Development

Economics
 Economic Growth - Definition
‘’Economic growth involves an increase over time in the actual output of goods and services as
well as increase in the economy's capability to produce goods and services’’ (Peterson)
❑ Increase in per capita income of the country at constant price
❑ Literally the term economic growth means and increase in the country's net national product
❑ Transformation of an economy from a state of underdevelopment to a state of development,
from an agrarian to highly industrialized society from lower saver to high saver and from rural
to urban.
Factors of Growth
❑ Fundamental Factors
Factors which attempt to define the potential for production of any economy in a fundamental
sense
1) Quantity and quality of national resources
2) Quantity and quality of capital
3) Quantity and Quality of labour source
4) Level of technology
❑ Socio-Economic Factors
Factors which are related to the socio-economic structure of the society
1) Distribution of income and wealth
2) Sociological and cultural structure
3) Legal structure of the country
4) Dominant forms of business organisations
❑ Intermediate Factors
Factors which enter in to the determination of level aggregate demand
Factors of Economic Growth
❑ The process of economic growth is determined by two types of factors:
Economic factors
Non economic factors
Economic Factors of Growth
1) Natural Resources (Land)
• The principal factor affecting the development of an economy
• A country which is deficient in natural resources will not be in a position of rapid
development
• In LDC’s Natural resources are either unutilized, underutilised or misutilised
• For development a country needs abundant natural resources and its proper
exploitation using improved technologies
2) Capital Accumulation
 • Capital means stock of physical reproducible factors of production
• Capital accumulation means increase in the stock of capital with the passage of time
3) Organisation
• To make the optimum use of factors of production in economic activities
4) Technological progress
• Important factor in the process of economic development
• It is the changes in methods of production which are the result of some new techniques
of research and innovation
Five distinctive pattern in the growth of technology – Simon Kuznet
i. A scientific discovery
ii. An Invention
iii. Innovation
iv. Improvement
v. Spread of invention
5) Division of labour and Scale of production
• Specialisation and division of labour leads to increase in productivity
• Increase in Productivity leads to economies of large scale which further help in
Industrial Development
• Division of labour leads to improvement in the productive capacities of labour
• Every labourer becomes more efficient than before. He saves time. He is capable of
inventing new machines and processes in production.
6) Structural Changes
• Transition from a traditional agricultural society to a modern industrial economy
including a radical transformation of existing institutions, social attitudes and motivation
• Such structural changes lead to increasing employment opportunities, higher labour
productivity and stock of capital, exploitation of new resources and improvement in
technology
Non -Economic Factors of Growth
❑ According to Nurkse, economic development has much to do with human endowments, social
attitudes, Political conditions etc.
❑ The essential non-economic factors are
1) Social factors
Social attitudes, Values, and institutions also influence Economic growth
2) Human Factors
Human resource 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
3) Political and administrative factors
A strong, efficient and incorrupt administration is essential for economic development
Economic Development
❑ Economic growth with structural changes in favour of non-agricultural sector.
❑ Economic development can be defined as economic growth plus, that is, something more than
economic growth. (attitudinal changes in people)
❑ Economic development as economic growth accompanied by rise in
productivity.(Technological dimension)
❑ Economic development as economic growth with redistribution of resources in favour of the
relatively worse off ( Unemployment, Inequality, Poverty)
Different views on Economic Development

