Chapter One – Introduction

❑ Topics Included:
✓ Economic Growth vs Economic
Development
✓ Goals and Objectives of Economic
Development.
✓ Capability Approach to Development
✓ Common Characteristics of
Developing Countries
Economic Growth
 The terms economic growth and economic
development are sometimes used interchangeably,
but there is a fundamental distinction between the
two.
 Economic Growth refers to the rise in the value of
all goods and services produced in the economy.
✓ It implies the annual increase in the country’s GDP
or GNP in percentage terms.
✓ It is the total monetary value of all goods and
services produced by that country over a specific
period of time.
✓ Economic growth is a short-term process which
takes into account yearly growth of the economy.
 Economic Development
• Traditionally development means;
✓achieving sustained rates of growth of real
income per capita to enable a nation to
expand its output at a rate faster than the
growth rate of its population.
✓Note the concept of ‘per capita national
income and “real per capita national
income”.
❖ The term per capita income is used to capture the
effect of population growth
❖ The term “real” is used to capture the effect of
inflation.
 It requires growth of per capita income in
excess of inflation (π)- called as growth of
real per capita income
✓Growth in GDPpc - π > 0, where inflation
rate is π = ΔPrice/Price
 If π > Growth in GDPpc then purchasing
power is falling even when income is
increasing.
 So “development” may not occur even if
GDPpc is growing when inflation growing
even faster.
 The New Economic View of Development
 Development is defined as a
multidimensional process involving major
changes in:
- Social structures, popular attitudes,
national institutions, Acceleration of
economic growth, reduction of inequality
and eradication of extreme poverty.
 If income is increasing in a country but
poverty, unemployment, and/or inequality
worsen “it would be strange to call the result
‘development’” (Seers, 1996).
 Thus, Development
✓ must represent the whole change by which
the entire social system moves away from a
condition of life widely perceived as
unsatisfactory toward a condition of life
regarded as materially and spiritually better.
✓ Consequently, development economics
must be concerned with the formulation of
appropriate public policies designed to
effect major economic, institutional,
and social transformations of entire
societies in a very short time.
 Economic development strategies that seek
to raise agricultural output, create
employment, and eradicate poverty have
often failed in the past because policy
advisers neglected to view the economy as
an interdependent social system in which
economic and noneconomic forces work
together.
❑Reading Assignment for Better
Understanding!
 Why Study Development Economics? Some
Critical Questions that necessitated the
Study of Development Economics are listed
on Michael P. Todaro and Stephen C. Smith
Economic Development, 12th edition (2015),
Page 11.. Go through it and bring the whole
list of the questions.
Capability Approach to Define Development
 According to Amartya Sen Capabilities
are the freedoms that people have, given
their personal features and their
command over commodities.
 Amartya Sen (1999) pointed out that
“Development requires the removal of major
sources of unfreedom; poverty as well
domination, poor economic opportunities
as well as systematic social deprivation,
neglect of public facilities as well as
intolerance or over activity of repressive
states”.
Development as Freedom

 Development consists of the

removal of various types of lack
of freedom that leave people
with littel choice and little
opportunity for exersicing their
reasoned agency
 Human freedom tends to
promote freedoms of other
kinds: many different
interconnections between
distinct instrumental freedoms
 Basic Goals of Development
 Sustenance: The ability to meet basic needs
( food, clothing, and shelter), that are necessary
to sustain an average human being at the bare
minimum level of living.
 Self-esteem: A sense of self-worth or self-respect
and dignity that society enjoys.

