restrict workforce development and
innovation.
Skill Mismatch: Education systems may not align with market needs, leading to unemployment or
underemployment.
4. Health Challenges
Disease Burden: High rates of infectious diseases, malnutrition, and lack of healthcare infrastructure
can reduce productivity.
Mental Health: Increasing awareness of mental health issues is crucial, as they often go untreated,
affecting overall well-being.
5. Political Instability and Governance Issues
Corruption: Mismanagement and corruption can divert resources from essential services and
development projects.
Conflict: Political unrest and violence can disrupt economic activities and displace communities.

6. Environmental Sustainability
Resource Depletion: Overexploitation of natural resources can lead to long-term environmental
damage.
Climate Change: Vulnerability to climate impacts can threaten food security, livelihoods, and physical
infrastructure.
7. Economic Dependency
31
Reliance on Aid: Overreliance on foreign aid can create vulnerabilities and limit self-sustained growth.
Single Industry Focus: Economies dependent on a single industry (e.g., oil, agriculture) may face
vulnerabilities to market fluctuations.
8. Technological Barriers
Digital Divide: Lack of access to technology can limit participation in the global economy.
Innovation Limitations: Insufficient investment in research and development can hinder technological
advancements.
9. Globalization Challenges
Market Competition: Local businesses may struggle to compete with global corporations.
Cultural Erosion: Global influences can undermine local cultures and traditions.
10. Demographic Changes
Aging Population: In some regions, an aging population can strain social services and healthcare
systems.
Youth Unemployment: High youth unemployment rates can lead to social unrest and economic
stagnation

2.4. The Millennium Development Goals

In September 2000, the 189 member countries of the United Nations at that time adopted eight
Millennium Development Goals (MDGs); committing themselves to making substantial progress
toward the eradication of poverty and achieving other human development goals by 2015. These are:

1. To eradicate extreme poverty and hunger

2. To achieve universal primary education

3. To promote gender equality

4. To reduce child mortality

5. To improve maternal health

32
6. To combat HIV/AIDS, malaria, and other diseases

7. To ensure environmental sustainability

8. To develop a global partnership for development

33
34
 2.4.1. From MDG to Sustainable Development Goals (SDG)

Up to 2015, the development agenda was centered on the Millennium Development Goals
(MDGs), which were officially established following the Millennium Summit of the United
Nations in 2000. On 25 September 2015, the 193 countries of the UN General Assembly
adopted the 2030 Development Agenda titled Transforming our world'.

This included the following goals:

1. End poverty in all its forms everywhere

2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture

3. Ensure healthy lives and promote well-being for all at all ages

4. Ensure inclusive and equitable quality education and promote lifelong learning
opportunities for all

5. Achieve gender equality and empower all women and girls

6. Ensure availability and sustainable management of water and sanitation for all

7. Ensure access to affordable, reliable, sustainable and modern energy for all

8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all

9. Build resilient infrastructure, promote inclusive and sustainable industrialization and

foster innovation

10. Reduce inequality within and among countries

11. Make cities and human settlements inclusive, safe, resilient and sustainable

12. Ensure sustainable consumption and production patterns

13. Take urgent action to combat climate change and its impacts

35
36
 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development

15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage
forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for
all and build effective, accountable and inclusive institutions at all levels

17. Strengthen the means of implementation and revitalize the global partnership for sustainable
development

2.5. Development Gap

Eliminating the development gap between rich and poor countries is the prime objective of the new
economic order. But what are the gaps?

 Real per capita GDP.

 Developing countries have higher unemployment (Particularly disguised unemployment )

 Level of educational attainment.

 In developing countries there is poor infrastructure, inadequate public service, high level of
corruption, and inefficient institutions.

Thus, the implications of differing conditions in development in developed and developing countries can
perhaps be most vividly seen in tests for economic “convergence” across countries.

 Can under developed countries “in per capita income?

To answer this question, we need to see absolute income gap and relative income gap. To eliminate the
absolute income gap between rich and poor countries, growth rate of income of poor countries has to be
higher than rich countries. The lets following four answer questions which would help us to see the
challenge of developing countries.

37
38
  Given the recent growth experience of poor countries, how long it take them to
reach the current average level of per capita income in the industrialized countries?
(i.e., years needed to equalize per capita income, if rdc =2%).

 Given the recent growth experience of poor countries relative to industrialized

countries, how many years it takes the per capita income gap eliminated?

To answer these questions, let us use simple compound interest formula:

S= P (1+r)n

Where, S= future value P= present value

r= rate of growth,

and n = time

Let YD = the current level of PCI of the industrialized countries is $ 20,000

rD = PCI growth rate of the industrialized countries (let be 3% per year From 2015-2035).