Difference between Economic Development and Economic growth

Sustainable Development
 ❑ Economic development should proceed at a pace and in a manner which will conserve the
environment and deployable resources
❑ The more goods were produced, the more pollution is produced and more non renewable
natural resources are exhausted.
❑ Sustainable Development is the level of development which take care of the needs of the
present generation without compromising the needs of the future generations.
❑ The concept of sustainable development was introduced by the Brundtland report in 1987.
This report is also known as our common future
Measurement of growth or development
❑ When economic development takeplace , investment increases and the stock of capital
increases.
❑ When total output increases , per capita consumption may increase or decrease.
❑ Some economists suggest that Economic growth and economic development means an
increase in quantitative aspects such as total output.
❑ Qualitative measures such as education, standard of living are also included by some other
economists to measure the economic growth or development
❑ Different viewpoints are there to measure the growth and development
1.National Income as an Index
❑ An increase in real national income is the most convenient measure of economic development
because a larger real national income is normally a pre-requisite for an increase in real per
capita (Kuznet, Meier and Baldwin)
❑ But the use of national income as an index to measure economic development has been
criticized due to aggregative grounds
❑ It ignored the consumption and distribution of resources
❑ It does not account for population trends as does per capita income
2. Per Capita Income as an Index
❑ Population is an important concern of economic development
❑ Increase in national income should be greater than the rate of gowth of population
❑ In developing countries having population pressure, a rise in per capita real income is better
than that of aggregate real income in the measurement of economic development
3. Per Capita Level of Consumption
❑ Increase in per capita income need not always increase per capita consumption which affect
the standard of living of the people.
❑ Improving the standard of living of the people is the ultimate objective of economic
development. Then the per capita consumption level is the most appropriate index of
measuring economic development.
4. UNRISD Indicator of socio-economic development
❑ United Nations Research Institute for Social Development tried to develop such indices as
would encompass social, political and economic variables related to industrialisation,
urbanization and modernization.
5. Physical Quality of Life Index (PQLI)
 ❑ It was developed for the Overseas Development Council in the mid-1970s by Morris David
Morris, as one of a number of measures created due to dissatisfaction with the use of GNP as
an indicator of development.
❑ He used three important indicators
Life Expectancy (LE)
Infant Mortality (IM)
Basic Literacy (BL)
❑ Morris suggested that since infant mortality refers to death before age one, therefore, life
expectancy at age one should be used instead of life expectancy at birth.
❑ These three indicators are averaged to get PQLI. ie,
PQLI = 1/3 (LEI + IM + BL)

6. Human Development Index

❑ The Human Development Index (HDI) is a statistic composite index of life
expectancy, education and per capita income indicators, which are used to rank countries into
four tiers of human development.
❑ The index was developed in 1990 by Indian Nobel prize winner Amartya Sen and Pakistani
economist Mahbub ul Haq, with help from Gustav Ranis of Yale University and Lord Meghnad
Desai of the London School of Economics and has been used since by the United Nations
Development Program in its annual Human Development Report.
Components of HDI
❑ HDI comprises of three main components
i. Life Expectancy Index (LEI)
It is the Life Expectancy at birth, not at age one, Because infant mortality is not
entering in this index as a separate indicator.
i. Educational attainment Index (EAI)
It is a combination of adult literacy rate with 2/3 weight and Combined Enrolment
Ratio with weight 1/3
i. Standard of Living Index (SLI)
It is represented here by a transformation of per income. First, per capita incomes
are converted into purchasing power parity (PPP). Presently, standard of living is
being captured by the log-transform of per capita income in PPP.
❑ HDI is an equi-weighted average of above three components. ie,
HDI = 1/3 (LEI + EAI + SLI)
❑ The geometric mean of the three indexes, the cube root of the product of the indexes, is the
human development index.
❑ A value above 0.800 is classified as very high, between 0.700 and 0.799 high, 0.550 to 0.699
as medium and anything below 0.550 as low.
 ❑ The 2020 report contained the HDI of 189 countries and territories and 15 regions or groups of
countries based on data collected in 2019.
❑ Norway is on the top since many years
❑ Niger is the country having lowest HDI
❑ India is on 131st position (Previous 129th)

State Human Development Index

❑ The national average HDI for India in 2008 was 0.467. By 2010, its average HDI had risen to
0.519.
❑ UNDP, the sponsor of Human Development Index methodology since 1990, reported India's
HDI to be 0.554 for 2012, an 18% increase over its 2008 HDI.
❑ United Nations declared India's HDI is 0.586 in 2014, a 5.77% increase over 2012. As for the
year 2018, HDI for India stood at 0.647.
7. Human Poverty Index
❑ The Human Poverty Index (HPI) was an indication of the poverty of community in a country,
developed by the United Nations to complement the Human Development Index (HDI) and
was first reported as part of the Human Deprivation Report in 1997.
 ❑ While the HDI measures average achievement , the HPI measures deprivations in the three
base dimensions of human development captured in HDI.
i. A long and a healthy life
ii. Knowledge
iii. A decent standard of living

