CHAPTER 1

MEASUREMENT OF ECONOMIC DEVELOPMENT

Introduction

Economic development is the primary objective of the majority of the

world’s nations. This truth is accepted without controversy, or so it would
appear in public discourse at least. Raising the well-being and socioeconomic
capabilities of peoples everywhere is easily the most crucial social task
facing us today. Every year, aid is disbursed, investments are undertaken,
policies are framed, and elaborate plans hatched to achieve this goal, or at
least to get closer to it. How do we identify and track the results of these
efforts? What criteria do we use to evaluate the extent of “development” a
country has undergone or how “developed” or “underdeveloped” a country
is at any point in time? How do we measure development?

Meaning:

Economic development is a process whereby an economy’s real

national income as well as per capita income increases over a long period of
time. Here, the process implies the impact of certain forces which operate
over a long period and embody changes in dynamic elements. It contains
changes in resource supplies, in the rate of capital formation, in demographic
composition, in technology, skills and efficiency, in institutional and
organisational set-up. It also implies respective changes in the structure of
demand for goods, in the level and pattern of income distribution, in size and
composition of population, in consumption habits and living standards, and in
the pattern of social relationships and religious dogmas, ideas and
institutions. In short, economic development is a process consisting of a long
chain of inter-related changes in fundamental factors of supply and in the
structure of demand, leading to a rise in the net national product of a country
in the long run.

Definition:

The term ‘economic development’ is generally used in many other

synonymous terms such as economic growth, economic welfare, secular
change, social justice and economic progress. As such, it is not easy to give
any precise and clear definition of economic development. But in view of its
scientific study and its popularity, a working definition of the term seems to
be quite essential. Economic development, as it is now generally understood,
includes the development of agriculture, industry, trade, transport, means of
irrigation, power resources, etc. It, thus, indicates a process of development.
The sectoral improvement is the part of the process of development which
refers to the economic development. Broadly speaking, economic
development has been defined in different ways and as such it is difficult to
locate any single definition which may be regarded entirely satisfactory.

OR

Economic development is the increase in the standard of living of a

nation's population with sustained growth from a simple, low-income
economy to a modern, high-income economy. Its scope includes the process
and policies by which a nation improves the economic, political, and social
well-being of its people.

OR

Economic development is a concerted effort on the part of the

responsible governing body in a city or county to influence the direction of
private sector investment toward opportunities that can lead to sustained
economic growth.

Sustained economic growth can provide sufficient incomes for the local
labor force, profitable business opportunities for employers and tax revenues
for maintaining an infrastructure to support this continued growth. There is
no alternative to private sector investment as the engine for economic
growth, but there are many initiatives that you can support to encourage
investments where the community feels they are needed the most

It is important to know that economic development is not community

development. Community development is a process for making a community
a better place to live and work. Economic development is purely and simply
the creation of wealth in which community benefits are created. There are
only three approaches used to enhance local economic development. They
are:

 Business Retention and Expansion - enhancing existing businesses

 Business Expansion - attracting new business
 Business Start-ups - encouraging the growth of new businesses.
 All three forms of economic development aim to create new primary
jobs that pay more than the prevailing wage, increase the amount of income
coming into the community from outside its market area, and create greater
capital investment in the community. The strategy is to achieve this in a
number of diversified industries.

Importance:

1. Job creation
Economic developers provide critical assistance and information
to companies that create jobs in our economy. We help to connect
new-to-market and existing companies with the resources and partners
they need to expand, such as Career Source Central Florida, utilities,
and county and city partners.

2. Industry diversification
A core part of economic development works to diversify the
economy, reducing a region’s vulnerability to a single industry. While
tourism plays an important role in creating jobs in the Orlando region,
economic development efforts help to grow industries outside of
tourism, including Innovative Technologies and Digital Media, Life
Sciences & Healthcare, Aviation, Aerospace & Defense, Advanced
Manufacturing, and Business Services.

3. Business retention and expansion

A large percentage of jobs in the Orlando economy are created
by existing companies that are expanding their operations. Our
economic development team executed 73 business retention and
expansion visits to local companies just last year to assist with their
operational needs.

4. Economy fortification
Economic development helps to protect the local economy from
economic downturns by attracting and expanding the region’s major
employers.

5. Increased tax revenue

The increased presence of companies in the region translates to
increased tax revenue for community projects and local infrastructure.
 6. Improved quality of life
Better infrastructure and more jobs improves the economy of
the region and raises the standard of living for its residents.

Economic Growth

Economic growth can be referred to as that increase which is

witnessed in the monetary value of all the goods and services that are
produced in the economy during a time period. It is one type of quantitative
measure which reflects the potential increase of the number of business
transactions taking place in the economy.
Economic growth can be measured in terms of the increase in the
aggregate market value of additional goods and services produced, using
economic concepts such as GDP and GNP.
Economic growth is a much narrower concept when compared to Economic
Development.
Economic growth means a rise in real GDP; effectively this means a
rise in national income, national output and total expenditure. Economic
growth should enable a rise in living standards and greater consumption of
goods and services. As a result, economic growth is often seen as the 'holy
grail' of macroeconomics.

However, this simplistic emphasis on economic growth is often

criticized because living standards depend on many more factors than just
increasing real GDP. Some economists have suggested that a more useful
measure is to look at a wider range of factors, such as the Human
Development Index (HDI) which measures GDP but also statistics such as
literacy and healthcare standards.

Objectives

 Reduction in poverty. Increased national output means households

can enjoy more goods and services. For countries with significant
levels of poverty, economic growth can enable vastly improved living
standards. For example, in the nineteenth century, absolute poverty
was widespread in Europe, a century of economic growth has lifted
 nearly everyone out of this state of poverty. Economic growth is
particularly important in developing economies.
 Reduced Unemployment. A stagnant economy leads to higher rates
of unemployment and the consequent social misery. Economic growth
leads to higher demand and firms are likely to increase employment.
 Improved public services. Higher economic growth leads to higher
tax revenues (even with tax rates staying the same). With higher
growth, incomes and profit, the government will receive more income
tax, corporation tax and expenditure taxes. The government can then
spend more on public services.
 Reduced debt to GDP ratios. Economic growth helps reduce debt to
GDP ratios. In the 1950s, the UK had a national debt of over 200% of
GDP. Despite very few years of budget surplus, economic growth
enabled a reduction in the level of debt to GDP.
 Importance of Economic Growth:

Virtuous Cycle of Economic Growth

  Countries with positive rates of economic growth will create a virtuous
cycle
 Economic growth will encourage inward investment as firms seek to
benefit from rising demand
 Higher growth leads to improved tax revenues which can be spent on
long-term public sector works, such as improved transport and
communication. This helps long-term growth.
 Confidence to invest. Higher growth encourages firms to take risks -
innovate and invest in future products and productive capacity.
Limitations of economic growth
1 Inequality and distribution:
Economic growth doesn't necessarily reduce relative poverty, it
depends on the distribution of incomes. Economic growth could bypass
the poorest in society. For example in the 1980s, the Gini coefficient
rose sharply - the richest 1% gained dis proportionality more.
2. Negative externalities:
Economic growth can cause negative externalities such as pollution,
higher crime rates and congestion which actually reduce living
standards. For example, China has experienced very rapid economic
growth but is now experience very serious levels of air pollution in
major cities.
3. Economic growth may conflict with the environment.
e.g. increased carbon production is leading to global warming.
Economic growth may bring benefits in the short-term, but costs in the
long-term.
4. It depends on what is produced. The Soviet Union has fantastic
rates of economic growth, but, often through producing a lot of steel
and pig iron that was not actually very useful.
5. Economic growth can be unsustainable. If growth is too rapid, it
will cause inflation, current account deficit and can lead to boom and
bust.
6. Does happiness actually increase? Theories of hedonistic
relativism suggest (beyond a certain level) increasing output has no
effect on changing life quality or happiness.
 Difference between Economic Development and Economic Growth

Contents Economic Development Economic Growth

Economic development is a much
broader concept than economic Economic Growth is a
Concept growth. narrower concept than
Economic development = Economic economic development.
Growth + Standard of Living
Economic Growth is
Economic Development is considered
considered as a single
as a Multidimensional phenomenon
dimensional in nature as
because it focuses on the income of
Scope it only focuses on the
the people and on the improvement
income of the people of
of the living standards of the people
the country.
of the country.

Term Long-term process Short term process

Both Qualitative & Quantitative
Terms:
Quantitative Terms:
Measurem HDI (Human Development Index),
Increases in real GDP.
ent gender-related index, Human poverty
index, infant mortality, literacy rate
etc.
Economic Development is related to Economic Growth is
Related To Underdeveloped and developing related to developed
countries of the world. countries of the world.
Brings a quantitative
Qualitative and Quantitative Impact
impact on the economy.
on the economy. Improvement in life
Effect Increase in the
expectancy rate, infant, literacy rate,
indicators like per capita
poverty rates, and mortality rate.
income and GDP, etc.
Process
Continuous process In a certain period
Tenor

Developed Countries:
A developed country, industrialized country (or post-industrial
country), more developed country (MDC), or more economically
developed country (MEDC), is a sovereign state that has a developed
economy and advanced technological infrastructure relative to other less
industrialized nations. Most commonly, the criteria for evaluating the degree
of economic development are gross domestic product (GDP), gross national
product (GNP), the per capita income, level of industrialization, amount of
widespread infrastructure and general standard of living. [3] Which criteria are
to be used and which countries can be classified as being developed are
subjects of debate.

Developed countries have generally more advanced post-

industrial economies, meaning the service sector provides more wealth than
the industrial sector. They are contrasted with developing countries, which
are in the process of industrialization or are pre-industrial and almost
entirely agrarian, some of which might fall into the category of Least
Developed Countries. As of 2015, advanced economies comprise 60.8% of
global GDP based on nominal values and 42.9% of global GDP based
on purchasing-power parity (PPP) according to the International Monetary
Fund

Characteristics of Developed Countries

1. Has a high income per capita. Developed countries have high per
capita incomes each year. By having a high income per capita, the country’s
economic value will be boosted. Therefore, the amount of poverty can be
overcome.
2. Security Is Guaranteed. The level of security of developed countries is
more secure compared to developing countries. This is also a side effect of
sophisticated technology in developed countries. With sophisticated
technology, security facilities and weapons technology also develop for the
better.
3. Guaranteed Health. In addition to ensuring security, health in a
developed country is also guaranteed. This is characterized by a variety
of adequate health facilities, such as hospitals and medical staff who are
trained and reliable. Therefore, mortality rates in developed countries can be
suppressed and the life expectancy of the population can be high. In
addition, with adequate health facilities, population development in
developed countries can also be controlled.
4. Low unemployment rate. In developed countries, the unemployment
rate is relatively small because every citizen can get a job.
5. Mastering Science and Technology. The inhabitants of developed
countries tend to have mastered science and technology from which new
useful products such as the industrial pendant lights were introduced to the
market. Therefore, in their daily lives, they have also used sophisticated
technology and modern tools to facilitate their daily lives.
6. The level of exports is higher than imports. The level of exports in
developed countries is higher than the level of imports because of the
superior human resources and technology possessed.

Least Developed Countries (LDCs)

Least developed countries (LDCs) are low-income countries confronting

severe structural impediments to sustainable development. They are highly
vulnerable to economic and environmental shocks and have low levels of
human assets.

Characteristics of Least Developed Countries

• Low level of GNI per capita: The Gross National Product (GNP) per
capita or Gross National Income (GNI) per capita is often considered to be a
good index of the economic welfare of the people in a country. Judging
developing nations by this criterion one finds them in an extremely
miserable position. The GNI per capita in these countries is very low.
According to the estimates of the World Bank, in 2007 there were 43 low
income economies where the GNI per capita was estimated at $350 or even
less. This low level of GNI per capita is sufficient to reflect the plight of
common people in these countries.

• High rate of population growth and dependency burdens:

Population has been rising in most developing countries at rates varying

between 2 and 3.5 percent per annum for the past few decades. This
demographic trend is unprecedented in the history of mankind. Due to
increased medical facilities there has been a sudden decline in the mortality
rates in these countries. However, in most developing countries birth rate
remain very high, in the range of 25 to 50 per thousands, while in developed
countries, nowhere it exceeds 15 per thousand. Interestingly, china, Sri
Lanka, and Thailand are the only lower middle income developing countries
which have managed to bring down their birth rates to 10 to 15 per
thousand. A high rate of population growth in the third world countries is
both a cause and effect of their underdevelopment.

• Technological Backwardness: In developing countries, production

techniques are inefficient over a wide range of industrial activity. This sorry
state of affairs cannot be explained in terms of one or two factors. Lack of
research and development (R&D), weak communication system between the
research institutes and industries, abundance of labour and capital scarcity
are some obvious reasons for the use of techniques which have otherwise
become obsolete. Developing countries generally do not have large effective
institutions working for discovering appropriate technology. Under the
circumstances, an attempt is made to import technology from developed
countries which often fails to adapt to local conditions. Moreover, whatever
limited research is undertaken in industrial technology; its results fail to
reach producers due to weak communication system. But those factors do
not explain wholly the continuance of outmoded techniques.

• Dependence: The process of underdevelopment in the Asian, African and

Latin American countries had begun with the integration of their economies
with those of the West European capitalist economies. This relationship
between the colonies and the metropolitan countries gave rise to an
international division of labour which allowed industrial development to take
place only in the latter. Though the economies of the colonies remained
backward yet they were part of the world capitalist system. They were in fact
made subservient to metropolitan interests and were forced to specialise in
primary producing activities. The pattern and direction of trade in colonial
period was also determined by the basic fact of the integration of colonies
with the metropolitan countries. On the one hand colonies depend on the
metropolitan countries for almost all the capital goods, industrial raw
materials and most of the manufactured consumer goods, while on the other
hand their exports constituted of one or two primary products.

• Widespread Poverty: The extent of absolute poverty is an important

dimension of the problem of income distribution in the developing countries.
At relatively lower levels of GNP per capita large income inequalities as they
exist in the developing countries of Asia, Africa and Latin America, have
resulted in widespread poverty. The poverty problem could perhaps be
overcome in these countries with a more equitable income distribution.
China`s case lends credence to the view that in near future if developing
countries wish to wipe out poverty they have no choice except to improve
the income distribution so as to ensure a minimum standard of living in
terms of calorie intake the nutrition levels, clothing, sanitation, health,
education and so on.

Underdeveloped Countries

An underdeveloped country or region does not have modern industries and

usually has a low standard of living. Some people prefer to use the
term developing.

Characteristics:
Low Level of Income:
Underdeveloped countries are maintaining a very low level of income in
comparison to that of developed countries. The per capita incomes of these
groups of countries are extremely low if we compare it with that of
developed countries. Moreover, inequality in the distribution of income along
with this low level of income worsens the situation in these economies to a
disastrous level.

Mass Poverty:
Existence of chronic mass poverty is another characteristic of
underdeveloped economies. This problem of poverty arises not due to any
temporary economic maladjustment but arises mainly due to existence of
orthodox methods of production and social institutions. The degree of
poverty in these economies gradually increases due to increase in its size of
population, growing inequality in income and increasing price level.

Nearly 76.8 per cent of the world populations are living in those
underdeveloped or developing countries of the world, enjoying only 15.6 per
cent of total world GNP.’ Iii these countries, majority of the population are
living below the poverty line.

Lack of Capital Formation:

Developing or underdeveloped countries of the world are suffering from poor
rate of capital formation. As the level of per capita income in these countries
is very low thus their volume and rate of savings are also very poor. This has
resulted lack of capital formation and which is again responsible for low rate
of investment in these countries.
Heavy Population Pressure:
The underdeveloped countries are also characterised by heavy population
pressure. The natural growth rate of population in these countries is very
high due to its prevailing high birth rate and falling death rate. This
excessive population pressure has been creating the problem of low
standard of living and reduction in the average size of holding.

Agricultural Backwardness:
The underdeveloped countries are also suffering from agricultural
backwardness. Although being the most important sector, agricultural sector
in these countries remains totally underdeveloped. But what is more peculiar
is that these countries are depending too much on this agricultural sector.

Nearly 60 to 70 per cent of the total population of these countries is

depending on agriculture and about 30 to 40 per cent of the total GNP of
these countries is generated from agricultural production. Agricultural
productivity in these countries remained still very poor in spite of its great
importance.

In these underdeveloped countries, agriculturists are still following traditional

methods and are applying modernised techniques on a very limited scale.

Unemployment Problem:
Excessive population pressure and lack of alternative occupations have
resulted in huge unemployment and underemployment problem in these
underdeveloped countries. In the absence of growth of alternative
occupations both in the secondary and tertiary sector of these countries, this
increasing number of population is being thrown on land to eke out their
living from agricultural sector.

This sort of increasing dependence on agricultural sector leads to disguised

unemployment or under-employment in these economies to a large scale.
Moreover, problem of educated unemployment in these economies is also
increasing gradually day by day due to lack of industrial development.

Unexploited Natural Resources:

For maintaining a rapid pace of economic growth in these underdeveloped
countries, possession of different types of natural resources in sufficient
quantity and its utilisation are very important. But under-developed
countries are either suffering from scarcity of raw materials or from un-
exploited natural resources of its own.
Shortage of Technology and Skills:
Underdeveloped countries are facing low level of technology and acute
shortage of skilled manpower’s. Poor technology and lower skills are
responsible for inefficient and insufficient production which leads to poverty
of masses. The pace of economic growth in these countries is very slow due
to application of poor technologies.

But the application of modern sophisticated technology both in agricultural

and industrial sector is of utmost need in these countries. This requires
sufficient amount of capital, technological advancement and training.

Lack of Infrastructural Development:

Lack of infrastructural development is a common feature of underdeveloped
countries. In respect of transportation, communication, generation and
distribution of electricity, credit facilities, social overheads etc. these
countries are very much backward than most of the developed countries.
Thus due to inadequate infrastructural facilities, the pace of economic
development in these countries are very slow.

Lack of Industrialization:
Underdeveloped countries are characterized by lack of industrial
development. The pace of industrialisation in these countries is very slow
due to lack of capital formation, paucity in the supply of machinery and tools
and also due to lack of initiative and enterprise on the part of people of these
countries.

In spite of having huge potential for industrial development, these countries

could not develop the industrial sector on a sound footing. Moreover,
whatever industrial development that has been achieved by these countries
are very much restricted only to some limited areas.

Lack of Proper Market:

Underdeveloped countries are also suffering from lack of properly developed
market. Whatever market these countries have developed, these are
suffering from number of limitations viz. lack of market information, lack of
diversification, lack of proper relation or connection between markets, lack of
adequate demand etc.

Mass Illiteracy:
Underdeveloped countries are mostly characterised by the existence of mass
illiteracy. Due to illiteracy the people in these countries are very much
superstitious and conservative which is again responsible for lack of initiative
and enterprise on the part of people of these countries.

Poor Socio-Economic Condition:

Underdeveloped countries are also suffering from totally poor socio-
economic conditions. The path of economic development in these countries
is being obstructed by various socio-economic factors like-joint family
system, universal marriage, costly social customs and the law of inheritance.

Inefficient Administrative Set Up:

Underdeveloped countries are also suffering from its existing inefficient
administrative set up. In the absence of efficient and sound administrative
set up, these countries are suffering from lack of proper economic
organisation, lack of investments and lack of appropriate decisions leading to
total mismanagement of these economies.

GDP

Definition:
Gross Domestic Product (GDP) is the total market value of all
domestically produced final goods and services for a particular year. Its five
key factors are: market value, final goods and services, produced,
within a country, during a specific time period.
OR
GDP is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time,
normally a year. GDP growth rate is an important indicator of the economic
performance of a country.

 Only final goods and services count; GDP includes goods and
services purchased by final users. Intermediate goods purchased for
resale or for the production of another good or service are excluded, to
avoid double-counting. Their value is embodied in the value of the
goods purchased by the end user.
 GDP is a flow variable; it measures the market value of production that
flows through the economy.
 Financial transactions and income transfers (e.g., social security and
welfare payments) are excluded because they represent exchanges,
not productions, of goods and services. GDP counts transactions that
add to current production.
  GDP counts only goods and services produced domestically, whether
by citizens or foreigners.
 It includes only goods produced during the current period. Thus, sales
of used goods are not counted in GDP. However, sales commissions
count toward GDP because they involve services provided during the
period.

GDP = GNP – Net Foreign Income From

Abroad

Measurement of GDP

1. Output Method:
This measures the monetary or market value of all the goods and
services produced within the borders of the country. In order to avoid a
distorted measure of GDP due to price level changes, GDP at constant prices
o real GDP is computed.

GDP (as per output method) = Real GDP (GDP at constant prices) –
Taxes + Subsidies.

2. Expenditure Method:
This measures the total expenditure incurred by all entities on goods
and services within the domestic boundaries of a country.

GDP (as per expenditure method) = C + I + G + (X-IM)

Where, C: Consumption expenditure,
I: Investment expenditure,
G: Government spending
(X-IM): Exports minus imports, that is, net exports.

3. Income Method:
It measures the total income earned by the factors of production, that
is, labour and capital within the domestic boundaries of a country.
GDP (as per income method) = GDP at factor cost + Taxes –
Subsidies.

Government services and household production are estimated and

included in the GDP. Activities occurring in the underground economy,
although sometimes productive, are not included in GDP.
Nominal and Real GDP
When comparing GDP across time periods, we confront a problem: the
nominal value of GDP may increase as the result of either expansion in the
quantities of goods produced or higher prices. Since the former will improve
our living standards, we have to adjust the nominal values (nominal GDP,
or money values) for the effects of inflation to get real values (real GDP).

A price index is used for the adjustment. It measures the cost of

purchasing a market basket or bundle of goods at a point in time relative to
the cost of purchasing the identical market basket during an earlier
reference period (e.g., a base year).

Consumer price index (CPI) (not included in the required reading) is

an indicator of the general level of prices. It attempts to compare the cost of
purchasing the market basket bought by a typical consumer during a specific
period with the cost of purchasing the same market basket during an earlier
period. The CPI is better at determining how rising prices affect the money
income of consumers. The CPI is more widely used for price changes over
time.

The GDP deflator is a price index that reveals the cost during the
current period of purchasing the items included in GDP relative to the cost
during a base year. Because the base year is assigned a value of 100, as the
GDP deflator takes on values greater than 100, it indicates that prices have
risen. It is a broader price index than the CPI since it is better at giving
an economy-wide measure of inflation. It is designed to measure the change
in the average price of the market basket of goods included in GDP. In
addition to consumer goods, the GDP deflator includes prices for capital
goods and other goods and services purchased by businesses and
governments. The GDP deflator also allows the basket of goods to change as
the composition of GDP changes, while the CPI is computed using a fixed
basket of goods.

We can use the GDP deflator together with nominal GDP to measure
the real GDP (GDP in dollars of constant purchasing power).

Real GDPi = Nominal GDPi x (GDP Deflator for base year/ GDP
Deflator for year i)
Included in GDP:

 Final goods and services sold for money. Only sales of final
goods are counted, because the transaction concerning a good used
to make the final good (for example, the purchase of wood used to
build a chair) is already incorporated in the final good total value (price
at which the chair is sold).

Not included in GDP:

 Unpaid work: work performed within the family, volunteer work, etc.
 Non-monetary compensated work
 Goods not produced for sale in the marketplace
 Bartered goods and services
 Black market
 Illegal activities
 Transfer payments
 Sales of used goods
 Intermediate goods and services that are used to produce other final
goods and services

Gross National Product (GNP):

Definition:

Gross national product (GNP) is an estimate of total value of all the

final products and services turned out in a given period by the means of
production owned by a country's residents. GNP is commonly calculated by
taking the sum of personal consumption expenditures, private domestic
investment, government expenditure, net exports and any income earned by
residents from overseas investments, minus income earned within the
domestic economy by foreign residents. Net exports represent the difference
between what a country exports minus any imports of goods and services.

GNP measures the economic activity of a country’s residents, even if

that activity does not occur within the national economy. Similarly, it
excludes non-residents’ economic activities, even if that activity occurs
within the national economy.

GNP = GDP + Net Factor Income from Abroad

 OR

GNP = C + I + G + X + Z

Where C is Consumption, I is investment, G is government, X is net

exports, and Z is net income earned by domestic residents from
overseas investments minus net income earned by foreign residents
from domestic investments.

GNP is a flow concept: GNP represents a flow. It is a quantity produced per

unit of time. It is the value of final goods and services produced in a country
during a given time period.

GNP measures final output: While calculating GNP, the market value of
only final goods and services produced in a year are added up. Final goods
are those goods which are purchased for final use in the market.

Components of Expenditures in GNP:

For measuring GNP at market price, the economists use
the Expenditure Approach.
According to this approach, there are four categories of
expenditures which are added together to measure Gross National Product
(GNP) at Market Price,
(i) Consumption,
(ii) Investment
(iii) Government Expenditure and
(iv) Net exports.

These four types of expenditures are explained in brief:

(i) Consumption Expenditure (C): It includes all personal expenditure

incurred by the citizens of a country on durable and non-durable goods in a
period of one year.

(ii) Investment (I): It is the total expenditure incurred by firms or

households on capital goods.
(iii) Govt. expenditures (G): It includes all types of expenditure incurred
by Federal, Provincial, Local Councils on the purchases of goods and services
such as national defence, law and order, street lighting etc.

(iv) Net Exports (X – M): Net exports of goods and services are the value
of exports minus the value of imports.
Formula for Gross Profit:
GNP = C + I + G + (X – M)
Where:
C = Consumption, I = Investment, G = Government Expenditure, X –
M = Net exports

Difference between Gross Domestic Product and Gross National

Product
Differences
Gross Domestic Product Gross National Product
based on

Gross National product is

Gross domestic product is
another metric used to
the value of a country’s
measure a country’s
finished domestic goods and
economic output. GNP is the
Definition services i.e. the value of
market value of goods and
work done by employees,
services produced by all
companies and self-
citizens of a country both
employed persons during a
domestically and abroad
specific time.
The worth of goods and
The worth of goods and
services produced by the
services produced within the
county’s citizens irrespective
Meaning geographical limits of the
of the geographical location
county is known as Gross
is known as Gross National
Domestic Product (GDP).
Product (GNP).
Gross domestic product is
Gross National Product
the most basic indicator
represents how the citizens
Indicator used to measure the overall
are subsidizing to the
health and size of the
country’s economy.
country’s economy.
Mainly used To study outlines of To study of find out how
 residents are contributing to
domestic economy
the economy
Production of products Production of products by the
What is it? within the country’s enterprises retained by the
borderline. residents of the country.
Basis Location Citizenship
It is a measurement of It is a measurement of
Measurement
domestic production production by nationals
Goods and services Goods and services produced
What is
produced by foreigners by citizens living outside the
included?
within that country country
Goods and services Goods and services produced
What is
produced by citizens outside by foreigners within that
excluded?
the country country
Scale on which
On an international
productivity is On a local level/scale
scale/scale
measured
How the residents are
The strength of the country’s
Summaries contributing to the country’s
domestic economy.
economy.
Productivity Productivity is measured on Productivity is measured on
scale a local scale. an international scale.
Calculation Calculating GDP includes GNP can be calculated by
adding together private adding consumption,
consumption or consumer government spending, capital
spending, government spending by businesses, and
spending, and capital net exports (exports minus
spending by businesses, and imports) and net income by
net exports. domestic residents and
businesses from overseas
Here’s a brief overview of investments. This figure is
each component: then subtracted from the net
income earned by foreign
Consumption: The value of residents (NFIA) and
the consumption of goods businesses from domestic
 and services acquired and
consumed by the country’s
households. This accounts
for the largest part of GDP

Government Spending: All

consumption, investment,
and payments made by the
government for current use

Capital Spending by
Businesses: Spending on
purchases of fixed assets
investment.
and unsold stock by private
businesses
GNP = GDP – NFIA
Net Exports: Represents
the country’s balance of
trade (BOT), where a
positive number bumps up
the GDP as country exports
more than it imports, and
vice versa

GDP = Consumption+
Investment + Government
Spending + Net export.

Purchasing power parity (PPP) :

Definition:
It is a measurement of prices in different countries that uses the prices
of specific goods to compare the absolute purchasing power of the
countries' currencies. In many cases, PPP produces an inflation rate that is
equal to the price of the basket of goods at one location divided by the price
of the basket of goods at a different location. The PPP inflation and exchange
rate may differ from the market exchange rate because of poverty, tariffs,
and other transaction costs.
 Purchasing power parity is an economic concept that seeks to weigh
the value of one country’s dollar against another. This is done by visualizing
a basket of goods and then comparing the cost of those goods in each
country being measured. However, you can’t simply take a look at the price
of one group of products in various countries. To get an accurate picture of
purchasing power parity, you’ll need to compare a wide variety of products
in that “basket of goods.”
The International Comparison Program makes determining purchasing
power parity its business. The organization, established in 1968, strives to
generate accurate purchasing power parities through a global survey that
looks at the cost of numerous goods. Economists across the world look at
this data when determining how the international economy is performing.

The importance of PPP

The PPP exchange rate of a country has two primary functions:

1. It is a good tool to compare the economic performance and position of

different countries. This is because the PPP rate is not subject to
extreme fluctuations (on a day to day basis) and typically only changes
(marginally) over years.
2. It can help economists determine exchange rate trends in the long run,
as exchange rates tend to move in the direction of the PPP exchange
rate.

Calculating relative PPP

The formula for relative PPP is:

S = P 1 / P2

Where:

S = the exchange rate of currency A to currency B

P1 = the cost of good “x” in currency A
P2 = the cost of good “x” in currency B

Drawbacks of Purchasing Power Parity

Since 1986, The Economist has playfully tracked the price of McDonald's
Corp.’s (MCD) Big Mac hamburger across many countries. Their study results
in the famed "Big Mac Index". In "Burgernomics"—a prominent 2003 paper
that explores the Big Mac Index and PPP—authors Michael R. Pakko and
Patricia S. Pollard cited the following factors to explain why the purchasing
power parity theory is not a good reflection of reality. 5

 Transport Costs

Goods that are unavailable locally must be imported, resulting in

transport costs. These costs include not only fuel but import duties as well.
Imported goods will consequently sell at a relatively higher price than do
identical locally sourced goods.

 Tax Differences
Government sales taxes such as the value-added tax (VAT) can spike
prices in one country, relative to another.

 Government Intervention
Tariffs can dramatically augment the price of imported goods, where
the same products in other countries will be comparatively cheaper.

 Non-Traded Services
The Big Mac's price factors input costs that are not traded. These
factors include such items as insurance, utility costs, and labor costs.
Therefore, those expenses are unlikely to be at parity internationally.

 Market Competition
Goods might be deliberately priced higher in a country. In some cases,
higher prices are because a company may have a competitive
advantage over other sellers. The company may have a monopoly or be part
of a cartel of companies that manipulate prices, keeping them artificially
high.

Human Development Index (HDI)

Definition:
The Human Development Index (HDI) is a statistic composite index
of life expectancy, education (Literacy Rate, Gross Enrollment Ratio at
different levels and Net Attendance Ratio), and per capita income indicators,
which are used to rank countries into four tiers of human development.
OR
The Human Development Index (HDI) is a statistical tool used to
measure a country's overall achievement in its social and economic
dimensions. The social and economic dimensions of a country are based on
the health of people, their level of education attainment and their standard
of living.
United Nations Development Programme has defined human
development as a process of enlarging peoples’ choices and their level of
well-being. According to Human Development Report, the three most
important choices of people are: To lead a long and healthy life To acquire
knowledge To enjoy a decent standard of living. Human Development is
measured by constructing Human Development Index (H.D.I).

Importance of human development

1. It is an end
Economic growth is the means and human development is an
end. Economic growth enables an economy to improve human
condition and enlarge the choices of the people which finally lead to
their development.
2. Helps to control population
Human development includes providing better education
facilities. Educated people understand the benefits of having a small
family. Increased medical facilities help to reduce the infant mortality
rate.
3. Increases efficiency
With human development, there is an improvement in health,
nutrition and education. This helps to increase efficiency and
productivity of labour.
4. Other resources are better utilized
The utilization of resources highly depends on the efficiency of
the human resource. Since, the efficiency of labour increases, other
resources are also better utilized.
5. The society becomes healthy and safe
Educated people who are bestowed with proper rights do not get
involved in anti-social activities like riots, terrorism, robbery etc.
Therefore, a safe and healthy society is created.
6. Conservation of environment
 Educated people are aware about the negative effect that over
population, deforestation, heavy industrialization etc. have on the
environment. Therefore, they make an extra effort to save the
environment. Human development is extremely important and it
depends on much more than just growth of income.

Human Development Index (H.D.I.) Human Development is

measured by constructing Human Development Index (H.D.I). The Human
Development Index (HDI) is a composite statistic of life expectancy,
education, and income indices used to rank countries. It was created by
the Pakistani economist Mahbub ul Haq and the Indian economist Amartya
Sen in 1990 and was published by the United Nations Development
Programme.

H.D.I. makes it clear that income cannot be considered as a

yardstick for measuring human development because well-being depends
on use of income and not on level of income. For constructing H.D.I, we
have to prepare index number for each of the three dimensions of human
development.
Sl Dimension Index
.
N
o
1 Long and healthy life dimension Life Expectancy
Index
2 Knowledge dimension Education Index
3 Standard of living dimension GDP per capita

In order to calculate the index, the following formula has been derived:
Dimension Index = Actual Value – Minimum Value Maximum Value
– Minimum Value

Although the HDI gives us a broader perspective on progress towards

development, it should be pointed out that
1) its creation was in part motivated by a political strategy designed to
focus attention on health and education aspects of development;
2) the three indicators used are good but not ideal (e.g. the U.N. team
wanted to ude nutrition status of children under age 5 as their ideal health
indicators, but the data were not available;
3) the national HDI may have the unfortunate effect of shifting focus away
from the substantial inequality within countries;
4) the alternative approach of looking at- GNP per capita rankings and
then supplementing this with other social indicators is still a respectable
one; and
5) one must always remember th'at the index is one of relative rather than
absolute development, so that if all countries improve at the weighted
rate, the poorest countries will not get credit for their progress.

Limitations of H.D.I.
Human Development is measured by constructing Human Development
Index (H.D.I).
1. The Human Development Index (HDI) is a composite statistic of life
expectancy, education, and income indices used to rank
countries.Many factors have been ignored Some critics are of view that
many indicators of human development such as infant mortality,
nutrition, security are totally neglected.
2. Problem of inequality is ignored Since HDI is an overall average, it
reflects the entire economy as a whole. HDI of a country neglects the
problem of inequality. It treats all people and all regions at par.
3. Imperfect index According to Prof. Amartya Sen, a Nobel Laureate, the
HDI is an imperfect index which tries to catch complex reality of
human development in one simple number.
4. Arbitrary use of weights The HDI uses weighted average but it does not
have any fruitful impact on measurement. The use of weights is
arbitrary.

Physical Quality of Life Index (PQLI):

Physical Quality of Life Index (P.Q.L.I) was developed by famous
economist Morris David in 1979 for 23 developed and developing
countries. Morris David used the following three indicators to prepare a
composite index known as Physical Quality of Life Index:
1. Life Expectant Rate (L.E.I)
2. Infant Mortality Rate (I.M.I)
3. Basic Literacy Rate (B.L.I)

1. Life Expectant Rate (L.E.I): Life expectancy means average number

of year a person is expected to live.
 2. Infant Mortality Rate (I.M.I): It refers to the number of infants dying
within one year of their birth out of every 1000 births.
3. Basic Literacy Rate (B.L.I): Any person above the age of 7 year who
can read and write in any one language with an ability to understand it is
considered as literate.
For each of the above indicator, the performance of individual country
is rated on a scale of 1 to 100 where 1 represents the worst performance
and 100 represent the best performance. P.Q.L.I is then constructed by
averaging these three indicators giving equal weight to each of them.
Morris David has given following formula to obtain P.Q.L.I
P.Q.L.I = L.E.I.+ I.M.I.+ B.L.I

Advantages
1. Aspect of welfare has been considered The three indicator i.e. life
expectancy rate, infant mortality rate and literacy rate very well represent
the welfare of the people of the country. A country wherein all the three
indicators are good can be said to be a developed economy.
2. Helps the government for analysis P.Q.L.I helps to government to
understand the overall welfare in the economy and how well its welfare
policies are being implemented. This helps the government to take
corrective action.
3. Easy to compare The method followed to measure P.Q.L.I is standard for
all the countries. Therefore, it can be used to make comparison between
countries and this helps the relatively underdeveloped countries to take
corrective measure.
4. Also considers distribution The P.Q.L.I considers the distribution of welfare
in the country. A country cannot have a high average of literacy rate, life
expectancy and low infant mortality rate unless a large part of the
population is covered by the benefits of economic development.
5. Data required is easily available The data relating to all the three
indicators is easily available in the census report. Therefore, measurement
of P.Q.L.I is a simple.