YDC = Current level of PCI of developing countries (is $1200)

r DC = growth rate of PCI of developing countries (let be 2%)

Y*D = the PCI of industrialized countries in 2035. Thus,

Y * D =20,000(1 -0.03)20 =$36,000

r* DC = required growth rate of PCI of the developing countries.

1. Years needed equalize PCI of developing countries?

2. Required growth rate of PCI of the developing countries?

Solution

39
40
Q1. (Years needed to equalize PCI)

 YD YDC 1rDC n

 20,000 120010.02n

n 20,000


1.02
1200

200 YD 
n
 
1.02 = or n n1r  n

DC  
12 Y
DC


y 
n D
 
y
 DC 

n 142
year

n1rDC 

41
23

42
 Chapter three

Structural Features and Common Characteristics of Developing countries

2.1 Defining the Developing World

The most common way to define the developing world is by per capita income. Several international
agencies, including the Organization for Economic Cooperation and Development (OECD) and the
United Nations, offer classifications of countries by their economic status, but the best-known system
is that of the International Bank for Reconstruction and Development (IBRD), more commonly known
as the World Bank. The classification includes all World Bank members, plus all other economies
with populations of more than 30,000.

Each year on July 1, the World Bank revises analytical classification of the world's economies based
on estimates of gross national income (GNI) per capita for the previous year.

As of 1 July 2015, the economies were classified based on GNI per capita of 2014 as follows,
 Low-income countries ($1,045 or less)

 Lower middle-income countries ( $1,046 - $4,125)

 Upper middle-income countries ( $4,126 - $12,735)

 High income countries ($12,736 or more).

Note: With a number of important exceptions, the developing countries are those with low, lower-
middle, or upper-middle incomes.

43
24

44
Low-income economies ($1,045 or less) ………….………31 countries

Afghanistan Gambia, The Niger

Benin Guinea Rwanda
Burkina Faso Guinea-Bisau Sierra Leone
Burundi Haiti Somalia
Cambodia Korea, Dem Rep. South Sudan
Central African Republic Liberia Tanzania
Chad Madagascar Togo
Comoros Malawi Uganda
Congo, Dem. Rep Mali Zimbabwe
Eritrea Mozambique
Ethiopia Nepal

Lower-middle-income economies ($1,046 to $4,125)……..…51Countries

Armenia Indonesia Samoa

Bangladesh Kenya São Tomé and Principe
Bhutan Kiribati Senegal
Bolivia Kosovo Solomon Islands
Cabo Verde Kyrgyz Republic Sri Lanka
Cameroon Lao PDR Sudan
Congo, Rep. Lesotho Swaziland
Côte d'Ivoire Mauritania Syrian Arab Republic
Djibouti Micronesia, Fed. Sts. Tajikistan
Egypt, Arab Rep. Moldova Timor-Leste
El Salvador Morocco Ukraine

45
 Georgia Myanmar Uzbekistan
Ghana Nicaragua Vanuatu
Guatemala Nigeria Vietnam
Guyana Pakistan West Bank and Gaza
Honduras Papua New Guinea Yemen, Rep.
India Philippines Zambia

Upper-middle-income economies ($4,126 to $12,735)………..53countries

Albania Fiji Namibia

Algeria Gabon Palau
American Samoa Grenada Panama
Angola Iran, Islamic Rep. Paraguay
Azerbaijan Iraq Peru
Belarus Jamaica Romania
Belize Jordan Serbia

46
25

47
 Bosnia and Herzegovina Kazakhstan South Africa
Botswana Lebanon St. Lucia
St. Vincent and the
Brazil Libya
Grenadines
Bulgaria Macedonia, FYR Suriname
China Malaysia Thailand
Colombia Maldives Tonga
Costa Rica Marshall Islands Tunisia
Cuba Mauritius Turkey
Dominica Mexico Turkmenistan
Dominican Republic Mongolia Tuvalu
Ecuador Montenegro

High-income economies ($12,736 or more) ……..80countries

Andorra Germany Poland

Antigua and Barbuda Greece Portugal
Argentina Greenland Puerto Rico
Aruba Guam Qatar
Australia Hong Kong SAR, China Russian Federation
Austria Hungary San Marino
Bahamas, The Iceland Saudi Arabia
Bahrain Ireland Seychelles
Barbados Isle of Man Singapore
Belgium Israel Sint Maarten (Dutch part)
Bermuda Italy Slovak Republic
Brunei Darussalam Japan Slovenia
Canada Korea, Rep. Spain
Cayman Islands Kuwait St. Kitts and Nevis

