Module I (L-2)

Economics and Development Studies

• Study of economic development is newest, more
exciting, and more challenging area of economics.
• Systematic study of problems and processes of
economic development is a recent phenomenon.
• It emerged only over last six or seven decades.
• Interdisciplinarity
- Yet sufficiently rigorous to follow a scientific approach
- But difficult to generalise theories
• Challenging intellectually and useful practically.
 Major goals – why should you study development
economics?
• To ensure that students understand real conditions and
institutions across the developing world.
• If we quote Todaro and Smith
“it helps us understand developing economies in order to help improve the
material lives of the majority of the global population”.

• To help students develop analytic skills while broadening their

perspectives of the wide scope of the field.

• To provide students with the resources to draw independent

conclusions as they confront development problems.

• To understand, apply and modify conventional economic theories to

deal with the case of developing/emerging countries
 Inapplicability of conventional theories
- Less applicability of growth models and their limitations

- Specific characteristics of developing/emerging countries

such as
1. Uniqueness of the problem
2. Presence of Imperfect market
3. Underemployment and unemployment problems
4. Presence of dualism
5. Prevalence of low income and high inequality

• Let’s have a look at the "famous" McDonald's hamburger

cross-country price list’
 Understanding the real condition- a typical example?
• Now let us examine a typical “extended” family in a poor rural area of South
Asia. The household is likely to consist of eight or more people, including
parents, several children, two grandparents, and some aunts and uncles. They
have a combined real per capita annual income, in money and in “kind”
(meaning that they consume a share of the food they grow), of $300.
Together they live in a poorly constructed one- or two-room house as tenant
farmers on a large agricultural estate owned by an absentee landlord who
lives in the nearby city. The father, mother, uncle, and older children must
work all day on the land. The adults cannot read or write; the younger
children attend school irregularly and cannot expect to proceed beyond a
basic primary education. All too often, when they do get to school, the
teacher is absent. They often eat only one or two meals a day; the food rarely
changes, and the meals are rarely sufficient to alleviate the children’s
persistent hunger pains. The house has no electricity, sanitation, or fresh
water supply. Sickness occurs often, but qualified doctors and medical
practitioners are far away in the cities, attending to the needs of wealthier
families. The work is hard, the sun is hot, and aspirations for a better life are
continually being snuffed out. In this part of the world, the only relief from
the daily struggle for physical survival lies in the spiritual traditions of the
people.
 Some questions
- Why does affluence coexist with dire poverty not only on
different continents but also within the same country, same
constituencies or even the same city?

- Can traditional, low-productivity, subsistence societies be

transformed into modern, high-productivity, high-income nations?

- To what extent are the development aspirations of poor nations

helped or hindered by the economic activities of rich nations?

- By what process and under what conditions do rural subsistence

farmers in the remote regions of Nigeria, Brazil, or the Philippines
evolve into successful commercial farmers?
Some other questions, such as
- How development begins in their own or other
countries; how development proceeds becomes self-
sustainable?

- Why development failed in some countries and in

others; and why development may not be able to
eradicate poverty, etc.?

- These and many other questions concerning

international and national differences in standards of
living, in areas including health and nutrition, education,
employment, environmental sustainability, population
growth, and life expectancies, might be posed on the
basis of even this very superficial look at life around the
world
• Although one could claim that Adam Smith was the
first “development economist” and that his Wealth of
Nations, published in 1776, 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 or six
decades or so.

• Although development economics often draws on

relevant principles and concepts from other branches
of economics, however, it is rapidly evolving its own
distinctive analytical and methodological identity.
 Nature of Development Economics
• Focus of traditional economics is primarily on;

- Least cost allocation of scarce productive resources

- Optimal growth of these resources over time

- Based on the assumption of economic ‘rationality’

- Emphasizes on utility, profit maximisation, market

efficiency and determination of equilibrium
Development economics lays emphasis
- The economic, social, political, and institutional mechanisms
and processes, both public and private, necessary to bring
about rapid and large-scale improvements in levels of living
for the peoples.

- Development problems of developing economies of the

world, characterised by commodity and resource market
imperfections and multiple equilibria and situations of
disequilibrium, where economic calculations are dominated by
political and social priorities.
 Economies as social systems
• Economics and economic systems, especially in the developing
world, must be viewed in a broader perspective than that
postulated by traditional economics.
• They must be analyzed within the context of the overall social
system of a country.
• By “social system,” we mean the interdependent relationships
between economic and noneconomic factors.
• Non-economic system means attitudes toward life, work, and
authority; public and private bureaucratic, legal, and
administrative structures; patterns of kinship and religion;
cultural traditions; systems of land tenure; the authority and
integrity of government agencies; the degree of popular
participation in development decisions and activities; and the
flexibility or rigidity of economic and social classes.
• These factor vary widely across regions, countries.
What is development ?
Lot of fantasies exist around the concept of
development.
 Conventional thinking on ‘Development’
• In ordinary language, it denotes ‘either a state or a process
associated with such concepts as material well-being,
progress, social justice, economic growth, personal
blossoming, or even ecological equilibrium’.