Limitations
1. Many other factors have been ignored P.Q.L.I ignores many factors which
influence the quality of life such as employment, housing, justice, social
security as well as human rights.
2. All factors have been given equal importance P.Q.L.I is a simple average of
literacy rate, infant mortality rate and life expectancy rate i.e. all the
 factors have been giving equal weightage. However, it is difficult to
understand the rationale behind giving equal importance to all factors.
3. Not a proper measure of economic development P.Q.L.I. does not explain
the structural change in the economy of a country. Moreover, it does not
at all consider economic or monetary concept. Hence, it is a poor measure
of economic development as well as economic growth. Inspite of these
drawbacks, P.Q.L.I. is considered as an improvement over traditional
measure of economic welfare. However, recently developed Human
Development Index (HDI) is a better and more refined version of PQLI.

Per Capita Income:

Definition:
Per capita income (PCI) or average income measures the average
income earned per person in a given area (city, region, country, etc.) in a
specified year. It is calculated by dividing the area's total income by its
total population.
Limitations of Per Capita Income

Although per capita income is a popular metric, it does have some

limitations.

1. Livings Standards

Since per capita income uses the overall income of a population and
divides it by the total number of people, it doesn't always provide an
accurate representation of the standard of living. In other words, the
data can be skewed, whereby it doesn't account for income inequality.

2. Inflation

Per capita income doesn't reflect inflation in an economy, which is the rate
at which prices rise over time.

3. International Comparisons

The cost of living differences can be inaccurate when making international

comparisons since exchange rates are not included in the calculation.
Critics of per capita income suggest that adjusting for purchasing power
parity (PPP) is more accurate, whereby PPP helps to nullify the exchange
rate difference between countries. Also, other economies use bartering
and other non-monetary activity, which is not considered in calculating per
capita income.

4. Savings and Wealth

Per capita income doesn't include an individuals savings or wealth. For

example, a wealthy person might have a low annual income from not
working but draws from savings to maintain a high-quality standard of
living. The per capita metric would reflect the wealthy person as a low-
income earner.

5. Children

Per capita includes children in the total population, but children don't earn
any income. Countries with many children would have a skewed result
since they would have more people dividing up the income versus
countries with fewer children.
6. Economic Welfare

The welfare of the people isn't necessarily captured with per capita
income. For example, the quality of work conditions, the number of hours
worked, education level, and health benefits are not included in per capita
income calculations. As a result, the overall welfare of the community may
not be accurately reflected.

It's important to consider that per capita income is only one metric and
should be used in conjunction with other income measurements, such as
the median income, income by regions, and the percentage of residents
living in poverty.

National Income
Introduction:
National income is an uncertain term which is used interchangeably
with national dividend, national output and national expenditure. On this
basis, national income has been defined in a number of ways. In common
parlance, national income means the total value of goods and services
produced annually in a country.

Definitions:
The definitions of national income can be grouped into two classes:
One, the traditional definitions advanced by Marshall, Pigou and Fisher;
and two, modern definitions.

1. The Marshallian Definition:

According to Marshall: “The labour and capital of a country acting on its
natural resources produce annually a certain net aggregate of
commodities, material and immaterial including services of all kinds. This
is the true net annual income or revenue of the country or national
dividend.” In this definition, the word ‘net’ refers to deductions from the
gross national income in respect of depreciation and wearing out of
machines. And to this, must be added income from abroad.
2. The Pigouvian Definition:
A.C. Pigou has in his definition of national income included that income
which can be measured in terms of money. In the words of Pigou,
“National income is that part of objective income of the community,
including of course income derived from abroad which can be measured in
money.”
Methods of Measuring National Income:
There are four methods of measuring national income. Which method is to
be used depends on the availability of data in a country and the purpose in
hand.

(1) Product Method:

According to this method, the total value of final goods and services
produced in a country during a year is calculated at market prices. To find
out the GNP, the data of all productive activities, such as agricultural
products, wood received from forests, minerals received from mines,
commodities produced by industries, the contributions to production made
by transport, communications, insurance companies, lawyers, doctors,
teachers, etc. are collected and assessed at market prices. Only the final
goods and services are included and the intermediary goods and services
are left out.

(2) Income Method:

According to this method, the net income payments received by all
citizens of a country in a particular year are added up, i.e., net incomes
that accrue to all factors of production by way of net rents, net wages, net
interest and net profits are all added together but incomes received in the
form of transfer payments are not included in it. The data pertaining to
income are obtained from different sources, for instance, from income tax
department in respect of high income groups and in case of workers from
their wage bills.

(3) Expenditure Method:

According to this method, the total expenditure incurred by the society
in a particular year is added together and includes personal consumption
expenditure, net domestic investment, government expenditure on goods
and services, and net foreign investment. This concept is based on the
assumption that national income equals national expenditure.

Another method of measuring national income is the value added by

industries. The difference between the value of material outputs and
inputs at each stage of production is the value added. If all such
differences are added up for all industries in the economy, we arrive at the
gross domestic product.

Importance of National Income Analysis:

The national income data have the following importance:
1. For the Economy:
National income data are of great importance for the economy of a
country. These days the national income data are regarded as accounts of
the economy, which are known as social accounts. These refer to net
national income and net national expenditure, which ultimately equal each
other.

Social accounts tell us how the aggregates of a nation’s income, output

and product result from the income of different individuals, products of
industries and transactions of international trade. Their main constituents
are inter-related and each particular account can be used to verify the
correctness of any other account.

2. National Policies:
National income data form the basis of national policies such as
employment policy, because these figures enable us to know the direction
in which the industrial output, investment and savings, etc. change, and
proper measures can be adopted to bring the economy to the right path.

3. Economic Planning:
In the present age of planning, the national data are of great
importance. For economic planning, it is essential that the data pertaining
to a country’s gross income, output, saving and consumption from
different sources should be available. Without these, planning is not
possible.

4. Economic Models:
The economists propound short-run as well as long-run economic
models or long-run investment models in which the national income data
are very widely used.

5. Research:
The national income data are also made use of by the research
scholars of economics. They make use of the various data of the country’s
input, output, income, saving, consumption, investment, employment,
etc., which are obtained from social accounts.

6. Per Capita Income:

 National income data are significant for a country’s per capita income
which reflects the economic welfare of the country. The higher the per
capita income, the higher the economic welfare of the country.

7. Distribution of Income:
National income statistics enable us to know about the distribution of
income in the country. From the data pertaining to wages, rent, interest
and profits, we learn of the disparities in the incomes of different sections
of the society. Similarly, the regional distribution of income is revealed.

It is only on the basis of these that the government can adopt measures to
remove the inequalities in income distribution and to restore regional
equilibrium. With a view to removing these personal and regional
disequibria, the decisions to levy more taxes and increase public
expenditure also rest on national income statistics.
Inter-Relationship among different concept of National Income

The inter-relationship among the various concept of national income

can be shown in the form of equations as under:
 The Millennium Development Goals (MDGs)
There were eight international development goals for the year 2015
that had been established following the Millennium Summit of the United
Nations in 2000, following the adoption of the United Nations Millennium
Declaration. The Sustainable Development Goals (SDGs) succeeded the
MDGs in 2016.
All 191 United Nations member states, and at least 22 international
organizations, committed to help achieve the following Millennium
Development Goals by 2015:

1. To eradicate extreme poverty and hunger

2. To achieve universal primary education
3. To promote gender equality and empower women
4. To reduce child mortality
5. To improve maternal health
6. To combat HIV/AIDS, malaria, and other diseases
7. To ensure environmental sustainability[1]
8. To develop a global partnership for development [2]

Each goal had specific targets, and dates for achieving those targets.
The 8 goals were measured by 21 targets. To accelerate progress,
the G8 finance ministers agreed in June 2005 to provide enough funds to
the World Bank, the International Monetary Fund (IMF) and the African
Development Bank (AfDB) to cancel $40 to $55 billion in debt owed by
members of the heavily indebted poor countries (HIPC) to allow them to
redirect resources to programs for improving health and education and for
alleviating poverty.
Interventions evaluated include (1) improvements required to meet the
millennium development goals (MDG) for water supply (by halving by 2015
the proportion of those without access to safe drinking water), (2) meet the
water MDG plus halving by 2015 the proportion of those without access to
adequate sanitation, (3) increasing access to improved water and sanitation
for everyone, (4) providing disinfection at point-of-use over and above
increasing access to improved water supply and sanitation (5) providing
regulated piped water supply in house and sewage connection with partial
sewerage for everyone (Hutton, G. Evaluation of the Cost and Benefits of
Water and Sanitation Improvements at the Global Level, 2004 WHO-Geneva)
 Critics of the MDGs complained of a lack of analysis and justification
behind the chosen objectives, and the difficulty or lack of measurements for
some goals and uneven progress, among others. Although developed
countries' aid for achieving the MDGs rose during the challenge period, more
than half went for debt relief and much of the remainder going
towards natural disaster relief and military aid, rather than further
development.
As of 2013, progress towards the goals was uneven. Some countries
achieved many goals, while others were not on track to realize any. A UN
conference in September 2010 reviewed progress to date and adopted a
global plan to achieve the eight goals by their target date. New
commitments targeted women's and children's health, and new initiatives in
the worldwide battle against poverty, hunger and disease.
Among the non-governmental organizations assisting were the United
Nations Millennium Campaign, the Millennium Promise Alliance, Inc., the
Global Poverty Project, the Micah Challenge, The Youth in Action EU
Programme, "Cartoons in Action" video project and the 8 Visions of Hope
global art project.
Sustainable Development Goals:

The Sustainable Development Goals (SDGs) or Global Goals are a

collection of 17 interlinked goals designed to be a "blueprint to achieve a
better and more sustainable future for all".The SDGs were set in 2015 by
the United Nations General Assembly and are intended to be achieved by
the year 2030. They are included in a UN Resolution called the 2030
Agenda or what is colloquially known as Agenda 2030.
The 17 SDGs are:
1. No Poverty
2. Zero Hunger
3. Good Health and Well-being
4. Quality Education,
5. Gender Equality,
6. Clean Water and Sanitation,
7. Affordable and Clean Energy
8. Decent Work and Economic Growth,
9. Industry, Innovation and Infrastructure
10. Reducing Inequality
11. Sustainable Cities and Communities
12. Responsible Consumption and Production
13. Climate Action,
 14. Life Below Water,
15. Life On Land,
16. Peace, Justice, and Strong Institutions,
17. Partnerships for the Goals.
Though the goals are broad and interdependent, two years later (6 July
2017) the SDGs were made more "actionable" by a UN Resolution adopted
by the General Assembly. The resolution identifies specific targets for each
goal, along with indicators that are being used to measure progress toward
each target. The year by which the target is meant to be achieved is
usually between 2020 and 2030. For some of the targets, no end date is
given.
To facilitate monitoring, a variety of tools exist to track and visualize
progress towards the goals. All intend to make data more available and
more easily understood. For example, the online publication SDG-Tracker,
launched in June 2018, presents available data across all indicators. The
SDGs pay attention to multiple cross-cutting issues, like gender equity,
education, and culture cut across all of the SDGs. There were serious
impacts and implications of the COVID-19 pandemic on all 17 SDGs in the
year 2020.
 CHAPTER 2
DIMENSIONS OF THE
DEVELOPMENT PROBLEMS OF
DEVELOPING COUNTRIES
Introduction

Development, however defined and measured, is something that has not been
realized in low-income countries. From its narrow measurement through gross
domestic product (GDP) to human development index (HDI) to a more
comprehensive index of sustainable development, now development can be seen in
low-income countries. Low-income levels have been associated with low
achievements in all aspects of social and environmental progress in these countries.
Even some levels of economic growth in terms of income per capita and social,
political, and environmental indicators of progress are all lacking behind. That is,
economic growth alone is not sufficient to advance societies and improve the
quality of life of citizens.
Meaning of the Term Underdeveloped/ Developing countries
The term ‘underdeveloped’ has been used in a variety of ways.
‘Undeveloped’ and ‘under developed’ countries are often used as synonyms. But
these two terms are easily distinguishable. An underdeveloped country is one which
has no prospects of development. An undeveloped country, on the other hand, is
one which has no potentialities of development. The Antarctic, the Arctic and parts
of the Sahara may be termed as undeveloped, while India, Pakistan, Uganda,
Columbia, Panama, etc. may be called underdeveloped. “Poor” and “backward” are
also used as synonyms for “underdeveloped”. A poor country does not mean a
young country. Poverty simply refers to the low level of per capita income of a
country. It has nothing to do with the country’s culture. ‘Backward countries’ is a
static term like the term ‘underdeveloped’. So the terms ‘poor’ and
‘underdeveloped’ are interchangeable. A more respectable term “developing
countries” has also come to be used in economic literature. However, Bauer regards
the expressions underdeveloped, developing and less developed as clearly
euphemisms. The terms underdeveloped and developing are especially
inappropriate euphemisms: underdeveloped because it so clearly suggests that the
condition it describes is abnormal, reprehensible and also perhaps readily
rectifiable. The term developing because its use leads to such contradictions as
references to the stagnation or retrogression of the developing world. According to
him poor or materially backward are the most appropriate expressions. The World
 Bank uses the term developing countries and divides them into low income and
middle income countries. Middle income countries are further divided into lower-
middle-income and upper-middle countries. Of late, a new term Third World is being
used.
Definition:
Underdeveloped is having a low standard of living, or immature and having a low
level of economic productivity and technological sophistication within the
contemporary range of possibility; developing.

Different Criteria of Underdevelopment

It is rather difficult to give a precise criterion of underdevelopment.

Underdevelopment can be defined in many ways: by the incidence of poverty,
ignorance, or disease; by maldistribution of the national income; by administrative
incompetence, by social disorganization. There is thus not a single definition which
is so comprehensive as to incorporate all the features of an underdeveloped
country. Still some of the criteria of underdevelopment are discussed below:

1. The first criterion of underdevelopment is the ratio of population to land area. But it
is very difficult to ascertain whether a high or a low ratio of population to area is an
indicator of underdevelopment. There are many underdeveloped countries in Africa
and Latin America where there are “empty spaces” signifying a low ratio. While
there are a number of other underdeveloped countries like India, China, Myanmar,
Pakistan, Malaysia and many other South Asian countries which have a high ratio
of population to area. This criterion is, therefore, vague and superfluous.

2. Another indicator of underdevelopment is the ratio of industrial output to total

output. It may also be explained as the ratio of industrial population to total
population. According to this criterion, countries with a low ratio of industrial
output to total output are considered underdeveloped. But this ratio tends to
increase with the increase in per capita income. Therefore, the degree of
industrialization is often a consequence rather than a cause of economic prosperity
in a country. In countries where agriculture is developed, tertiary or service
industries tend to grow spontaneously because increasing disposable agricultural
surplus creates demand for the products of the industrial sector. But when the
disposable surplus agricultural income is used to subsidize uneconomic urban
industry, the overall per capita income would tend to be lower. Thus, this criterion
is not a valid indicator of underdevelopment.

3. The third criterion of underdevelopment is the low ratio of capital to per head of
population. Nurkse defines underdeveloped countries as those which “compared
with the advanced countries are underequipped with capital in relation to their
population and natural resources”. But dearth of capital is not a satisfactory
criterion of underdevelopment for the following reasons:
(a) Capital deficiency is not related to absolute size of a country’s stock of
capital but to the ratio of capital to population or to some other factor.
 (b) The Principle of Marginal Productivity tells that where the ratio of capital
to other factors is low, the marginal productivity of capital is high. But it is
difficult to infer from this that in underdeveloped countries marginal
productivity of capital is high since capital is scarce, or that a high
marginal productivity of capital suggests a scarcity of capital. It is possible
that poor organisation, low skills, unfavourable weather, etc. may tend to
keep the marginal productivity of capital low in underdeveloped countries,
(c) Moreover, if capital deficiency is taken as an indicator of
underdevelopment, other socio-economic factors are neglected. As Nurkse
himself says, “Economic development has much to do with human
endowments, social attitudes, political conditions and historical accidents.
Capital is a necessary but not a sufficient condition of progress.”
4. Another criterion indicates towards poverty as the main cause of
underdevelopment. Staley defines an underdeveloped country as one
“characterised by mass poverty which is chronic and not the result of some
temporary misfortune and by obsolete methods of production and social
organisation, which means that the poverty is not entirely due to poor natural
resources and hence could presumably be lessened by methods already proved in
other countries”. This definition points towards some of the important
characteristics of underdeveloped countries. That underdeveloped countries have
unexploited natural resources, scarcity of capital goods and equipment, obsolete
techniques of production and defects in socio-economic organisation, none can
deny. But it does not lay emphasis on the basic criterion of underdevelopment,
viz., low per capita income. As Barbara Ward says, “Perhaps the most satisfactory
method of defining poverty is to discuss the question simply in terms of per capita
income—the average income available to citizens in various countries.”

5. Thus one of the most commonly acceptable criteria of underdevelopment is the

low per capita real income of underdeveloped countries as compared with the
advanced countries. According to the United Nations experts, “We use it (the
term underdeveloped country) to mean countries in which per capita real
income is low when compared with the per capita real income of the United
States of America, Canada, Australia and Western Europe.” But such definitions,
which explain an underdeveloped country in terms of the low per capita level
of income, can by no means be considered adequate and satisfactory. For they
focus attention only on one aspect of underdevelopment, viz., poverty. They do
not analyse the causes of low consumption levels, of inhibited growth and of the
development potential of an underdeveloped economy. Moreover, “being
under-developed in the technical sense means nothing in terms of the level of
civilization, culture or spiritual values”. Serious difficulties also arise while
measuring per capita national income in underdeveloped countries and their
comparison with the per capita income of the advanced countries. The data on
per capita national income is often inaccurate, misleading and unreliable due to
the following reasons:
 (a) There is a substantial non-monetized sector in underdeveloped countries
which makes the calculation of national income difficult. A great deal of what is
produced in the subsistence sector is either exchanged for other goods or is
kept for personal consumption. This tends to understate the national income.

(b) There is lack of occupational specialization in such countries which

makes the calculation of national income by distributive shares or by industrial
origin difficult. Besides the crop, farmers often produce a variety of products
like eggs, milk, articles of clothing, etc. that are never included in the national
income estimates.

(c) In underdeveloped countries people are mostly illiterate and do not keep
any accounts, and even if they do, they are reluctant to disclose their income
correctly. In such a situation only rough estimates are possible.

(d) National income estimates include only those goods and services which
are commercially used. But in underdeveloped countries people living in rural
areas and manufacturing articles of consumption from rudimentary goods are
able to avoid many expenses. They build their own huts, garments and other
necessities. Thus in underdeveloped countries, relatively fewer goods are
channelised through the market, and therefore are not included in the national
income estimates.

(e) The computation of national income in terms of money underestimates the

real income. It does not include the real cost of producing an article, the effort
or sacrifice of leisure forgone in the process of production. The income earned
by two persons may be the same, but if one works for longer hours than the
other, there is some justification in saying that the real income of the former is
underestimated.

(f) National income estimates fail to measure adequately changes in output

due to changes in the price level. Index numbers used to measure changes in
the price level are simply rough approximations. Moreover, the price levels
vary in different countries. Consumers’ wants and preferences also differ in
each country. Therefore, the national income figures of different countries are
often misleading and incomparable.

(g) International comparisons of national income are inaccurate due to

exchange rate conversion of different currencies into a common currency, i.e.,
US dollar. The use of a single currency unit for computing the total output of
goods and services underestimates the national incomes of underdeveloped
countries as compared with the developed ones. The rates of exchange are
primarily based on the prices of internationally traded goods. But there are
many goods and services in underdeveloped countries that are never traded
internationally and are also priced low. “It is contended that approximately
correct results can be obtained only when there exists an equivalence between
the prevailing exchange rates and the relationship of internal prices. The
equivalence is unlikely to be achieved for most countries today in view of the
prevalent use of exchange control and quantitative restrictions on trade.” This
makes international comparisons of national incomes misleading and
superfluous.

(h) The calculation of per capita income in an underdeveloped country is

likely to be understated or overstated due to unreliable and erroneous
population figures. The census data is never accurate in such countries.

(i) Above all, difficulties arise in the definition of income, in the differences
in concepts used for the computation of national income in various countries
and calculating the contribution to national income of such governmental
activities as irrigation and power projects, police and military services etc.

Despite these limitations, per capita income is the most widely used
indicator of the level of underdevelopment.
Characteristics of an Underdeveloped Country/ Developing
Countries.

Underdevelopment can be defined in many ways: by the incidence of

poverty, ignorance, or disease; by maldistribution of the national income; by
administrative incompetence, by social disorganization. In order to examine the
problems of an underdeveloped country, it is useful to have in mind a general
sketch of the economy of such a country. Though it is difficult to locate a
representative underdeveloped country on the world map, yet it is possible to focus
attention on some of its characteristics:

 General Poverty;

An underdeveloped country is poverty-ridden. Poverty is reflected

in low GNP per capita. According to the World Development Report,
1999-2000, 59.6 per cent of the world population in 1998 living in low-
income economies had GNP per capita of $ 760 or less; 25.4 per cent in
middle income economies had $ 761 to $ 9,360; and 15.0 per cent in
high-income economies had $ 9,361 or more. The extremely low GNP per
capita of low-income economies reflects the extent of poverty in them.
Further, the World Bank Report pointed out vast income disparities
among nations. Among the low- income countries were Nepal and
Tanzania with GNP per capita of $210, Nigeria $300, Uganda $ 320,
Zambia $330, Bangladesh $350, Ghana $390, India $430, Pakistan $
480, Zimbabwe $610, Indonesia $ 680 and China $750. Some of the
middle-income group countries were Sri Lanka with GNP per capita of
$810, Philippines $1,050, Kenya $1310, Namibia $1,940, Russian
Federation $2,300, South Africa $2880, and Malaysia $3,600. Of the
high-income countries, Luxembourg led with GNP per capita of $43,570,
followed by Switzerland $40,080, Norway $34,330, Denmark $33,260,
Japan $32,380, Singapore $30,060, United States $29,340 and so on.
However, it is not relative poverty but absolute poverty that is
more important in assessing such economies. Absolute poverty is
measured not only by low income but also by malnutrition, poor health,
clothing, shelter, and lack of education. Thus absolute poverty is
reflected in low living standards of the people. In such countries, food is
the major item of consumption and about 80 per cent of the income is
spent on it as compared with 20 per cent in advanced countries. People
mostly take cereals and other starches to the total absence of nutritional
foods, such as meat, eggs, fish, and dairy products. For instance, the per
capita consumption of protein in LDCs is 52 grams per day as compared
with 105 grams in developed countries. The per capita fat consumption
in LDCs is 83 grams daily as against 133 grams in developed countries.
As a result, the average daily calorie intake per capita hardly exceeds
2,000 in underdeveloped countries as compared with more than 3,300
to be found in the diets of the people of advanced countries.
The rest of the consumption of such countries consists mainly of a
thatched hut and almost negligible clothing. People live in extremely
insanitary conditions. More than 1,200 million people in the developing
countries do not have safe drinking water and more than 1,400 million
have no sanitary waste disposal. Of every 10 children born, two die
within a year, another three die before the age of five, and only five
survive to the age of 40 years. The reasons are poor nutrition, unsafe
water, poor sanitation, uninformed parents and lack of immunisation.
Services like education and health hardly flourish. Recent data reveal
that there is a doctor for 2,083 persons in India, for 5,555 persons in
Bangladesh, for 20,000 persons in Nepal, and for 870 persons in China,
as against 410 persons for the developed countries. Most developed
countries are expanding educational facilities rapidly. Still such efforts
fall short of the manpower requirements of these economies. In many
low-income countries about 70 per cent of the primary school age
children go to school, at the secondary level, enrolment rates are lower
than 20 per cent and enrolment in higher education hardly comes up to 3
per cent. Moreover, the type of education being imparted to the majority
of the school and college-going children is ill-suited to the development
needs of such countries. Thus the vast majority of the people in LDCs are
ill-fed, ill-clothed, ill-housed and ill-educated. The number of people in
absolute poverty in LDCs, excluding China, is estimated at about 1,000
million. Half of them live in South Asia, mainly in India and Bangladesh; a
sixth live in East and Southeast Asia, mainly in Indonesia; another sixth
in Sub-Saharan Africa; and the rest in Latin America, North Africa and the
Middle East. Poverty is, therefore, the basic malady of an
underdeveloped country which is involved in ‘misery-go-round’. Prof.
Cairncross is justified in saying that the underdeveloped countries are
the slums of the world economy.

 Agriculture as the Main Occupation

In underdeveloped countries two-thirds or more of the people live

in rural areas and their main occupation is agriculture. There are four
times as many people occupied in agriculture in some underdeveloped
countries as there are in advanced countries. In low-income countries
like China, Kenya, Myanmar and Vietnam, more than 71 per cent of the
population is engaged in agriculture while the percentages for the United
States, Canada and West Germany is 3, 3 and 4 respectively. This heavy
concentration in agriculture is a symptom of poverty. Agriculture, as the
main occupation, is mostly unproductive. It is carried on in an old fashion
with obsolete and outdated methods of production. The average land
holdings are as low as 1 to 3 hectares which usually support 10 to 15
people per hectare. As a result, the yield from land is precariously low
and the peasants continue to live at a bare subsistence level.
Such countries mainly specialize in the production of raw materials
and foodstuffs, yet some also specialize in non-agricultural primary
production, i.e., minerals. For example, Sri Lanka specializes in tea,
rubber and coconut products; Malaysia in rubber, tin and palm oil;
Indonesia in rubber, oil and tin; Pakistan in cotton; Bangladesh in jute;
India in tea; and Brazil in coffee. An underdeveloped country is thus a
primary sector economy. Besides the primary sector there is the
underdeveloped secondary sector with a few simple, light and small
consumer goods industries and an equally underdeveloped tertiary
sector, i.e., transport, commerce, banking and insurance services. In
some of the low-income countries such as Bangladesh, Ethiopia, Nepal,
Uganda, Ghana and Tanzania the share of agriculture in GDP continues to
be more than 40 per cent and the share of industry and manufacturing
less than 20 per cent.
 A Dualistic Economy

Almost all underdeveloped countries have a dualistic economy. One

is the market economy, the other is the subsistence economy. One is in
and near the towns, the other is in the rural areas. One is developed, the
other is less developed. Centred in the towns, the market economy is
ultra-modern with all the amenities of life, viz., the television, the car,
the bus, the train, the telephone, the picture house, the palatial buildings,
the schools and the colleges. Here too government, offices, the business
houses, the banks and a few factories are visible. The subsistence
economy is backward and is mainly agriculture- oriented.
Dualism is also characterised by the existence of an advanced
industrial system and an indigenous backward agricultural system. The
industrial sector uses capital-intensive techniques and produces a
variety of capital goods and durable consumer goods. The rural sector is
engaged in producing agricultural commodities with traditional
techniques. Both perpetuate unemployment and disguised
unemployment. There is also financial dualism consisting of the
unorganised money market charging very high interest rates on loans
and the unorganised money market with low interest rates and abundant
credit facilities. This aggravates economic dualism between the
traditional sector and the modern industrial sector.
 In many underdeveloped countries, there are foreign-directed
enclaves thus making a triplistic economy. They are highly capitalistic
and are found in petroleum, mining and plantations. The native hired
labour working in these plantations and mines spends a considerable
part of its wages on imported consumer goods. The standard of living of
the workers working there differs from that of their brethren living in the
subsistence sector. The dualistic or triplistic nature of the economy is
not conducive to healthy economic progress. The primary sector
inhibits the growth of the secondary and the tertiary sectors by putting
a limit on their expansion and development.

 Underdeveloped Natural Resources

The natural resources of an underdeveloped country are

underdeveloped in the sense that they are either unutilized or
underutilized or misutilized. A country may be deficient in natural
resources, but it cannot be so in the absolute sense. Although a country
may be poor in resources, it is just possible that in the future it may
become rich in resources as a result of the discovery of presently
unknown resources or because new uses may be found for the known
resources. Thus, instead of saying that underdeveloped countries are
absolutely deficient in natural resources, it is more appropriate to say
that they have not been successful in overcoming the scarcity of natural
resources by appropriate changes in technology and social and economic
organization. Generally speaking, they are not deficient in land, mineral,
water, forest or power resources. Africa possesses considerable
reserves of copper, tin, bauxite, and gold; Asia is rich in petroleum, iron,
bauxite, manganese, mica and tin; and Latin America’s reserves of
petroleum, iron, zinc, and copper are immense. The forest wealth of
Africa and South America still remains unpenetrated and unexplored.
Thus underdeveloped countries do possess resources but they remain
unutilized, underutilized or misutilized due to various inhibitions such as
their inaccessibility, lack of technical knowledge, non-availability of
capital and the small extent of the market.

 Demographic Features

Underdeveloped countries differ greatly in demographic position

and trends. Diversity exists in the size, density, age-structure and the
rate of growth of population. But there appears to be one common
feature, a rapidly increasing population which adds a substantial number
to the total population every year. With their low per capita income and
low rate of capital formation, it becomes difficult for such countries to
support this additional number. And when output increases due to
improved technology and capital formation, it is swallowed up by
increased population. As a result, there is no marked improvement in the
living standards of the masses. Warning about the increase in numbers,
Keenleyside writes: “The womb is slower than the bomb but it may
prove just as deadly. Suffocation rather than incineration may mark the
end of the human story.”
Almost all the underdeveloped countries possess high population
growth potential characterized by high birth-rate and high but declining
death-rate. The advancement made by medical science has resulted in
the discovery of marvellous drugs and the introduction of better methods
of public health and sanitation which have reduced mortality and
increased fertility. Declining death-rates and increasing birth-rates give a
very high natural growth rate of population. The average annual growth
rate of population in developing countries is 2 per cent as compared with
about 0.7 per cent in developed countries. This rapid increase in
numbers aggravates the shortage of capital in such economies because
large investments are required to be made to equip the growing labour
force even with obsolete equipment.
An important consequence of high birth-rate is that a larger
proportion of the total population is in younger age group. The
percentage of population under 15 years of age is about 40 in
developing countries, compared with only 20 to 25 per cent in
developed countries. Moreover, 90 per cent of the dependents are
children in LDCs whereas their percentage is only 66 in developed
countries. A large percentage of children in the population entails a
heavy burden on the economy which implies a large number of
dependents who do not produce at all but do consume. With many
dependents to support, it becomes difficult for the workers to save for
the purposes of investment in capital equipment. It is also a problem for
them to provide, their children with the education and bare necessities
of life that are essential for the country’s economic and social progress in
the long run.
Underdeveloped countries have also a shorter life expectancy
which means that a smaller fraction of their population is available as
an effective labour force. Average life expectancy at birth is roughly 51
years in low income countries whereas in the developed countries it is
75 years. Low life expectancy means that there are more children to
support and few adults to provide for them which inhibits the rate of
economic growth.
 Lastly, in the majority of underdeveloped countries, the density of
agricultural population is very high in relation to the area of cultivated
land. In Egypt, in the inhabited area of the valley of the Nile, the density
of population is 600 persons per sq. km. Though in other
underdeveloped countries it is much less, yet their density is increasing
rapidly with the growth of population. The problem is becoming serious
in the river deltas of Asia and Africa and in the densely populated
islands of Malaysia, Indonesia, and Sri Lanka. Shortage of land in
relation to an excessively large agricultural population leads to
overcrowding, over-cropping and soil exhaustion, thereby impeding
economic progress.

 Unemployment and Disguised Unemployment

In underdeveloped countries there is vast open unemployment and

disguised unemployment. The unemployment is spreading with
urbanisation and the spread of education. But the industrial sector has
failed to expand alongwith the growth of labour force thereby increasing
urban unemployment. Then there are the educated unemployed who fail
to get jobs due to structural rigidities and lack of manpower planning.
With the present average annual growth rate of 4.5 per cent in urban
population, 20 per cent of the labour force in urban areas is unemployed.
But underemployment or disguised
or concealed unemployment, is a
notable feature of underdeveloped
countries. Such unemployment is not
voluntary but involuntary. People are
prepared to work but they are unable to
find work throughout the year due to
lack of complementary factors. Such
unemployment is found among rural
landless and small farmers due to the
seasonal nature of farm operations and
inefficient labour and equipment to
keep them fully employed. A person is
said to be disguised unemployed if his
contribution to output is less than what
he can produce by working for normal
hours per day. His marginal productivity
is nil or negligible, and by withdrawing
such labourers, farm output can be
increased.
Disguised unemployment is explained in Fig. 1 where TP is the total
production curve. When OL1 labourers are employed on a farm, total
production is OQ1. With the employment of more labourers OL2,
production increases to OQ2. But by employing more labourers OL2,
production does not increase at all. It remains constant at OQ2. The
marginal productivity of labour becomes nil when more labourers are
employed beyond OL2. Thus L2L3 labourers are disguised unemployed on
this farm. In the 1950s, economists estimated the number of disguised
unemployed at 25-30 per cent of rural labour force. Now it is agreed that
it does not exceed 5 per cent, even though precise estimates are not
available.

There are also other types of underemployed persons in such

countries. A person is considered to be underemployed if he “is forced
by unemployment to take a job that he thinks is not adequate for his
purpose, or not commensurate with his training.” Further, there are those
who work full time in terms of hours per day but earn very little to rise
above the poverty level. They are hawkers, petty traders, workers in
hotels and restaurants and in repair shops, etc., in urban areas. Open
and disguised unemployed in urban and rural areas are estimated at 30-
35 per cent of the labour force in LDCs.

 Economic Backwardness
In underdeveloped countries particular manifestations of economic
backwardness are low labour efficiency, factor immobility, limited specialization in
occupation and in trade, economic ignorance, values and social structure that
minimize the incentives for economic change. The basic cause of backwardness is
to be found in low labour productivity as compared with the developed countries.
This low labour efficiency results from general poverty which is reflected in low
nutritional standards, ill health, illiteracy and lack of training and occupational
mobility, etc.
There is also occupational immobility of labour due to the joint family system
and the caste system. Certain cultural and psychological factors are more dominant
than wage rates in determining the supply of labour. The joint family system makes
people lethargic and stay-at-home. In many underdeveloped countries, certain
occupations are reserved for members of some particular caste, religion, race, tribe
or sex. In Latin America, cloth making falls within the exclusive jurisdiction of
women. In India, a janitor always belongs to a particular caste. According to
Stephen. Enke, “underdeveloped countries have what might be termed an
uneconomic culture. Primarily, this means that traditional attitudes discourage the
full utilization of human resources. More specifically, it means that men are less
likely to strive for extra- consumption.” In underdeveloped countries people are
mostly illiterate, ignorant, conservative, superstitious and fatalists. Poverty in such
countries is abysmal, but it is considered to be God-given, something preordained.
It is -never attributed to personal lack of thrift and industry.
There is extensive prevalence of child labour and women’s status and
position in society is inferior to men. Dignity of labour is conspicuously absent.
Government jobs, even of a clerical nature, have more prestige than manual work.
People are ranked not according to their capacity to do a particular job but by age,
sex, caste, clan and kinship. They are governed by customs and traditions.
Individualistic spirit is absent. Exchange by barter is widespread and money
economy is hardly understood. “The value system minimizes the importance of
economic incentives, material rewards, independence and rational calculation. It
inhibits the development and acceptance of new ideas and objectives and fails to
compare the costs and advantages of alternative methods to achieve objectives. In
short, the cultural value system within many poor countries is not favourable to
economic achievement and the people remain economically backward.”