48
Channel Islands Latvia St. Martin (French part)
Chile Liechtenstein Sweden
Croatia Lithuania Switzerland
Curaçao Luxembourg Taiwan, China
Cyprus Macao SAR, China Trinidad and Tobago
Czech Republic Malta Turks and Caicos Islands
Denmark Monaco United Arab Emirates
Estonia Netherlands United Kingdom
Equatorial Guinea New Caledonia United States
Faeroe Islands New Zealand Uruguay
Finland Northern Mariana Islands Venezuela, RB
France Norway Virgin Islands (U.S.)
French Polynesia Oman

49
26

50
High-income OECD members …………………… 32 countries

Australia Greece Norway

Austria Hungary Poland
Belgium Iceland Portugal
Canada Ireland Slovak Republic
Chile Italy Slovenia
Czech Republic Israel Spain
Denmark Japan Sweden
Estonia Korea, Rep. Switzerland
Finland Luxembourg United Kingdom
France Netherlands United States
Germany New Zealand

List of countries with new income groups

Economy Old income group New income group

Bangladesh Low Lower middle
Kenya Low Lower middle
Myanmar Low Lower middle
Tajikistan Low Lower middle
Mongolia Lower middle Upper middle
Paraguay Lower middle Upper middle
South Sudan Lower middle Low
Argentina Upper middle High income
Hungary Upper middle High income
Seychelles Upper middle High income
Venezuela, RB Upper middle High income

51
Source (The World Bank, 2015)

52
27

53
 2.2. An Overview of the Diverse Structure of Developing Countries

Developing countries are considered to be different from one another on eight broad categories. These
are:-

1. Size and Income Level

Economic potential of a country is significantly determined by its physical and population size, and its
level of national income per capita. In the world of developing countries, larger and populated nations
such as Brazil, India, Nigeria and Ethiopia, exist side-by-side with small countries like Paraguay,
Nepal and Djibouti. This size provides both advantages and disadvantages. Large size usually presents
advantages of diverse resource endowment, large potential markets, and lesser dependence on foreign
sources of materials and products. However, it also creates problems of administrative control,
national cohesion, and regional imbalances.

2. Historical Background

The other sources of diversity among the developing countries are their traditional and colonial
heritages. Apparently, countries have their own different cultural background accumulated in their
history, making them to have different social and economic institutions. Moreover, developing nations
were at one time or another, colonies of Western European countries. The European colonial powers
had a dramatic and long-lasting impact on the economies, political and institutional structures of their
African and Asian colonies. The economic structures of these nations, as well as their educational and
social institutions have typically been modeled on those of their former economic rulers.

The diversity in colonial heritage together with the indigenous cultural differences has resulted in
different structural problems in these countries. Depending on their colonial heritage, therefore, the
countries are required to take different measures. Countries like those in Africa that only recently
gained their independence are likely to be more concerned with consolidating and evolving their own
national economic and political structures than with simply promoting rapid economic development.
Their policies may consequently, reflect a greater interest in these immediate political issues.

54
28

55
Latin American countries have a longer history of political independence plus a more shared colonial
heritage. Therefore, in spite of geographic and demographic diversity, the countries possess relatively
similar economic, social, and cultural institutions and face similar problems. In Asia, on the other
hand, different colonial heritages and the diverse cultural traditions of the indigenous peoples have
combined to create different institutional and social patterns.

3. Physical and Human Resources

Endowments of physical and human resources are other sources of disparities in economic growth
potential of the counties. If we start with the physical resource endowments, on the one hand, there are
countries which are extremely and favorably endowed with resources such as minerals, raw materials,
and fertile land. On the other hand, there are also poorly endowed nations where endowments of raw
materials and minerals and even fertile land are relatively minimal.

Moreover, geography and climate can play an important role in the success or failure of development
efforts. Other things being equal, it is said that island economies seem to do better than landlocked
economies. With respect to climate also temperate zone countries do better than tropical zone nations.

Developing countries are also distinguished one from the other in their human resource endowments.
The human resource endowments include not only the number of people and their skill levels but also
their cultural outlooks, attitudes toward work, access to information, willingness to innovate, and
desire for self-improvement.

4. Ethnic and Religious Composition

Ethnicity and religion often play a major role in the success or failure of development efforts. Currently, more
than 40% of the w more than five significant ethnic populations. In most cases, one or more of

These groups face serious problems of discrimination. Over half of the less developed countries have
recently experienced some form of inter-ethnic conflict. Just in the first half of the 1990s, ethnic and
religious conflicts leading to wide spread death and distinction took place in many African countries
and some countries of other regions.