• For instance, HDR 1991 stated that the basic objective of human
development is ‘to enlarge the range of people’s choices to
make development more democratic and participatory. These
choices should include access to income and employment
opportunities, education and health and a clean and safe
physical environment. Each individual should also have the
opportunity to participate fully in community decisions and
to enjoy human, economic and political freedom’.
Now the question is, whether these are definitions at
all?
• As per Rist (2014), these definitions are normative
(what should happen) or instrumental (what is the
purpose) and register the abundant use of
intensifiers ( e.g. more democratic and more
participatory) which actually point to things which are
actually presently lacking or deficient.

• He says that if the definition is to be operational, it

must first eliminate all ‘preconceptions’ the fallacious
ideas that dominate the mind of the laymen and then
base itself upon certain ‘ external characteristics’
common to all phenomena within the group in
question.
• Or to put it more bluntly – we must define
‘development’ in such a way that a Martian could not
only understand what is being talked about, but
also identify the places where development does
or does not exist.
• Rist (2014) further stresses that these normative
injections only can act as compass to help us to find
the direction.
• Rist( 2014) further says these are all pseudo
definitions having the major defect of this they are
based upon the way in which one person ( or a set
of persons) pictures the ideal conditions of
social existence – personal predilections do play
pivotal role.
• However, the question is that if development is only a
useful word for the sum of virtuous human
aspirations, we can conclude at once that it exists no
where and probably never will.
• Yet ‘development’ does exist through the action that
it legitimates, through the institutions it keeps alive
and signs testifying to its presence.
For instance, there are developed and developing
countries, development projects, development cooperation
ministers, development institutions, NGOs responsible for
furthering development etc.
• Similarly, in the name of development, schools are
built, exports encouraged, wells dug, roads laid,
children vaccinated etc. When all these are said
and done, every modern human activity can be
undertaken in the name of development.
• Hence, for conventional thinking, the quest for a
definition therefore oscillates between two equally
irrepressible extremes:
- One is the ‘expression of a wish to live a better
life’,
- And the other is ‘ the great mass of actions’
• The weakness of these two perspectives is that they
do not allow us to identify development;
Why ?
- Because, it appears in one case a subjective feeling
of fulfilment varying from individual to individual.

- And the other a series of operation, where there is

no priori proof that they really contribute to the
stated objective.
• Rist (2014) argues that to escape from this dead-end, we
must return to Durkheim’s two fold requirements of
a definition;
- That it should cover all the phenomena in question.
- And that it should include only their external
characteristics.
• In other words, it is necessary to identify practices that
anyone may observe what allows us to say that certain
countries are developed and others are developing.

• The point is that it is not about contrasting two different

countries by showing that one has more of this (e.g.
schools, roads, currency reserves, average calorie
consumption, cars, democracy, telephone etc.) but less
of that (illiteracy, cultural traditions, children per family
etc), while the other set has the reverse of everything.
• Rather the process at the root of their contrast
needs to be brought into light- a process whose
rhythms differ in two sets of countries and which
transforms them either qualitatively or
quantitatively in ways which cannot be reversed.

• The functioning's of development has to be first

explained, before we detect whether that exists or
not.
• Rist (2014) defines it ‘ Development consists of a set of
1) practices, sometimes appearing in conflict to each
other which require for the 2) reproduction of society –
the general transformation and destruction of the natural
environment and of 3) social relations. Its aim is to 4)
increase the production of commodities (goods and
services) geared, by way of exchange, 5) to effective
demand’
- 1) The practices in question (economics, social, political
and cultural) correspond to the ‘ external
characteristics’. Hence it excludes from a definition
any normative aspect stressing what is hoped as against
what actually occurs.
- 2) These practices enable the world system to reproduce
itself.
)‘these practices often leads to general
transformation and destruction of the natural
environment…’
- 3)‘… and of social relations’

Social relations are not free from the rule of commodity and
exploitations- that is from exchange –value determined by supply and
demand.
e.g. gradual generalisation of wage-labour in modern societies
Since every service has a price, new American thinking did not hesitate to
extend the economic approach to family relationships,
including marriage, domestic production, fertility and even altruism.
• This revolution in the way of approaching social
relations is expressed in many different ways.
• For instance, expansion of leisure market or in a
new possibilities offered by medical science-
womb-leasing.
• All these clearly reflects that commodity form is
continuing its march into every area of social
relations.
• Now everyone is expected to learn how to sell
themselves.
-4) To increase the production of commodities
(goods and services)
The process is geared to increase the production, on the assumption that
more is better
It is therefore entirely focussed on the production of ‘maximum’ not the
‘optimum’
- 5) Geared to effective demand
People produce in order to sell and they sell so that they can buy something
else.
Adam Smith the father of Economics aptly said that‘ it is not the
benevolence of butcher, the brewer or the baker, that we expect our
dinners, but from their regard to their own interest’ (Adam Smith, 1976)
• However, it may be objected that the essence of
‘development’ is not worldwide expansion of the
market system. Hence the questions which are
relevant are;
- Is it not different from mere economic growth?