 Lack of Enterprise and Initiative

Another characteristic feature of underdeveloped countries is the

lack of entrepreneurial ability. Entrepreneurship is inhibited by the social
system which denies opportunities for creative faculties. “The force of
custom, the rigidity of status and the distrust of new ideas and of the
exercise of intellectual curiosity, combine to create an atmosphere
inimical to experiment and innovation.” The small size of the market, lack
of capital, absence of private property, absence of freedom of contract
and of law and order hamper enterprise and initiative.
Besides, there exist a few entrepreneurs who are engaged in the
manufacture of some consumer goods, and in plantations and mines that
tend to become monopolistic and quasi-monopolistic. They develop
personal and political contacts with the government officials, enjoy a
privileged position, and receive preferential treatment in finance,
taxation, exports, imports, etc. It is they who start new industries and
thus founded individual business empires which inhibit the growth of
fresh entrepreneurship within the country.
The thin supply of entrepreneurs in such countries is also attributed
to the lack of infrastructural facilities which add to the risk and
uncertainty of new ertrepreneurship. LDCs lack in properly developed
means of transport and communications, cheap and regular power
supply, availability of sufficient raw materials, trained labour, well-
developed capital and money markets, etc.
Further, entrepreneurship is hindered by technological
backwardness in underdeveloped countries. This reduces output per
man and the products are of substandard quality. Such countries do not
possess the necessary technical know-how and capital to evolve their
own techniques which may be output-increasing and labour-absorbing.
Mostly they have to depend upon imported capital-intensive techniques
which do not fit in their factor endowments.
No wonder, LDCs lack dynamic entrepreneurship which Schumpeter
regarded as the focal point in the process of economic development.

 Insufficient Capital Equipment

Insufficiency of capital equipment is another general characteristic

of such countries. Underdeveloped countries are characterized as
“capital-poor, or low-saving and low-investing” economies. There is not
only an extremely small capital stock but the current rate of capital
formation is also very low. In most underdeveloped countries gross
investment is only 5-6 per cent of GNP whereas in advanced countries it
is about 15-20 per cent. Such low rates of the growth of capital stock is
hardly enough to provide a rapidly growing population (at 2-2.5 per cent
per annum), let alone invest in new capital projects. In fact, these
countries find it difficult to cover even depreciation of capital and
replace the existing capital equipment.
The root cause of this capital deficiency is the problem of
undersaving or, more precisely, that of under- investment in productive
instruments capable of increasing the rate of economic growth. The per
capita income being very low, people on the bare edge of subsistence
level cannot, save much thereby leaving very little for further investment.
There are extreme inequalities in the distribution of income in such
countries. But this does not mean that the volume of savings available
for capital formation is high. In fact, large savings are possible only in
the case of 3-5 per cent of the people at the top of the income pyramid.
Moreover, the persons at the peak of the income pyramid are traders
and landlords who have a tendency to invest in unproductive channels
such as in gold, jewellery, precious stones, idle inventories, luxurious
real estates and money markets abroad, etc.
Another reason as to why the saving ratio does not rise with the
increased level of income in the long run is the “demonstration effect.” In
everybody there is a great urge “to keep up with the Joneses,” that is, to
imitate the standard of living of our prosperous neighbours. Similarly,
there is a tendency on the part of the people of the underdeveloped
countries to emulate the higher consumption standards of advanced
countries. As a result of the demonstration effect, the rise in income is
spent on increased expenditure on conspicuous consumption and thus
savings are almost static or negligible. This demonstration effect is
usually caused by foreign films, magazines and visits abroad.
This tendency to emulate the consumption patterns of advanced
countries is to be found not only in the case of private individuals but
also in the case of governments. The governments in LDCs emulate social
security programmes found in developed countries, viz., minimum wage
legislation, health insurance, pension and provident fund schemes, etc.,
but these measures put obstacles in the way of entrepreneurship and
thus retard capital formation. “It is not surprising,” writes Haberler,
“that poor and backward economies when they wake up and set their
minds to develop in a hurry and catch up with more developed
economies are tempted to overspend and live beyond their means.” Thus
such countries suffer from chronic capital deficiency and the factors
responsible for this are not only economic but also socio- political in
nature.

 Technological Backwardness

Underdeveloped countries are also in the backward state of

technology. Their technological backwardness is reflected, firstly, in high
average cost of production despite low money wages; secondly, in high
labour-output and capital-output ratios as a rule, and on the average,
given constant factor prices thus reflecting a generally low productivity
of labour and capital; thirdly, in the predominance of unskilled and
untrained workers; and lastly, in the large quantity of capital equipment
required to produce, a national output. “Deficiency of capital hinders the
process of scrapping off the old techniques and the installation of
modern techniques, Illiteracy and absence of a skilled labour force are
the other major hurdles in the spread of techniques in the backward
economy. Thus it may be pointed out that technological backwardness is
not only the cause of economic backwardness, but it is also the result of
it.”
This technological backwardness is due to technological dualism
which implies the use of different production functions in the advanced
sector and the traditional sector of the economy. The existence of such
dualism has accentuated the problem of structural or technological
unemployment in the industrial sector and disguised unemployment in
the rural sector. Under developed countries are also characterised by
structural disequilibrium at the factor level which leads to technological
unemployment. This technological unemployment arises from mal-
allocation of resources, the structure of demand and technological
restraints.

 Foreign Trade Orientation

Underdeveloped economies are generally foreign trade-oriented.

This orientation is reflected in exports of primary, products and imports
of consumer goods and machinery. The percentage share of fuels,
minerals, metals, and other primary products in the merchandise exports
of the majority of LDCs, as revealed by the recent World Bank data is on
an average about 80 per cent. For instance, the share of Ethiopia is 99
per cent, of Myanmar 97 per cent, of Uganda 99 per cent, of Indonesia 96
per cent, of Malaysia 80 per cent, of Algeria 100 per cent and of Kenya
86 per cent.
This too much dependence on exports of primary products leads to
serious repercussions on their economies. Firstly, the economy
concentrates mainly on the production of primary exports to the
comparative neglect of other sectors of the economy. Secondly, the
economy becomes particularly susceptible to fluctuations in the
international prices of the export commodities. A depression abroad
brings down their demand and prices. As a result, the entire economy is
adversely affected. Lastly, too much dependence on a few export
commodities to the utter neglect of other consumption goods has made
these economies highly dependent on imports. Imports generally consist
of fuel, manufactured articles, primary commodities, machinery and
transport equipment, and even food. Coupled with these is the operation
of the demonstration effect which tends to raise the propensity to import
still , further,
Of late, there has been a secular decline in the income terms of
trade (capacity to import) of the underdeveloped countries so that they
are faced with the balance of payments difficulties. An underdeveloped
country’s weak export capacity relatively to its strong import needs is
reflected in its persistent external indebtedness. For instance, the gross
inflow of public medium and long-term loans to Mexico was 72,510
million dollars and the repayment of principal was 7,502 million dollars
in 1985.
The foreign trade-orientation also manifests itself through the flow
of foreign capital to underdeveloped countries. It plays a dominant role
in developing and expanding the export sector. It also controls and
manages those services which are ancillary to the export sector. In this
way foreign capital has tended to monopolize its position in certain
selected fields like minerals, plantations, and petroleum in
underdeveloped countries. The multi-national corporations (MNCs) from
the developed countries have spread themselves in developing countries
in manufacturing, export-oriented plantations, petroleum and mining.
Such a widespread hold of foreign capital drains their resources. The
foreigners are interested only in maximizing their gains at the expense of
the developing countries.

 Vicious Circles of Poverty

There are circular relationships known as the ‘vicious circles of

poverty’ that tend to perpetuate the low level of development in LDCs.
Nurkse explains the idea in these words: “It implies a circular
constellation of forces tending to act and react upon one another in such
a way as to keep a poor country in a state of poverty. For example, a
poor man may not have enough to eat; being underfed, his health may
be weak; being physically weak, his working capacity is low, which
means that he is poor, which in turn means that he will not have enough
to eat; and so on. A situation of this sort relating to a country as a whole,
can be summed up in the trite proposition: “A country is poor because it
is poor.”

Vicious Circles of Poverty

 The basic vicious circle stems from the fact that in LDCs total productivity
is low due to deficiency of capital, market imperfections, economic backwardness
and underdevelopment. However, the vicious circles operate both on the demand
side and the supply side. The demand-side of the vicious circle is that the low
level of real income leads to a low level of demand which, in turn, leads to a low
rate of investment and hence back to deficiency of capital, low productivity and
low income. This is shown in Fig. 1. Low productivity is reflected in low real
income. The low level of real income means low saving.

The low level of saving leads to low investment and to deficiency of

capital. The deficiency of capital, in turn, leads to low level of
productivity and back to low income. Thus the vicious circle is complete
from the supply side. It is depicted in Fig. 2. The low level of real income,
reflecting low investment and capital deficiency is a common feature of
both the vicious circles.
A third vicious circle envelops underdeveloped human and natural
resources. Development of natural resources is dependent upon the
productive capacity of the people in the country. If the people are
backward and illiterate, lack in technical skill, knowledge and
entrepreneurial activity, the natural resources will tend to remain
unutilised, underutilized or even misutilized. On the other hand, people
are economically backward in a country due to underdeveloped natural
resources. Underdeveloped natural resources are, therefore, both a
consequence and cause of the backward people. This is explained in Fig.
3.

“Poverty and underdevelopment of the economy are thus

synonymous. A country is poor because it is underdeveloped. A country
is underdeveloped because it is poor and remains underdeveloped as it
has not the necessary resources for promoting development. Poverty is
a curse, but a greater curse is that it is self-perpetuating.”
  Low Rate of Capital Formation

The most pertinent obstacle to economic development is the

shortage of capital. This stems from the vicious circles of poverty
analysed above. Poverty is both a cause and a consequence of a
country’s low rate of capital formation. In an underdeveloped country, the
masses are poverty-ridden, they are mostly illiterate and unskilled, use
outmoded capital equipment and methods of production. They practise
subsistence farming, lack mobility and have little connection with the
market sector of the economy. Their marginal productivity is extremely
low. Low productivity leads to low real income, low saving, low
investment and to a low rate of capital formation. The consumption level
is already so low that it is difficult to restrict it further to increase the
capital stock. That is why millions of farmers in such countries use
outmoded and obsolete capital equipment. Such small sums as they may
be able to save are often hoarded in the form of currency or used in
purchasing gold and jewellery, etc. The inclination to hoard money is due
to absence of banking facilities in rural areas. No wonder, there is little
capital formation in underdeveloped countries.
It is the high income group that does most of the savings in
underdeveloped countries. But these savings do not flow into productive
channels. On the other hand, they are dissipated “into real estate, gold,
jewellery, commodity hoards and hoards of foreign or domestic currency,
money lending and speculation.” Thus ‘value-retaining’ objects and
durable consumer goods dominate their expenditure pattern. In addition,
conspicuous consumption plays an important part in their consumption
patterns. Consequently, they prefer an imported article for its prestige
value to an equally good domestic article.

But what are the main reasons for the lack of incentives to save and
invest in underdeveloped countries? These include, imperfect
maintenance of law and order, political instability, unsettled monetary
conditions, lack of continuity in economic life, the extended family
system with its drain on resources, and its stifling of personal initiative
and certain systems of land tenure.” The other reasons which inhibit
investment are:
Firstly, sheer habit. It is always easier to attempt the familiar than the
unfamiliar. By nature man is happy in his old moorings and would not like
to take risks in new ventures.
 Secondly, small extent of the domestic market. The capacity of the
domestic market to absorb new supplies of commodities is limited due
to the low purchasing power of the masses.
Thirdly, the difficulties of securing funds for investment purposes are
also insurmountable. Many manufacturing activities require large capital-
outlays which are difficult to obtain due to lack of a well- developed
capital and stock market, and credit and banking system.
Fourthly, the lack of skilled labour and factor mobility enhance the
cost of production and thereby hamper potential investors.
Fifthly, absence or inadequacy of basic services like transportation,
power and water-supply, etc., further reduce the inducement to invest.
Lastly, the entrepreneurial ability in itself is a scarce factor in most of
the underdeveloped countries. Whatever little entrepreneurship is
available, that is scared away by high risks involved in investment. The
traders and merchants are mostly engaged in the export industry which
consists of primary products. Thus, there is no addition to the real stock
of capital in these countries.
In between the low income and high income groups, there is a small
middle income group. It is mostly engaged in well-established and less
risky ventures, such as providing marketing and other services. This
group, though not lacking in entrepreneurial ability, is reluctant to invest
in manufacturing industries for the reasons which are not far to seek.
There is the difficulty of obtaining institutional and corporate finance,
advanced technology, trained labour and management. Above all, the
difficulties enumerated in the preceding para go together to inhibit the
growth of capital in such countries.

 Socio-cultural Constraints

No doubt shortage of capital is a serious obstacle but it is not the

only obstacle to economic development. As Nurkse has said: “Economic
development has much to do with human endowments, social attitudes,
political conditions and historical accidents. Capital is a necessary but
not a sufficient condition of progress.” Broadly speaking,
underdeveloped countries possess social institutions and display such
attitudes as are not conducive to economic development. According to
the UN Report on Processes and Problems of Industrialization in
Underdeveloped Countries there are ‘elements of social resistance to
economic change’ in underdeveloped countries which include
institutional factors characterized by ‘rigid stratification of occupations’
reinforced by traditional beliefs and values; attitudes involving ‘inferior
valuation attached to business roles and their incompatibility with the
patterns of living and concepts of social dignity upheld by the high status
groups’ and ‘factionalism’ which has been defined as ‘the tendency of the
society; to be divided by caste and class cleavages, ethnic or religious
distinctions, differences in cultural tradition and social pattern, kinship
loyalties and regional identification. Such factors tend to inhibit social
and geographical mobility and constitute a drag on progress. The people
of such countries are averse to accept new values created by the impact
of innovations.
The family is the primary economic and social unit. Family attitudes
are responsible for population pressures and attachment to land. They
also limit the range of individual freedom in making economic decisions
which in turn influence the motives to save and invest. Money is hoarded
or invested in gold, jewellery or in real estate or is spent to meet social
obligations on ceremonial occasions to maintain status. Ostentatious
expenditure, better known as conspicuous consumption, on the part of the
wealthier classes also limits the capacity to save and invest.
In such a society relations are personal or patriarchal rather than
universal. People are influenced by kinship or status as determined by
caste, clan or creed. “It appears to be difficult to disentangle a person’s
abilities and capacities as a worker from his caste, religious beliefs,
social or geographical origin or other attributes that have little to do with
his potential contribution to production. Consequently, efficiency suffers
because special abilities go unused.” Moreover, administrators,
managers, politicians and policy makers belong to the privileged and
dominant classes of society. Since such persons do not have the best
talents, they stand in the way of good government, clean administration,
and in the efficient working of large-scale enterprises. They lead to
nepotism, bribery, favouritism and inefficient administration. Bad
administration whether in private or public enterprise makes economic
development all the more difficult.

Social attitude towards education is further inimical to economic

progress. Purely academic education which trains people for
government and other clerical jobs is preferred to technical and
professional education in such countries. There is prejudice against
manual work which is despised and ill-rewarded. Consequently, there
develops a natural distaste for practical work and training that leads to
technological backwardness.
Oriental religions give less inducements to the virtues of thrift and
hard work. People in such societies regard work as a necessary evil
rather than a virtue. They place high values on leisure, contentment and
participation in festivals and religious ceremonies. Thus, money that can
be usefully invested is dissipated in uneconomic ventures. People do not
believe that progress is possible through human efforts and man is not
helpless before the blind forces of fate. Religious dogmas inhibit
progress, for they prevent social, economic and political institutions to
change in a way that is conducive to economic development. As Dr. S.
Radhakrishnan observed, “The qualities associated with the Eastern
culture make for life and stability; those characteristics of the West for
progress and adventure.”

 Agricultural Constraint

Another obstacle relates to the agricultural sector. The majority of

LDCs are predominantly agricultural. Agricultural production constitutes a
large share of their GDP and agricultural commodities form a
considerable part of the value of their total exports. “Agricultural
practices are controlled by custom and tradition. A villager is fearful of
science. For many villagers, insecticide is taboo. A new and improved
seed is suspect. To try it is a gamble. Fertilisers, for example, are indeed
a risk. To adopt these untried methods might be to risk failure. And
failure could mean starvation.” It is, in fact, not the behaviour of farmers
that acts as a constraint on agricultural growth. Instead, the constraints
are to be found in the environment in which farmers operate the
technology available to them, the incentives for production and
investment, the availability and price of inputs, the provision of
irrigation, and the climate. The LDCs situated in tropical and sub-tropical
zones are at a disadvantage in terms of climate. Due to heat and
torrential rains, their soils are poor as they contain little organic matter.
As a result of the environmental factors, agricultural output fails to
increase to meet the rising demand of the developing economy. Further,
when the growth rate of population is also high, per capita agricultural
and food output may actually decline instead of increasing, as was the
case with the low income countries during 1970-80 when their per capita
agricultural output declined by 0.4 per cent and per capita food output
by 0.3 per cent per year. That is why the percentage share of food in the
merchandise imports of many LDCs has been more than 25 per cent
which entails a heavy burden on their foreign exchange resources. Thus
the poor performance of the agricultural sector is a major constraint on
the sluggish economic growth of LDCs.
  Human Resources Constraint

Undeveloped human resources are an important obstacle to

economic development in LDCs. Such countries lack in people
possessing critical skills and knowledge required for all-round
development of the economy. The existence of surplus labour in them is
to a considerable extent due to shortage of critical skills. Undeveloped
human resources are manifest in low labour productivity, factor
immobility, limited specialisation in occupation, and in customary values
and traditional social institutions that minimise the incentives for
economic development. Further, “the economic quality of the population
remains low when there is little knowledge of available natural
resources, possible alternative production techniques, necessary skills,
existing market conditions and opportunities, and institutions that might
be created to favour economising effort and economic rationality.” Since
LDCs have a dearth of critical skills and knowledge, physical capital,
whether indigenous or imported, cannot be productively utilised. As a
result, machines breakdown and wearout soon, materials and
components are wasted, the quality of production falls, and costs rise.

 Foreign Exchange Constraint.

Economists like Myint, Prebisch, Singer, Lewis and Myrdal maintain

that certain ‘disequalising forces’ have been operating in the world
economy as a result of which the gains from trade have gone mainly to
the developed countries leading to foreign exchange constraint.
After the opening up of underdeveloped countries to world markets,
there has been a phenomenal rise in their exports. But this has not
contributed much to the development of the rest of the economy of these
countries, as the export sector has developed to the utter neglect of
other sectors of the economy. On the other hand, too much dependence
on exports has exposed these economies to international fluctuations in
the demand for and prices of their products. They have become unstable
due to cyclical-instability and balance of payments difficulties. During a
depression, the terms of trade become adverse and foreign exchange
earnings fall steeply. As a result, they suffer from unfavourable balance
of payments. But they are unable to take advantage of a fall in the prices
of their products by increasing their exports due to the inelastic nature of
supply of their export goods which are mainly agricultural and mineral
products. Similarly, they are unable to benefit from a boom in world
market. An improvement in their terms of trade is not accompanied by
an increase in output and employment due to market imperfections,
inadequate overhead capital and structural maladjustments. On the
contrary, increased export earnings lead to inflationary pressure,
malallocation of investment expenditure and to balance of payments
difficulties.
As a result, there has been a secular deterioration in the income
terms of trade (or the capacity to import) of LDCs so that they are faced
with foreign exchange constraint. This has led to the need for larger
inflow of aid and foreign investment. Consequently, debt servicing of
amortisation and interest of debt have risen, income payments of
dividends and profits on private direct foreign investment have grown,
and the net inflow of foreign capital has declined. All these have led to
further shortage of foreign exchange reserves which acts as a severe
limitation on the development programmes of LDCs.
 CHAPTER 3
GROWTH MODELS AND THEORIES
OF DEVELOPMENT
Introduction

Meaning of Growth Models and theories in economic

development

Economic Development occurs with the reduction and elimination of poverty,

inequality and unemployment within a growing economy. There are different
indicators to classify the levels of economic development. Gini coefficient is a
statistical measure of income distribution. A Gini coefficient of 0 means perfect
equality. Human Development Index (HDI) Measures a country's average
achievements in three basic dimensions of human development: life expectancy,
educational attainment and adjusted real income (PPP$ per person).
Economic growth is related to a quantitative sustained increase in the country’s per
capita output or income accompanied by expansion in its labour force,
consumption, capital and volume of trade. On the other hand, economic
development is a wider concept than economic growth. “It is taken to mean growth
plus change.” It is related to qualitative changes in economic wants, goods,
incentives, institutions, productivity and knowledge or the “upward movement of
the entire social system”, according to Myrdal. It describes the underlying
determinants of growth such as technological and structural changes. In fact,
economic development embraces both growth and decline. An economy can grow
but it may not develop because poverty, unemployment and inequalities may
continue to persist due to the absence of technological and structural changes. But
it is difficult to imagine development without economic growth in the absence of an
increase in output per capita, particularly when population is growing rapidly.
Economic development theories and models seek to explain and predict how:
Economies develop (or not) over time; - Barriers to growth can be identified and
overcome; Government can induce (start), sustain and accelerate growth with
appropriate development polices. Theories are generalizations. While Less
Developed Countries (LDCs) share similarities, every country’s unique economic,
social, cultural, and historical experience means the implications of a given theory
vary widely from country to country.
There is no one agreed “model of development”. Each theory gives an insight into
one or two dimensions of the complex process of development. For example, the
Rostow model helps us to think about the stages of development LDCs might take,
while the Harrod-Domar model explains the importance of adequate savings in that
process.

Economic Development Concepts:

Absolute advantage: Occurs when a country or region can create more of a

product with the same factor inputs.
Comparative advantage: The basis of standard free trade theory. First introduced
by David Ricardo in 1817. Ricardo predicts all countries gain if they specialize and
trade the goods in which they have a comparative advantage. Comparative
advantage exists when a country has a margin of superiority in the production of a
good or service i.e. where the opportunity cost of production is lower. This is true
even if one of the trading nations is more productive in all traded goods (has an
absolute advantage) compared to the other country.

Major Growth Models and Development Theories

ADAM SMITH’S THEORY

Adam Smith is regarded as the foremost classical economist. His

monumental work, An Enquiry into the Nature and Causes of the Wealth
of Nations published in 1776, was primarily concerned with the problem
of economic development. Though he did not expound any systematic
growth theory, yet a coherent theory has been constructed by later day
economists which is explained below.
Natural Law. Adam Smith believed in the doctrine of ‘natural law’
in economic affairs. He regarded every person as the best judge of his
self-interest who should be left to pursue it to his own advantage. In
furthering his own self-interest, he would also further the common good.
In pursuance of this, each individual was led by an “invisible hand’ which
guided market mechanism. “It is not to the benevolence of the baker but
to his self-interest that we owe our bread,” said Smith. Since every
individual if left free, will seek to maximise his own wealth, therefore all
individuals, if left free, will maximise aggregate wealth. Smith was
naturally opposed to any government intervention in industry and
commerce. He was a staunch free trader and advocated the policy of
laissez-faire in economic affairs. The “invisible hand” the automatic
equilibrating mechanism of the perfectly competitive market tended to
maximise national wealth.
Division of Labour is the starting point of Smith’s theory of
economic growth. It is division of labour that results in the greatest
improvement in the productive powers of labour. He attributed this
increase in productivity: (1) to the increase in the dexterity of every
worker; (2) to the saving in time to produce goods; and (3) to the
invention of large number of labour-saving machines. The last cause of
increase in productivity stems not from labour but from capital. It is
improved technology that leads to division of labour and the expansion of
the market. But what leads to division of labour is a certain propensity in
human nature—the propensity to truck, barter and exchange one thing for
another. Division of labour, however, depends on the size of the market.
One of his famous sayings that ‘the division of labour is limited by the
extent of the market’ implies that the division of labour increases with the
extension of the market. For this purpose, expansion of commerce and
international trade is especially beneficial. With the increase in
population and transport facilities, there is bound to be greater division
of labour and increase in capital.
Process of Capital Accumulation. Smith, however, emphasized
that capital accumulation must precede the introduction of division of
labour. Like the modern economists, Smith regarded capital accumulation
as a necessary condition for economic development. So the problem of
economic development was largely the ability of the people to save more
and invest more in a country. The rate of investment was determined by
the rate of saving and savings were invested in full. But almost all
savings resulted from capital investments or the renting of land. So only
capitalists and landlords were held to be capable of saving. The
labouring classes were considered to be incapable of saving. This belief
was based on the ‘Iron Law of Wages’. The classical economists also
believed in the existence of a wages fund. The idea is that wages tend to
equal the amount necessary for the subsistence of the labourers. If the
total wages fund at any time becomes higher than the subsistence level,
the labour force will increase, competition for employment will become
keener and wages will come down to the subsistence level. In such a
situation, some of the workers will find it difficult to pull on below an
accustomed normal living standard. They will, therefore, be unable to
marry or bring up children. The working force will be reduced and
competition among the capitalists for employing workers would tend to
raise wages. Thus, Smith believed that “under stationary conditions,
wage rates fall to the subsistence level, whereas in periods of rapid
capital accumulation, they rise above this level. The extent to which they
rise depends both upon the rate of accumulation and upon the rate of
population growth.” The wages fund was, however, built up of savings
and was utilized for hiring labour through investments. He believed that
savings found their way into investment more or less automatically. Thus
the wages fund could be increased by increasing the rate of net
investment.
 Why do Capitalists Make Investments? According to Smith,
investments were made because the capitalists expected to earn profits
on them; and the future expectations with regard to profits depended on
the present climate for investment as well as actual profits. But what is
the behavior of profits during the development process? Smith believed
that profits tended to fall with economic progress. When the rate of
capital accumulation increases, increasing competition among capitalists
raises wages and tends to lower profits. In fact, it is the increasing
difficulty of finding new profitable investment outlets that leads to falling
profits. Regarding the role of interest rate in economic development,
Smith wrote that with the increase in prosperity, progress, and
population, the rate of interest falls, and as a result the supply of capital
is augmented. The reason being that with the fall in interest rate, the
moneylenders will lend more to earn more interest for the purpose of
maintaining their standard of living at the previous level. Thus the
quantity of capital for lending will increase with the fall in the rate of
interest. But when the rate of interest falls considerably the
moneylenders are unable to lend more in order to earn more to maintain
their standard of living. Under the circumstances, they will themselves
start investing and become entrepreneurs. Thus, even with the fall in the
rate of interest, there is increase in capital accumulation and economic
progress.
So far as rent is concerned, Smith believed that economic progress
involves rise in money as well as real rentals, and a rise in rental share
of national income. This is because the interests of landowners are
closely connected with the general interest of society.

Agents of Growth. According to Smith, farmers, producers and

businessmen are the agents of economic progress. It was free trade,
enterprise and competition that led farmers, producers and businessmen
to expand the market which, in turn, made economic development
possible. The functions of these three are interrelated. To Smith,
development of agriculture leads to increase in construction works, and
commerce. When agricultural surplus arises as a result of economic
development, the demand for commercial services and manufactured
articles rises. This leads to commercial progress and the establishment of
manufacturing industries. On the other hand, their development leads to
increase in agricultural production when farmers use advanced
production techniques. Thus capital accumulation and economic
development take place due to the emergence of the farmer, the
producer and the businessman.
 Process of Growth. “Taking institutional, political and natural
factors for granted, Smith starts from the assumption that a racial group–
we may call it a “nation”—will experience a certain rate of economic
growth that is accounted for by increase in numbers and by saving. This
induces a “widening of market” which is turn increases division of labour
and thus increases productivity... In this theory the economy grows like a
tree. This process is no doubt exposed to disturbances by external
factors, that are not economic, but in itself it proceeds steadily,
continuously. Each situation grows out of the preceding one in a uniquely
determined way, and the individuals whose acts combine to produce each
situation count individually for no more than the individual cells of a
tree.” According to Smith, this process of growth is cumulative. When
there is prosperity as a result of progress in agriculture, manufacturing
industries and commerce, it leads to capital accumulation, technical
progress, increase in population, expansion of markets, division of labour
and rise in profits continuously. All this happens in Smith’s progressive
state which “is in reality the cheerful and the hearty state to all the
different orders of the society.”
Stationary State. But this progressive state is not endless. It
ultimately leads to a stationary state. It is the scarcity of natural resources
that finally stops growth. In such an opulent state, the competition for
employment would reduce wages to the subsistence level and competition
among businessmen would bring profits as low as possible. Once profits
fall, they continue to fall. Investment also starts declining and in this way
the end result of capitalism is the stationary
state. When this happens, capital accumulation
stops; population becomes sationary; profits are
the minimum; wages are at the subsistence level;
there is no change in per capita income and
production, and the economy reaches the state of
stagnation. According to Smith, the stationary
state is dull, the declining melancholy. Life is hard
in the stationary state for the different sections
of the society and miserable in the declining
state. All this happens in a free market economy.
Smith’s theory is explained in terms of Fig.1
where time is taken on the horizontal axis and rate of accumulation, dK/dT ,
on the vertical axis. The economy grows from K to S during the time path
T. After T, the economy reaches the stationary state linked to S where
further growth does not take place because wages rise so high that profits
become zero and capital accumulation stops.
A Critical Appraisal

Smith’s theory has the great merit of pointing out how economic growth came
about and what factors and policies impede it. In particular, he pointed out the
importance of parsimony in saving and capital accumulation; of improved
technology, division of labour and expansion of market in production; and of the
process of balanced growth in the interdependence of farmers, traders and
producers. Despite these merits, it has certain weaknesses.

1. Rigid Division of Society. Smith’s theory is based on the socio-economic

environment prevailing in Great Britain and certain parts of Europe. It assumes
the existence of a rigid division of society between capitalists (including
landlords) and labourers. But the middle class occupies an important place in
modern society. Thus, this theory neglects the role of the middle class which
provides the necessary impetus to economic development.

2. One-sided Saving Base. According to Smith, capitalists, landlords and

moneylenders save. This is, however, a one-sided base of savings because it did
not occur to him that the major source of savings in an advanced society was
the income-receivers and not the capitalists and landlords.

3. Unrealistic Assumption of Perfect Competition. Smith’s whole theory is

based upon the unrealistic assumption of perfect competition. This laissez-faire
policy of perfect competition is not to be found in any economy. Rather, a
number of restrictions are imposed on the private sector, and on internal and
international trade in every country of the world.

4. Neglect of Entrepreneur. Smith neglects the role of the entrepreneur in

development. This is a serious defect in his theory. The entrepreneur is the focal
point of development, as pointed out by Schumpeter. It is the entrepreneur who
organises and brings about innovations thereby leading to capital formation.

5. Unrealistic Assumption of Stationary State. Smith is of the view that the

end result of a capitalist economy is the stationary state. It implies that there is
change in such an economy but around a point of equilibrium. There is progress
but it is steady, uniform and regular like a tree. But this explanation of the
process of development is not satisfactory because development takes place by
‘fits and starts’ and is not uniform and steady. Thus the assumption of the
stationary state is unrealistic.

6. Static Model. According to Hicks, Smith’s model, though it looks like a growth
model, is not a growth model in the modern sense. It does not exhibit a
sequence. Thus it is a static model.

Its Applicability to Underdeveloped Countries

The Smith theory of economic development has limited validity for underdeveloped
countries. In such economies, the size of the market is small. As a result, the
capacity to save and inducement to invest are low The size of the market is
determined by the volume of production. This in turn depends on the level of
income. ‘Capacity to buy means capacity to produce’ here. And productivity, to a
certain extent, depends on the degree to which capital is employed in production.
Since the size of the market is small, productivity is low, and low productivity
implies low level of income. The low level of income results in small capacity to save
and inducement to invest and they keep the size of the market small. To use the
Keynesian terminology, the level of real income is low in underdeveloped countries
but the propensity to consume is very high and every increase in income is spent on
food products. Little is saved and invested. The volume of production remains at a
low level. Consequently, the size of the market remains small.

Moreover, political, social and institutional assumptions underlying Smith’s

theory are not applicable to the conditions prevailing in underdeveloped
countries.Laissez-faire has lost its significance in such economies.
Competition has been gradually replaced by monopoly which has tended
to perpetuate and strengthen the vicious circles of poverty. Therefore,
development is possible through government intervention rather than
through a policy of laissez-faire.,

Conclusion.

Despite this, Smith’s theory of economic development points toward

certain factors that are helpful in the process of developing
underdeveloped countries. Farmers, traders and producers, the three
agents of growth mentioned by Smith, can help in developing the
economy by raising productivity in their respective spheres. In the
absence of a free market economy, the state can induce them to produce
more, as is being done in India. Their interdependence also points toward
the importance of balanced growth for such economies.
In particular, Smith extolled the virtues of saving which is regarded as a
crucial factor for capital formation in underdeveloped countries. He
wrote, “Every prodigal appears to be a public enemy and every frugal
man a public benefactor.”
Further, his emphasis on improved technology, division of labour and
expansion of market in the process of development has become the
corner stone of policy in such countries. As aptly remarked by Rostow,
indeed looked at from the present day, the Wealth of Nations is a
dynamic analysis, and programme of policy for an underdeveloped
country.
THE SCHUMPETERIAN THEORY

Introduction

Joseph Alois Schumpeter first presented his theory of economic growth in

Theory of Economic Development published in German in 1911 (its English edition
appeared in 1934) which was elaborated and refined but in no way altered in any
essential respect in his Business Cycles (1939) and Capitalism, Socialism and
Democracy (1942).

The Theory

To start with, Schumpeter assumes a perfectly competitive economy

which is in stationary equilibrium. In such a stationary state, there is
perfect competitive equilibrium: no profits, no interest rates, no savings,
no investments and no involuntary unemployment. This equilibrium is
characterised by what Schumpeter terms the “circular flow” which
continues to repeat itself in the same manner year after year, similar to
the circulation of the blood in an animal organism. In the circular flow, the
same products are produced every year in the same manner. “For every
supply there awaits somewhere in the economic system a corresponding
demand. For every demand the corresponding supply.” In other words, all
economic activities are repetitive in a timeless economy. To Schumpeter,
“The circular flow is a stream that is fed from the continually flowing
springs of labour-power and land, and flows in every economic period
into the reservoir which we call income, in order to be transformed into
the satisfaction of wants.” Development, according to him, “is
spontaneous and discontinuous change in the channels of the circular flow,
disturbance of equilibrium, which forever alters and displaces the
equilibrium state previously existing.” These ‘spontaneous and
discontinuous’ changes in economic life are not forced upon it from
without but arise by its own initiative from within the economy and
appear in the sphere of industrial and commercial life. Development
consists in the carrying out of new combinations for which possibilities
exist in the stationary state. New combinations come about in the form of
innovations.
Innovations. An innovation may consist of: (1) the introduction of a
new product; (2) the introduction of a new method of production; (3) the
opening up of a new market; (4) the conquest of a new source of supply
of raw materials or semi-manufactured goods; and (5) the carrying out of
the new organisation of any industry like the creation of a monopoly.
According to Schumpeter, it is the introduction of a new product and the
continual improvements in the existing ones that lead to development.
Role of Innovator. Schumpeter assigns the role of an innovator not
to the capitalist but to the entrepreneur. The entrepreneur is not a man of
ordinary managerial ability, but one who introduces something entirely
new. He does not provide funds but directs their use. The entrepreneur is
motivated by: (a) the desire to found a private commercial kingdom, (b)
the will to conquer and prove his superiority, and (c) the joy of creating,
of getting things done, or simply of exercising one’s energy and ingenuity.
His nature and activities depend on his social-cultural environment. To
perform his economic function, the entrepreneur requires two things: first,
the existence of technical knowledge in order to produce new products;
second, the power of disposal over the factors of production in the form
of credit. According to Schumpeter, a reservoir of untapped technical
knowledge exists which he can make use of. Therefore, credit is essential
for development to start.