56
29

57
Ethnic and religious diversity need not, however, necessarily lead to inequality, turmoil, or instability.
There have been numerous instances of successful economic and social integration of minority or
indigenous ethnic populations in countries as diverse as Malaysia and Mauritius. The point is that the
ethnic and religious composition of a developing nation and whether or not that diversity leads to
conflict or cooperation can be important determinants of the success or failure of development efforts.
Too often economists neglect to recognize this fundamental fact.

5. Relative Importance of the Public and Private Sectors

Most developing countries have mixed economic systems, featuring both public and private ownership
and use of resources. The division between the two and their relative importance are mostly
determined by the historical and political circumstances of the countries. In general, Latin American
and South East Asian nations have larger private sectors than South Asia and African nations.

6. Industrial Structure

Developing countries are predominantly agrarian in economic, social, and cultural outlook. Labour
force in most of these countries is overwhelmingly engaged in agriculture. This sector contributes
significantly also to the GDP of many of the poor nations. Farming is not merely an occupation but a
way of life for most people in Asia, Africa, and Latin America.

Nevertheless, there are great differences between the structure of agrarian systems and patterns of land
ownership in Latin America and Africa. Asian agrarian systems are somewhat closer to those of Latin
America in terms of patterns of land ownership. But even then the similarities are lessened by
substantial by cultural differences.

It is in the relative importance of both the manufacturing and service sectors that we find the widest
variation among developing nations. Most Latin American countries possess more advanced industrial
sectors. Asian countries like Taiwan, South Korea, and Singapore are also rapidly becoming
industrialized states.

58
30

59
In spite of the common problems, therefore, development strategies may vary from one country to the
next, depending on the nature, structure, and degree of interdependence among its primary, secondary,
and tertiary industrial sector.

7. External Dependence: Economic, Political, and Cultural

The degree to which a country is dependent on foreign economic, social, and political forces is related
to its size, resources endowment, and political history. For most developing countries, this dependence
is substantial. In some cases, it touches almost every facet of life.

Most small nations are highly dependent on foreign trade with the developed world. Almost all small
nations are dependent on the importation of foreign and often inappropriate technologies of
production. This fact alone exerts an extraordinary influence on the character of the growth process in
these dependent nations.

Even beyond the strictly economic manifestations of dependence in the form of the international
transfer of goods and technologies is the international transmission of institutions and values. Most
notably are systems of education and governance, and attitudes toward life, work, and self. The
transmission phenomenon brings mixed blessings to most less developed countries especially to those
with the greatest potential for self-reliance. A

Countrys ability to chart its own e affected by its degree of dependence on these and other external forces.

8. Political Structure, Power, and Interest Groups

It is often not the suitability of economic policies alone that determines the outcome of national
approaches to critical development problems. The political structure and the vested interests and
allegiances of ruling elites (e.g., large landowners, urban industrialists, bankers, foreign
manufacturers, the military, and trade unionists) will typically determine what strategies are possible
and where the main barriers to effective economic and social change may lie.

60
31

61
The concentration of interests and power among different segments of the populations of most
developing countries is itself the result of their economic, social, and political histories and is likely to
differ from one country to the next.

2.3 Common Characteristics of Developing Countries

i) Low Levels of Living

In developing nations, general levels of living tend to be very low for the vast majority of people. This
is true not only in relation to their counterparts in rich nations but often also in relation to small elite
groups within their own societies. These low levels of living are manifested quantitatively and
qualitatively in the form of low incomes (poverty), inadequate housing, poor health, limited or no
education, high infant mortality, low life and work expectancy, and in many cases a general sense of
malaise and hopelessness.

ii) Low Levels of Productivity

In addition to low levels of living, developing countries are characterized by relatively low levels of
labor productivity. The concept of a production function systematically relating outputs to different
combinations of factor inputs for a given technology is often used to describe the way in which
societies go about providing for their material needs. But the technical engineering concept of a
production function must be supplemented by a broader conceptualization that includes among its
other inputs managerial competence, worker motivation, and institutional flexibility. Throughout the
developing world, levels of labor productivity (output per worker) are extremely low compared with
those in developed countries.

For example, the principle of diminishing marginal productivity states that if increasing amounts of a
variable factor (labor) are applied to fixed amounts of other factors (e.g., capital, land, materials), the
extra or marginal product of the variable factor declines beyond a certain number. Low levels of labor
productivity can therefore be explained by the absence or severe lack of "complementary" factor
inputs such as physical capital or experienced management.