- Does it not set itself ‘human goals’ that conflict with the cynicism of
the process presented above?

- Is it not the generous expression of a real concern for others?

- How are we to explain the discrepancy between such high minded goals
and practices hindering their achievement?
 Underdevelopment and expectations
• It is argued often that economic development could be thought of
as a massive coordination failure.

• Because, several investments do not occur simply because other

complementary investments are not made, (Paul Rosenstein-Rodan
[1943] and Albert Hirschman [1958]

• Inter-Industry Links: The expansion of a particular production

sector will have both direct and indirect implications for other
sectors through these links.
• For instance, the development of a transportation network, such
as railways, will facilitate the export of certain types of products,
and thereby encourage their production.
• This is an example of what might be called a supply link, one that
works by lowering the cost of inputs to another sector. At the
same time, the expansion of railways will raise the demand for
railway inputs, such as steel. This is an example of a demand link.
• As an illustration of complementarity, suppose that the “action” in
question is as follows:the magnitude of investment in a
particular industry. Then a complementarity exists if the
links are “positive”, as in the examples given above.
• For instance, an investment expansion in railways increases the
incentive to invest in steel.
• However, it is possible that the very same economy may be plunged
into a low level of activity for no other reason than the fact that
sectoral depressions are self-reinforcing. At the same time, there
may exist another (self-fulfilling) level of economic activity.
• Demand Complementarities: This is the possibility that an
expansion in some industries will serve to raise income, and in this
way, generate demand for the product of other industries.

• An expansionary investment in some subset of sectors will

increase the incentives of other sectors to follow suit, because
there is now a greater demand for their products. that is better for
all concerned.
What is development economics?
• One of the narrowest approaches is to consider
development as ‘ economic development’ and with
specific thrust on ‘economic growth’ more specially
growth of income per capita.
• Economic development, also traditionally seen as a
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.
• It was assumed that Per capita GNI growth would
trickle down to the masses in the form of jobs or
other economic opportunities.
• Signaling that something was wrong with the narrow
definition of ‘development’.
• It was also observed that growth was achieved at
the cost of human development , inequality and
unemployment.
• Several scholars clamored for more direct attack on
poverty, increasingly inequitable income distribution,
and rising unemployment.
• During 1970’s, economic development came to be
redefined in terms of reduction of elimination of
poverty, income inequality and unemployment
within the context of growing economy.
• However, it was observed during 1950’s and 60’s that
many economic nations did reach their targets, but the
levels of living of masses of people remain for most part
unchanged.
• During 1950’s and 1960’s previously neglected sub-field
of Development Economics was rediscovered.
• Available economic models seemed to offer only
limited insights into the practical problems facing
the so called Third World.
• Dominant one sector macro-models of the day, from
Keynesian to Harrod-Domar (Harrod 1939 and Domar
1957) to Solow 1956 seemed to have relatively little
relevance for societies not primarily concerned with
business cycles or steady state properties.
• “Redistribution from growth” became a common slogan.
• Dudley Seers posed the basic question about the meaning
of development succinctly when he asserted;

‘ The questions to ask about a country’s development are therefore:

- What has been happening to poverty?
- What has been happening to unemployment?
- What has been happening to inequality?
If all three of these have declined from high levels, then beyond doubt this
has been a period of development for the country concerned. If one or two
of these central problems have been growing worse, especially if all three
have, it would be strange to call the result “development” even if per
capita income doubled.’
• Development must therefore be conceived as a
multidimensional process involving major changes in
societal structures, popular attitudes, and national
institutions as well as acceleration of economic growth,
reduction of inequality and eradication of poverty.

• Development, in its essence must represent the whole gamut

of change.

• This has been very succinctly put forward by the leading

thinker of development Prof. Amartya Sen that income and
wealth are not ends in themselves, but instruments for other
purposes.

• He argues about
‘capability to function’
An example
 Readings
• Chapter 1: Introducing Economic Development: A global
Perspective of ‘Economic Development’, (11th Edition),
by M P Todaro and S C Smith.

• The History of Economic Development by Gibert Rist

(Fourth Edition) (Chapter 1 and 4)

• What’s New in Development Economics? By Debraj Ray,

2000