8. Gender Development Index

❑ The Gender Related Development Index (GDI) is an index designed to measure gender
equality.
❑ GDI together with the Gender Empowerment Measure (GEM) were introduced in 1995 in
the Human Development Report written by the United Nations Development Program.
❑ The aim of these measurements was to add a gender-sensitive dimension to the Human
Development Index (HDI).
❑ The GDI adjusts the average achievement to reflect the inequalities between men and women
in the following dimensions
i. A long and a healthy life
ii. Knowledge
iii. A decent standard of living
❑ Gender Development Index, based on data collected in 2018, and published in 2019:-
❑ Countries are grouped into five groups based on the absolute deviation from gender parity in
HDI values, from 1 (closest to gender parity) to 5 (furthest from gender parity). This means that
grouping takes equally into consideration gender gaps favoring males, as well as those
favoring females.
❑ First Rank – Kuwait
❑ India ranks 153rd
9. Social Progress Indicate
❑ SPI refers to social progress defined at the individual level in three dimensions
❑ These three dimensions are
Longevity or potential life time
Consumption of private goods
Access to public goods
 ❑ The index is published by the nonprofit Social Progress Imperative, and is based on the
writings of Amartya Sen, Douglass North, and Joseph Stiglitz.
❑ India ranks 117

10. Genuine Progress indicator

❑ Genuine progress indicator (GPI) is a metric that has been suggested to replace, or
supplement, gross domestic product (GDP).
❑ The GPI is designed to take fuller account of the well-being of a nation, only a part of which
pertains to the size of the nation's economy, by incorporating environmental and social factors
which are not measured by GDP.
❑ GPI includes more than 20 aspects of our economic life that the GDP ignores.
❑ The value of activities that add to human progress are added and those which reduce
progress are substracted from the measure.
11. Green Index
❑ The world bank’s environmentally sustainable development division has developed a new
index called Green Index
❑ The Green index attach a dollar value to each of the three components
Produced assets
Natural resources
Human resources
❑ It puts a price tag on polluted assets, the sum of all machineries, factories, roads and other
infrastructure
❑ It then calculates the true estimate of a country’s wealth taking into account all such resources
which do not always show up on traditional economic indicators
12. Global Multidimensional Poverty Index
❑ The Multidimensional Poverty Index was launched by the UNDP and the OPHI in 2010.
❑ MPI is based on the idea that poverty is not unidimensional (not just depends on income
and one individual may lack several basic needs like education, health etc.), rather it
is multidimensional.
❑ The index shows the proportion of poor people and the average number of
deprivations each poor person experiences at the same time.
❑ MPI uses three dimensions and ten indicators which are:
• Education: Years of schooling and child enrollment (1/6 weightage each, total 2/6);
• Health: Child mortality and nutrition (1/6 weightage each, total 2/6);
• Standard of living: Electricity, flooring, drinking water, sanitation, cooking fuel and
assets (1/18 weightage each, total 2/6)
❑ A person is multidimensionally poor if she/he is deprived in one third or more (means 33%
or more) of the weighted indicators (out of the ten indicators). Those who are deprived in
one half or more of the weighted indicators are considered living in extreme
multidimensional poverty.
❑ MPI is significant as it recognizes poverty from different dimensions compared to the
conventional methodology that measures poverty only from the income or monetary terms.
❑ Global Multidimensional Poverty Index 2020 was released by the United Nations
Development Programme (UNDP) and the Oxford Poverty & Human Development
Initiative (OPHI).
❑ The data of the index is based on the study of poverty trends in 75 countries.