Role of Profits. An entrepreneur innovates to earn profits. Profits

are conceived “as a surplus over costs: a difference between the total
receipts and outlay–as a function of innovation.” According to
Schumpeter, under competitive equilibrium the price of each product just
equals its cost of production, and there are no profits. Profits arise due to
dynamic changes resulting from an innovation. They continue to exist till
the innovation becomes general.
Breaking the Circular Flow. Schumpeter’s model starts with the
breaking up of the circular flow with an innovation in the form of a new
product by an entrepreneur for the purpose of earning profits. In order to
break the circular flow, the innovating entrepreneurs are financed by
bank-credit expansion. Since investment in innovations is risky, they must
pay interest on it. Once the new innovation becomes successful and
profitable, other entrepreneurs follow it in “swarm-like clusters.”
Innovations in one field may induce other innovations in related fields. The
emergence of a motor car industry may, in turn, stimulate a wave of new
investments in the construction of highways, rubber tyres and petroleum
products, etc. But the spread of an innovation is never 100 percent.
The spread of innovation is shown in Fig. 1 where the percentage of
firms adopting a particular innovation is shown on the vertical axis and
time taken on the horizontal axis. The curve OI shows that firms adopt an
innovation slowly to start with but soon the adoption of innovation gains
momentum. But it never reaches 100 per cent adoption by firms.
Cyclical Process. Since investment is
assumed to be financed by creation of bank
credit, it increases money incomes and prices
and helps to create a cumulative expansion
throughout the economy. With the increase in the
purchasing power of the consumers, the demand
for the products of the old industries increases in
relation to supply. Prices rise, profits increase
and old industries expand by borrowing from the
banks. It induces a secondary wave of credit
inflation which is superimposed on the primary
wave of innovation.
Over-optimism and speculation add further to the boom. After a
period of gestation, the new products start appearing in the market
displacing the old products and enforcing a process of liquidation, re-
adjustment and absorption. The demand for the old products is decreased.
Their prices fall. The old firms contract output and some are even forced to
run into liquidation. As the innovators start repaying bank loans out of
profits, the quantity of money is decreased and prices tend to fall. Profits
decline. Uncertainty and risks increase, the impulse for innovation is
reduced and eventually comes to an end. Depression ensues.

Schumpeter believes in the existence of the Kondratieff long-wave

of upswings and downswings in economic activity. Each long-wave
upswing is brought about by an innovation in the form of a new product
which leads to further innovations in the methods of production, new
forms of business organisation, new sources of supply of raw materials
and intermediate products, and new markets. Thus there is abundance to
goods available for the masses.” In the words of Schumpeter, “mass
production means production for the masses.” Once the upswings ends,
the long-wave downswing begins and the painful process of readjustment
to the “point of previous neighborhood of equilibrium” starts. Ultimately
the natural forces of recovery bring about a revival. Once again
equilibrium is restored. Then smite enterprising entrepreneurs begin with
a new set of innovations, others follow, and a new boom begins.
Schumpeter describes this process of ‘capitalist development as one of
“creative destruction” wherein the old economic structures of society are
being continually destroyed and the new structures are being continually
created in their place.
This is shown in Fig. 2 where time is taken on
the horizontal axis and national output on the vertical
axis. The curve YPT shows the long-run cyclical
upswings and downswings. When there is a new
innovation, the economy moves upwards from Y and
production increases upto P. When this innovation
ends and a new innovation starts and replaces the
earlier one the, output level falls from P to T. In this
way, “the creative destruction” process leads to the
new equilibrium T of the economy that is higher than
the earlier point Y which shows the development of
the economy.
Schumpeter’s cyclical process of economic development is
illustrated in Fig. 3 where the secondary wave is superimposed on the
primary wave of innovation. With over-optimism and speculation,
development proceeds more rapidly in the prosperity phase. When
recession starts, the cycle continues downward below the equilibrium
level to the depression phase. Ultimately, another innovation brings about
revival.
In fine, entrepreneurs are the key
figures in the Schumpeterian analysis.
They bring about economic development
in spontaneous and discontinuous manner.
And “cyclical swings are the cost of
economic development under capitalism,”
a permanent feature of its dynamic time-
path.
Secularly, continued technological progress will result in an
unbounded increase in total and per capita output, since historically there
are no diminishing returns to technological progress. As long as
technological progress takes place, the rate of the profit will be positive.
Hence there can be no drying up of sources
of investible funds nor any vanishing of
investment opportunities. “There is
therefore no a priori ceiling to the level of
per capita income in a capitalist society.
Nonetheless, the economic success of
capitalism will eventually lead to its decay.
For the very process of capitalist
development weakens the institutions and
values basic to its own survival.” “Can
capitalism survive? No, I do not think it
can,” wrote Schumpeter, as his final
appraisal of the future of capitalism. To him, the very success of
capitalism “undermines the social institutions which protect it, and
“inevitably” creates conditions in which it will not be able to live and
which strongly point to socialism as the heir apparent.”
Process of End of Capitalism. According to Schumpeter,
capitalism can maintain itself only so long as entrepreneurs behave like
knights and pioneers. But such daring innovators are being destroyed by
the capitalist system itself which rests on a rational attitude. This
enquiring, sceptical and rational attitude permeates the entire capitalist
society. As a result, three forces are discernible that are the beginning of
the creeping death of capitalism. They are: (1) the decadence of the
entrepreneurial function; (2) the disintegration of the bourgeois family;
and (3) the destruction of the institutional framework of the capitalist
society.
In the early stages of capitalism, the driving force came from
entrepreneurs who dared to innovate, to experiment, and to expand. But
now innovation is reduced to a routine. Technological progress has
become the business of teams of trained specialists. The new ‘lords’ of
business are the managers, depersonalized owners and private
bureaucrats. This reduces the industrial bourgeoisie to a class of wage-
earners and thus undermines the function and the position of the
entrepreneur as the “warrior knight.”
There is also the destruction of the bourgeoisie family. Parents
adopt a rationalistic attitude in their behaviour towards children. The
traditional family idea is weakened. The desire to found a “private
kingdom” , a “dynasty” is no longer there. The will to accumulate wealth
gradually disappears and along with it another important aspect of the
capitalist society.
Finally, Schumpeter contends that the entrepreneur also tends to
destroy the institutional framework of the capitalist society. The tendency
towards concentration into big concerns weakens and destroys the twin
institutions of private property and freedom of contract. In the case of big
concerns, the proprietors are the small and large shareholders who are
“dematerialized” and “defunctionalized” by the professional, salaried
managers. The proprietors’ role is performed by the latter while the
former are totally divorced from active management. According to
Schumpeter, it was rationality that had destroyed the royal power in the
past. Now again, it is the rationalistic attitude of the ruling group towards
domestic and international problems that will be the bane of capitalism.
But all these forces are not enough to ring the death knell of capitalism. It
is, however, the active hostility of the intellectuals which is bringing the
day nearer. The intellectuals sow seeds of doubt and discontentment in
the minds of the masses against the social and political framework of the
capitalist order. By inciting the white-collar groups and the labouring
classes they are able to secure anti-capitalist political reforms. As a
result, the institutional framework upon which capitalism rests starts
crumbling and there is a gradual movement towards socialism. Eventually
capitalism would fade away without any bang or whimper.

Criticisms of The Theory

“Schumpeter’s theory must be ranked as a major performance, one

worthy of such great economists as Smith, Mill, Marx, Marshal and
Keynes.” No doubt it is replete with brilliant reasoning and insight of a
great theorist, yet it is not free from criticisms.

1. The entire process of Schumpeter’s theory is based on the

innovator whom he regards as an ideal person. Such persons were to
be found in the 18th and 19th centuries. At that time innovations were
made by entrepreneurs or inventors. But now all innovations form part of
the functions of a joint stock company. Innovations are regarded as the
routine of industrial concerns and do not require an innovator as such.
2.Economic development is not the result of the cyclical process. The
downswings and the upswings are not essential for economic development. As
Nurkse pointed out, economic development is related to continuous changes.

3. Schumpeter’s contention that cyclical changes are due to

innovations is also not correct. As a matter fact, cyclical fluctuations may be
due to psychological, natural, and financial causes.

4.Schumpeter regards innovations as the main cause of economic

development. But this is far from reality because economic development not
only depends an innovations but also on many economic and social changes.

5. Schumpeter gives too much importance to bank-credit in his theory.

Bank credit may be important in the short run when industrial concerns get
credit facilities from the banks. But in the long run when the need for capital
funds is much greater, bank credit is insufficient. For this, business houses have
to float fresh shares and debentures in the capital market.

6. Schumpeter’s analysis of the process of transition from capitalism to

socialism is not correct. He does not analyse how a capitalist society is
transformed into socialism. He simply tells that the institutional framework of a
capitalist society is transformed with changes in the functions of the
entrepreneur. His analysis of the end of capitalism is emotional rather than
real.
To conclude with Meier and Baldwin, “Schumpeter’s broad socio-
economic analysis of capitalist process is generally admired. Yet few
seem prepared to accept its conclusions. His arguments are stimulating
but not completely convincing.... Although Schumpeter’s analysis is
provocative, it seems one-sided and over-emphasized.”
Schumpeter’s Analysis and Underdeveloped Countries

The applicability of Schumpeter’s theory to underdeveloped countries is

limited for the following reasons:

1. Different Socio-Economic Order. Schumpeter’s theory corresponds

to a particular socio-economic order that existed in Western Europe and
America of the 18th and 19th centuries. In that period, some of the
prerequisites of growth already existed. In underdeveloped countries, the
socio-economic conditions are altogether different and the prerequisites for
development in the form of economic and social overheads are non-
existent.

2. Lack of Entrepreneurship. The Schumpeterian analysis depends

upon the existence of an entrepreneurial class. However, in
underdeveloped countries adequate entrepreneurship is lacking. In such
economies, there are low profit expectations and low state of technologies
which do not encourage innovational investments in new plant and
equipment. Moreover, the lack of adequate power, transport, skilled
personnel, etc. act as disincentives to entrepreneurial activity.
3. Not Applicable to Socialist Countries. Schumpeter’s analysis is not
applicable to the majority of underdeveloped countries which have socialist
leanings. For example, the introduction of social security measures and high
progressive income taxes are inimical to the development of an entrepreneurial
class because they tend to reduce profits.

4. Not Applicable to Mixed Economies. Moreover, Schumpeter’s

innovator is a private entrepreneur who does not fit in the present day
mixed economies. In an underdeveloped country, government is the
biggest entrepreneur. The main impetus for development comes from the
public and the semi-public sectors. Thus, Schumpeter’s innovator has a
limited role to play in an underdeveloped country.

5. Institutional Changes and not Innovations Needed. To start

the development process and to make it self-sustaining, it is not
innovations alone but a combination of several factors like organizational
structures, business practices, skilled labour and appropriate values,
attitudes and motivations which are required.

6. Assimilation of Innovations. According to Henry Wallich, the

development process in underdeveloped countries is based, not on
innovation, but on the assimilation of existing innovations. For
entrepreneurs in underdeveloped countries are not in a position to
innovate. Rather, they adopt innovations taking place in advanced
countries.

7. Neglects Consumption. The Schumpeterian process is

‘production oriented’ while the development process is ‘consumption-
oriented’. This appraisal is applied in the current trend towards the
welfare state in which demand and consumption play a leading role.

8. Neglects Savings. Schumpeter’s exclusive emphasis on bank

credit obscures the role of real savings in investment. It also undermines
the importance of deficit financing, budgetary savings, public credit and
other fiscal measures in economic development.

9. Neglects External Effects. According to Schumpeter,

development is the result of changes that arise from within the economy.
But in underdeveloped countries, changes do not take place from within
the economy rather they are the outcome of imported ideas, technology
and capital. Backward technology, low saving potential and outmoded
social, economic and political institutions are incapable of leading to
development from “within” in underdeveloped economies.

10. Neglects Population Growth. Further, Schumpeter failed to take

into account the impact of the growth of population on the economic
development of a country. High growth rate of population tends to lower
the growth rate of a developing economy.

11. Unsatisfactory Explanation of Inflationary Forces. In

Schumpeter’s system, inflationary impulses form an integral part of the
process of development, but it involves no secular inflation. The long-
term price level remains stable. However, in an underdeveloped
economy the inflationary forces are very powerful.

Conclusion. All the same, Schumpeter’s theory underlines the importance of

inflationary financing and innovations as the main factors in economic
development. Inflationary financing is one of the potent methods which
every underdeveloped country tries to use at one time or another. His
analysis is relevant to underdeveloped countries from the standpoint of long
range increase in productivity and absorption of surplus labour in gainful
employment as a result of innovations.
MARX’ STAGES OF GROWTH

Marx’s analysis of stages of growth is based on his ‘materialistic

interpretation of history’ in which he attempts to show that all historical
events are the result of a continuous struggle between different classes
and groups in society. The main cause of this struggle is the conflict
between ‘the mode of production’ and ‘the relations of production’.
The mode of production relates to a particular arrangement of
production in a society that determines its entire social, political and
religious way of living. People use the mode of production by entering
into mutual relations. Marx’s calls these relations as the ‘relations of
production’ which are continually changing. The relations of production
relate to the class structure of society uniquely characterised by (i) the
organisation of labour in a scheme of division (of labour) and co-
operation, the skills of labour, and the status of labour in the social
context with respect to degrees of freedom or servitude; (ii) the
geographical environment and the knowledge of the use of resources and
materials; and (iii) the technical means and processes and stage of
science generally. Thus Marx relies upon his materialistic interpretation
of history to develop his theory of stages of growth.

According to Marx, historically society has passed through five

different stages: primitive communal, slave, feudal, capitalist and
socialist. We will study them one by one.

1. THE PRIMITIVE COMMUNAL STAGE

The primitive communal stage was the first stage in the evolution
of society. During this stage, man succeeded in advancing from the use
of sticks and stones to making new implements like bows and arrows,
boats, etc. Man also learnt how to make fire.
People lived in groups and in clans based on consanguineous ties.
They lived in common dwellings, and worked on common lands with
common tools. The products they produced were shared equally. But
whatever they obtained was hardly enough for subsistence. Thus the
relations of production were based on the common ownership of the
means of production. The productive forces developed slowly but
steadily. The primitive society developed and improved its work from
gathering natural products like fruits, berries, etc., to cultivation of
crops, and from hunting wild animals to raising livestock. The
development of new tools and implements increased the skills and
productivity of labour. The use of metal tools, the wooden plough with a
metal plough-share, the metal axe, etc. made labour more productive.
Later on, this led to the development of different crafts and
occupations for making tools, implements, weapons, clothing, etc.
within the community.
The barter system began to develop when people started
exchanging products and paying for work in the form of products.

With the social division of labour, the clan began to break into
families. This led to the institution of private property whereby the family
became the owner of the means of production. But the head of the former
clan was the real head of families who owned the means of production.
In this process of social evolution, some producers began to produce
more products than required for the subsistence of the families. This led
to the appropriation of the surplus produced by them and to the
exploitation of others. This paved the way for emergence of the slave
society.

2. THE SLAVE STAGE

In the slave stage, the development of productive forces was based

on the corresponding production relations. In these relations, the slave-
owner owned both the means of production and the slave alongwith
whatever he produced.
The production relations in the slave society gave rise to such
slave-owning city-stages as Rome and Greece, having different organs of
coercion and exploitation. They were the government machinery, court,
army, etc. This superstructure was meant to defend private property and
exploitation.
The productive forces were further developed in this society. With
improved tools, implements and irrigation facilities, labour productivity
in agriculture increased. Ore mining and smelting of metals began.
There were crushing and flour mills. Canals were built, dykes and water
raising devices were used to irrigate land.
The division of labour spread alongwith various crafts such as
weaving, tanning, cloth and footwear making, pottery making, metal
smelting and forging, weapon making, etc. With the growth of states,
towns grew up, commerce and trade developed both internally and
externally. This led to the construction of buildings and ship building.
 In the slave society, there existed domination, coercion, subjugation
and exploitation of slaves by a few slave-owners. For some time, slaves
were used as the main productive force. But with the passage of time,
the slave society’s class structure led to the conflict between the
productive forces and the relations of production. As a result, the
exploited slaves rose against their enslavers which overthrew the entire
structure of the slave society and on its ruins rose the feudal system.

3. THE FEUDAL STAGE

In the feudal stage, the development of productive forces was

based on feudal relations of production where the feudal lord owned the
land and the serfs as the main means of production. The serfs worked
like slaves for the feudal lord. They performed all kinds of services like
cultivating the land and doing all kinds of jobs alongwith their family
members for the feudal lord. But unlike in the slave society, the peasants
could own a plot of land, livestock, farming tools and implements, etc.
They worked for both the feudal lord and for themselves. The serfs were
also required to pay a part of their produce to the landlords.

The state grew on the strength of the feudal lords who often had
their own armies and helped the monarchy to expand its frontiers. The
state, in turn, tried to preserve and consolidate feudal private property
and the relations of production.
Productive forces continued to develop under the feudal society.
There was much progress in agriculture. Varieties of grains, vegetables
and fruits were cultivated. Fertilisers and rotation of crops were
introduced. The output of animal products was increased by animal
husbandry. Draught animals were employed on a wider scale for farming,
transportation, etc. Crafts were further developed with inventions of new
machines, tools and implements, especially in textile production. People
learnt harnessing water and wind power by making water mills and wind
mills. They discovered the art of paper making and book printing.
As the productive forces continued to develop, small handicraft
workshops gave place to manufacturing units under one roof with a large
number of workers. This led to large division of labour and specialisation
which raised labour productivity. The manufacturing process was further
encouraged by the discovery of new countries like America, India, etc.
which spread the demand for manufactured products to them.
 Feudalism gave rise to two types of class struggle: one, between
the serfs and the feudal lords, and two, between the proletariat and the
urban bourgeoisie. This led to revolutions which replaced the feudal
relations of production with the capitalist relations.

4. THE CAPITALIST STAGE

In the capitalist stage, the capitalist owns the means of production

and uses them for individual profit. The worker is free to work for any
capitalist. He does not have any means of production. But he sells his
labour power which leads to his exploitation. According to Marx, labour
power is like any other commodity. The value of labour power is the
value of the means of subsistence (commodities) necessary for the
maintenance of the labourers, which is determined by the number of
hours necessary for its production. But the value of commodities
necessary for the subsistence of the labourer is never equal to the value
of the commodite produced by him. Therefore, the capitalist forces the
labourer to work for longer hours. The extra hours he works, he receives
nothing. Marx calls, it “surplus labour”. This leads to “surplus value”
which increases the capitalist’s profit.

But it is not possible to increase the working hours because the

workers resist it. Therefore, the capitalists increase the productivity of
labour in order to raise the surplus value or profit. For this, they bring
technological changes (i.e. increase in constant capital) so as to raise
output and lower the cost of production. This had been the process of
capitalist development in its early stage.
In the next stage, there has been concentration of capital in big
enterprises, called monopolies, engaged in the production and
marketing of commodities in bulk. To earn high profits, they introduce
labour-saving machines to raise labour productivity. These capitalists
who are unable to replace labour by new machines are “squeezed out”
and their enterprises are taken over by big capitalists.
The process of replacing labour by machines creates an industrial
reserve army which increases as capitalism develops. But when the
capitalist is replacing the workers by machines and increasing the
industrial reserve army (the unemployed), he is reducing the surplus
value. This reduces his profit. The increase in unemployment and
reduction in profit lead to a capitalist crisis. Marx compares the
capitalist to a sorcerer whose incantations bring into action such
powerful forces that he is unable to control them. Ultimately, capitalism
leads to a fierce class struggle between the proletariat and the
bourgeoisie. This provides the economic basis for the revolutionary
transformation from capitalism to socialism.

5. THE SOCIALIST OR COMMUNIST STAGE

The last stage is communism which is brought about by the

proletarian revolution whereby the “dictatorship of the proletariat” is
established. According to Marx, in this stage, the state will “wither away”
and each individual will contribute to the national product according to his
abilities and receive according to his needs.
But the followers of Marx refer to the socialist stage in which the
means of production are owned and regulated by the state. The reward of
every person is determined on the principle of “each according to his ability
and each according to his needs.” There is no class struggle. Neither the
exploiter nor the exploited exist. The entire production and distribution is
controlled and regulated by a central planning authority for public welfare.
Prof. Lange divides the socialist stage into two main parts. He calls the
slave, feudal and capitalist stages as antagonistic because the owners of
factors of production exploit the labourers in them. On the other hand, the
primitive and socialist stages are non-antagonistic because the ownership
of factors of production is in the hands of the common man and the society
and there is no exploitation of workers.

MARX VS. ROSTOW

The stages of growth theories of Marx and Rostow have both similarities
and differences which are discussed as under:

Similarities

Rostow presented his Stages of Economic Growth as an alternative to

Marx’s stages. He described his Stages of Economic Growth as a Non-
communist Manifesto as against Marx’s Communist Manifesto. Like Marx,
Rostow also gave five stages of growth through which an economy has to pass.
Both interpret the evolution of society from an economic perspective.

Differences

The following are the differences between the Marxian and the
Rostowian theories:
 1. Marx’s theory of stages of growth is based on the economic interpretation
of history. Marx provides the actual process of the stages of growth of the
society right from the origin of mankind to the present. For this, he develops the
theory of Historical Materialism based on the changes in the mode of
production and consequent changes in the relation of production. But Rostow
does not provide any specific theory of the stages of economic growth. He
explains only some characteristics which move an economy from one stage to
another.

2. Marx’s explanation of the stages of economic growth is based on

interaction between economic and non-economic factors. On the other hand,
Rostow does not explain such a relationship between economic and non-
economic factors in the growth process.

3. Marx’s theory is highly consistent with historical facts in the economies of

his age. It logically explains how one stage contains within itself the necessary
elements for the next stage. But Rostow simply provides the classification of an
economy into the various stages of growth.

4. Marx gives a realistic explanation of the stages of growth based on the

actual evolution of the society. On the other hand, Rostow provides empirical
evidence in support of his different stages but these evidences are not
consistent and definite.
NURKSE’S THEORY OF DISGUISED UNEMPLOYMENT AS A SAVING
POTENTIAL

Meaning of Disguised Unemployment

The concept of disguised unemployment was introduced into the

theory of underdevelopment by Rosenstein-Rodan in his famous article
“Problems of Industrialization of Eastern and South-Eastern Europe” and
was elaborated by Ragner Nurkse. In its strict sense, it means that given
the techniques and productive resources, the marginal productivity of
labour in agriculture over a wide range is zero in overpopulated
underdeveloped countries. It is, therefore, possible to withdraw some
surplus labour from agriculture without reducing total farm output. Such
unemployment is found where too many workers are engaged in
agricultural operations because of the lack of alternative or
complementary employment opportunities. If, for example, seven persons
are engaged in cultivating a farm that could be cultivated by five, it
implies that all the seven workers are not fully employed. If two are
withdrawn and given some alternative job, the total output of the farm
will not be reduced when five workers are left to do the same work. It
means that two workers are not contributing anything to farm output and
their marginal productivity is zero.
Prof. A.K. Sen does not agree with this
interpretation of disguised unemployment. He asks,
“If marginal productivity of labour over a wide range
is zero, why is labour being applied at all?” The
confusion arises from failure to distinguish between
labour and labour time. In Sen’s view, “It is not that
too much labour is being spent in the production
process, but that too many labourers are spending it.
Disguised unemployment thus normally takes the
form of a smaller number of working hours per
head.” If, for instance, in a family 35 hours’ work a
day is done on a farm, the marginal product of the
35th hour falls to zero. Let us further assume that 7
members work on the farm for 5 hours a day. Given
the same technique and production process, if two
labourers go away, the remaining 5 labourers would
be able to maintain the same level of output by
working harder and longer for 7 hours a day.
 Thus there is disguised unemployment of two labourers. The amount
of disguised unemployment also depends on the number of hours’ work a
day per labourer. If it is fixed at 7 hours a day, then again two labourers
are disguised unemployed even if they work on the farm. It is thus the
marginal productivity of the labourer that is nil over a wide range and the
productivity of labour may be just equal to zero at the margin. Sen
explains the difference between the two approaches with the help of the
Fig. 1.
TP is the total output curve which becomes horizontal when OL labour is
employed. It implies that the marginal product of labour becomes zero with OL
labour hours and it is no use employing labour beyond this point. However, the
number of labourers engaged in agricultural operations is OL2 and each works
for tan a hours. But the working hours per labourer are tan b. Thus L2L1
labourers are disguised unemployed. It shows that marginal productivity of
labour is zero at point L and that of labourer over the range L2L1 is nil.

NURKSE’S THEORY

Ragner Nurkse developed the thesis that disguised unemployment in

overpopulated underdeveloped countries can be a source of capital
formation. According to Nurkse, the state of disguised unemployment in
underdeveloped countries constitutes “a disguised saving potential.’
Underdeveloped countries suffer from disguised unemployment on a
mass scale. With existing techniques of production in agriculture, it is
possible to remove from land a large proportion of the surplus labour
force without reducing agricultural output. This surplus labour force can
be put to work on capital projects, like irrigation, drainage, roads,
railways, houses, factories, training schemes, community development,
education and health, etc. In this way, rural underemployment can be a
source of capital formation.
Nurkse has split up the problem of mobilizing the disguised
unemployed as a saving potential in two parts:
Firstly, how to feed the surplus population transferred to the
various capital projects.
Secondly, how to provide tools to the new workers to work with.

Feeding the Surplus Population. Though the first problem can be

solved to some extent by voluntary savings, by taxation and even by
importing foreign capital, yet the magnitude of the problem requires that
it should be self-financing. At present the unproductive surplus labourers
are being supported by the productive labourers. The latter are doing
virtual saving since they are producing more than they consume. But this
saving is running waste because it is being utilized in feeding the
unproductive labourers whose contribution to output is zero or
negligible. If the productive peasants working on land continue to feed
their unproductive dependents working on capital projects, then their
virtual saving would become effective saving. But this capital formation
“through the use of surplus labour is self- financing only if the
mobilization of the concealed saving potential is 100 per cent
successful.” Nurkse further emphasizes, “It seems to be a question of all
or nothing. Either the whole of the food surplus that becomes available
on the land through the withdrawal of the surplus labourers is mopped up
to feed the unproductive labourers in their new occupations or nothing
can be done at all.” But the snag is that there may arise certain leakages
in this food fund available for capital formation:
(a) The newly employed worker may start consuming more food than
they were consuming at the farms;
(b) the peasants left behind on the farms may themselves start
consuming more food than before; and
(c) the problem of bearing the cost of transporting food from the farms
to the capital projects. Though it is not possible to plug these
leakages fully, Nurkse suggests that this can be done by
complementary savings in other sectors of the economy, by state
action in requisitioning the surplus food stocks from the peasantry,
and even by meeting the deficit from imported food stocks. He also
stresses the need for levying indirect taxes on commodities that
enter into the peasants’ budget: taxation in kind, a tax on land
owners and on their rents may further help in mopping up the food
surplus. Nurkse’s firm conviction is that “whatever the machinery
employed may be, some form of collective saving enforced by the
state may prove to be indispensable for the mobilization of the saving
potential implicit in disguised unemployment.”

Financing of Tools. The second problem relates to the financing of

tools to be provided to new construction project workers. Even though
capital goods can be imported, yet as usual an act of domestic saving is
required in this case. In some of the densely populated agricultural
economies, there is not only underemployment of labour but also of capital.
Due to small scattered plots, large number of farm tools, implements and
draught animals are used. But if these small and scattered holdings are
consolidated, certain simple tools will be released which the investment
workers can use in new capital projects. Moreover, simple tools and
equipment that the newly employed workers require can be made by the
workers themselves with their own hands. Such simple tools can also be
imported from abroad in exchange for the country’s exports. But it is
essential that only that capital equipment should be imported which can be
easily adapted to the prevailing factor endowments in the country. As
Nurkse puts it, “Much simpler tools and equipment may be appropriate to
the relative factor endowments of countries of this type in the early stages
of development.”
To sum up, “Hands would move from the village to the new
construction sites; with the hands would also move mouths; and with less
mouths to feed in the village the possibility would be created for food to
move out of the village to supply the needs of a swollen army of
construction workers, without any fall in consumption on the part of those
remaining in the village.” Thus a process of economic development is
generated through the use of the disguised unemployed. Nurkse, therefore,
rightly believes that there is concealed saving potential in rural
underemployment in overpopulated underdeveloped countries that can be
effectively utilized as a means of capital formation.

LIMITATIONS OF THE CONCEPT

The concept of disguised unemployment as a concealed saving

potential has led to considerable controversy. Economists have
questioned the practicability of this concept in democratic
underdeveloped economies. The various difficulties that stand in its
working are examined below:
1. Propensity to Consume not Constant. Nurkse assumes that the
propensity to consume of both the newly employed workers and those left on
the farms remains constant. But this is an untenable assumption. Kurihara is of
the view that as a result of transferring the disguised unemployed to the capital-
goods sector, the propensity to consume may rise in the case of the whole
economy. “In this event the pressure will increase for allocating to the
consumer goods sector those resources which might otherwise be used to
increase output of capital goods.”

2. Problems of Collection and Distribution of Food Surplus. Nurkse fails to

visualise the problems connected with the mopping up and the distribution of
the food surplus from those working on the farms to those working on the new
capital projects. How is the food to be collected and distributed to workers at the
project sites? How much each farm is to contribute to the food fund, if such a fund
is created? If farm owners refuse to supply food, what action is contemplated?
Nurkse’s thesis does not offer any solution to these problems.
3. Marketable Surplus does not Increase. Further, it is doubtful that the
withdrawal of surplus labour from agriculture would increase the marketable
surplus. Kaldor holds that in underdeveloped countries, peasants produce for
self-sufficiency rather than for profits and the amount supplied to the non-
agricultural sector tends to be governed by the need for industrial products.
Since as a result of reduction of farm hands, the demand for industrial products
is also reduced, it is possible that a reduction in surplus labour force would be
followed by a reduction, rather than an increase, in the amount of marketable
surplus for the towns.

4. Difficult to Mobilize Disguised Unemployed. It is not easy to mobilize

the disguised unemployed and send them to the new capital projects. They are
so intensely attached to their family and land that they do not like to leave their
kith and move to the new projects. Majority of the disguised unemployed,
however, find their way into the armed forces, as is the case in India.

5. Not Possible to Get Work without Payment of Wages. In Nurkse’s

analysis, the problem of payment of wages to the workers does not arise
because the entire process of capital formation is assumed to be self-financing.
This is unrealistic. Unless wages are paid, workers cannot be attracted to the
new capital projects. As Lewis remarks, “Unpaid labour may be very important
in countries which resort to compulsory labour but its scope in other countries
is limited.”

6. Successful only in Totalitarian States. As a corollary to the above, this

‘up by the bootstraps’ approach can succeed only under strong totalitarian
governments and has little relevance to democratic underdeveloped countries.
As a matter of fact, this approach to capital formation has succeeded in China
where the masses have been forced to work on capital projects by providing
only minimum rations required for bare subsistence. Nurkse himself admitted
this fact when he declared later on, “Some of the underdeveloped countries do
have potential domestic resources available for capital construction. But it may
be very hard nay impossible to mobilize them without resorting to coercive
methods.”

7. Problems of Inflation and Balance of Payments. The task of providing

work to the surplus labour force is beset with a number of difficulties. Lewis
maintains that what holds back the use of such labour is not the lack of fixed
capital but the lack of working capital. Assuming that working capital is
available, the employment of surplus labour is likely to lead to inflation in the
economy. When the newly employed workers are paid wages, their demand for
consumer goods increases without a corresponding increase in the output of
consumer goods. Hence prices will rise. “This will also stimulate imports of
consumer goods, with unfortunate effect on the balance of payments, and if
these effects are prevented by strict control of imports and of exports the effect
is merely to swell the sum of money circulating at home, and set to put greater
pressure on the domestic prices.”
8. Unskilled Labour Fails to Increase the Output of Fixed Capital.
According to Kurihara, the use of unskilled and ill-equipped labour may not
increase significantly the output of fixed capital which is of crucial importance
to industrialization. The shifting of the disguised unemployed to investment
projects of a labour-intensive type requiring no special skill or equipment
cannot be expected to produce fixed capital “in quantities and qualities that are
of immediate and adequate use to industrialization. The most that could be
expected of such labour-intensive projects is a limited amount of preliminary
capital formation (e.g., swamp clearance of factory sites, dirt road building for
modern highways, and handicrafts serving as raw materials for machine made
manufactures). But it takes machines to make machines on a scale large enough
to speed up industrialization. And the disguised unemployed are an ineffective
substitute for such machines to make machines.”

9. Unrealistic Assumption of Technological Neutrality. Kurihara further

maintains that the tacit assumption of technological neutrality involved in
Nurkse’s idea of disguised unemployment as a saving potential is untenable and
unhelpful. During the process of industrialization, if the capital-goods sector
adopts labour-saving devices, it will set a limit to the full mobilization of the
disguised unemployed in the economy. In such a situation, capital equipment
will have to grow at a much faster rate to equip labour with increasing
productivity. Technological progress is thus inevitable.

10. Effects of Increasing Population on Capital Formation. To Kurihara,

Nurkse fails to analyse the effects of rising population on capital accumulation.
A rapidly growing population aggravates the difficulty of increasing the rate of
capital formation in two ways:

“(i) there is a continuous addition to the unproductive labour force

which eats up whatever saving potential is created by shifting the
disguised unemployed to the new capital projects; and
(ii) this population growth outstrips capital accumulation showing
thereby that disguised unemployment grows faster than can be absorbed
productively by the very stock of capital that the disguised unemployed
are supposed to help expand.”

11. Not Applicable to Directly Productive Activities. Hirschman makes a

distinction between ‘permissive’ and ‘compulsive’ factors in economic
development. According to Nurkse, it is by employing the unproductive workers
in social overhead capital projects that capital formation will take place. But
Hirschman is of the view that though social overhead capital is fundamental to
economic development, yet it is only a ‘permissive’ factor, for it simply permits
private investment to go ahead. The existence of ‘directively productivity
activity,’ on the other hand, is a ‘compulsive’ factor in economic development.
It includes, among others, machine tools and iron and steel industries. He,
therefore, contends that Nurkse’s concept of converting the rural surplus labour
into capital formation can have relevance only with regard to social overhead
capital but not to directly productivity activities which are more significant from
the viewpoint of economic development.

12. Fall in Production. Schultz does not agree with Nurkse that the removal of
surplus labour force from the farms to the new capital projects will not reduce
agricultural productivity. He contends that there is “no evidence for any poor
country anywhere that would suggest that a transfer of even some small
fraction, say, 5 per cent of the existing labour force out of agriculture, with other
things equal, could be made without reducing its production.”As Doreen
Warriner has pointed out, the emphasis on overpopulation or disguised
unemployment is most unfortunate because it concentrates on pure guesswork
and diverts attention away from the ascertainable facts—the fall in output per
head resulting from pressure of population on the means of subsistence and
the destruction of soil fertility.

13. Defective Empirical Evidence. Empirical evidence has shown that the
estimates of 20-25 per cent of surplus labour are entirely inadequate and
defective. Kao, Anschel and Eicher have shown that the empirical studies
supporting such optimistic estimates of disguised unemployment were often
poorly conceived. In addition, “by considering temporary rather than
permanent labour transfers and by allowing some reorganisation of production,
various writers have arrived at a high percentage of disguised unemployment.
To date, there is little reliable empirical evidence to support the existence of
more than 5 per cent disguised unemployment in underdeveloped countries.”

Conclusion. The inference can be drawn from the entire discussion that
the existence of disguised unemployment as a concealed saving
potential and hence as a source of capital formation in overpopulated
underdeveloped countries is beset with a number of difficulties and has
little practicability in countries that have wedded themselves to a
democratic way of living. We may thus conclude with Viner that “there is
little or nothing in all the phenomena designated as ‘disguised
unemployment,’ as ‘hidden unemployment,’ or as ‘underemployment’
which in so far as they constitute genuine social problems would not be
adequately taken into account by competent, informed, and
comprehensive analysis of the phenomenon of low productivity of
employed labour, its causes, its true extent, and its possible remedies.”