 Freedom of choice( to be able to choose) A

situation in which a society has a variety of
alternatives from which to satisfy its wants and
individuals enjoy real choices according to their
preferences.
Objectives of Development
1. To increase the availability and widen the
distribution of basic life-sustaining goods
(food, shelter, health, protection)
2. To raise the levels of living (higher
incomes, more jobs, better education,
etc.)
3. To expand the range of economic and
social choices available
Measures of Economic Development
1. Per Capita Income or Per Capita GDP
 The first and earliest measure of economic
development was per capita income or GDP. Still
this indicator is used as the measure of economic
development.
 However, using Per Capita Income (PCI) or GDP
to measure developments is misleading because
it emphasizes on only monetary values and does
not include the non-monetary economic
indicator.
Other measure
 Economic development being a
multidimensional concept, there is no single
measure of it that completely captures the
process and thus we use different composite
indices.
 The New Human Development Index
 Human Poverty Index
 Multidimensional Poverty Index (MPI)
 Human Development Index (HDI) An
index measuring national socioeconomic
development, based on measures of
education, health, and adjusted real income
per capita.
 It ranks each country on a scale of 0 (lowest
human development) to 1 (highest human
development), with:
✓ Low human development (index of 0.0 – 0.499)
✓ Medium human development (index of 0.5 – 0.799);
✓ High human development (index of 0.80 – 1.0.)
 The Index is based on three goals or end
products of development:
✓Longevity:- a long and healthy life as
measured by life expectancy at birth;
✓ knowledge as measured by a combination of
average schooling attained by adults and
expected years of schooling for school-age
children; and
✓ a decent standard of living as measured by
real per capita gross
Human Poverty Index
 Developed by UNDP and it measures the
deprivation in terms of the absence/ prevalence of
the capabilities to acquire and use three essential
elements of human life:
✓ A long and healthy life-vulnerability to death at a
relatively early age as measured by the probability at
birth of not surviving to age 40;
✓ Knowledge-exclusion from the world of reading and
communication, as measured by the adult illiteracy rate;
✓ A decent standard of living-a lack of access to overall
economic provisioning as measured by the unweighted
average of two indicators; the percentage of the
population not using an improved water source and the
percentage of children under weight for age.
Multidimensional Poverty Index (MPI)
 Recognizing the limitation of HDI and HPI, UNDP
presented a new composite poverty measurement -
called as Multidimensional Poverty Index (MPI)
which is an index of acute multidimensional
poverty.
 It reveals the combination of deprivation in
education, health and living standard.
✓ The health dimension is measured by child
mortality and nutrition.
✓ The education dimension is measured by years of
schooling and child enrollment.
✓ The living standard dimension is measured by the
availability of electricity, drinking water, sanitation,
flooring, cooking fuel and assets.
 Common Characteristics
of Developing World
 Defining the developing-
❑ Per capita income
✓Several international agencies, including
the World Bank offer classifications of
countries by their economic status.
✓The most common way to define the
developing world is by per capita income
 In the World Bank’s classification system,
213 economies are ranked by their levels of
gross national income (GNI) per capita.
The cutoff points are:
✓ Low-income countries- per capita gross
national income in 2011 of $1,025 or less;
✓ Lower-middle-income countries with
$1,026- $4,035;
✓ Upper-middle-income countries have
incomes between $4,036 - $12,475; and
✓High-income countries have incomes of
$12,476 or more
 Common Characteristics of DCs
 Despite the great diversity of developing nations,
most share common problems that define their
underdevelopment.
1. Low levels of living
- Low total and per capita incomes relative to DCs
- Widespread poverty given low incomes and poor
distribution of income.
- Poor health and education; high infant mortality,
low levels of literacy, significant school dropouts,
inadequate and often irrelevant educational
curricula and facilities.
21
 Common Characteristics ----continued
2. Low levels of labor productivity : The
explanations:
1. In some LDCs, poor attitudes towards to
work and self-improvement, manual labor,
discipline, low levels of adaptability, work
ethic, and general drive to innovate and
experiment.
2. Poor health and nutrition levels

22
 Common Characteristics ----continued

 High levels of population growth and

dependency burdens
 Substantial dependence on agricultural
production and primary-product exports
✓ Most LDCs oriented to production and
export of primary products rather than
manufactured goods or services.
 Why? What is the implication of this to
economic development?
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 Common Characteristics ----continued

3. Prevalence of imperfect markets and

incomplete information
- Markets do not efficiently function to
equilibrate supply and demand and
determine prices.
- Limited access to necessary information to
make informed economic decisions -
production, consumption, marketing, etc.