62
32

63
iii) High Rates of Population Growth and Dependency Burdens

Statistics on demographic evolution by country show that the present rhythm of global population
growth is largely the result of the acceleration of growth in the developing regions. This swift
population growth in developing countries is due to their higher birth rate as compared to death rate,
though death rate also is high.

Both older people and children are often referred to as an economic dependency burden. This means
that they are nonproductive members of society and therefore must be supported financially by a
country's labor force (usually defined as citizens between the ages of 15 and 64). The overall
dependency burden (i.e., both young and old) represents only about one-third of the populations of
developed countries but almost 45% of the populations of the less developed nations. Moreover, in the
latter countries, almost 90% of the dependents are children, whereas only 66% are children in the
richer nations.

We may conclude, therefore, that not only are Third World countries characterized by higher rates of
population growth, but they must also contend with greater dependency burdens than rich nations. The
circumstances and conditions under which population growth becomes a deterrent to economic
development is a critical issue.

iv) High and Rising Levels of Unemployment and Underemployment

One of the principal manifestations of and factors contributing to the low levels of living in
developing nations is their relatively inadequate or inefficient utilization of labor in comparison with
the developed nations. Underutilization of labor is manifested in two forms. First, it occurs as
underemployment—people, both rural and urban, who are working less than they could (daily,
weekly, or seasonally). Underemployment also includes those who are normally working full-time but
whose productivity is so low that a reduction in hours would have a negligible impact on total output.
The second form is open unemployment—people who are able and often eager to work but for whom
no suitable jobs are available.

64
33

65
v) Substantial Dependence on Agricultural Production and Primary Product Exports

The vast majorities of people in Third World nations live and work in rural areas. Over 65% are
rurally based, compared to less than 27% in economically developed countries. Similarly, 62% of the
labor force is engaged in agriculture, compared to only 7% in developed nations. Agriculture
contributes about 20% of the GNP of developing nations but only 3% of the GNP of developed
nations.

vi) Imperfect Markets and Incomplete Information

Starting from the 1980s almost every developing country is moving toward the establishment of a
market economy for many reasons. Many countries did so at the behest of the World Bank, which kept
advocating "market-friendly" economic policies as preconditions for loans. There seemed to be a
growing consensus that there had been too much government intervention in the workings of Third
World economies. This government intervention is sighted by many as the major cause of the
problems in the poor nations. Hence, free market and unfettered competition are considered as the key
to rapid economic growth.

But the presumed benefits of market economies and market-friendly policies depend heavily on the
existence of institutional, cultural, and legal prerequisites that are taken for granted in the industrial
societies. In many LDCs, these legal and institutional foundations are either absent or extremely weak.

vii) Dominance, Dependence, and Vulnerability in International Relations

For many less developed countries, a final significant factor contributing to the persistence of low
levels of living, rising unemployment, and growing income inequality is the highly unequal
distribution of economic and political power between rich and poor nations. These unequal strengths
are manifested in economic and non economic aspects of the relationships. Economically, the
dominant powers of rich nations control the pattern of international trade. They have also the ability to
dictate the terms whereby technology, foreign aid, and private capital are transferred to developing
countries.

66
34

67
Other equally important aspects of the international transfer process can serve to inhibit the
development of poor nations. One subtle but nonetheless significant factor has been the transfer of
First World values, attitudes, institutions, and standards of behavior to Third World nations. Examples
include the colonial transfer of often inappropriate educational structures, curricula, and school
systems; the formation of Western-style trade unions; the organization and orientation of health
services in accordance with the curative rather than preventive model; and the importation of
inappropriate structures and procedures for public bureaucratic and administrative systems.

Finally, the penetration of rich-countries' attitudes, values, and standards also contributes to a problem
widely recognized and referred to as the international brain drain. Brain drain is the migration of
professional and skilled personnel, who were often educated in the developing country at great
expense, to the various developed nations. Examples include doctors, nurses, scientists, engineers,
computer programmers, and economists.

The net effect of all these factors is to create a situation of vulnerability among Third World nations in
which forces largely outside their control can have decisive and dominating influences on their
economic and social well-being.

Conclusion

The phenomenon of underdevelopment must be viewed in both a national and an international context.
Problems of poverty, low productivity, population growth, unemployment, primary product export
dependence, and international vulnerability have both domestic and global origins and potential
solutions. Economic and social forces, both internal and external, are therefore responsible for the
poverty, inequality, and low productivity that characterize most Third World nations. The successful
pursuit of economic and social development will require not only the formulation of appropriate
strategies within the Third World but also a modification of the present international economic order
to make it more responsive to the development needs of poor nations.

68
35

69