A REALISTIC VIEW

The views expressed above are by those who are sceptical about
the concept. But it cannot be denied that the use of surplus labour as the
source of capital formation “brings within a narrow time-horizon projects
which were outside this horizon. It gives scale economies, enlarges land,
capital and employment and raises productivities all round.” So far as
the problem of wage payment is concerned Prof. Khusro suggests three
methods:
(i) Underemployed workers can be organized on their own and on their
neighbours’ farms on mutual aid on capital building. They need not be given
a wage. They eat the same food at their own kitchens. As a result, there are
no inflationary pressures on food prices.
(ii) Underemployed workers can be organized to work on capital construction
within a village outside their own farms. They are given a wage. But they
return to their kitchens daily to eat the same food which they would have
eaten any way. They spend their wages on non-food items whose prices
rise. But with a time-lag, they would produce the capital which would
produce the extra food which will pay for the ‘wage-goods.’
(iii) Underemployed workers can be organized to work on capital projects
away from their villages and paid a wage. They would spend their wages
on food and this will lead to inflationary pressures. “But eventually it
produces the capital which produces the food which pays for the wage.
The problem in all the three cases is (a) of organization, and (b) of bridging
the gap between work (wage payment) and product. If these programmes
are undertaken on a nationwide basis, monetary-fiscal measures become
necessary.” According to Khusro, the essence of the matter is organization
in the field and taking up of projects with due regard to efficiency.

LEWIS’ THEORY OF UNLIMITED SUPPLIES OF LABOUR

THE LEWIS THEORY

Two Sector Economy. Prof. W. Arthur Lewis has developed a very

systematic theory of Economic Development with Unlimited Supplies of
Labour. Like the classical economists, he believes that in many
underdeveloped countries an unlimited supply of labour is available at a
subsistence wage. Economic development takes place when capital
accumulates as a result of the withdrawal of surplus labour from the
“subsistence” sector to the “capitalist” sector. The capitalist sector is
that part of the economy which uses reproducible capital and pays
capitalists for the use thereof.’ It employs labour for wages in mines,
factories, and plantations for earning profit. The subsistence sector is that
part of the economy which does not use reproducible capital. In this
sector, output per head is lower than in the capitalist sector.
Lewis starts his theory with the assertion that the classical theory of
perfectly elastic supply of labour at a subsistence wage holds true in the case of
a number of underdeveloped countries. Such economies are over-populated
relatively to capital and natural resources so that the marginal productivity of
labour is negligible, zero or even negative. Since the supply of labour is
unlimited, new industries can be established or existing industries expanded
without limit at the current wage by drawing upon labour from the subsistence
sector. The current wage is what labour earns in the subsistence sector, i.e., the
subsistence wage. The main sources from which workers would be coming for
employment at the subsistence wage as economic development proceeds are
“the farmers, the casuals, the petty traders, the retainers (domestic and
commercial), women in the household and population growth.” But the capitalist
sector also needs skilled workers. Lewis argues that skilled labour is only a
“quasibottleneck, a temporary bottleneck” which can be removed by providing
training facilities to unskilled workers.

Capitalist Surplus. Now the question is what determines the

subsistence wage at which the surplus labour is available for
employment in the capitalist sector? It depends upon the minimum
earnings required for subsistence. To be precise, the wage level cannot
be less than the average product of the worker in the subsistence sector.
It may, however, be higher than this, if the farmers are to pay rent or food
costs more or if they feel that psychic disutilities of leaving home are
large. Though “earnings in the subsistence sector set a floor to wage in
the capitalists sector,” yet in practice capitalist wages are more than 30
per cent higher than subsistence wages due to:

(a) a substantial increase in the output of the subsistence sector which

by raising real income might induce workers to ask for a higher
capitalist wage before offering themselves for employment;
(b)if with the withdrawal of labour from the subsistence sector, total
product remains the same, the average product and hence the real
income of those remaining behind will rise and the withdrawn workers
might insist on a higher wage in the capitalist sector;

(c) the high cost of living and some humanitarian consideration may
move the employers to raise the real wage, or government may
encourage trade unions and support their wage-bargaining efforts.
The supply of labour is, however, considered to be perfectly elastic
at the existing capitalist wage.

Capital Formation Depends on Capitalist Surplus. Capitalists

aim at profit maximisation. It is they who save and automatically invest
what they save. Since the marginal productivity of labour in the capitalist
sector is higher than the capitalist wage, this results in capitalist surplus.
This surplus is reinvested in new capital assets. Capital formation, takes
place and more people are employed from the subsistence sector. This
process continues till the capital-labour ratio rises and the supply of
labour becomes inelastic and the surplus labour disappears. Thus capital
formation depends on the capitalist surplus. The Lewis theory can be
explained with the help of Fig. 1. The horizontal axis measures the
quantity of labour employed and the vertical axis, its wage and marginal
product. OS represents average subsistence wage in the subsistence
sector, and OW the capitalist wage. At OW wage in the capitalist sector,
the supply of labour is unlimited, as shown by the horizontal supply curve
of labour WW. In the beginning, when ON 1 labour is employed in the
capitalist sector, its marginal productivity curve is P1L1 and the total
output of this sector is OP1O1N1. Out of this workers are paid wages
equal to the area OWQ 1N1. The remaining area WP 1Q 1shows surplus
output. This is the capitalist surplus or total profit earned by the capitalist
sector. When this surplus is reinvested, the curve of marginal productivity
shifts upwards to P 2L 2- The capitalist surplus and employment are now
larger than before being WP 2Q2 and ON 2respectively. Further
reinvestments raise the marginal productivity curve and the level of
employment to P 3L 3and ON 3and so on, till the entire surplus labour is
absorbed in the capitalist sector. After this, the supply curve WW will
slope from left to right upwards like an ordinary supply curve, and wages
and employment will continue to rise with development.

Thus, capital is formed out of profits earned by the capitalists.

According to Lewis, if technical progress is capital-saving, it may be
considered as an increment in capital, and if it is labour-saving, it may be
considered as an increment in the marginal productivity of labour. As
such, he does not make any distinction between the growth of technical
knowledge and the growth of productive capital and treats them as a
“single phenomenon” with the result that technical progress tends to raise
profits and increase employment in the capitalist sector.

Role of the State and Private Capitalists. “The central problem

in the theory of economic development,” according to Lewis, “is to
understand the process by which a community which was previously
saving and investing 4 or 5 per cent of its national income or less
converts itself into an economy where voluntary saving is running at
about 12 to 15 per cent of national income or more. This is the central
problem because the central fact of economic development is rapid
capital accumulation (including knowledge and skills with capital). In
underdeveloped countries with surplus labour, only 10 per cent of the
people with the largest income save who receive about 40 per cent of the
national income.
 The wage and salary classes hardly
save 3 per cent of the national income.
But the dominant classes consisting of
landlords, traders, moneylenders,
priests, soldiers, princes are engaged in
prodigal consumption rather than in
productive investments. It is, therefore,
the state capitalist and indigenous
private capitalists who create capital out
of profits earned. “The indigenous
private capitalist is bound up with the
emergence of new opportunities,
especially something that widens the
market, associated with some new
technique which greatly increases the
productivity of labour, and hence the
capitalist surplus. The state capitalist, on
the other hand, can accumulate capital
even faster than the private capitalist, since he can use for this purpose
not only the profits of the capitalist sector, but also what he can force or
tax out of the subsistence sector.” Thus, once a capitalist sector has
emerged it is only a matter of time before it becomes sizable. If the
opportunities for using capital productivity increase rapidly, the surplus
will also grow rapidly, and the capitalist class with it.
Capital Formation through Bank Credit. But capital is created
not only out of profits, it is also created out of bank credit. In an
underdeveloped economy which has abundant idle resources and
shortage of capital, credit creation has the same effect on capital
formation as profits. It will raise output and employment. Credit- financed
capital formation, however, leads to inflationary rise in prices for some
time. When the surplus labour is engaged in the capitalist sector and
paid out of created money, prices rise because income increases while
consumer goods output remains constant. This is only a temporary
phenomenon, for as soon as capital goods start producing consumption
goods, prices start falling. In the words of Lewis, “Inflation for the
purpose of capital formation is a very different kettle of fish. It is self-
destructive. Prices begin to rise but are sooner or later overtaken by
rising output, and may, in the last stage, end up lower than they were at
the beginning.” The inflationary process also comes to an end “when
voluntary savings increase to a level where they are equal to the inflated
level of investment.” As capital formation is taking place all the time,
output and employment rise continuously and so do profit. Since higher
profit lead to higher saving, a time will come when savings increase so
much that new investments can be financed without recourse to bank
credit.
This analysis also applies to the government which receives back
the inflation financed money in the form of taxes. Secondly, when
national income increases with rising output, it is not required to resort
to deficit financing. Given abundant labour and scarce physical
resources, the effect of capital formation either through taxation or credit
creation is the same on output. Since backward economies are faced
with unlimited supplies of labour, the Lewis theory is primarily concerned
with this problem.
End of the Growth Process. The theory shows that “if unlimited
supplies of labour are available at a constant real wage, and if any part
of the profit is reinvested in productive capacity, profit will grow
continuously relatively to the national income and capital formation will
also grow relatively to national income.” But the process of growth
cannot go on indefinitely, if as a result of capital accumulation no surplus
labour is left. It may also stop if despite the existence of surplus labour,
real wages rise so high as to reduce the capitalist profit to the level
where they are all consumed and nothing is left, for net investment. This
may happen in any one of the four ways:
(a) if the capitalist sector expands so rapidly that it reduces
absolutely the population in the subsistence sector, the average
productivity of labour rises in the latter sector because there are very
few people to share the product and so the capitalist wage rises in the
former sector (in the diagram SS and WW will shift upwards and reduce
profit);
(b) if as a result of the expansion of the capitalist sector relatively to
the subsistence sector, the terms of trade turn against the former with
rising prices of raw materials and food, the capitalists will have to pay
higher wages to the workers;
(c) if the subsistence sector adopts new techniques of production,
real wages would rise in the capitalist sector and so reduce the
capitalist surplus; and
(d), if the workers in the capitalist sector imitate the capitalist way of
life; and agitate for higher wages and if successful in raising their wages,
the capitalist surplus and the rate of capital formation will be reduced.

In Open Economy. When capital accumulation is adversely

affected by any of these factors, it can continue by encouraging mass
immigration or by exporting capital to such countries as possess
abundant labour at subsistence wage. Both these possibilities are,
however, ruled out by Lewis himself.
First, mass immigration of unskilled labour is not possible because
trade unions in the high-wage countries oppose it. They fear that labour
imports would bring down wages to the subsistence level of the poorest
country.
Second, the effect of capital exports is to reduce the creation of
fixed capital at home and hence to reduce the demand for labour and
wages in the capital-exporting country. But the reduction in wages is
offset if capital exports cheapen the things which workers import
because their real wages will rise. On the other hand, the reduction in
wages is further encouraged if capital exports raise the cost of imported
things as the real wages of workers will fall. So the effect of capital
exports cannot be assessed with definiteness.
A CRITICAL APPRAISAL

The Lewis theory is applicable to overpopulated underdeveloped

countries under certain set conditions. Its applicability is, therefore,
circumscribed by its assumptions which are the basis of criticisms
discussed below:

1. Wage Rate Not Constant in the Capitalist Sector. The theory assumes a
constant wage rate in the capitalist sector until the supply of labour is
exhausted from, the subsistence sector. This is unrealistic because the wage
rate continues to rise over time in the industrial sector of an under developed
economy even when there is open unemployment in its rural sector.

2. Not Applicable if Capital accumulation is

Labour Saving. Lewis assumes that the
capitalist surplus is reinvested in productive
capital but according to Reynolds, if the
productive capital happens to be labour saving,
it would not absorb labour and the theory
breaks down. This is shown in Fig. 2 where the
curve P2L2 has a greater negative slope than
the curve P 1L 1, thereby showing labour-
saving technique. With the shifting of the
marginal productivity curve upwards from P1L1
to P2L2, the total output has risen substantially
from OP 1Q1N1to OP2Q1N1. But the total wage
bill OWQ1N1and the labour employed ON1
remain unchanged.

3. Skilled Labour not a Temporary Bottleneck. Given an unlimited supply

of labour, Lewis assumes the existence of unskilled labour for his theory. Skilled
labour is regarded as a temporary bottleneck which can be removed by
providing training facilities to unskilled labour. No doubt skilled labour is in
short supply in underdeveloped countries but skill- formation poses a serious
problem, as it takes a very long time to educate and train the multitudes in
such countries.

4. Lack of Enterprise and Initiative. The Lewis theory is based on the

assumption that a capitalist class exists in underdeveloped countries. In fact,
the entire process of growth depends on the existence of such a class which
has the necessary skill to accumulate capital. In reality, such countries lack
capitalists with necessary enterprise and initiative.

5. Multiplier Process does not operate in LDC. Again, the theory assumes
that capital accumulation takes place when the capitalist class continues to
reinvest profits. It, therefore, presupposes the operation of the “investment
multiplier” which is not applicable to underdeveloped countries. For if profits
are reduced somehow or the prices of wage goods rise, the process of capital
formation will stop before all the surplus labour is absorbed.

6. One sided Theory. This is a one-sided theory because Lewis does not
consider the possibility of progress in the agricultural sector. As the industrial
sector develops with the transfer of surplus labour, the demand for food and
raw materials will rise which will, in turn, lead to the growth of the agricultural
sector.

7. Neglects Total Demand. Lewis does not study the problem of aggregate
demand. He assumes that whatever is produced in the capitalist sector is either
consumed by itself or is exported. He does not even analyse the possibility of
the capitalist sector selling its products to the subsistence sector. In case, it so
happens, the growth process may come to a halt much earlier through
unfavourable terms of trade or the subsistence sector adopting new techniques
of production to meet the expanding raw material demand of the capitalist
sector.

8. Mobility of Labour not so Easy. Higher capitalist wage will not lead to the
movement of surplus labour from the subsistence sector to the capitalist
sector. People are so intensely attached to their family and land that they do
not like to leave their kith and kin. Moreover, differences in language and
custom, the problems of congestion, housing and high cost of living in the
capitalist sector stand in the way of mobility of labour to this sector. This is the
main weakness of the theory.

9. Marginal Productivity of Labour not Zero. Schultz does not agree that the
marginal productivity of labour in overpopulated underdeveloped countries is
zero or negligible. If it were so, the subsistence wage would also be zero. The
fact is that every worker receives the subsistence wage, may be in kind, if not
in cash. It is, therefore, difficult to find out the exact number of surplus
labourers who are to move to the capitalist sector, their number hardly
exceeding 5 per cent, as is now generally accepted.

10. Productivity falls with Migration of Labour from the Subsistence

Sector. Lewis assumes that when the surplus labour is withdrawn from the
subsistence sector to the capitalist sector, the agricultural production remains
unaffected in the subsistence sector. But the fact is that withdrawal of workers
from the farms will reduce output. As pointed out by Schultz, “there is no
evidence for any poor country anywhere that would suggest that a transfer of
even some fraction, say 5 per cent of the existing labour- force out of
agriculture, with other things being equal, could be made without reducing its
production.”

11. Low Income Groups also Save. It is not correct to say that only 10 per
cent of the people with the largest income save. In fact, people, with low
incomes also save due to social reasons and even small farmers save for
capital accumulation in underdeveloped countries, whereas high income groups
save less because they spend more under the influence of the demonstration
effect.

12. Inflation, not Self-Destructive. Lewis’s view that inflation for the
purpose of capital formation is self-destructive is difficult to believe in the face
of acute shortage of consumer goods. Production of consumer goods fails to
increase rapidly due to structural rigidities. On the other hand, the marginal
propensity to consume of the people is near unity, so that all increases in
income lead to inflationary rise in prices.

13. Inefficient Tax Administration. Lewis’s contention that taxation will mop
up increasing income cannot be accepted because the tax administration in
underdeveloped countries is not so efficient and developed as to collect taxes
sufficient enough for capital accumulation.

Conclusion. Despite these limitations, the Lewis theory has the merit of
explaining in a very clear cut way the process of development. This two
sector theory has great analytical value. It explains how low capital
formation takes place in underdeveloped countries which have plethora
of labour and scarcity of capital. His study of the problems of credit
inflation, population growth, technological progress, and international
trade gives the theory a touch of realism.

THE “BIG PUSH” THEORY

ROSENSTEIN-RODAN’S THESIS

The theory of the “big push” is associated with the name of

Professor Paul N. Rosenstein-Rodan. The thesis is that a “big push” or a
large comprehensive programme is needed in the form of a high
minimum amount of investment to overcome the obstacles to
development in an underdeveloped economy and to launch it on the
path to progress. To stress his argument, he quotes an analogy from an
MIT Study: “There is a minimum level of resources that must be devoted
to... a development programme if it is to have any chance of success.
Launching a country into self-sustaining growth is little like an airplane
off the ground. There is a critical ground speed which must be passed
before the craft can become airborne.” The theory states that
proceeding “bit by bit” will not launch the economy successfully on the
development path, rather a minimum amount of investment is a
necessary condition for this. It necessitates the obtaining of external
economies that arise from the simultaneous establishment of technically
interdependent industries. Thus indivisibilities and external economies
flowing from a minimum quantum of investment are a prerequisite for
launching economic development successfully.
Rosenstein-Rodan distinguishes between three different kinds of
indivisibilites and external economies. One, indivisibilities in the
production function, especially the indivisibility of the supply of social
overhead capital; two, indivisibility of demand; and three, indivisibility in
the supply of savings. Let us analyse the role of these indivisibilities in
bringing economic development.

1. INDIVISIBILITIES IN THE PRODUCTION FUNCTION

According to Rosenstein-Rodan, indivisibilities of inputs, outputs or

processes lead to increasing returns. He regards social overhead capital
as the most important instance of indivisibility and hence of external
economies on the supply side. The services of social overhead capital
comprising basic industries like power, transport, and communications
are indirectly productive and have a long gestation period. They cannot
be imported. Their installations require a “sizeable initial lump” of
investment. So excess capacity is likely to remain in them for some time.
They also possess “an irreducible minimum industry mix of different
public utilities, so that an underdeveloped country have to invest
between 30-40 per cent of its total investment in these channels.”
Thus, social overhead capital is characterised by four indivisibilities.
First, it is irreversible in time and, therefore, must precede other directly
productive investments. Second, it has a minimum durability, thus
making it very lumpy. Third, it has a long gestation period. Last, it has an
irreducible minimum industry mix of different kinds of public utilities.
These indivisibilities of supply of social overhead capital are one of the
principal obstacles to development in underdeveloped countries.
Therefore, a high initial investment in social overhead capital is
necessary to pave the way for quick-yielding directly productive
investments.

2. INDIVISIBILITY OF DEMAND

The indivisibility or complementarity of demand requires

simultaneous setting up of interdependent industries in underdeveloped
countries. This is because individual investment projects have high risks
because low incomes limit the demand for their products. To illustrate,
Rosenstein-Rodan takes first a closed economy where a hundred
disguised unemployed workers are employed in a shoe factory whose
wages constitute an additional income. If these workers spend all their
income on shoes they manufacture, the shoe market will have a regular
demand and thus succeed. But the fact is that they would not like to
spend all their additional income on shoes, human wants being diverse.
Nor will the people outside the factory buy additional shoes when they
are poor. Thus, the new factory will be abandoned for want of an
adequate market. To vary the example, suppose ten thousand
unemployed workers are engaged in one hundred factories (instead of
hundred workers in one factory)
who produce a variety of
consumer goods and spend their
wages on buying them. The new
producers would be each others’
customers and thus create market
for their goods. The
complementarity of demand
reduces the risk of finding a
market and increases the
incentive to invest. In other
words, it is the indivisibility of
demand which necessitates a
high minimum quantum of
investment in interdependent
industries to enlarge the size of the market.
Rosenstein’s example of the shoe factory is explained in Fig.1. The
curves ATC and MC represent the costs of a plant which is a little smaller
than the optimum-size plant. D1 and MR1 are the demand and marginal
revenue curves of the shoe factory when investment is made only in it. It
produces OQ1 (10,000) shoes and sells at OP1 price which does not
cover the ATC. So the factory is incurring CABP1 losses. But when
simultaneous investment is made in a number of different industries, the
market for shoes expands. The demand for shoes rises to D4 (four times)
so that the quantity of shoes becomes OQ (40,000). Now the shoe factory
earns profits equal to P4RST. Similarly, other industries earn profits.

3. INDIVISIBILITY IN THE SUPPLY OF SAVINGS

A high income elasticity of saving is the third indivisibility in Rosenstein’s

theory. A high minimum size of investment requires a high volume of
savings. This is not easy to achieve in underdeveloped countries
because of low incomes. To overcome this, it is essential that when
incomes increase due to an increase in investment, the marginal rate of
saving should be very much higher than the average rate of saving.
Given these three indivisibilities and the external economies to which
they give rise, a “big push” or a minimum quantum of investment is
required to overcome the obstacles to development in underdeveloped
countries. “There may be finally a phenomenon of indivisibility in the
vigour and drive required for a successful development policy,” writes
Rodan. But proceeding bit by bit in an isolated and small way does not
lead to a sufficient impact on growth. A climate for development is only
created when investment of a minimum speed or size is made within an
underdeveloped economy.

A CRITICAL APPRAISAL

Rosenstein Rodan regards his theory of development superior to the

traditional static equilibrium theory because it appears to contradict the
latter’s motto that nature does make jumps. His theory is based on more
realistic assumptions of indivisibilities and nonappropriabilities in the
production functions. It examines the path towards equilibrium and not
merely the conditions at a point of equilibrium. It is thus primarily a
theory of investment concerned with imperfect markets in
underdeveloped countries. It is a high minimum quantum of investment
rather than price mechanism in such imperfect markets that takes an
underdeveloped economy towards an optimum position.
The big push theory is, however, not free from certain defects.
1. Negligible Economies from Investment in Export and Import
Substitutes. The main justification for a big push in investment on
social overhead capital is the realization of extensive external
economies. But as pointed out by Viner, underdeveloped economies
realize greater economies from world trade independently of home
investment. Rodan has recognised this fact, but keeps silent over another
reality that in the newly developing countries investment for export and
for marginal import substitutes occupies a large chunk of total
investment. The external economies argument for a big push does not
hold because external economies are negligible in the above types of
investments.
2. Negligible Economies even from Cost-Reducing Investments. Even in
the production of local consumer goods and most public utilities, potential
external economies can be realized in a limited way. Investments in the case of
fairly inelastic demand are cost-reducing rather than output-expanding. Since
external economies accrue from the output-expansion in the initial industry,
they are negligible in the case of cost-reducing investment.

3. Neglects Investment in the Agricultural Sector. One of the principal

defects of the big push theory is that it emphasizes the importance of a high
level of investment in capital goods and consumer goods industries and social
overhead capital, except agricultural and other primary industries. In
agriculture- oriented underdeveloped countries a big push of large investments
in irrigation, transportation facilities, land reforms, and in improving
agricultural practices through better tools, implements, fertilisers etc. are as
important as investment in other industries. The neglect of the agricultural
sector in such economies will retard rather than accelerate their development.

4. Generates Inflationary Pressures. Even the launching of a high

minimum amount of investment on social overheads is highly expensive.
Moreover, overhead capital has a high capital-output ratio and a very
long gestation period. This makes the task of developing UDCs more
difficult and longer. This is because such countries do not possess
enough financial resources to provide social overhead capital required
for the big push. The period during which social overhead capital is
being formed will also be one of inflationary pressures because of the
shortage of consumer goods. These inflationary pressures, in turn, would
prolong the process of building social overhead capital, thus making it
highly difficult for an UDC to achieve rapid economic development.

5. Low Investment Leads to Large Increase in Output. John Adler’s

statistical analysis of the economic development of the world reveals
that “a relatively low level of investment pays off well in the form of
additional output.” This conclusion is based on his study of low capital-
output ratios in India, Pakistan and in many other Asian and Latin
American countries. Thus, there appears to be little conclusive proof that
a big push of investment is a prerequisite for the economic development
of underdeveloped countries.

6. Administrative and Institutional Difficulties. Further, the big push

theory is based upon a burst of state-engineered investment. Rosenstein
himself points out that in the presence of imperfectly developed markets
in underdeveloped countries, the price mechanism is a very poor
signalling system. But the dependence on state investment itself poses a
number of problems. The administrative and institutional machinery in
such economies is weak and inefficient. Difficulties are bound to arise not
only in drawing up the plans for various projects but also in their
execution. Lack of statistical information, technical know-how, trained
personnel and coordination between the various departments are some
of the complex problems which are not easy of solution. Moreover, the
majority of underdeveloped countries have a mixed economy, where the
private and public sectors are mostly competitive rather than
complementary. This leads to mutual rivalry and suspicion which are
inimical to a balanced growth of the economy.

7. Not an Historical Fact. Last but not the least, Rodan’s thesis is a
sort of prescription for launching underdeveloped countries on the path
to progress rapidly in the present. It is not an historical explanation of
how development takes place. Historically, the presence or absence of a
big push has not been a distinguishing feature of growth anywhere,
according to Professor Hagen.
 CHAPTER 4
DETERMINANTS OF ECONOMIC
DEVELOPMENT
Introduction
The Economics of Development refers to the problems of the economic
development of underdeveloped countries. Though the study of economic
development has attracted the attention of economists right from Adam
Smith down to Marx and Keynes, yet they were mainly interested in the
problems which were essentially static in nature and largely related to a
Western European framework of social and cultural institutions. It is,
however, in the forties of the 20th century and especially after the Second
World War that economists started devoting their attention towards
analyzing the problems of underdeveloped countries and formulating
theories and models of development and growth. Their interest in the
economics of development has been further stimulated by the wave of
political resurgence that swept the Asian and African nations as they threw
off the colonial yoke after the Second World War. The desire on the part of
new leaders in these countries to promote rapid economic development
coupled with the realisation on the part of the developed nations that
‘poverty anywhere is a threat to prosperity everywhere,’ has aroused further
interest in the subject.
The process of economic growth is determined by two types of factors,
economic and non-economic. Economic growth is dependent upon its
natural resources, human resources, capital, enterprise, technology, etc.
These are economic factors. But economic growth is not possible so long
as social institutions, political conditions and moral values in a nation do
not encourage development. These are non-economic factors. We study
these economic and non-economic determinants of economic growth
separately.
Economic Factors
Economists regard factors of production as the main economic forces that
determine growth. The growth rate of the economy rises or falls as a
consequence of changes in them. Some of the economic factors are
discussed below:

Natural Resources, Capital Accumulation, Organisation

The principal factor affecting the development of an economy is the
natural resources or land. “Land” as used in economics includes natural
resources such as the fertility of land, its situation and composition,
forest wealth, minerals, climate, water resources, sea resources etc. For
economic growth, the existence of natural resources in abundance is
essential. A country which is deficient in natural resources will not be in
a position to develop rapidly. As pointed out by Lewis, “Other things
being equal, men can make better use of rich resources than they can of
poor.”
In LDCs, natural resources are either unutilised, underutilised or
misutilised. This is one of the reasons for their backwardness. The
presence of abundant resources is not sufficient for economic growth.
What is required is their proper exploitation. If the existing resources are
not being properly exploited and utilised, the country cannot develop.
J.L. Fisher has rightly said, “There is little reason to expect natural
resource development if people are indifferent to the products or services
which such resources can contribute.” This is due to economic
backwardness and lack of technological factors. Therefore, natural
resources can be developed through improved technology and increase
in knowledge. In reality, as pointed out by Lewis, “the value of a
resource depends upon its usefulness, and its usefulness is changing all
the time through changes in taste, changes in technique or new
discovery.” When such changes are taking place, any nation can develop
itself economically through fuller utilisation of its natural resources: For
example, Britain underwent agricultural revolution by adopting the
method of rotation to crops between 1740-60. Similarly, France was able
to revolutionise its agriculture on the British pattern despite shortage of
land. On the other hand, the countries of Asia and Africa have not been
able to develop their agriculture because they have been using old
methods of production.
It is often said that economic growth is possible even when an economy
is deficient in natural resources. As pointed out by Lewis, “A country
which is considered to be poor in resources today may be considered
very rich in resources at some later time, not merely because unknown
resources are discovered, but equally because new uses are discovered
for the known resources.” Japan is one such country which is deficient in
natural resources but it is one of the advanced countries of the world
because it has been able to discover new uses for limited resources.
Moreover, by importing certain raw materials and minerals from other
countries, it has been successful in overcoming the deficiency of its
natural resources through superior technology, new researches, and
higher knowledge. Similarly, Britain has developed without non-ferrous
metals.
The means of transport and communication have an important bearing on
economic growth. Their development reduces the transport costs, and
increases the external and internal trade of the country. As a result, the
economy progresses. In countries where road, rail, canals or rivers are
inter connected with each other, economic growth is encouraged, as has
been the case in Britain, France, Germany and the Netherlands.
Thus, for economic growth the existence of abundant natural resources is
not enough. What is essential is their proper exploitation through
improved techniques so that there is little wastage and they could be
utilised for a longer time.

Technological Progress
Technological changes are regarded as the most important factor in
the process of economic growth. They are related to changes in the
methods of production which are the result of some new techniques of
research or innovation. Changes in technology lead to increase in the
productivity of labour, capital and other factors of production.
Kuznets traces five distinct patterns in the growth of technology in
modern economic growth. They are: a scientific discovery or an addition
to technical knowledge; an invention; an innovation; an improvement;
and the spread of invention usually accompanied by improvements. Like
Schumpeter, he regards innovation as the most important technological
factor in economic growth. In modern economic growth the five factors,
mentioned by Kuznets, have helped in the development of technology.
Kuznets points out that LDCs must import modern technology to accelerate
their productive capacity in the short run because they cannot wait until
they themselves invent or modify the technology of advanced countries.
But as they adopt imported technology, they must develop their
indigenous technical skills.
It is a misnomer that all modern technology is capital-intensive. Advanced
countries have also low-cost capital-saving, labour-intensive
productivity-raising technology which can be transferred to developing
countries.
LDCs should, therefore, benefit from the vast fund of technical knowledge
of the advanced countries. However, scientific and industrial technology
to be useful in an LDC needs careful processing and adaptation in
accordance with its social, economic and technical absorption capacities
and requirements. Above all, imported technology requires strong
backing of R and D studies of problems arising in assimilation,
adaptation and improvement in keeping with the factor endowments of
the country. One of the principal causes in modern economic growth has
been the spending of high percentages of their national income on R and
D by the advanced countries.

Structural Change
Structural changes imply the transition from a traditional agricultural society
to a modern industrial economy involving a radical transformation of existing
institutions, social attitudes, and motivations. Such structural changes lead
to increasing employment opportunities, higher labour productivity and the
stock of capital, exploitation of new resources and improvement in
technology.
An LDC is characterized by a large primary sector and a very small
secondary sector along with an equally small tertiary sector. Structural
changes may begin with the transfer of population from the primary to
secondary and then to tertiary employment. In an overpopulated
agriculture-oriented economy, 70-80 per cent of the population is engaged
in the agricultural sector. Structural changes involve the expansion of the
non-agricultural sector so that the proportion of population in the
agricultural sector is progressively reduced. It implies reduction in the size
of contribution to net national output by the agricultural sector. But a
decline in the share of the agricultural sector in the net national product
does not mean a fall in the output of agriculture. Rather agricultural
output must increase in absolute terms. In order to increase agricultural
output, radical changes will have to be made in the form of land reforms,
improved agricultural techniques and inputs, better marketing
organisation, new credit institutions etc.
When agricultural production increases, it increases money incomes in
the agricultural sector. This, in turn, expands rural demand for consumer
goods and agricultural inputs which act as stimulants to the expansion of
the industrial sector. The industrial sector itself affects the agricultural
sector.
First, the expansion of farm output requires improved farm machinery
and other inputs manufactured by the industrial sector.
Second, increasing agricultural productivity and income expands the
demand for consumer goods and services available in the industrial
sector. “The scope for increasing agricultural productivity and income, in
other words, is heavily dependent upon the structural transformation of
the economy as it affects the growth of commercial demand for goods
produced, the growth of alternative employment opportunities, and the
increased quantity of purchased inputs available to the agricultural
sector.”
Another important aspect of structural changes is the transfer of
population from primary and secondary to tertiary employment. Tertiary
production includes a number of dissimilar services producing non-
material goods like transport, retail and wholesale distribution, education,
government and domestic services, etc. With economic development the
demand for tertiary products increases very rapidly because the
expansion of the agricultural and industrial sectors is dependent largely
on the existence of transport, retail and wholesale distribution, technical
personnel, etc. So the proportion of working labour in tertiary
occupations rises with economic development. But many of the tertiary
occupations like railways, motor transport, etc., are of high capital
intensity and involve substitution of capital for labour on a large scale.
Thus, in the initial phase of economic growth, tertiary occupations fail to
absorb large number of people, and the majority of workers become
“pedlars of all kinds of goods and services requiring little or no capital
outfit, such as vendors of fruit, newspapers, or else car washers, porters,
waiters and shop assistants.” This type of underemployment is reinforced
by disguised unemployment in the rural sector.
An innovation or the opening of a new area may bring about a structural
change within the economy thereby, widening the domestic market and
creating a foreign market. Technical invention takes place in such
societies where traditionalism gives way to desire for experimentation.
“Apart from the build-up of economic overhead capital, such as a
communications and transport system and investment in harbour
facilities, some warehouses and similar installation favouring especially
foreign trade, most of the innovations introduced during the preparatory
period are based upon changes in the institutional arrangements in the
legal, educational, familial, or motivational orders. Once these new
institutions have been created, they operate as ‘gifts from the past,’
contributing freely to the vigorous spurt of economic activity in the period
of take-off. What is perhaps most important about the structural changes
taking place during the take-off period is the adaptation of previously
existing institutions for new ends, especially for capital formation.”
Non-Economic Factors

Social Factors
Social attitudes, values and institutions also influence economic, growth.
The term “attitude” means the totality of beliefs and values that cause
human behaviour to be what it is. The term “values” refers to motivations
of human behaviour towards particular ends.
Modern economic growth has been influenced by social and psychological
factors. Western culture and education led to reasoning and scepticism. It
inculcated the spirit of adventure which led to new discoveries and
inventions and consequently to the rise of the new mercantile classes.
These forces brought about changes in social attitudes, expectations, and
values. People cultivated the habits of saving and investment, and
undertook risks to earn profits. They developed what Lewis calls, “The
will to economise,” to maximise output for a given input. As a result, the
European countries experienced the Industrial Revolution in the 18th and
19th centuries. Economic and religious freedom brought about further
changes in social attitudes and values. Single family unit took the place of
joint family system which further helped in modern economic growth.
In LDCs there are such social attitudes, values and institutions which are
not conducive to economic development. Religion gives less inducements
to the virtues of thrift and hardwork. People are fatalists and therefore
are not hard working. They are influenced more by traditional customs
and place high values on leisure, contentment and participation in
festivals and ceremonies. Thus social attitudes stand in the way of
development when money is wasted on non-economic ventures.
Moreover, the joint family is the primary social and economic unit. It
prevents people from taking independent economic decisions, breeds
lethargy, and encourages growth in numbers. In such societies relations
are personal or patriarchal. People are influenced by caste, clan or creed
at the social level.
These social attitudes, values and institutions should be changed or
modified for economic development to take place. Social organizations
like the joint family, caste system, kinship, and religious dogmas should be
modified so that they may be more favourable to development. But it is
not an easy task. Any social change will bring discontentment and
resistance in its wake. It may, therefore, adversely affect the national
economy. Therefore, all socio-cultural changes should be selective. They
should be introduced by stages. Persuasion and not coercion should be
the method. Education and demonstration can do a lot in this direction.
Popular education leads to popular enlightenment and opens the way to
knowledge. It opens men’s mind to new methods and new techniques of
production. It creates self-discipline, power to think rationally and to
probe into the future. Emphasizing the importance of education in
economic development. Cairncross writes: “No country can count itself
developed, in which education in the way of industrial civilization has not
taken place. Peasants have to be brought within the monetary economy
and not left to pursue subsistence farming; workers have to become used
to working fixed hours in factories for wage payments; towns have to
grow, and so banks and business enterprises; the fruits of science have to
be applied throughout the economy. Above all, there must emerge as a
continuing element in the life of the country, a group of business,
administrative and political leaders who can be depended upon to
maintain the momentum of development by constant innovation.”
Certain races have higher tendencies to develop than others, such as
Punjabis and Parsees in India, and Negroes in America and Brazil. For
development, it is essential that races should not be kept aloof from each
other. Rather, they should be intermixed so that there is a union of cultural
values and racial qualities. But such measures require a lot of patience.
The society’s structure is transformed by such racial changes.
The UN Report on Economic Development of Underdeveloped Countries,
laying emphasis on changes in social attitudes, values and institutions
observes that without painful adjustments rapid economic development is
impossible. Old ideas will have to be dispensed with; old institutions will
have to be dispensed with; the bonds of caste, religion and race will
have to be broken. But the process of change should be evolutionary
rather than revolutionary. Otherwise, radical changes in social attitudes
and values will bring about dissatisfaction, discontentment and violence
in their wake and retard the path to economic development.
Myrdal in his Asian Drama advocates the adoption of “modernisation
values” or “modernisation ideals” for the rapid economic development of
LDCs. Modernisation means “the social, cultural and psychological
framework which facilitates the application of tested knowledge to all
phases and branches of production.” The modernisation ideals include,
first, rationality in thought and action through a deliberate cultivation of
scientific attitude and application of modern technology in order to
increase productivity, raise levels of living, and bring about social and
economic equalisation. As pointed out by Jawaharlal Nehru, “The test of a
country’s advance is how far it is utilising modern techniques. Modern -
technique is not a matter of just getting a tool and use it. Modern
technique follows modern thinking.”
But the desire to better their lot and the initiative to make material
progress must arise among the nationals of the country. Development
must be willed by the country itself; it cannot be implanted from outside.
External forces should stimulate and facilitate the national forces. They
should supplement and not supplant them. Foreign aid can only initiate or
stimulate development; it cannot maintain it. Development will falter in
the absence of sufficient internal motivation. Unless the momentum of
development comes from within the economy, the initial initiative to
development will be dissipated and shortlived. As Cairncross puts it,
“Development is impossible if it does not take place in the minds of
men.” It is, therefore, imperative that if the process of economic growth is
to be cumulative and long lasting, the forces of development must be
firmly rooted within the domestic economy.
Modernisation ideals also require changes in institutions and attitudes ‘in
order to increase labour efficiency and diligence, effective competition,
mobility and enterprise; permit greater equality of opportunities, make
possible higher productivity and well-being and generally promote
development’. The barriers of caste, colour, religion, ethnic origin,
culture, language, and provincial loyalties should be broken down, and
property and education should not be so unequally distributed as to
represent social monopolies. All this is possible through changes in social
institutions and attitudes of the people by spreading education and
knowledge. People should be aware of the objectives before them and
the ‘will’ to attain them. But where the social set-up is influenced by rigid
caste and joint family systems, there is little individual freedom and
professional mobility. As a result, people have little incentive to work
more, earn more and save more, and have a backward sloping curve of
effort and risk taking. For development, therefore, such social institutions
and attitudes should be changed which stand in the way of free society
and free competition. For instance, Myrdal views the various land reforms
in India as attempts to breakup the caste system so as to eradicate social
monopolies and barriers to free competition.
Modernisation of ideals with regard to attitudes are called by Myrdal as
the creation of the “new man” or the “modern man”, the “citizen of the
new state”, the “man in the era of science”, the “industrial man”. This
implies change in attitudes so that people have efficiency, diligence,
orderliness, punctuality, frugality, scrupulous honesty, rationality in
decision on action, preparedness for change, alertness to opportunities
as they arise in the changing world, energetic enterprise, integrity and
self-reliance co- operativeness, and willingness to take the long view.
Changes in attitudes towards modernisation lead to development of the
agricultural, industrial and tertiary sectors of the economy. But the
development of these sectors is not possible without entrepreneurship.
According to Myrdal, LDCs lack entrepreneurship not because they are
deficient in capital or raw materials but because they are deficient in
persons with right attitude for entrepreneurship. E. Hagen in his On the
Theory of Social Change (1962) ascribes the lack of entrepreneurship to
the childhood environment in the traditional society which creates
tensions, anxieties, and rage among adults. They suffer from “respect
withdrawal” and develop “retreatism” as the dominant personality trait.
According to Hagen, it is over a very long period of several generations
that there develops a class of entrepreneurs with “need achievement”
motivation. Such psychological attitude emerges when a generation of
fathers demand achievement or do not stand in the way of achievement,
and mothers play a supporting role in encouraging activity on the part of
infants.
McClelland in The Achieving Society (1961) propounds the view that the
growth of entrepreneurship depends on the need for achievement
motivation. According to him, n-Ach (n-achievement) is a relatively stable
personality characteristic rooted in experiences in middle of childhood.
Variations in n-Ach levels were correlated with the stories in children’s
textbooks, and it was found that n-Ach was very high in the United States
of America 80 or 90 years ago. It is the highest in Russia and China now.
It is rising in such developing countries as Mexico and Nigeria. He
attributes high n-Ach in these countries to ideological reform hypothesis,
to Protestantism in Europe and America, to zealous Communist ideology
in Russia and China, and to the spirit 0f nationalism in the developing
countries.
McClelland alongwith David Winter conducted experiments in Kakinada
town of Andhra Pradesh in India and revealed that neither money, nor
caste, nor traditional beliefs played an important part in the n-Ach factor
in the emergence of entrepreneurship there. It was found that those who
were trained in the Small Industries Extension Training Institute at
Hyderabad in 1964-65 for a two-week motivation programme displayed a
more active entrepreneurial behaviour later on. Thus, attitudes,
motivations and environment should all combine to promote
entrepreneurship for economic development.