24
 Common Characteristics ----continued
4. Dependence and vulnerability in international
relations
- Many are small countries with little global economic or
political power which are price-takers in world
markets.
- Subject to “Westernization” pressures (education,
cultural and moral values, food diets and habits). Why
might this be a problem?
- Dependent on imports of food, fuel, and other critical
materials making LDCs vulnerable and being held
economic hostage by developed countries as well as
rich dominating groups within LDCs
25
5. Lower Levels of Human Capital
 Human capital—health, education, and
skills—is vital to economic growth and
human development.
 We have already noted the great disparities
in human capital around the world while
discussing the Human Development Index.
 6. Higher Level of Absolute Poverty
 Absolute poverty, which is the situation of
being unable or only barely able to meet the
subsistence essentials of food, clothing,
shelter, and basic health care is common to
all developing countries.
7. Greater Social Fractionalization
 Low-income countries often have ethnic,
linguistic, and other forms of social
divisions, sometimes known as
fractionalization.
 This is sometimes associated with civil
fighting and even violent conflicts, which
can lead developing societies to divert
considerable energies to working for
political accommodations if not national
consolidation.
8. Larger Rural Populations but Rapid
Rural-to-Urban Migration
 One of the hallmarks of economic
development is a shift from agriculture to
manufacturing and services.
 In developing countries, a much higher
share of the population lives in rural areas
and massive migration from rural to
urban migration.
9. Lower Levels of Industrialization and
Manufactured Exports
 Industrialization is associated with high
productivity and incomes and has been a
hallmark of modernization and national
economic power.
 It is not accident that most developing-
country governments have made
industrialization a high national priority,
with a number of prominent success stories
in Asia.
Underdeveloped Markets
 Imperfect markets and incomplete
information are far more prevalent in
developing countries, with the result that
domestic markets, notably but not only
financial markets, have worked less
efficiently.
 In many developing countries, legal and
institutional foundations for markets are
extremely weak.
▪ Underdevelopment of markets is due to lack of:
✓legal system that enforces contracts and validates
property rights;
✓ a stable and trustworthy currency;
✓ an infrastructure of roads and utilities that results
in low transport and communication costs;
✓ a well-developed and efficiently regulated system of
banking and insurance;
✓ substantial market information for consumers and
producers about prices, quantities etc.
✓ social norms that facilitate successful long-term
business relationships.
 As conclusion:
 Economic and social development will often be
impossible without corresponding changes in the
social, political, legal, and economic institutions of a
nation such as;
✓ land tenure systems; forms of governance,
✓ educational structures; labor market relationships,
✓ property rights and contract law,
✓ civic freedoms, the distribution and control of
physical and financial assets,
✓ laws of taxation and inheritance, and provision of
credit.
 But fundamentally, every developing country
confronts its own constraints on feasible
policy options and other special
circumstances, and each will have to find its
own path to effective economic and social
institutions.
 Besides to all those factors, Physical size and
population, Historical background of
countries, Physical and human resource
endowment, Ethnic and religious
composition and the relative importance of
the public and private sectors also matters a
lot for economic development.
 Q2. Why is a strict economic definition of development
inadequate? What do you understand economic development to
mean? Can you give hypothetical or real examples of situations in
which a country may be developing economically but may still be
underdeveloped?
 Q2. How does the capability approach to development help us
gain insight into development goals and achievements? Is money
enough? Why or why not?
 Q3. Discuss the Human Development Index as an indicator of
development What are strengths and weaknesses of the Human
Development Index as a comparative measure of human welfare?

 Q4. For all of their diversity, many less developed countries are
linked by a range of common problems. What are these
problems? Which do you think are the most important? Why?
 END OF CHAPTER ONE