Human Factor
Human resources have been an important factor in modern-economic
growth. Economic growth does not depend on the mere size of human
resources but on their efficiency. According to Kuznets, the population of
Europe increased by 433 per cent between 1750-1950 while the
population of the remaining world increased by 200 per cent over the
period. Whereas population increased five-fold in European and now
developed countries, there was ten-fold increase in their GNP per capita.
Such a phenomenal increase in their GNP per capita is attributed to the
development of the human factor which is reflected in the increased
efficiency or productivity: of their labour force. This is called human
capital formation. This “is the process of increasing knowledge, the skills,
and the capacities of all people of the country.” It includes expenditure on
health, education and generally on social services. Denison’s estimates
reveal that expenditure incurred on education in the United States
between 1929-57 contributed 23 per cent to its gross national output.
According to Soloman Fabricant, the increase in the total national
product of the United States through increase in physical capital between
1889-1957 equaled the increase through higher labour productivity.
But rapidly increasing population is a great hindrance to the economic
development of LDCs. With their low per capita incomes and low rates of
capital formation, it becomes difficult for them to support the increase in
population. And when output increases due to improved technology and
capital formation, it is swallowed up by increase in numbers. As a
result, there is no improvement in the real growth rate of the
economy.
A proper use of human resources can be made for economic
development in the following ways:
First, there should be control over population. Human resources can be
utilized best if the size of population is controlled and reduced. This
requires family planning and research on population control so as to
bring down the birth-rate.
Second, there should be change in the outlook of the labour force. The
social behaviour of the labour force is important in the process of
economic development. To increase labour productivity and the
mobility of labour, there should be change in the outlook of the people
so that they should imbibe the importance of dignity of labour. This
requires changes in institutional and social factors. Such changes
depend upon the spread of education. It is the educated and trained
labour force with high productive efficiency that leads to rapid
economic development. Thus “the most important requirement of
rapid industrial growth is people. People ready to welcome the
challenge of economic change and the opportunities in it. People,
above all, who are dedicated to the economic development of their
country, and to high standards of honesty, competency, knowledge
and performance.”
Political and Administrative Factors
Political and administrative factors also helped in modern economic
growth. The economic growth of Britain, Germany, the United States,
Japan and France has been due to their political stability and strong
administration since the 19th century. With the exception of the United
States, they were directly involved in the two World Wars and were
devastated. Still they have continued to progress on the strength of their
political and administrative traditions. On the other hand, Italy has not
been able to grow up to their level due to political instability and corrupt
and weak administration. Peace, protection and stability have
encouraged the development of entrepreneurship in developed countries,
alongwith the adoption of appropriate fiscal and monetary policies by the
governments from time to time.
The weak administrative and political structure is a big hindrance to the
economic development of LDCs. A strong, efficient and incorrupt
administration is, therefore, essential for economic development. Prof.
Lewis rightly observed: “The behaviour of government plays an
important role in stimulating or discouraging economic activity.” Peace,
stability and legal protection encourages entrepreneurship. The greater
the freedom, the more the entrepreneurship will prosper. Technical
progress, factor mobility and large size of market help stimulate
enterprise and initiative. But the former can only take place under clean
administration and stable political conditions. Similarly, a good
government can help in capital formation by adopting the right monetary
and fiscal policies, and by providing timely overhead capital fatilities.
Thus “a government must offer society the services if it desires to
stimulate economic development: order, justice, police and defence;
rewards commensurate with ability and application in productivity,
security in the enjoyment of property which may be of extremely varied
character; testamentary rights; the assurance that business covenants
and contracts will be kept; the provision of standards of weights and
measures and currency and the stability of governmental system itself, to
maintain the sense of order and future calculability of expectations and
duties.” In this way, clean and strong administration, full of justice,
stimulates economic development. As rightly pointed out by Lewis, “No
country has made progress without positive stimulus from intelligent
governments.”
All LDCs have emerged as independent nations from the colonial rule. But
independence has not necessarily led to national consolidation. Myrdal
regards national consolidation as “a pre-condition both for the
preservation of the states as a growing concern and for its efficient
functioning as a matrix for the effective formation and execution of
national policies, that is for planning.” By national consolidation he means
“a national system of government, courts and administration that is
effective, cohesive, and internally united in purpose and action, with
unchallenged authority over all regions and groups within the boundaries
of the state.” National consolidation, in turn, requires “emotional
integration” which coincides with the modernisation ideals of changes in
values, attitudes and institutions.

Additional Sources
Factors Determining Economic Development
Regarding the determinants of economic growth Prof. Ragner Nurkse
observed that, “Economic development has much to do with human
endowments, social attitude, political condition and historical accidents.”
Again, Prof. PT. Bauer also mentioned that “The main determinants of
economic development are aptitude, abilities, qualities, capacities and
facilities.”
Thus economic development of a country depends on both economic and
non-economic factors. The following are some of the economic and non-
economic factors determining the pace of economic development
A. Economic Factors:
Economic environment is working as an important determinant of economic
development of a country. Economic environment can determine the pace of
economic development as well as the rate of growth of the economy. This
economic environment is influenced by the economic factors like—
population and manpower resources, natural resources and its utilization,
capital formation and accumulation, capital output ratio, occupational
structure, external resources, extent of the market, investing pattern,
technological advancement, development planning, infrastructural facilities,
suitable industrial relations etc.

1. Population and Manpower Resources:

Population is considered as an important determinant of economic growth. In
this respect population is working both as a stimulant and hurdles to
economic growth. Firstly, population provides labour and entrepreneurship
as an important factor service.
Natural resources of the country can be properly exploited with manpower
resources. With proper human capital formation, increasing mobility and
division of labour, manpower resources can provide useful support to
economic development.
On the other hand, higher rate of growth of population increases demand for
goods and services as a means of consumption leading to increasing
consumption requirements, lesser balance for investment and export, lesser
capital formation, adverse balance of trade, increasing demand for social
and economic infrastructural facilities and higher unemployment problem.
Accordingly, higher rate of population growth can put serious hurdles on the
path of economic development. Moreover, growth of population at a higher
rate usually eats up all the benefits of economic development leading to a
slow growth of per capita income as it is seen in case of India.
But it has also been argued by some modern economists that with the
growing momentum of economic development, standard of living of the
general masses increases which would ultimately create a better
environment for the control of population growth.
Moreover, Easterlin argued that population pressure may favourably affect
individual motivation and this may again lead to changes in production
techniques. Thus whether growing population in a country practically retards
economic growth or contributes to it that solely depends on the prevailing
situation and balance of various other factors determining the growth in an
economy.

2. Natural Resources and Its Utilization:

Availability of natural resources and its proper utilization are considered as
an important determinant of economic development. If the countries are rich
in natural resources and adopted modern technology for its utilization, then
they can attain higher level of development at a quicker pace. Mere
possession of natural resources cannot work as a determinant of economic
development.
In spite of having huge variety of natural resources, countries of Asia and
Africa could not attain a higher level of development due to lack of its proper
utilization. But countries like Britain and France have modernized their
agriculture in spite of shortage of land and the country like Japan has
developed a solid industrial base despite its deficiency in natural resources.
Similarly, Britain has developed its industrial sector by importing some
minerals and raw materials from abroad.
However, an economy having deficiency in natural resources is forced to
depend on foreign country for the supply of minerals and other raw materials
in order to run its industry. Thus in conclusion it can be observed that
availability of natural resources and its proper utilization is still working as an
important determinant of economic growth. As India is having sufficient
natural resources, thus it has helped the country to maintain economic
environment for attaining development.

3. Capital Formation and Capital Accumulation:

Capital formation and capital accumulation are playing an important role in
the process of economic development of the country. Here capital means the
stock of physical reproducible factors required for production.
The increase in the volume of capital formation leads to capital
accumulation. Thus it is quite important to raise the rate of capital formation
so as to accumulate a large stock of machines, tools and equipment by the
community for gearing up production.
In an economy, capital accumulation can help to attain faster
economic development in the following manner:
(a) Capital plays a diversified role in raising the volume of national output
through changes in the scale or technology of production.
(b) Capital accumulation is quite essential to provide necessary tools and
inputs for raising the volume of production and also to increase employment
opportunities for the growing number of labour force.
(c) Increase in capital accumulation at a faster rate results increased supply
of tools and machinery per worker.
Various developed countries like Japan have been able to attain higher rate
of capital formation to trigger rapid economic growth. Normally, the rate of
capital formation in under-developed countries like India is very poor.
Therefore, they must take proper steps, viz., introduction of compulsory
deposit schemes, curtailing the conspicuous consumption, putting curbs on
imports of consumption goods, inflow of foreign capital etc. In order to attain
a rapid economic growth, the rate of domestic savings and investment must
be raised to 20 per cent.
Naturally, in the initial period, it is not possible to step up the rate of capital
formation at the required rate by domestic savings alone. Initially, to step up
the rate of investment in the economy, inflow of foreign capital to some
extent is important.
But with the gradual growth of domestic savings in the subsequent years of
development, the dependence on foreign capital must gradually be
diminished. Being a technologically backward country, India has decided to
permit foreign direct investment in order to imbibe advanced technology for
attaining international competitiveness under the present world trade and
industrial scenario.

4. Capital-Output Ratio:
Capital-output ratio is also considered as an important determinant of
economic development in n country. By capital-output ratio we mean
number of units of capital required to produce per unit of output. It also
refers to productivity of capital of different sectors at a definite point of time.
But the capital output ratio in a country is also determined by stage of
economic development reached and the judicial mix of investment pattern.
Moreover, capital-output ratio along with national savings ratio can
determine the rate of growth of national income.

This is a simplified version of Harrod-Domar Model. This equation shows that

rate of growth of GNP is directly related to savings ratio and inversely related
to capital-output ratio. Thus to achieve a higher rate of growth of national
income, the country will have to take the following two steps, i.e., (a) to raise
the rate of investment and (b) to generate necessary forces for reducing
capital-output ratio.

5. Favorable Investment Pattern:

Favorable investment pattern is an important determinant of economic
development in a country. This requires proper selection of industries as per
investment priorities and choice of production techniques so as to realize a
low capital—output ratio and also for achieving maximum productivity.
Thus in order to attain economic development at a suitable rate, the
Government of the country should make a choice of suitable investment
criteria for the betterment of the economy. The suitable investment criteria
should maximise the social marginal productivity and also make a balance
between labour intensive and capital intensive techniques.

6. Occupational Structure:
Another determinant of economic development is the occupational structure
of the working population of the country. Too much dependence on
agricultural sector is not an encouraging situation for economic
development. Increasing pressure of working population on agriculture and
other primary occupations must be shifted gradually to the secondary and
tertiary or services sector through gradual development of these sectors.
The rate of economic development and the level of per capita income
increase as more and more work force shift from primary sector to secondary
and tertiary sector. As A.G.B. Fisher writes, “We may say that in every
progressive economy there has been a steady shift of employment and
investment from the essential ‘Primary activities’ … to secondary activities of
all kinds and to a still greater extent into tertiary production.”
Thus to attain a high rate of economic development, inter-sectoral transfer of
work force is very much necessary. The extent and pace of inter-sectoral
transfer of work force-depend very much on the rate of increase in
productivity in the primary sector in relation to other sectors.

7. Extent of the Market:

Extent of the market is also considered as an important determinant of
economic development. Expansion of the scale of production and its
diversification depend very much on the size of the market prevailing in the
country.
Moreover, market created in the foreign country is also working as a useful
stimulant for the expansion of both primary, secondary and tertiary sector of
the country leading to its economic development. Japan and England are
among those countries which have successfully extended market for its
product to different foreign countries. Moreover, removal of market
imperfections is also an important determinant of economic development of
under-developed countries.

8. Technological Advancement:
Technological advancement is considered as an important determinant of
economic environment. By technological advancement we mean improved
technical know-how and its broad-based applications.
It includes:
(a) Use of technological progress for economic gains,
(b) Application of applied sciences resulting in innovations and inventions
and
(c) Utilisation of innovations on a large scale.
With the advancement of technology, capital goods become more
productive. Accordingly, Prof. Samuelson rightly observed that “High
Invention Nation” normally attain growth at a quicker pace than “High
Investment Nation”.
There may be three forms of technological advancement, i.e.,
(a) Capital saving,
(b) Labour saving or
(c) Neutral.

The following three conditions must be satisfied for attaining

technological advancement in a country:
(a) Making provision for large investments in research,
(b) Ability to realize the possibilities of using scientific inventions and
innovations for commercial purposes and expansion and diversification of
the market for its product.
As the underdeveloped countries like India have failed to fulfill these
conditions thus their development process is neither self-sustaining nor
cumulative. Thus in order to attain a higher rate of development, the under-
developed countries should adopt only that type of technology which can
suit their requirements.

9. Development Planning:
In recent years, economic planning has been playing an important role in
accelerating the pace of economic development in different countries.
Economic development is considered as an important strategy for building
various social and economic overhead or infra- structural facilities along with
the development of both agricultural, industrial and services sectors in a
balanced manner.
Planning is also essential for mobilization of resources, capital formation and
also to raise the volume of investment required for accelerating the pace of
development. Countries like former U.S.S.R. and even U.S.A. and West
Germany have achieved a rapid development through the adoption of
economic planning.

10. External Factors:

The present situation in the world economy necessitates the active support
of external factors for sustaining a satisfactory rate of economic growth in
under-developed economies. Moreover, domestic resources alone cannot
meet the entire requirement of resources necessary for economic
development.
Therefore, at certain levels, availability of foreign resources broadly
determines the level of economic development in a country.
The external factors which are playing important role in sustaining
the economic development include:
(a) Growing export earnings for financing increasing import bills required for
development,
(b) Increasing flow of foreign capital in the form of direct foreign investment
and participation in equity capital and
(c) International economic co-operation in the form of increasing flow of
foreign aid from advanced countries like U.S.A., Japan etc. and also increased
volume of concessional aid from international institutions like I.M.F., I.B.R.D.
(World Bank) and other regional bodies on economic co-operation like
ASEAN, OPEC, E.E.C. etc.

11. Infrastructural Facilities:

Development of infrastructural facilities is also an important component of
economic environment in a country

12. Suitable Industrial Relations:

Suitable industrial relations are also an important determinant economic
development in a country like India. Healthy trade union activities and
cordial relations between employer and employee promote such economic
environment for development.

B. Non-Economic Factors:
Economic factors alone are not sufficient for determining the process of
economic development in a country like India. In order to attain economic
development, proper social and political climate must be provided. In this
connection, United Nations Experts observed, “Economic Progress will not
occur unless the atmosphere is favorable to it. The people of a country must
desire progress and their social, economic, legal and political situations must
be favorable to it.”
Emphasizing the role of non-economic factors Prof. Cairn-cross observed,
“Development is not governed in any country by economic forces alone and
the more backward the country, the more this is true. The key to
development lies in men’s minds, in the institutions in which their thinking
finds expression and in the play of opportunity on ideas and institutions.”

Again Prof. Macord Wright writes, “The fundamental factors making

economic growth are non-economic and non-materialistic in character. It is
spirit itself that builds the body.” Prof. Ragnar Nurkse has further observed,
“Economic development has much to do with human endowments, social
attitudes, political conditions and historical accidents.”

Under-developed countries are facing various socio-political hurdles in the

path of economic development. Thus in order to attain economic growth,
raising the level of investment alone is not sufficient rather it is also equally
important to gradually transform the out dated social, religious and political
institutions which put hindrances in the path of economic progress
.
Thus following are some of the important non-economic factors
determining the pace of economic development in a country:
(a) Urge for Development:
It is the mental urge for development of the people in general that is playing
an important determinant for initiating and accelerating the process of
economic development. In order to attain economic progress, people must
be ready to bear both the sufferings and convenience. Experimental outlook,
necessary for economic environment must grow with the spread of
education.

(b) Spread of Education:

Economic progress is very much associated with the spread of education.
Prof. Krause has observed that, “Education brings revolutions in ideas for
economic progress.” Education provides stimulus to economic growth as it
teaches honesty, patriotism and adventure. Thus education is working as an
engine for economic development.
In this connection, Prof. H.W. Singer has rightly observed, “Investment in
education is not only highly productive but also yields increasing returns. So,
education plays pioneer role for the creation of human, capital and social
progress which in turn determines the progress of the country.”

(c) Changes in Social and Institutional Factors:

Conservative and rigid social and institutional set up like joint family system,
caste system, traditional values of life, irrational behaviour etc. put severe
obstacle on the path of economic development and also retards its pace.
Thus to bring social and institutional change as per changing environment
and to realize the modern values of life are very much important for
accelerating the pace of economic development in a country.

(d) Proper Maintenance of Law and Order:

Maintenance of law and order in a proper manner also helps the country to
attain economic development at a quicker pace. Stability, peace, protection
from external aggression and legal protection generally raises morality,
initiative and entrepreneurship. Formulation of proper monetary and fiscal
policy by an efficient government can provide necessary climate for
increased investment and also can stimulate capital formation in the
country.
Thus in order to accelerate the pace of economic development the
government must make necessary arrangement for the maintenance of law
and order, defence, justice, security in enjoyment in property, testamentary
rights, assurance to continue business covenants and contracts, provision for
standard weights and measures, currency and formulation of appropriate
monetary and fiscal policy of the country.
But the economies of under-developed countries like India are now facing
serious threat from large scale disorder, terrorism, disturbances in the
international border etc. All these have led to diversion of resources and
initiatives from developmental to non-developmental ends.
Moreover, under such a chaotic situation, capital formation process, business
initiatives and enterprise of private firms are seriously suffered and distorted
leading to a stagnation of economy in these countries. In this connection,
Prof. Arthur Lewis has rightly stated, “No country has made progress without
positive stimulus from intelligent government.” Thus to attain economic
development at a quicker pace’, proper maintenance of law and order and
stability are very important.

(e) Administrative Efficiency:

Economic development of a country also demands existence of a strong,
honest, efficient and competent administrative machinery for the successful
implementation of government policies and programmes for development.
The existence of a weak, corrupt and inefficient administrative machinery,
leads the country into chaos and disorder.
Prof. Lewis has rightly observed, “The behaviour of the government plays an
important role in stimulating or discouraging economic activity.” Therefore,
maintenance of proper administrative set up is a determinant of economic
development of a country.

(f) Cultural Set Up:

Sound cultural set up also build up a better non-economic environment
which are conducive towards economic development. Cultural activities
improve the mental set up of the people in general and develop
simultaneously a sense of bond-ness among various sections of people living
in the society. All these create a better environment for development.
(g) Politico-Legal Environment:
The politico-legal environment of the country is also an important
determinant of economic development. Political stability and legal support
for developmental activities creates a better environment for development.
Reforms in the form of industrial policy reforms, labour reforms etc. should
be enacted through proper legislation.
Side by side, the judicial system in the country should be developed in such
a manner so that it can maintain wide network to serve for the course of
development. The legislature and the judiciary in the country should work
hand in hand to create a better investment-friendly environment for
development.
Such politico-legal environment can play an important role towards creating
a better business environment in the country. The politico-legal environment
in India has not yet been developed to the accepted level. Accordingly, the
Chambers of Commerce, foreign investors are demanding various changes in
the politico-legal environment in the country so as to reap maximum benefit
from economic reforms.

(h) Natural Environment:

Suitable natural environment is also an important component of non-
economic environment determining the business environment in the country.
Thus the business environment in the country needs a natural support which
includes suitable climate, balanced wealthier, suitable natural environment,
i.e., free from flood and draught etc.
Moreover, the maintenance of eco- friendly, atmosphere is also quite
important for the promotion of developmental activities in an economy. In a
country like India, the natural environment always promotes the
developmental activities. But in certain exceptional situations, the country
usually faces extreme natural environment resulting flood, draught etc.
which disturbs the developmental process of the country.
Thus three is a great importance of both economic as well as non-economic
factors on the maintenance of business environment in a country. Moreover,
in a vast country like India having a large land and population, the economic
and non-economic environment are playing a very important role for
maintaining a sound business environment within the country.
 Chapter 5
Inequality, Poverty and
Development
Introduction

Global poverty is decreasing, but billions of people still do not have the
resources they need to survive and thrive. Economic growth can reduce
poverty, but it can also drive inequality that generates social and
economic problems. And efforts at domestic resource mobilization
through taxation, though critical to funding the SDGs, can negatively
impact the poor. In this work, CGD experts offer suggestions to improve
how changes in development financing can be made to tackle poverty
and inequality.
Meaning and Definition of Inequality, Poverty
Inequality refers to disparities and discrepancies in areas such as income,
wealth, education, health, nutrition, space, politics and social identity.
Economic inequality is the unequal distribution of income and
opportunity between different groups in society. It is a concern in almost
all countries around the world and often people are trapped in poverty
with little chance to climb up the social ladder. But, being born into
poverty does not automatically mean you stay poor. Education, at all
levels, enhancing skills, and training policies can be used alongside social
assistance programs to help people out of poverty and to reduce
inequality. Several countries are also now exploring whether a universal
basic income could be the answer.
Poverty is the state of not having enough material possessions or income for a
person's basic needs. Poverty may include social, economic, and political elements.

The World Bank Organization describes poverty in this way:

“Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and
not being able to see a doctor. Poverty is not having access to school and
not knowing how to read. Poverty is not having a job, is fear for the
future, living one day at a time.
The Kuznets Hypothesis

There has been much controversy among economists over the issue
whether economic growth increases or decreases income distribution.
Prof. Kuznets is the first economist to study this problem empirically. He
observes that in the early stages of economic growth relative income
inequality increases, stabilises for a time and then declines in the later
stages. This is known as the inverted U-shaped hypothesis of income
distribution.
In his 1955 Study, Kuznets takes the following data relating to three
LDCs–India, Ceylon and Puerto-Rico and two DCs—U.K. and U.S.
Table 1 shows that in LDCs 60% of the poorest received 30% and
less of national income, whereas in DCs they received more than 30% of
national income. So far as the richest 20% in LDCs are concerned, they
received 50% and more of national income. In DCs, they received 45%
and less. Kuznets comes to the conclusion that the size distribution of
income was more unequal in LDCs than in DCs. It was high (1.67 to 2.33)
in LDCs and low (1.25 to 1.29) in DCs.

TABLE 1 : Relative Income Inequality in Various

Countries in about 1950

It was in his 1963 Study that Kuznets developed his inverted U-

shaped hypothesis by taking the data of 18 countries by size distribution
of income. On their basis, he constructed different Lorenz curves for DCs
and LDCs and derived their Gini coefficients. It was 0.37 for DCs and 0.44
for LDCs. It showed that income inequalities were higher in LDCs than in
DCs and this is explained in Figure 1 where the 45° straight line OD is of
equal income distribution. The thick curve to the right and nearer to this
line is the Lorenz curve of DCs. The dotted curve further to the right
represents the Lorenz curve of LDCs.
 But the Gini coefficient of distribution is a better measure of the
degree of income inequality. It varies from 0 (complete equality) to 1
(complete inequality). The larger the coefficient, the greater the
inequality. The Gini coefficient is measured in Figure 1 as the ratio of
area A/A + B or A/Δ OCD. The
greater is this ratio, the more unequal is
the distribution of income i.e., the more
the Lorenz curve falls below the 45° line.
In Figure 1, the area A covered by the
thick Lorenz curve roughly represents
37% of the triangle OCD for DCs and the
area covered by the dotted Lorenz curve
represents roughly 44% of the area of
the triangle OCD for LDCs.
The changes in the distribution of income as
measured by the Gini coefficient in relation to
the increase in per capita income trace out the
Kuznets inverted U-shaped curve K, as shown in
Figure 2. “Note that the more robust portion of
the Kuznets curve lies to the right: income
inequality falls with an
increase in per capita income at higher levels of development. The
variance around the estimated Kuznets curve is greatest, however, from
low to middle levels of development.”

The inverted U-shaped curve hypothesis applies to the present developed

and developing countries but the degree of inequality in the latter is
greater than in the former.

Causes of Increase in Inequality with Development

There are many factors which tend to increase relative income

inequality in the early stages of development in LDCs.
LDCs are characterized by geographic, social, financial and
technological dualism. When the process of transition from a traditional
agricultural society to modern industrial economy begins, it increases
inequalities in income distribution. There are structural changes which
lead to increasing employment opportunities, exploitation of new
resources, and improvements in technology. All these lead to increase in
per capita income in the industrial sector. The incomes of workers,
managers, entrepreneurs, etc. in urban areas increase more rapidly. But
income per capita of workers engaged in agricultural and non- agricultural
occupations in rural areas does not rise due to subsistence agriculture,
defective land tenure system and rural backwardness.
The industrial sector uses capital-intensive techniques which
absorbs only educated, skilled and trained workers. Workers in this sector
have high incomes and employers earn large profits. Thus the modern
industrial sector grows faster than the rural subsistence sector. As a
result, the relative share of income and profit in national income of this
sector rises, more than in the rural sector.
The migration of rural population to urban areas does not provide
gainful employment opportunities to the uneducated and unskilled people
in towns and cities. The majority of them become vendors of fruits,
vegetables, newspapers, etc., car washers, waiters, porters, shop
assistants, domestic servants, etc. All such persons are underemployed
and have low incomes.
When migration to urban areas starts in the early stages of
development, some landlords also move to the urban sectors who invest
in urban property, stocks, bonds, etc. Such investments bring them higher
incomes than from landownership in rural areas.
On the other hand, with technological advance and increase in
financial facilities in urban areas, a new class of entrepreneurs emerges
which leads to diversification in manufacturing, trade and business.
Consequently, incomes and profits of persons engaged in them increase.
There is urban bias in the allocation of financial resources for
development on the part of governments with the result that the rural
economy remains backward with disguised unemployment and low per
capita income.
Governments in LDCs find it difficult to pass and implement
legislation relating to land reforms and other economic measures to
reduce concentration of income and wealth among the rich due to
political reasons. Consequently, income inequalities increase.
Further, such governments are financially weak and are not in a
position to spend on such social securities measures as free education,
health facilities, etc. which reduce poverty and increase per capita
income. They also do not impose heavy taxes on incomes and profits so
as to increase saving, investment and capital formation.
Above all, higher growth rate of population among the masses in
LDCs increases the absolute number of people and hence relative
inequality.
Causes of Reduction in Inequality with Development

Kuznets gives two reasons for the decrease in inequality of income

distribution when the country reaches high income levels in the later
stages of development. First, the per capita income of the highest income
groups falls because their share of income from property decreases.
Second, the per capita income of the lowest income groups rises when
the government takes legislative decisions with respect to education and
health services, inheritance and income taxation, social security, full
employment and economic relief either to whole groups or individuals.
As development proceeds, it sets in motion a chain of cumulative
expansion in the industrial sector, thereby leading to higher per capita
income. This, in turn, increases the demand for farm products and other
products of rural and backward areas which raise the per capita income
of the people of these areas. This is what Hirchman calls “trickling down
effects” and Myrdal calls “spread effects” of development.
Besides, the incomes of rural areas also increase from urban
remittances and / or foreign remittances. People belonging to rural areas
but working in urban areas and / or living in foreign countries remit large
sums to their dependents.
Above all, as development gains momentum the growth rate of
population declines which increases per capita income.
As pointed out by Montek S. Ahluwalia,4 the improvement in income
distribution observed in the later stages of development has been due to
intersectoral shifts in the structure of production, expansion in educational
attainment and skill of the labour force, and reduction in the rate of growth
of population.

Its Critical Appraisal

Kuznets’ inverted U-hypothesis has been empirically tested and

confirmed by some economists while others find it the other way. Kravis in
his study of eleven developing and developed countries confirms the
Kuznets hypothesis that the degree of inequality first increases at lower
levels of development and the declines at higher levels of development.
Adelman and Morris in their study of 43 developing and 13 developed
countries work out their average Gini coefficients as 0.47 and 0.29
respectively. They come to the conclusion that income inequality
increases up to a certain level of development and then declines, thereby
confirming the Kuznets inverted U-hypothesis. Similarly, Montek S.
Ahluwalia in his analysis of the data for 60 countries finds that relative
income inequality increases substantially in the early stages of
development with reversal of this tendency in the later stages.
Despite these, the validity of the Kuznets inverted U-hypothesis has
been questioned on the basis of the data taken by Kuznets and others for
their studies. Kuznets takes a very small sample of developing and
developed countries. Critics opine that his analysis is based on 5 per cent
empirical information and 95 per cent speculation.

According to Todaro, the long-run data for developed countries do

seem to support the Kuznets hypothesis but the studies of the
phenomenon in LDCs have produced conflicting results. His study of 13
LDCs shows that higher income levels can be accompanied by falling and
not rising inequality.” Todaro also finds fault with the methodology used
by economists to test the Kuznets hypothesis. The time-series data being
not available for most LDCs, economists use cross-sectional data. Using
cross-sectional data for a time-series phenomenon for drawing
conclusion is basically wrong. In a recent study, Anand and Kanbur have
shown that the choice of data as the measure of inequality may lead to
U-relationship between income inequality and development, Inverted-U
relationship or no relationship at all.

Economic characteristics of poverty groups rural poverty, women

and poverty

1. Rurality

In Asia and Africa, around 80% of absolute poverty is found in rural areas,
where most of the poor are engaged in subsistence farming or related
activities. In South America, this number is around 50%. However, in many
developing nations, most investment and relief has been delivered to urban
centres.

2. Women and Children

Women and children are disproportionately affected by absolute poverty.

These two demographic groups are highly connected because women spend
proportionally more of their income on their children then do men. There is
thus a higher likelihood that improvements brought about in the lives of
women will be passed along to the next generation. Unfortunately, poverty-
relief assistance has traditionally been targeted towards males.
Women are often marginalized for cultural reasons. They often don't
have access to credit, education, medical and government services. Their
earning power is considerably less than that of males, and they often
work in illegal sectors, or perform tasks that are
non-remunerated/intangible.

3. Ethnic minorities and indigenous populations

Ethnic minorities and indigenous populations are very often more likely
to live in poverty, and lack access to education, medical services and
employment. This is often a result of economic, social and political
discrimination. A factor here is also statistical discrimination, or a
propensity to discriminate because the majority of encounters with a
given ethnicity have been deemed negative overall.

Policy options for poverty reduction and enhance income

distribution

1. Altering relative factor prices

Developing economies often suffer from high unemployment, while firms

continue to invest in capital-intensive forms of production. This is
counter-intuitive because high unemployment would suggest that labor
prices should be able to compete with capital prices. The explanation is
that a number of factors contribute to artificially inflate labor prices,
while others artificially decrease the price of capital. It is therefore
assumed that by removing these price distortions, firms will increase
labor-employment.

2. Asset ownership

A root cause of income inequality is inequality in asset ownership

(including such things as education). Various programs, such as land
ownership reform, can be implemented to counter this effect. The net
result should be an increased ability to earn sufficient income.

3. Progressive taxation

Taxation that increases with income is generally considered to be an

effective way of financing programs which can benefit the poor. Note that
although progressive on paper, these policies can be regressive in reality
because the rich tend to receive much of their income via asset
ownership rather than directly in the form of wages.

4. Direct transfers

This has been used in many contexts, but runs the risk of being abused
both by those in need, and those not in need. A good way of getting
around these problems is through workfare programs, which reward the
poor for work that they do at such low wages that only the most
desperate would have enough incentive to take advantage of the
program
 Chapter 6
Education and Development
Introduction

In this chapter, we explore the relationship between education and economic

development and review the past and current trends and implications of
investment in education and economic development in developing countries.

At the end of the chapter will be able to answer the following six basic
questions:

1. How does education influence the rate, structure, and character of

economic

growth?

2. Does education in general and the structure of LDC educational systems in

particular contribute to or retard the growth of domestic inequality and

poverty?

3. What is the relationship of education to rural-urban migration and urban

unemployment?

4. Do women lag behind men in educational attainment, and is there a

relation-

ship between the education of women and their desired family size?

5. Do contemporary formal educational systems tend to promote or retard

agricultural and rural development?

6. What is the relationship among LDC educational systems, developed

country

educational systems, and the international migration of highly educated

professional and technical workers from the less developed to the more

developed nations?
Education and Human Resources

Public Educational Expenditure

Most economists argue that it is the human resources of a nation, not its
physical capital or its natural resources, that ultimately determine the
character and pace of its economic and social development. The principal
institutional mechanism for developing human skills and knowledge is the
formal educational system. Most Third World nations believe that the rapid
quantitative expansion of educational Opportunities is the key to national
development: The more education, the more rapid the development.
Therefore, all countries have committed themselves to the goal of universal
education in the shortest possible time.
Nevertheless, the challenge is now gathering momentum, and it comes from
many sources. It can be found most clearly in the character and results of
the development process itself. After more than three decades of rapidly
expanding enrolments and hundreds of billions of dollars of educational
expenditure, the plight of the average citizen in many parts of Africa and
Latin America seems little improved. Absolute poverty is chronic and
pervasive. Economic disparities between rich and poor widen with each
passing year. Unemployment and underemployment have reached
staggering proportions, with the "educated" increasingly swelling the ranks
of the urban unemployed

Education in Developing Regions

Public Educational Expenditure

In many developing countries, formal education is the largest "industry" and
the greatest consumers of public revenues. Poor nations have invested huge
sums of money in education. The reasons are numerous. Literate farmers
with at least a primary education is thought to be more productive and more
responsive to new agricultural technologies than illiterate farmers.
Secondary school graduates with some knowledge of elementary computer
operations and information retrieval processes are needed to perform
technical and administrative functions in growing public and private
bureaucracies. University graduates with advanced are needed to
provide the professional and managerial expertise necessary for a
modernized public
and private sector.
In addition to these obvious human resource needs, the people themselves,
both rich and poor, have exerted tremendous political pressure for the
expansion of school places in developing countries. Parents have realized
that in an era of scarce skilled manpower, the more schooling and the more
certificates their children can accumulate, the better will be their chances of
getting secure and well paid jobs. More years of schooling have been
perceived as the only avenue of hope for poor children to escape from
poverty. As a result of these forces acting on both demand and supply, there
has been a tremendous acceleration in LDC public expenditures on education
during the past decades. The proportion of national income (budgets) spent
on education has increased rapidly. In Africa during the 1960s and 1970s
public educational expenditures more than doubled. By the 1990s,
educational budgets in many developing nations were absorbing 15% to 27%
of total government recurrent expenditure.

Literacy, The Gender Gap: Women and Education

Literacy
The ability to read, write, and comprehend information, is obviously a
fundamental component of human resource development. The percentage of
LDC adults who are illiterate has fallen from 60% in 1960 to 31 % in 1995.
However, as a result of rapid population growth, the actual number of adult
illiterates has risen over this same period by nearly 150 million to an
estimated total of over 872 million in 1996. Illiteracy rate in Saharan Africa is
43%.

The Gender Gap

Women and Education Young females receive considerably less education

than young males in almost every developing country. In 66 out of 108
countries, women's enrolment in primary and secondary education is lower
than that of men by at least 10 percentage points. This educational gender
gap is the greatest in the poorest countries and regionally in the Middle East
and North Africa. For all developing countries taken together, the female
literacy rate was 29% lower than male literacy, women's mean years of
schooling were 45% lower than men's, and females' enrolment rates in
primary, secondary, and postsecondary schools were 9%, 28%, and 49%
lower, respectively, than the corresponding male rate.

Why is female education important? Is it simply a matter of equity?

The answer is that there now exists ample empirical evidence that
educational discrimination against women hinders economic development in
addition to reinforcing social inequality.

Closing the educational gender gap by expanding educational opportunities

for women is economically desirable for four reasons:

1.The rate of return on women's education is higher than that on men's in

most developing countries.

2.Increasing women's education not only increases their productivity on the

farm and in the factory but also results in greater labor force participation,
later marriage, lower fertility, and greatly improved child health and
nutrition.

3.Improved child health and nutrition and more educated mothers lead to
multiplier effects on the quality of a nation's human resources for many
generations to come.

4.Because women carry a disproportionate burden of the poverty and

landless-ness that permeates developing societies, any significant
improvements in their role and status via education can have an important
impact on breaking the vicious cycle of poverty and inadequate schooling.

Educational Supply and Demand: The Relationship between

Employment Opportunities and Educational Demands

The amount of schooling received by an individual, although affected by

many non-market factors, can be regarded as largely determined by demand
and supply, like any other commodity or service. However, because most
education is publicly provided in less developed countries, the determinants
of the amount demanded turn out to be much more important than the
determinants of supply. On the demand side, the two principal influences on
the amount of schooling desired are (1) a more educated student's prospects
of earning considerably more income through future modern-sector
employment (the family's private benefits of education) and (2) the
educational costs, both direct and indirect, that a student or family must
bear. The amount of education demanded is thus in reality a derived demand
for high-wage employment opportunities in the modern sector.
On the supply side, the quantity of school places at the primary, secondary,
and university levels is determined largely by political processes, often
unrelated to economic criteria. Given mounting political pressure throughout
the Third World for greater numbers of school places, public supply of these
places is fixed by the level of government educational expenditures. These
are in turn influenced by the level of aggregate private demand for
education. Because it is the amount of education that is demanded that
largely determines the supply (within the limits of government financial
feasibility), let us look more closely at the economic (employment-oriented)
determinants of this derived demand. The amount of schooling demanded
sufficient to qualify an individual for modern-sector jobs appears to be
determined by the combined influence of the following four variables:

1.The wage or income differential.

This is the wage differential between jobs in the modern sector and those
outside it (family farming, rural and urban self-employment, etc.), which for
simplicity we can call the traditional sector. The greater the income
differential between the modern
and traditional sectors, the greater the quantity of education demanded.

2. The probability of success in finding modern-sector employment

An individual who successfully completes the necessary schooling for entry
into
the modern-sector labour market has a higher probability of getting that
well-paid urban job than someone who does not.

3.The direct private costs of education

We refer here to the current out-of-pocket expenses of financing a child's
education. These expenses include school fees, books, clothing, and related
costs.

4.The indirect or opportunity costs of education.

An investment in a child's education involves more than just the direct out-
of
-pocket costs of that education, especially when the child reaches the age at
which he can make a productive contribution to family income. At this point,
for each year the child continues his education, he in effect foregoes the
money income he could expect to earn or the output he could produce for
the family farm. This opportunity cost of education must also be included as
a variable affecting its demand.

Social versus Private Benefits and Costs

The inexorable attraction of ever-higher levels of education is even more

costly than this simple picture suggests. Typically, in developing countries,
the social costs of education (costs borne by the public) increase rapidly as
students climb the educational ladder. The private costs of education (those
borne by students themselves) increase more slowly or may even decline.

This widening gap between social and private costs provides an even greater
stimulus to the demand for higher education than it does for education at
lower levels. Educational demand therefore becomes increasingly
exaggerated at the postsecondary levels. But educational opportunities can
be accommodated to these distorted demands only at full social cost. As
demands are generated progressively through the system, the social cost of
accommodation grows much more rapidly than the places provided. More
and more resources may be misallocated to educational expansion in terms
of social costs, and the potential for creating new jobs will consequently
diminish for lack of public financial resources.

Figure 1 provides an illustration of this divergence between private and

social benefits and costs. It also demonstrates how this divergence can lead
to a misallocation of resources when private interests supersede social
investment criteria.

In Figure 1a expected private returns and actual private costs are plotted
against years of completed schooling. As a student completes more and
more years of schooling, her expected private returns grow at a much faster
rate than her private costs, for reasons explained earlier. To maximize the
difference between expected benefits and costs, the optimal strategy for a
student would be to secure as much schooling as possible.

Now consider Figure 1b, where social returns and social costs are plotted
against years of schooling. The social benefits curve rises sharply at first,
reflecting the improved levels of productivity of, say, small farmers and the
self-employed that result from receipt of a basic education and the
attainment of literacy, arithmetic skills, and elementary vocational skills.
Thereafter, the marginal social benefit of additional years of schooling rises
more slowly, and the social returns curve begins to level off. By contrast, the
social cost curve shows a slow rate of growth for early years of schooling and
then a much more rapid growth for higher levels of education. This rapid
increase in the marginal social costs of post primary education is the result
both of the much more expensive capital and recurrent costs of higher
education and, more important, of the fact that much post primary education
in developing countries is heavily subsidized.

Figure 1: Private versus Social Benefits and Costs of Education:

An illustration
It follows from Figure 1b that the optimal strategy from a social viewpoint,
the one that maximizes the net social rate of return to educational
investment, would be one
that focuses on providing all students with at least B years of schooling.
Beyond B years, marginal social costs exceed marginal social benefits, so
additional public educational investment in new, higher-level school places
will yield a negative net social rate of return .
Education, Society, and Development: Some Issues,
Education and Economic Growth
Education, Society, and Development: Some Issues
We cannot discuss the relationship between education and development
without explicitly linking the structure of the educational system to the
economic and social character of the Third World society in which it is
contained. Educational systems more often than not reflect the essential
nature of that society. For example, if the society is in egalitarian in
economic and social structure, the educational system will probably reflect
that bias in terms of who is able to proceed through the system. At the same
time, education can influence the future shape and direction of society in a
number of ways. Thus the link between education and development goes
both ways. By reflecting the socioeconomic structures of the societies in
which they function (whether egalitarian or not), educational systems tend to
perpetuate, reinforce, and reproduce those economic and social structures.

With these general observations in mind, let us look at five specific economic
components of the development question-growth, inequality and poverty,
population and fertility, migration, and rural development – to see in what
way they influence or are influenced by most LDC educational systems. Such
an examination will demonstrate the important two-way relationship that
exists between education and development. It should also provide us with an
even broader understanding of the development problems.

Education and Economic Growth

For many years, the proposition that educational expansion promoted and in
some cases even determined the rate of overall GNP growth remained
unquestioned. The logic seemed fairly straightforward. Developing nations
were deficient in their supply of semiskilled and skilled manpower. Without
such manpower, which, it was assumed, could be created only through the
formal educational system, development leadership in both the public and
private sectors would be woefully lacking.

Clearly, in the newly independent nations of Africa and Asia, there was an
immediate need to build up the human as well as physical capital
(infrastructure) in order to provide indigenous leadership for the major tasks
of development. Rapid quantitative expansion of enrolments therefore
appeared justified in light of the substantial manpower scarcities of the
1950s and 1960s. And although it is often difficult to document statistically,
it seems clear that the expansion of educational opportunities at all levels
has contributed to aggregate economic growth by (1) creating a more
productive labour force and endowing it with increased knowledge and skills;
(2) providing widespread employment and income-earning opportunities (3)
creating a class of educated leaders to fill vacancies left by departing
expatriates or otherwise vacant positions (4) providing the kind of training
and education that would promote literacy and basic skills while encouraging
"modern" attitudes on the part of diverse segments of the population. Even if
alternative investments in the economy could have generated greater
growth, educated and skilled labour force is a necessary condition of
sustained economic growth.

However, any evaluation of the role of education in the process of economic

development should go beyond the analysis of the single statistic of
aggregate growth. We must also consider the structure and pattern of that
economic growth and its distribution implications – which benefits.

Education, Inequality, and Poverty, Education, Internal Migration,

and the Brain Drain

Education, Inequality, and Poverty

Studies on the economics of education in both developed and developing

nations formerly focused on the link among education, labour productivity,
and output growth. As a result, the impact of education on the distribution of
income and on the elimination of absolute poverty was largely neglected.
Recent studies, however, have demonstrated that contrary to what might
have been assumed, the educational systems of many developing nations
sometimes act to increase rather than to decrease income inequalities.

The basic reason for this perverse effect of formal education on income
distribution is the positive correlation between level of education and level of
lifetime earnings. This correlation holds especially for workers who are able
to complete secondary and university education where income differentials
over workers who have completed only part or all of their primary education
can be on the order of 300% to 800%. And as levels of earned income are
clearly dependent on years of completed schooling, it follows that large
income inequalities will be reinforced if students from the middle and upper
income brackets are represented disproportionately in secondary and
university enrolments. In short, if for financial or other reasons the poor are
effectively denied access to secondary and higher educational

opportunities, the educational system can actually perpetuate and even

increase inequality in developing countries.

Education, Internal Migration, and the Brain Drain

Education seems to be an important factor influencing rural-urban migration.

Numerous studies of migration in diverse countries have documented the
positive relationship between the educational attainment of an individual and
his or her propensity to migrate from rural to urban areas. Basically,
individuals with higher levels of education face wider urban-rural real-income
differentials and higher probabilities of obtaining modern-sector jobs than
those with lower levels of education (recall from the previous chapter how
income differentials and job probabilities interact to determine migration
patterns). The probability variable in particular accounts for the growing
proportion of the more educated rural migrants in the face of rising levels of
urban unemployment among the less educated.
Education also plays a powerful role in the growing problem of the
international migration of high-level educated workers-the so-called brain
drain from poor to rich countries. This is particularly true in the case of
scientists, engineers, academics, and physicians, many thousands of whom
have been trained in home country institutions at considerable social cost
only to reap the benefits from and contribute to the further economic growth
of the already affluent nations.

The international brain drain deserves mention not only because of its
effects on the rate and structure of LDC economic growth but also because
of its impact on the style and approach of Third World educational systems.
The brain drain, broadly construed, has not merely reduced the supply of
vital professional people available within developing countries; perhaps even
more serious, it has diverted the attention of the scientists, physicians,
architects, engineers, and academics who remain from important local
problems and goals. These include the development of appropriate
technology; the promotion of low-cost preventive health care; the
construction of low-cost housing, hospitals, schools, other service facilities;
the design and building of functional yet inexpensive labour intensive roads,
bridges, and machinery; the development of relevant university teaching
materials; and the promotion of problem-oriented research on vital domestic
development issues. Such needs are often neglected as, dominated by rich-
country ideas as to what represents true professional excellence, those
highly educated and highly skilled LDC professionals who do not physically
migrate to the developed nations nevertheless migrate intellectually in terms
of the orientation of their activities. This "internal" brain drain is much more
serious than the external one.

Education of Women, Fertility, and Child Health, Education and

Rural Development

Education of Women, Fertility, and Child Health

Most studies reveal an inverse relationship between the education of women
and their size of family, particularly at the lower levels of education.
Assuming that lower levels of urban unemployment (especially among the
educated) and lower levels of fertility are important policy objectives for LDC
governments, the basic issue is whether the continued rapid quantitative
expansion of the formal educational system (and the resource allocation
decisions implicit therein) will ameliorate or exacerbate the twin problems of
accelerating internal migration and rapid population growth. With respect to
this issue, both theory and evidence seem once again to indicate that given
limited government resources, the further excessive quantitative expansion
of school places beyond perhaps basic education is both undesirable and
unwise. There are two main reasons for this conclusion.

First, as we discovered earlier in the chapter, any rapid expansion of the

formal primary system creates inexorable pressures on the demand side for
the expansion of secondary and tertiary school places. The net result is the
widespread phenomenon of excessive expansion of school places from the
standpoint of real resource needs and the associated dilemma of rising levels
of rural- urban migration and urban unemployment among a cadre of
increasingly more educated and more politically vocal migrants.

Second, if, as many observers have argued, the education of women does
affect their fertility behaviour, primarily through the mechanism of raising
the opportunity cost of their time in child-rearing activities, then it follows
that unless sufficient employment opportunities for women (as well as for
men) can be created, the reliance on educational expansion as a policy
instrument for lowering fertility will be much less effective. However,
reallocating existing educational resources to women's education, in
combination with an aggressive program of rural and urban female
employment creation could go a long way toward achieving the twin goals of
fertility reduction and poverty alleviation.
Finally, as mentioned earlier in the chapter, educating women has been
shown to be a critical ingredient in breaking the vicious cycle of poor child
health, low educational performance, low income, high fertility, and poor
child health.

Education and Rural Development

If national development is to become a reality in Third World nations, there

must be a better balance between rural and urban development. Because
most of the priority projects of the past few decades focused on the
modernization and development of the urban sector, much more emphasis
must be placed in future years on expanding economic and social
opportunities in rural areas. Although agricultural development represents
the main component of any successful rural development program simply
because 60% of LDC rural populations are engaged directly or indirectly in
agricultural activities, rural development must nevertheless be viewed in a
broader perspective.

First and foremost, it should be viewed in the context of far-reaching

transformations of economic and social structures, institutions, relationships,
and processes in rural areas. The goals of rural development cannot simply
be restricted to agricultural and economic growth. Rather, they must be
viewed in terms of a balanced economic and social development with
emphasis on the equitable distribution, as well as the rapid generation, of
the benefits of higher levels of living. Therefore, are the creation of more
productive employment opportunities both on and off the farm; more
equitable access to arable land; more equitable distribution of rural income;
more widely distributed improvements in health and nutrition; and
broadened access to both formal (in-school) and non-formal (out-of-school)
education, for adults as well as children, of a sort that will have direct
relevance to the needs and aspirations of rural dwellers.
What, then, might be the real and lasting educational needs for rural
development? Philip H. Coombs and Manzoor Ahmed have grouped these
educational needs for young people and adults, males and females, into four
main categories:

1.General or basic education (literacy, arithmetic, an elementary

understanding of science and the immediate environment, etc.) – what most
primary and secondary schools now seek to achieve.

2.Family improvement education – designed primarily to impart knowledge,

skills, and attitudes useful for improving the quality of family life and
including such subjects as health and nutrition, homemaking and child care,
home repairs and improvements, and family planning.

3.Community improvement education – designed to strengthen local and

national institutions and processes through instruction in such matters as
local and national government, cooperatives, and community projects.

4.Occupational education – designed to develop particular knowledge and

skills associated with various economic activities that are useful in making a
living.

TABLE Illustrative Rural Occupational Groups and Their

Learning Needs
Group Types of Learning Needs
at Varying Levels of
Sophistication and
Specialization

A. Persons directly engaged in  Farm planning and

agriculture management, rational
1.Commercial farmers decision making,
2.Small subsistence and semi recordkeeping, cost and
revenue computations, use
subsistence farm families of credit
3.Landless farm workers  Application of new inputs,
varieties, improved farm
practices
 Storage, processing, food
preservation
 Supplementary skills for
farm maintenance and
improvement, and side-line
jobs for extra income
 Knowledge of government
services, policies, programs,
targets
 Knowledge and skills for
family improvement (e.g.,
health, nutrition, home
economics, child care,
family planning)
B. Persons engaged in off-  Civic skills (e.g., knowledge
farm commercial activities of how cooperatives, local
1.Retailers and wholesalers of government, national
farm supplies and equipment, government function)
goods and other items
2.Suppliers of repair and  New and improved technical
maintenance services skills applicable to particular
3.Processors, stores, and shippers goods and services
of agricultural commodities  Quality control
4.Suppliers of banking and credit  Technical knowledge of
services goods handled sufficient to
5. Construction and other artisans advise customers on their
6. Suppliers of general transport
services use, maintenance, etc.
7.Small manufacturers  Management skills
(business planning;
recordkeeping and cost
accounting;
 procurement and inventory
control; market analysis and
C. General services personnel: sales methods; customer
rural administrators, and employee relations;
planners, technical experts knowledge of government
1.General public administrators, services, regulations, taxes;
broad-gauged analysts, and use of credit)
planners at subnational levels
2.Managers, planners,
technicians, and trainers for  General skills for
specific public services (e.g., administration, planning,
agriculture, transport, irrigation, implementation, information
health, small industry, education, flows promotional activities
family services, local government)  Technical and management
3.Managers of cooperatives and skills applying to particular
other farmer associations specialties
4.Managers and other personnel  Leadership skills for
of credit service's generating community
enthusiasm and collective
action, staff team work, and
support from higher
echelons
Policies Largely External to Educational Systems, Policies Internal to
Educational Systems

Policies Largely External to Educational Systems

A. Adjusting Imbalances, Signals, and Incentives

Policies that tend to remedy major economic imbalances and incentive

distortions (e.g., in income and wage differentials) and alleviate social and
political constraints on upward mobility can have the multiple beneficial
effects of increasing job opportunities, slowing the rate of rural-urban
migration, and facilitating development-related modifications of educational
systems.

B. Modifying Job Rationing by Educational Certification

To break the vicious cycle in which overstated job specifications make over
education necessary for employment, policies are needed that will induce or
require public and private employers to seek realistic qualifications. Basic to
this procedure would be the elimination of school certificates for many jobs,
especially in the public sector (janitors, messengers, file clerks, etc.), which
tends to set the pattern for the private sector.

C. Curbing the Brain Drain

Controlling or taxing the international migration of indigenously trained high-

level a professional is a very sensitive area. When a nation invests scarce
public financial resources in the education and training of its people only
then to forgo the social returns on that investment as a result of
international migration, it seems both economically and morally justifiable to
seek either temporarily to restrict that movement in the national interest or,
better, to tax the overseas earnings of professional migrants and reinvest
those revenues in programs of national development. Such a tax on overseas
earnings would act as a financial disincentive to migrate.

Policies Internal to Educational Systems

A. Educational Budgets

Where politically feasible public educational budgets should grow more

slowly than in the past to permit more revenue to be used for the creation of
rural and urban employment opportunities. Moreover, a larger share of
educational budgets should be allocated to the development of primary as
opposed to secondary and higher education in order to promote self-
education and rural work-related learning experiences in later life.

B. Subsidies

Subsidies for the higher levels of education should be reduced as a means

of over-coming distortions in the aggregate private demand for education.
Policies should be promoted by which the beneficiary of education would
bear a larger proportion of educational costs as the student proceeds
through the system. This should be done either directly, through loan
repayments, or by service in rural areas. At the same time, low income
groups should be provided with sufficient subsidies to permit them to
overcome the sizable private costs (including opportunity costs) of schooling.

C. Primary School Curricula in Relation to Rural Needs

To maximize the productivity of rural human resources, primary school

curricula and non-formal educational opportunities for school dropouts and
adults should be directed more toward the occupational requirements of
rural inhabitants, whether in small-farm agriculture, non-farm artisan and
entrepreneurial activities, or public and commercial services. Such curricula
and task-related reorientations of rural learning systems, however, will not
be effective in eliciting popular support unless rural economic opportunities
are created so that small farmers, artisans, and entrepreneurs can make use
of their vocational knowledge and training. Without these incentives, people
will justifiably view such formal and non-formal occupational training
programs with considerable skepticism. They would probably rather pursue
the formal school certificate and take their chances in the urban job lottery.

D. Quotas

To compensate for the inequality effects of most existing formal school

systems, some form of quotas may be required to ensure that the proportion
of low – income students at secondary and higher educational levels at least
bears some relationship to their proportion in the overall population. Under
present systems, implicit quotas by income status often determine which
students precede through the educational system. Replacing this de facto
quota system with an alternative that ensures that capable low-income
students will be able to improve their own and their family's well-being by
overcoming the financial barriers to educational advancement through loans
and subsidies would go a long way toward making educational systems true
vehicles of economic and social equality

CHAPTER 7
GENDER AND DEVELOPMENT
Introduction

Selected concepts central to Gender and Development thinking are explained

here. These are intended to help you explore some of the key ideas and issues in
Gender and Development and their implications for policy and practice. The
succinct explanations here are neither comprehensive nor definitive. Readers are
advised to consult the recommended readings for more detailed discussions.

Quick Definitions

Culture: The distinctive patterns of ideas, beliefs, and norms which characterise
the way of life and relations of a society or group within a society

Gender Analysis: The systematic gathering and examination of information on

gender differences and social relations in order to identify, understand and redress
inequities based on gender

Gender Equality and Equity: Gender equality denotes women having the same
opportunities in life as men, including the ability to participate in the public sphere.

Gender equity denotes the equivalence in life outcomes for women and men,
recognising their different needs and interests, and requiring a redistribution of
power and resources.
Gender Mainstreaming: An organisational strategy to bring a gender perspective
to all aspects of an institution’s policy and activities, through building gender
capacity and accountability

Gender Needs: Shared and prioritised needs identified by women that arise from
their common experiences as a gender.

Gender Planning: The technical and political processes and procedures necessary
to implement gender-sensitive policy

Gender Training A facilitated process of developing awareness and capacity on

gender issues, to bring about personal or organisational change for gender equality

National Machineries for Women: Agencies with a mandate for the

advancement of women established within and by governments for integrating
gender concerns in development policy and planning

Sex and Gender: Sex refers to the biological characteristics that categorise
someone as either female or male; whereas gender refers to the socially
determined ideas and practices of what it is to be female or male

Social Justice: Fairness and equity as a right for all in the outcomes of
development, through processes of social transformation

WID: The WID (or Women in Development) approach calls for greater attention to
women in development policy and practice, and emphasises the need to integrate
them into the development process.

GAD (or Gender and Development) approach focuses on the socially constructed
basis of differences between men and women and emphasises the need to
challenge existing gender roles and relations

Women’s Empowerment: A ‘bottom-up’ process of transforming gender power

relations, through individuals or groups developing awareness of women’s
subordination and building their capacity to challenge it.

Gender and Development

WID – Women in Development

The WID (or Women in Development) approach calls for greater attention to
women in development policy and practice, and emphasises the need to integrate
them into the development process.

The WID perspective evolved in the early 1970s from a ‘liberal’ feminist
framework and was particularly influential in North America. It was a reaction to
women being seen as passive beneficiaries of development. It marked an important
corrective, highlighting the fact that women need to be integrated into development
processes as active agents if efficient and effective development is to be achieved.
Women’s significant productive contribution was made visible, although their
reproductive role was downplayed. Women’s subordination was seen in terms of
their exclusion from the market sphere, and limited access to and control over
resources. Programmes informed by a WID approach addressed women’s practical
needs by, for example, creating employment and income-generating opportunities,
improving access to credit and to education. Women’s ‘problem’ was therefore
diagnosed as insufficient participation in a benign development process, through an
oversight on behalf of policymakers.

GAD – Gender and Development

The GAD (or Gender and Development) approach to development policy and
practice focuses on the socially constructed basis of differences between men and
women and emphasises the need to challenge existing gender roles and relations.

GAD emerged from a frustration with the lack of progress of WID policy, in changing
women’s lives and in influencing the broader development agenda. GAD challenged
the WID focus on women in isolation, seeing women’s ‘real’ problem as the
imbalance of power between women and men. There are different interpretations of
GAD, some of which focus primarily on the gender division of labour and gender
roles focus on gender as a relation of power embedded in institutions (see Gender
Analysis). GAD approaches generally aim to meet both women’s practical gender
needs and more strategic gender needs (see Gender Needs), by challenging
existing divisions of labour or power relations (see Gender Division of Labour;
Gender Relations).

Although WID and GAD perspectives are theoretically distinct, in practice it is less
clear, with a programme possibly involving elements of both. Whilst many
development agencies are now committed to a gender approach, in practice, the
primary institutional perspective remains as WID and associated ‘antipoverty’ and
‘efficiency’ policies. There is often a slippage between GAD policy rhetoric and a
WID reality where ‘gender’ is mistakenly interpreted as ‘women’.

Women’s Empowerment

Women’s Empowerment is a ‘bottom-up’ process of transforming gender power

relations, through individuals or groups developing awareness of women’s
subordination and building their capacity to challenge it. The term ‘empowerment’
is now widely used in development agency policy and programme documents, in
general, but also specifically in relation to women. However, the concept is highly
political, and its meaning contested. Thus, there are dangers in the uncritical
overuse of the term in agency rhetoric, particularly where it becomes associated
with specific activities, or used in simplistic ways.

Central to the concept of women’s empowerment is an understanding of power

itself. Women’s empowerment does not imply women taking over control previously
held by men, but rather the need to transform the nature of power relations. Power
may be understood as ‘power within,’ or self-confidence, ‘power with’, or the
capacity to organise with others towards a common purpose, and the ‘power to’
effect change and take decisions, rather than ‘power over’ others.

Empowerment is sometimes described as being about the ability to make choices,

but it must also involve being able to shape what choices are on offer. What is seen
as empowering in one context may not be in another.

Empowerment is essentially a bottom-up process rather than something that can be

formulated as a top-down strategy. This means that development agencies cannot
claim to 'empower women', nor can empowerment be defined in terms of specific
activities or end results. This is because it involves a process whereby women,
individually and collectively, freely analyse, develop and voice their needs and
interests, without them being pre-defined, or imposed from above. Planners working
towards an empowerment approach must therefore develop ways of enabling
women themselves to critically assess their own situation and shape a
transformation in society. The ultimate goal of women’s empowerment is for women
themselves to be the active agents of change in transforming gender relations.

Whilst empowerment cannot be ‘done to’ women, appropriate external support can
be important to foster and support the process of empowerment. A facilitative
rather than directive role is needed, such as funding women’s organisations that
work locally to address the causes of gender subordination and promoting dialogue
between such organisations and those in positions of power.

Recently, interest has grown among development professionals in approaches to

measuring women’s empowerment, particularly in relation to microcredit
programmes. A number of ‘indicators of empowerment’ have been developed in
different contexts. Again, caution must be exercised in assuming that
empowerment can be externally defined and objectively assessed, or that such
indicators can be easily transferred.

National Machineries for Women

Agencies with a mandate for the advancement of women established within and by
governments for integrating gender concerns in development policy and planning
National Machineries for Women (NMWs) - whether offices, desks, or ministries –
were central to the integration strategies of the 1970s (see WID/GAD). They
expanded in numbers in the 1980s and 1990s, now being a feature of most
governments.
NMWs have made many positive achievements, most importantly legitmising the
place of gender issues in development planning (Goetz, 1998).

However, NMWs have often proven weak, under-resourced, vulnerable to changing

political fortunes, and often ghettoized within social and welfare departments. The
fact that many national machineries were established during periods of fiscal
restraint and government restructuring has made claims on resources difficult to
advance.

Some lessons have been learned. National machineries set up during democratic
transitions (e.g. Philippines, Chile, South Africa, Uganda) have been more influential
and effective, at least in part because of a political commitment to greater social
equality and justice. Positive experiences also highlight the importance of broad and
open processes of consultation, for example in the development of national gender
policies.

NMWs have therefore had varying degrees of success, and face many challenges in
their ability to fulfil a catalytic role and build capacity in other ministries as well as
their own. There are many constraints remaining on their effectiveness. These
include: lack of strong and clear mandates; underfunding and overreliance on donor
funding; lack of qualified and technically skilled staff; bureaucratic resistance;
inappropriate location; lack of political autonomy; and often lack of political support
from national political leadership.

The 1990s have seen a shift towards new strategies for NMWs of institutionalising or
‘mainstreaming’ gender through advocacy and policy oversight work across all
sectors, ministries and departments. Strategies include: lobbying for gender in
national development plans; setting up of focal points in other ministries; gender
training at all levels; guidelines and checklists to assist planning and evaluation;
and building strategic alliances with NGOs and other women’s organisations.

Social Justice

Social Justice Fairness and equity as a right for all in the outcomes of development,
through processes of social transformation The idea of ‘social justice’ as the
outcome of struggles against

social inequalities implies change towards a more ‘fair’ society. This requires
strategies to redress past injustices, violation of rights or persistent economic and
social inequalities. Social movements such as the women’s, worker’s, and human
rights movements, have fought against perceived social injustices from a variety of
entry points. Such movements have also challenged the ideologies and prejudices
that legitimate social inequalities, in order to mobilise people for change.
There are varying conceptions of ‘justice’. Common to them all is a formal idea of
justice - the idea that inequalities of distribution must be justified by an impartial
and rational assessment of ‘relevant’ differences between the people involved. One
key theory of justice, based on Rawls’ ideas, translates this into the idea of ‘justice
as fairness’ with its equity overtones and need for redistributive strategies. Other
thinking, derived from welfare economics, focuses on more ‘efficiency’ ideas of
maximising overall utility or welfare, such that no-one can be made better off
without someone else being worse off. In development thinking a ‘capability’
perspective of justice is common, based on the work of Amartya Sen, i.e. the idea
that people should have the capabilities to survive and function and the freedom to
pursue well-being. This requires both aggregative and redistributive considerations.

Mainstream poverty debates have tended to focus on meeting the basic needs of
poor people and maximising their opportunities, rather than seeing poverty as an
issue of social inequality or injustice. More radical perspectives, often adopted by
NGOs, do see poverty as an issue of injustice and focus on organising and building
capacity for the assertion of rights by the marginalised. The idea of poverty as an
issue of rights is growing in influence in the development discourse, however, as for
example in the DFID White Paper.

Strategies towards social justice have often overlooked the specific gender injustice
or discrimination, as well as wider social injustices, faced by women. The women’s
movement has been working to ensure that efforts to address injustice, through
human rights measures, or economic and social policies, are informed by an
understanding of gender inequalities.

Gender analysis

The systematic gathering and examination of information on gender differences and

social relations in order to identify, understand and redress inequities based on
gender. Gender analysis is a valuable descriptive and diagnostic tool for
development planners and crucial to gender mainstreaming efforts. The
methodology and components of gender analysis are shaped by how gender issues
are understood in the institution concerned. There are a number of different
approaches to gender analysis, including the Gender Roles or Harvard framework,
and Social Relations Analysis.

The Gender Roles framework focuses on describing women’s and men’s roles and
their relative access to and control over resources. The analysis aims to anticipate
the impacts of projects on both productive and reproductive roles. It takes the
household, rather than the breadth of institutions, as the unit of analysis and tends
to assume that women are a homogeneous category.
In contrast, the Social Relations approach seeks to expose the gendered power
relations that perpetuate inequities. This analysis moves beyond the household to
include the community, market, and state institutions and so involves collecting
data at all these levels. It uncovers differences between women, divided by other
aspects of social differentiation such as class, race and ethnicity. The aim is to
understand the dynamics of gender relations in different institutional contexts and
thereby to identify women’s bargaining position and formulate strategies to
improve this. It has proved challenging to adopt this approach in operational work.

Other gender analysis frameworks include: the Moser/DPU Framework; the Longwe
Method/Women’s Empowerment Framework; and Levy’s Web of Institutionalisation.

Recently, tools have also been developed to apply gender analysis to the analysis of
markets, of macro-economic and sectoral policies, and of public expenditure and
budgets.

Gender Equality & Equity

The term ‘gender equity’ is often used interchangeably with ‘gender equality’. Here,
a distinction is drawn between these two concepts, reflecting divergent
understandings of gender differences and of the appropriate strategies to address
these. Gender equality denotes women having the same opportunities in life as
men, including the ability to participate in the public sphere.

This expresses a liberal feminist idea that removing discrimination in opportunities

for women allows them to achieve equal status to men. In effect, progress in
women’s status is measured against a male norm. Equal opportunities policies and
legislation tackle the problem through measures to increase women’s participation
in public life. For example, in Chile, the National Service for Women (SERNAM)
developed an Equal Opportunities Plan for Chilean Women 1994-1999. This focused
on equitable participation in education, the labour market, health services, and
politics. Judicial reform is another key tool in the fight for equality, but lack of
implementation and enforcement might limit its impact.

However, this focus on what is sometimes called formal equality, does not
necessarily demand or ensure equality of outcomes. It assumes that once the
barriers to participation are removed, there is a level playing field. It also does not
recognise that women’s reality and experience may be different from men’s.

Gender equity denotes the equivalence in life outcomes for women and men,
recognising their different needs and interests, and requiring a redistribution of
power and resources. The goal of gender equity, sometimes called substantive
equality, moves beyond equality of opportunity by requiring transformative change.
It recognises that women and men have different needs, preferences, and interests
and that equality of outcomes may necessitate different treatment of men and
women.

An equity approach implies that all development policies and interventions need to
be scrutinised for their impact on gender relations. It necessitates a rethinking of
policies and programmes to take account of men’s and women’s different realities
and interests. So, for example, it implies rethinking existing legislation on
employment, as well as development programmes, to take account of women’s
reproductive work and their concentration in unprotected, casual work in informal
and home based enterprises.

It is worth examining the content of policies, not just the language, before deciding
whether an equity or an equality approach is being followed. Gender equity goals
are seen as being more political than gender equality goals, and are hence are
generally less accepted in mainstream development agencies.

Gender Mainstreaming

An organisational strategy to bring a gender perspective to all aspects of an

institution’s policy and activities, through building gender capacity and
accountability.

The 1970s strategies of integrating women into development by establishing

separate women’s units or programmes within state and development institutions
had made slow progress by the mid- 1980s. (See National Machineries for Women).
In light of this, the need was identified for broader institutional change if pervasive
male advantage was to be challenged. Adding women- specific activities at the
margin was no longer seen as sufficient. Most major development organisations and
many governments have now embraced ‘gender mainstreaming’ as a strategy for
moving towards gender equality.

With a mainstreaming strategy, gender concerns are seen as important to all

aspects of development; for all sectors and areas of activity, and a fundamental
part of the planning process. Responsibility for the implementation of gender policy
is diffused across the organisational structure, rather than concentrated in a small
central unit.

Such a process of mainstreaming has been seen to take one of two forms. The
agenda-setting approach to mainstreaming seeks to transform the development
agenda itself whilst prioritizing gender concerns. The more politically acceptable
integrationist approach brings women’s and gender concerns into all of the existing
policies and programmes, focusing on adapting institutional procedures to achieve
this. In both cases, political as well as technical skills are essential to a
mainstreaming strategy.
Any approach to mainstreaming requires sufficient resources, as well as high-level
commitment and authority. A combined strategy can be particularly powerful. This
involves the synergy of a catalytic central gender unit with a cross-sectoral policy
oversight and monitoring role, combined with a web of gender specialists across the
institution. The building of alliances both within the institution and with outside
constituencies, such as women’s organisations, is crucial for success.
Mainstreaming tools include gender training, introducing incentive structures which
reward efforts on gender, and the development of gender-specific operational tools
such as checklists and guidelines.

Gender Needs

Shared and prioritised needs identified by women that arise from their common
experiences as a gender.

Certain women’s interests, of a political or practical nature, related to their

experience as a gendered person. Such prioritized concerns have been translated
into the concept of gender needs(Moser, 1989). This identifies the way in which
women’s gender interests, defined by women themselves, can be satisfied in the
planning process. Although needs and interests are conceptually different
(Molyneux, 1998), in practice, they are closely related in the planning process.
Needs, as well as interests, result from a political process of contestation and
interpretation and thus should not be externally defined or seen as fixed.

Practical Gender Needs (PGNs) according to Moser (1989) are the immediate needs
identified by women to assist their survival in their socially accepted roles, within
existing power structures. Policies to meet PGNs tend to focus on ensuring that
women and their families have adequate living conditions, such as health care and
food provision, access to safe water and sanitation, but also seek to ensure access
to income-earning opportunities. PGNs do not directly challenge gender inequalities,
even though these needs may be a direct result of women’s subordinate position in
society.

Strategic gender needs (SGNs), are those needs identified by women that require
strategies for challenging male dominance and privilege. These needs may relate to
inequalities in the gender division of labour, in ownership and control of resources,
in participation in decision-making, or to experiences of domestic and other sexual
violence. These needs are often seen as feminist in nature as they seek to change
women’s status and position in society in relation to men. As such, they are more
likely to be resisted than PGNs.

In reality, it is difficult to distinguish so clearly between strategic and practical

needs. Any policy or programme may meet both sets of needs. Through collective
organising around practical gender needs, women may achieve more strategic and
transformatory goals. This politicisation of practical gender needs is a favoured
entry point for NGOs and women’s organisations.
However, women may not always recognise or prioritise their strategic gender
needs, particularly if it could threaten their immediate practical needs. At any time,
gender interests may not be prioritised over women’s other interests which cut
across these, such as those of class and race, so assumptions cannot be made of
women’s solidarity.

Gender Planning

The technical and political processes and procedures necessary to implement

gender-sensitive policy and practice The purpose of gender planning is to ensure
gender-sensitive policy outcomes through a systematic and inclusive process. If
gender policy has transformatory goals, then gender planning as a process will
necessarily be a political one, involving consultation with and participation of
different stakeholders.

There is a variety of gender planning frameworks based on differing approaches to

gender analysis, each with its own planning principles and tools. For example,
Caroline Moser (1993) developed a gender planning framework consisting of gender
planning tools, gender planning procedures, and the components of gender
planning practice. The gender planning tools include gender roles identification,
gender needs assessment, and the collection of disaggregated data at the
household level. The gender planning procedures involve the diagnosis of the
gender problem, formulation of gender objectives, procedures for monitoring and
evaluation, gender-based consultation and participation, and identification of an
entry strategy. The final aspect, practice, identifies the need to institutionalise
gender planning, and to operationalise this through recognised procedures. Building
capacity amongst planners is necessary to ensure policy is transformed into
practice with the minimum of dilution.

The social relations approach differs in its focus on power in gender relations (See
Gender Analysis). This approach uses aninstitutional framework for the analysis of
gender inequalities as a tool for gender-aware planning. It recognises that the
means through which needs are met is as important as the planned ends of any
intervention. The planning process is conceived as participatory and constituted by
an analysis and evaluation of causes, effects, means and ends. A seven-point
‘Gender audit for development interventions’ supports this framework. (Kabeer and
Subrahmanian, 1996).

Whilst gender transformatory policies are increasingly being generated, concerns

are focusing on the ‘misbehaviour’ of such policies, i.e. a tendency to slip in
implementation from transformatory objectives to outcomes that fail to challenge
existing gender relations. It has been recognised that GAD approaches are
constrained by resistance and subversion, from within both implementing
organisations and targeted communities. Gender planning needs therefore to be
part of an on-going process of gender mainstreaming, backed up by sufficient
resources, commitment and authority. Gender planning procedures need to involve
the participation of stakeholders and clear lines of accountability.

At the project level, a variety of planning tools are used to operationalise gender
policy, including general and sector-specific checklists and guidelines. Logical
Framework Analysis is an example of a planning tool which, if used in a gender-
sensitive manner, can help to ensure accountability, participation of various
stakeholders, and that relevant monitoring and evaluation procedures are
implemented.

Gender Training

A facilitated process of develosping awareness and capacity on gender issues to

bring about personal or organisational change for gender equality

Gender training is one of a range of institutional strategies used to integrate gender

into the work of development co-operation agencies. Its objectives can include
raising general awareness of the relevance of gender to an organisation’s work and
skills transfer in gender analysis, gender-aware planning, programme design and
implementation. Gender training typically involves: group discussion and reflection
on gender roles and relations; case studies of the impact of development policies
and programmes on gender relations; as well as role plays and simulation games
which highlight gender dynamics.

The trainer’s, as well as the organisation’s, approach to gender and development

influence the training approach, and hence the framework used (See Gender
Analysis). These vary in the degree to which they see the need for personal
attitudinal and behavioural change, or focus primarily on changing organisational
procedures and practices. Personal transformation tends to be a training objective
for Southern NGOs/women’s organisations rather than development co-operation
agencies. and the ‘further reading’ below.

As awareness grows within an organisation, so the emphasis of gender training

shifts to more tailored courses to meet specific needs and demands, and to more
skills-based training. Gender training was initially mainly focused at the project
level, but more recently emphasis has shifted to sectoral and macro-economic
policy-making.

Attention has recently focused on the need to evaluate the impact of gender
training. Experience suggests that training is most effective when it is part of a
broader strategy of organisational change.
 CHAPTER 8
GENDER ISSUES, TRENDS OF
WOMEN EMPOWERMENT AND
ROLES OF GENDER IN
DEVELOPMENT IN ETHIOPIA
Introduction to Gender Issues

Gender is an important consideration in development. It is a way of looking at how

social norms and power structures impact on the lives and opportunities available
to different groups of men and women. Globally, more women than men live in
poverty. Women are also less likely than men to receive basic education and to be
appointed to a political position nationally and internationally. Understanding that
men and women, boys and girls experience poverty differently and face different
barriers in accessing services, economic resources and political opportunities helps
to target interventions.

Gender issues include all aspects and concerns related to women’s and men’s lives
and situation in society, to the way they interrelate, their differences in access to
and use of resources, their activities, and how they react to changes, interventions
and policies.

Gender Discrimination

Gender Discrimination is the systematic, unfavourable treatment of individuals on

the basis of their gender, which denies them rights, opportunities or resources.
Across the world, women are treated unequally and less value is placed on their
lives because of their gender. Women’s differential access to power and control of
resources is central to this discrimination in all institutional spheres, i.e. the
household, community, market, and state.
Within the household, women and girls can face discrimination in the sharing out of
household resources including food, sometimes leading to higher malnutrition and
mortality indicators for women. (See Intra-household Resource Distribution). At its
most extreme, gender discrimination can lead to son preference, expressed in sex
selective abortion or female feticide. In the labour market, unequal pay,
occupational exclusion or segregation into low skill and low paid work limit women’s
earnings in comparison to those of men of similar education levels. Women’s lack of
representation and voice in decision making bodies in the community and the state
perpetuates discrimination, in terms of access to public services, such as schooling
and health care, or discriminatory laws.
The law is assumed to be gender-neutral when in fact it may perpetuate gender
discrimination, being a product of a culture with oppressive gender ideologies. Even
where constitutional or national legal provisions uphold gender equality principles,
religious or other customary laws that privilege men may take precedence in
practice. However, the law, when reformed with women’s input, can be a potent
tool for challenging discrimination, if combined with other strategies, including
capacity-building to overcome barriers to claiming rights.
The Convention on the Elimination of all forms of Discrimination against Women
(CEDAW) in 1979 brought into international focus the rights of women as human
rights, including the right to be free from discrimination. Women activists regard
this convention as a key tool to support their struggle against discrimination in all
spheres, pushing governments towards attaining these internationally recognised
minimum standards.

Gender Division of Labour

The socially determined ideas and practices which define what roles and activities
are deemed appropriate for women and men Whilst the gender division of labour
tends to be seen as natural and immutable, in fact, these ideas and practices are
socially constructed. This results in context-specific patterns of who does what by
gender and how this is valued. Gender divisions of labour are not necessarily rigidly
defined in terms of men’s and women’s roles, as is sometimes assumed. They are
characterised by co-operation in joint activities, as well as by separation. Often, the
accepted norm regarding gender divisions varies from the actual practice.
However, roles typically designated as female are almost invariably less valued
than those designated as male. Women are generally expected to fulfil the
reproductive role of bearing and raising children, caring for other family members,
and household management tasks, as well as home based production. Men tend to
be more associated with productive roles, particularly paid work, and market
production. In the labour market, although women’s overall participation rates are
rising, they tend to be confined to a relatively narrow range of occupations or
concentrated in lower grades than men, usually earning less.
Historically, women’s productive roles have been ignored or under-valued,
particularly in the informal sector and subsistence agriculture. This has led to
misconceived development projects; for example the services of extension agents
and agricultural inputs being targeted at men. Because women’s labour is
undervalued, it is often assumed by mainstream development policies to be
infinitely elastic. For example, policy makers expect that women can take on roles
previously fulfilled by public services, such as care for the sick and elderly, when
cutbacks are made.
The formal documentation and recognition of women’s roles and the related time
burden is crucial for gender-sensitive development interventions. Recently,
international organisations have begun to measure all forms of economic activity by
gender. International definitions of economic activity have also been broadened to
include subsistence farming, food processing and homeworking ‘in anticipation of
profit’. Time budget surveys are also being implemented in some places to measure
women’s input into reproductive work.
Gender and development policies and programmes can challenge and change
women’s socially prescribed roles, in pursuit of gender equity. For example, women
have been successfully trained and employed as water technicians or builders in
communities where these were jobs previously a male domain. However,
programmes aiming to increase women’s participation in spheres beyond the
household must ensure that they are properly remunerated. They should also be
accompanied by consideration of how men, or public provision, can reduce women’s
responsibilities in the home.

Gender Relations

Hierarchical relations of power between women and men that tend to disadvantage
women These gender hierarchies are often accepted as ‘natural’ but are socially
determined relations, culturally based, and are subject to change over time. They
can be seen in a range of gendered practices, such as the division of labour and
resources, and gendered ideologies, such as ideas of acceptable behaviour for
women and men.
Analyses which focus on gender relations differ in emphasis from those which take
‘gender roles’ as a starting point. They give more prominence to the connectedness
of men’s and women’s lives, and to the imbalances of power embedded in male-
female relations. They also emphasise the interaction of gender relations with other
hierarchical social relations such as class, caste, ethnicity and race. But whether
gender relations act to alleviate, or to exacerbate other social inequalities, depends
on the context.
Gender relations constitute and are constituted by a range of institutions, such as
the family, legal systems or the market. They are a resource which is drawn on daily
to reinforce or redefine the rules, norms and practices which govern social
institutions. Since historically women have been excluded from many institutional
spheres, or their participation circumscribed, they often have less bargaining power
to affect change who institutions operate.
So, for example, where they are perceived to transgress their accepted roles,
women can be physically or sexually abused by male partners with relative
impunity. In many cultures, beatings or rape in marriage are considered acceptable
in the existing legal framework. Even where, following lobbying of women’s groups,
rape or violence within marriage is outlawed, women may be reluctant to seek
redress because the male dominated judicial system is unsympathetic, or because
they fear ostracism. Where women retaliate, they become criminalised themselves.
However, change is possible: in a few recent cases, following sustained campaigns,
women have been acquitted of ‘crimes’ against violent partners and new laws have
been passed to respond to such attenuating circumstances.
Hierarchical gender relations constrain development efforts. For example, rigidities
in the gender division of labour limit the effective mobilisation of women’s labour to
support export production. Poverty reduction efforts are hampered where men use
their authority to usurp control over resources targeted at women. Development
strategies need to be informed by an analysis of gender relations and to support
women’s own attempts to change the rules and practices which reinforce these
gender hierarchies.

Gender Violence

Any act or threat by men or male-dominated institutions, that inflicts physical,

sexual, or psychological harm on a woman or girl because of their gender
Gender violence occurs in both the ‘public’ and ‘private’ spheres. It happens in
virtually all societies, across all social classes, with women particularly at risk from
men they know. Official figures are scarce, and under reporting is rife, especially
when the violence involves another family member. Violence against women, and
particularly systematic rape, has frequently been used as a weapon of war against
particular ethnic groups or entire populations.
There is, however, no single definition of gender violence accepted internationally
and there is much debate over the breadth of inclusion. Commonly, the acts or
threats of such included in the definition are rape, sexual harassment,
wifebattering, sexual abuse of girls, dowry-related violence, and nonspousal
violence within the home. Other definitions extend to marital rape, acts such as
female genital mutilation, female infanticide, and sex-selective abortion. In addition,
certain definitions include ‘sexual exploitation’ such as enforced prostitution,
trafficking of women and girls, and pornography.
It is now recognised in international law that violence against women is a human
rights issue with major health and economic implications. The rape of women in
wartime has been recognized and explicitly prohibited since 1949 in article 47 of
the Fourth Geneva Convention Relative to the Treatment of Civilian Persons in
Times of War. The United Nations (UN) recently appointed a Special Rapporteur on
violence against women. However, legislation alone is insufficient to address this
problem. The prevention and elimination of violence against women is hampered by
pervasive attitudes that devalue women’s lives and by institutional resistance,
including from the judicial system and the police, to recognising the extent of the
problem. There is hostility to interfering with ‘private’ domestic disputes. Even
where countries have issued appropriate legislation, its implementation and
enforcement may well be weak. Additional support activities are required.
Legislative reform, training of the police and lawyers, provision of shelters, and the
building of capacity for women to combat violence and pursue their rights, are all
necessary.
Development policy must understand both the obstacles gender violence places in
the way of effective development, and the debilitating impact it has on women’s
lives. Policy concerns should not only focus on programmes specifically targeted at
violence against women, but on violence as an aspect of other programmes, such
as microenterprise schemes. Development interventions themselves could make
women more vulnerable to violence if men feel threatened by attempts to enhance
women’s status

Women’s Human Rights

The recognition that women’s rights are human rights and that women experience
injustices solely because of their gender. The UN Universal Declaration of Human
Rights (1948) laid out the idea of the universality of rights, but failed to take into
account women’s needs and interests as women. Its focus was on formal political
and civil rights, hence conceiving rights to be relevant to the ‘public’ rather than the
‘private’ sphere. As such, violations of women’s bodily integrity, which occurred in
the private sphere were not part of the human rights discourse.
The Convention on the Elimination of all forms of Discrimination against Women
(CEDAW) established in 1979 marked an important step towards explicit prohibition
of discrimination against women. During preparations for the World Conference on
Human Rights in Vienna (1993), women’s groups mobilized around the slogan of
“Women’s rights are human rights!” which signifies the indivisibility of women’s
rights from universal human rights. Participants in the UN Beijing Women’s
Conference (1995) continued with this call, attempting to broaden the conception of
rights to include social, economic, and cultural rights, as well as reproductive and
sexual rights put on the agenda at the 1994 Cairo population conference.
Gender-based violence has been a high profile issue in advocacy efforts on women’s
human rights. Groups have campaigned for the recognition as human rights of, for
example, the right of women to freedom from rape, from sexual assault as refugees
and displaced women, from abuse in custody, and particularly domestic violence.
The 1993 Vienna Conference on Human Rights was a watershed as it marked the
first international recognition of violence against women as a human rights
violation. There is now a UN Special Rapporteur on Violence Against Women with
the specific remit to gather facts and report to the UN.
Whilst there has been progress in the recognition of women’s human rights in
international human rights instruments this has not been matched by progress in
the implementation and enforcement of these rights by state bodies. Many
countries have failed to ratify CEDAW, and some that have ratified it have failed to
uphold it. Even when international and national laws recognize women’s human
rights, they may be undermined by patriarchal customary laws or social practices.
Furthermore, human rights advocates, including those promoting women’s rights,
face challenges from those who regard human rights discourse as a western,
imperialist imposition on other cultures.
Mobilisation of women to claim their rights is essential in order to press for reforms,
and for the implementation and enforcement of human rights and national legal
instruments. This requires strategies of capacity-building in terms of literacy, legal
knowledge, and political participation. Gender-awareness training for the judiciary
and the police, in addition to strengthening women’s participation in these fields, is
also crucial.

Intra – Household Resource Distribution

The dynamics of how different resources that are generated within, or which come
into the household are controlled and accessed by its different members.
Gender analysis has revealed some evidence of bias against female members of
households in the allocation of resources such as income, food, nutrition, health
care and education. These patterns are not universal, however, and are also
mediated by other factors such as age, and birth order. For example, there is little
evidence of nutritional bias against girl children in Sub-Saharan Africa, whereas in
South Asia this pattern has been widely noted. It has also been shown that
resources controlled by women, for example in female-headed households, are
distributed differently to resources controlled by men. There is some evidence that
women spend a higher percentage of their generally smaller incomes on family
consumption and children’s welfare.
Conventional macro-economics treats the activities performed within the household
as non-economic and hence irrelevant. Conventional micro-economists typically
sees the household as a consumption unit and treat it as a ‘black-box’, assuming
genderneutrality. It was the New Household Economics (pioneered by Gary Becker
in the 1960s) that challenged the conventional microeconomic approach and
highlighted the importance of production within the household. In this model, all
resources are pooled and distributed in an altruistic manner by a benevolent male
household head to maximise the welfare of household members. However, gender
analysts, particularly feminist anthropologists and economists, have demonstrated
that this characterisation of the household is naïve and ignores gender power
imbalances and conflict within the household.
Feminist models highlighted the fact that resources are not always pooled and
stressed the role of bargaining processes within the household in determining
access to resources. Gender relations within the household are then seen as
characterised by both conflict and co-operation, whereby women tend to have less
bargaining power in the struggle over household resources (for example, Sen). The
division of labour and dynamics within the household are seen also to influence
opportunities and outcomes for women outside the home, in employment for
example. Certain theorists suggest that women’s bargaining position within the
household is enhanced when they work outside the home. Other mechanisms for
enhancing women’s bargaining power in the home include strengthened property
rights, and membership of collective organisations.
The household has often been used as the basic unit of analysis in, for example,
poverty measures. But because of inequalities in intrahousehold distribution,
household income-based measures of poverty do not correlate neatly with gender-
differentiated assessments of well-being. Consequently, poverty reduction
strategies that target male household heads, erroneously assume that benefits will
‘trickle-down’ to the rest of the household. Where women are targeted with income-
generating opportunities, it cannot either be assumed that women will retain control
of those resources they bring into the household. This suggests the need for
improved data collection and analysis procedures that collect more data at
individual level, incorporate consideration of intrahousehold dynamics and
recognise the heterogeneity of household arrangements.

Patriarchy

Systemic societal structures that institutionalise male physical, social and economic
power over women.
Some feminists use the concept of patriarchy to explain the systematic
subordination of women by both overarching and localised structures. These
structures work to the benefit of men by constraining women’s life choices and
chances. There are many differing interpretations of patriarchy. However, the roots
of patriarchy are often located in women’s reproductive role and sexual violence,
interwoven with processes of capitalist exploitation. The main ‘sites’ of patriarchal
oppression have been identified as housework, paid work, the state, culture,
sexuality, and violence. Behaviours that discriminate against women because of
their gender are seen as patriarchal ‘practices’; for example occupational
segregation, exclusion, and unequal pay.
The concept of patriarchy has been drawn into gender and development theorising;
in order to challenge not only unequal gender relations but also unequal capitalist
relations, sometimes seen as underpinning patriarchy (Mies, 1986; DAWN, 1995).
Feminists who explain gender inequality in terms of patriarchy often reject male-
biased societal structures and practices and propose greater female autonomy or
even separatism as a strategy. In some views, women are seen as having room for
manoeuvre within a constraining patriarchal system by negotiating a ‘patriarchal
bargain’ with men. This entails a trade-off between women’s autonomy, and men’s
responsibility for their wives and children.
An overarching theory of male power may help to conceptualise the extent of
gender inequality but fails to deal with its complexity. It tends to assume that
gender oppression is uniform across time and space. More recent thinking has
therefore rejected such a universal concept, identifying the need for detailed
historical and cultural analysis to understand gender-based oppression. Neither are
women a homogeneous group constrained in identical ways.
Gender inequalities are crosscut by other social inequalities such as class, caste,
ethnicity and race, which could be prioritised over gender concerns in certain
contexts. A rigid and universal concept of patriarchy denies women space for
resistance and strategies for change. A more nuanced analysis is needed that takes
into account difference and complexity, and the agency of women.

Access to Education

Gender often influences whether or not children attend or remain in school. Across
the world, girls are more likely than boys to be out of school, and the poorest
girls/women from the most disadvantaged rural areas tend to have the lowest
educational attainment levels. The reasons why girls are more likely than boys to be
out of school relate to social power structures and socially-constructed norms that
define the roles that boys/men and girls/women should play. These gender roles
affect their rights, responsibilities, opportunities and capabilities, including their
access to and treatment in school. While educational exclusion based on gender
disproportionately affects girls/women, it also affects boys/men.

The ways in which gender relates to educational exclusion are complex, and affect
males and females differently. For example, when poverty forces children out of
school, boys are often sent to work, while girls are kept at home to help with
domestic chores. In some cases, young people’s gendered perceptions of their own
roles and responsibilities may lead them to regard school as unmasculine or
irrelevant. In some cases, the intersectionality between sex and other factors
collectively determine gender norms and expectations and lead to educational
exclusion. For example, poverty and lack of lucrative employment opportunities for
women may cause some families to prioritise boys’ education over girls’. Similarly,
gendered traditional practices – such as rites of passage or female genital
mutilation – may take place during the school term and prevent boys or girls from
going to school. In many countries, rural girls are more affected by the lack of a
nearby school than rural boys or urban students, because of concerns for girls’
safety while travelling to school.

In terms of impacts, research suggests that low educational attainment can lead to
the entrenchmentof unequal power structures as well as discriminatory gender
norms and attitudes at individual or household level, which may then be replicated
and perpetuated at community level through unequal practices within schools and
unequal opportunities in the workplace. Breaking the cycle of gender inequality and
its detrimental impacts requires ending state patriarchy and overturning unequal
power relations at governmental level. Yet women’s subordinate position in society
and low educational levels relative to men’s block their equal representation in key
decision-making fora, which in turn prevents gender- equalising reforms from being
implemented – thus preserving the status quo.
Reproductive Health & Rights

Reproductive health: A state of complete physical, mental and social well-being,

and not merely the absence of disease or infirmity, in all matters relating to the
reproductive system and to its function and processes. (ICPD PoA article 7.2)
Reproductive rights: The right to freely decide the number, spacing and timing of
children, and to have the information, education and means to do so. These rights
should be exercised without discrimination, violence or force (ICPD PoA article 7.3).
Sexual health: The state of physical, emotional, mental and social wellbeing in
relation to sexuality; not merely the absence of disease, dysfunction or infirmity. It
includes the possibility of having pleasurable and safe sexual experiences, free of
coercion, discrimination and violence. (WHO, 2006)

Sexual rights
The human rights of women include their right to have control over and decide
freely and responsibly on matters related to their sexuality, including sexual and
reproductive health, free of coercion discrimination, and violence. (Beijing Platform
for Action, paragraph 96)

The International Conference on Population and Development (ICPD) in Cairo in

1994 was a turning point for how the world viewed population issues. From having
been exclusively focused on family planning, demographic trends and population
control, the language became rights-focused and expanded to include sexual health
and reproductive rights, and other population-related issues such as migration and
urbanisation. The needs of young people were also highlighted.

The 4th World Conference on Women in Beijing in 1995 further advanced the
agenda by linking SRHR to a broader gender perspective. It established that women
had the right to decide on all matters related to their sexuality, including sexual and
reproductive health, free from coercion, discrimination and violence, and linked
these rights to their ability to participate in democratic processes, economic
activities and development at large.

Sexual and reproductive health and rights include, among others, access to sexual
and reproductive health services, the ability to exercise one’s rights over one’s
body, comprehensive sexuality education, safe motherhood, access to commodities
such as contraceptives, and HIV and AIDS prevention and treatment. The provision
of sexuality education and sexual and reproductive health services to young people
to promote safer sex, reduce unwanted pregnancies and school drop-out rates –
enabling young people to participate in democracy, economic growth and
sustainable development – is also an integral part of SRHR.

Maternal Health

Maternal health is also a matter of human rights and gender equality and not only a
public health issue. Maternal deaths in low income countries are largely due to an
inadequate attention to women’s health issues and to repressive structures that
prevent women and young people from being able to influence their own situation
and development based on personal choices and preferences. These choices
include being able to determine the number of children one would like to have and
the spacing of births. The currently high maternal mortality rate is also due to lack
of access to adequate SRHR services such as comprehensive family planning, safe
and legal abortion, skilled attendance and care in pregnancy and at birth for
mothers and newborns.

Despite numerous statements of political commitments, MDG5 – to improve

maternal health – has shown exceptionally slow progress in low-income countries
the past decades. Poor maternal health is an underestimated development problem
claiming approximately 350.0000 lives each year according to recent studies and
with far-reaching consequences on poverty reduction and economic growth.
However, these deaths are unnecessary and preventable. Targeted and cost
effective interventions will contribute to dramatically altering this picture in most
developing countries. The difference between high and low income countries lies in
access to sexual and reproductive health services, including contraceptives, skilled
attendance at birth, safe abortion, pre- and post-natal care and emergency
obstetric care. Women in low income countries still lack these essential services and
access to related information and education.

Gender-based violence

Gender-based violence is violence against women based on women’s subordinate

status in society. It includes any act or threat by men or male dominated institutions
that inflict physical, sexual, or psychological harm on a woman or girl because of
their gender. In most cultures, traditional beliefs, norms and social institutions
legitimize and therefore perpetuate violence

Gender-based violence includes physical, sexual and psychological violence such as

domestic violence; sexual abuse, including rape and sexual abuse of children by
family members; forced pregnancy; sexual slavery; traditional practices harmful to
women, such as honor killings, burning or acid throwing, female genital mutilation,
dowry-related violence; violence in armed conflict, such as murder and rape; and
emotional abuse, such as coercion and abusive language. Trafficking of women and
girls for prostitution, forced marriage, sexual harassment and intimidation at work
are additional examples of violence against women. Gender violence occurs in both
the ‘public’ and ‘private’ spheres. Such violence not only occurs in the family and in
the general community, but is sometimes also perpetuated by the state through
policies or the actions of agents of the state such as the police, military or
immigration authorities. Gender-based violence happens in all societies, across all
social classes, with women particularly at risk from men they know.

The conceptualization of violence against women and girls as a violation of human

rights was one of the achievements of the women’s movement during the Second
World Conference on Human Rights in Vienna in 1993. In March of the following
year, the United Nations Commission on Human Rights set forth a resolution that
integrated women’s rights within the mechanisms assuring protection of human
rights. In answer to the request of women’s organizations at the Vienna conference,
this Commission also named a Special Rapporteur on Violence Against Women. The
Special Rapporteur's mission is to receive and investigate information on situations
of gender-based violence throughout the world.

Also in 1993, the UN General Assembly adopted the Declaration on the Elimination
of Violence Against Women (DEVAW), which is currently the main international
document addressing the problem of gender-based violence. In DEVAW, the UN
offered the first official definition of gender-based violence. In the remaining time
we will explore the definition of gender-based violence found in the DEVAW.

Child Marriage

Child marriage is defined by UNICEF as “a formal marriage or informal union before

age 18” and occurs throughout the world.ii Being forced into marriage before one is
able to give consent violates the basic human rights of boys and girls. Most married
youth are girls, with estimates revealing that 1 in 3 girls in the developing world are
estimated to be married before the age of 18. On average globally, only 5% of
males marry before their 19th birthday.

The right to free and full consent to a marriage is recognized in numerous

international conventions and declarations including the Universal Declaration of
Human Rights, the Convention on Consent to Marriage, and the Convention on the
Rights of the Child, with the understanding that consent cannot be “free and full”
when one of the parties is not mature enough to make an informed decision about a
life partner. Despite efforts in these and other conventions to discourage child
marriage, national legal frameworks sometimes violate international norms by
treating females and males differently. For example, in Pakistan, where it is
estimated that one-third of all marriages fall under the category of child marriage,
the legal age of marriage for boys is 18 but 16 for girls. Cultural and socioeconomic
conditions, poverty, and lack of access to education also influence whether a girl is
married early; child marriage is most common in the world’s poorest countries and
among the poorest households, with girls living in poor households twice as likely to
marry before the age of 18 as girls from wealthier families.

The consequences of child marriage are severe. National and international

indicators on maternal health, education, food security, poverty eradication,
HIV/AIDS, and gender equality are all negatively correlated with high child marriage
rates. Child brides are under great pressure to prove their fertility, which often
results in pregnancies when their bodies are not yet ready, resulting in greater
maternal and newborn morbidity. Married girls under 15 are five times more likely
to die in childbirth than married women in their 20s.xviii They are also more likely to
experience complications of childbirth including obstetric fistula and hemorrhaging.
Child brides are also at greater risk for contracting HIV and other sexually
transmitted diseases due to their inability to reject unsafe sexual practices

Female Genital Mutilation

The concept- FGM – has been coined and used to refer to what is otherwise
commonly known as female circumcision in part to reflect the amount of genital
organs removed and therefore the pain and damage it inflicts on girls and women.
Unlike male circumcision which entails only the removal of the foreskin in the penis,
FGM in almost all cases involves removal of genital organs ranging from
clitoridectomy- the removal of the prepuce or hood of the clitoris; excision- the
removal of the clitoris and all or part of the labia minora; to infibulation which
involves the removal of the clitoris, the labia minora and most of the labia majora.
In the last procedure, the two remaining sides of the vulva are sewn together
leaving only a tiny opening for the passage of urine and menstrual blood (Toubia
1993). Approximately 85% of women who are subjected to FGM undergo
clitoridectomy and excision while 15% are infibulated (Toubia 1993). FGM is
supposed to transform a girl to a woman although the age at which it is done varies
from society to society but ranges from a few weeks to puberty. In societies where
the ritual takes place at puberty, it enacts a symbolic rebirth into adulthood, a
process by which the society passes on knowledge and codes of conduct expected
in adulthood. This is thus an initiation rite. There are however cases, as in the
Chisungu in Zambia where the initiation rite does not involve removal of the genital
organs (Richards 1982).
The consequences of FGM are numerous. As a physical surgery without anaesthesia,
the pain must be excruciating. Moreover, bleeding and infections the latter due to
the use of unsterilised tools are life threatening risks. Many other problems
including, stress, shock and trauma; complications during sexual intercourse
especially in the case of infibulation; complications during pregnancy and childbirth;
urine retention, damage to the urethra and obstruction of menstrual flow arise
(Toubia 1993, WHO 1994, Dorkenoo and Elworthy 1994, Heise, Pitanguy and
Germain 1994). As an irreversible operation, the physical and psychological damage
inflicted on girls and women affect their sexual and reproductive health throughout
life.

Trends of Women Empowerment in Ethiopia

In Ethiopia, 80 percent of the population resides in rural areas and women provide
the majority of the agricultural labor in these communities. However, their
contributions often go largely unrecognized and their fathers or husbands often
restrict access to resources and community participation. Worse, one in three
women experience physical, emotional or sexual violence, 65 percent of women
have experienced female genital mutilation, and only half of girls who enroll in
primary schools ever make it to grade 5.
USAID invests in empowering women and girls in Ethiopia across all of our programs
by promoting equal access to education, health, and economic opportunities. In
doing so, we help create opportunities for more equitable participation in society for
females across the country. We also address the root causes of gender-based
violence, child marriage, and female genital mutilation.

Role of

Gender Development in Ethiopia

1. Increasing Female Educational Opportunities

Although the primary school enrollment rate of girls in Ethiopia has climbed from
21 to 91 percent in the last three decades, the majority are unable to transition to
secondary and tertiary school due to distance, personal security and economic
challenges. As girls grow older, academic participation becomes increasingly
difficult as it takes time away from essential income generating activities. Only 35
percent of undergraduate university students are female and five percent drop out
in the first year. At the same time, female-led instruction at the university level is
extremely low at only 11 percent. To tackle these challenges and better support the
continued education of the next generation of female Ethiopian leaders, our
Reading for Ethiopia’s Achievement Developed activity focuses on improving
reading skills in primary schools. We provide supplementary reading materials and
purposefully support girls’ participation in reading clubs to enhance learning
performance and increase retention.

2. Expanding Economic Opportunities for Women

Women often face different and more basic economic constraints than men,
including less access to credit and limited market access. To support women’s
ability to create businesses and secure their own livelihoods, we encourage
financing for female-owned businesses through the Development Credit Authority.
To support women in agriculture under the Feed the Future initiative, we empower
women in decision-making about production, the use of resources like land, water,
or capital, and control over income. We support women in chronically food insecure
households by boosting access to improved farming inputs and creating income
earning agricultural activities.

3. Promoting the Health and Safety of Women and Girls

According to the Ethiopian Demographic and Health Survey in 2016, 30 percent of
Ethiopian women do not make decisions on individual and family issues. Instead,
their husbands make decisions for them on choices including the option to use birth
control methods, and whether to give birth in a health facility or seek the assistance
of a trained provider. Additionally, harmful traditional practices—early marriage and
childbearing, female genital mutilation and gender-based violence—all having
adverse effects on Ethiopian women. Through the President’s Emergency Plan for
AIDS Relief (PEPFAR), we address the HIV risks associated with early marriage. We
also provide medical assistance for women and girls suffering from fistula—a birth
injury common in very young mothers—and educate communities about the health
risks of female genital mutilation. To boost maternal and newborn health, we
support primary health care to end preventable child and maternal deaths and
teach women about nutrition.