Key Points
Global Scenario:
 • 1.3 billion people are still living in multidimensional poverty. More than 80% are deprived in
at least five of the ten indicators used to measure health, education and living standards in
the global MPI.
• The burden of multidimensional poverty disproportionately falls on children - half of
multidimensionally poor people are children under age 18.
• 65 out of 75 countries studied significantly reduced their multidimensional poverty levels
between 2000 and 2019.
• About 84.3% of multidimensionally poor people live in Sub-Saharan Africa and South
Asia.
• 67% of multidimensionally poor people are in middle-income countries.
Indian Scenario:
• India lifted as many as 270 million people out of multidimensional poverty between 2005-06
and 2015-16.
• Neighbourhood Scenario: In China, 70 million people left multidimensional poverty between
2010 and 2014, while in Bangladesh, the numbers declined by 19 million between 2014 and
2019.
• Impact of Covid-19: Covid-19 is having a profound impact on the development landscape.
• The study finds that on average, poverty levels will be set back 3 to 10 years due
to Covid-19.
• Sustainable Development Goals: The index emphasises on measuring and monitoring
progress under the goals to reach ‘zero poverty by 2030-Goal 1 of the SDGs’.
13. Sustainable Development Report (SDG)
❑ The Sustainable Development Report 2020 presents the SDG Index and Dashboards for all
UN member states and frames the implementation of the Sustainable Development Goals
(SDGs) in terms of six broad transformations.
❑ It was prepared by teams of independent experts at the Sustainable Development Solutions
Network (SDSN) and the Bertelsmann Stiftung.
❑ India – 117

The Sustainable Development Goals (SDG)

❑ The Sustainable Development Goals had replaced the Millennium Development Goals
(MDGs), which has been started as a global effort in the year 2000 in order to tackle the
indignity of poverty.
❑ The MDGs established objectives, which were measurable and universally agreed for tackling
the problems of extreme poverty and hunger, preventing deadly diseases, and expanding
primary education to all children, among many of the development priorities.
❑ The United Nations Millennium Development Goals were eight goals that all 191 UN member
states have agreed and tried to achieve by the year 2015.
❑ The United Nations Millennium Declaration, signed in September 2000 commits world leaders
to combat poverty, hunger, disease, illiteracy, environmental degradation, and discrimination
against women.
❑ The Eight Millennium Development Goals are:
❑ to eradicate extreme poverty and hunger;
❑ to achieve universal primary education;
❑ to promote gender equality and empower women;
❑ to reduce child mortality;
❑ to improve maternal health;
❑ to combat HIV/AIDS, malaria, and other diseases;
❑ to ensure environmental sustainability; and
❑ to develop a global partnership for development.
❑ As the MDGs era came to a conclusion with the end of the year 2016. Their came the official
launch of the bold and transformative 2030 Agenda for Sustainable Development adopted by
world leaders at the United Nations.
❑ The new Agenda calls on countries to begin their efforts in order to achieve 17 Sustainable
Development Goals (SDGs) over the next 15 years.
❑ The Sustainable Development Goals (SDGs) were first talked at the United Nations
Conference on Sustainable Development in Rio de Janeiro in 2012.
❑ The SDGs came into effect in January 2016, and it will continue to guide UNDP policy and
funding until 2030. The SDGs have been formulated by UNDP.
The objective was to produce a set of universal goals that will meet the urgent environmental,
political and economic challenges faced by the world. It includes 17 goals:
CLASSICAL THEORIES OF DEVELOPMENT
❑ The Classical School of economic thought was formalised by Adam Smith, Malthus, Ricardo,
Mill and Say, who developed the classical theory of development.
❑ However, there are distinctions in terms of the emphasis laid by each thinker to the classical
theory of development.
❑ While Malthus and Mill emphasized the demand side, Smith, Ricardo and Say proposed a
supply side growth models. Adam Smith - An Enquiry into the nature and Cause of Wealth of
nations - 1776
❑ Jean Baptiste Say - A Treatise on Political Economy - 1803
❑ David Ricardo - The Principles of Political Economy and Taxation – 1817
❑ Malthus - Principles of Political Economy - 1820
❑ JS Mill - Principles of Political Economy – 1848
ADAM SMITH’S THEORY OF ECONOMIC DEVELOPMENT
❑ Adam Smith is regarded as the foremost classical economist. His monumental work, An
Enquiry into the nature and Cause of Wealth of nations published in 1776, was primarily
concerned with the problem of Economics of Development.
❑ Though he did not expound and systematic growth theory, yet a coherent theory has been
constructed by later day economists.
❑ Smith posited a supply-side driven model of growth. Briefly we can set out the story via the
simplest of production functions:

Y = ƒ(L, K, T) where Y is output, L is labour, K is capital and T is land, so output is

related to labour and capital and land inputs.
❑ Consequently output growth (gY) was driven by population growth (gL), investment (gK), land
growth (gT) and increases in overall productivity (gƒ). ie, gY = φ(gƒ, gK, gL, gT)
Assumptions:
❑ Population growth, in the traditional manner of the time, was endogenous. It depended on the
sustenance available to accommodate the increasing workforce.
❑ Investment was also endogenous; determined by the rate of savings (mostly by capitalists);
❑ Land growth was dependent on conquest of new lands (e.g. colonisation) or technological
improvements of fertility of old lands.
❑ Technological progress could also increase growth overall; Smith's famous thesis that the
division of labour or specialisation improves growth was a fundamental argument.
❑ Smith also saw improvements in machinery and international trade as engines of growth as
they facilitated further specialisation.
❑ He also assumed the existence of perfect competition
Main Features
❑ Natural law – laissez-faire and self interest leads to Development
 Adam Smith believed in the doctrine of ‘Natural law’ in economics affairs. He regarded every
person as the best judge of his own interest who should be left to pursue it to her own
advantage.
❑ Division of Labour
• Division of labour increases productivity which depends upon the size of the market.
• It is division of labour that results in the greatest improvement in the productive powers of
labour.
• The attributes of this increase in productivity are
(i) the increase in the dexterity of every worker;
(ii) the saving in time to produce goods; and
(iii) to the inventions of large number of labour saving machines.
❑ Process of Capital Accumulation
• Division of labour leads to capital accumulation and capital accumulation leads to
economics of development
• Only capitalists and landlords are capable of savings
• The working class is incapable of savings because it gets wages equal to subsistence
level

❑ Profits, the incentive to investment

• Profits induce investment
• According to classical economists, investment were made because the capitalists
expected to earn profits on them; and future expectations with regard to profits
depended on the present climate for investment as well as actual profit.
• Profits tend to fall with economic progress when the rate of capital accumulation
increases. Increasing competitions among capitalists tends to lower profits.
• Thus with the growth of economy’s capital stock, competition among entrepreneurs for
scarce labour tends to bid up wages and thereby lowers profits.
❑ Agents of Growth
• According to Smith, farmers, producers and businessman are the agents of progress
and economic growth. The functions of these three are, however, interrelated. To Smith,
development of agriculture leads to increase in construction works, and commerce.
❑ Shortage of natural resources stops growth
• According to Smith, the process of growth is cumulative.
• When there is prosperity as a result of progress in agriculture, manufacturing industries
and commerce, it leads to capital accumulations, technical progress, increase in
population expansions of markets, division of labour and rise in profits continuously.
• But this process is not endless. It is the scarcity of natural resources that finally stops
growth.
CRITICISMS
❑ Rigid division of Society:
 • Smith’s theory is based on the socio-economic environment prevailing is Great Britain
and certain parts of Europe. It assumes the existence of a rigid division of society
between capitalists (Including land lords) and labourers.
❑ One sided saving biase
• According to Smith, Capitalists, landlords and money lenders save. This is,
however, a one-sided base of saving because it did not occur to him that the major
source of savings in our advance society was the income receivers and not the
capitalists and landlords.
❑ Unrealistic assumption of perfect competition:
• Smith’s whole model is based upon the unrealistic assumption of perfect competition.
The laissez-faire policy of perfect competition is not to be found in any economy.

RICARDIAN THEORY OF ECONOMIC DEVELOPMENT

❑ Ricardo presented his view on Economic Development in an unsystematic manner in his book
The Principles of Political Economy and Taxation.
❑ Like Smith, Ricardo never propounded any theory of development; he simply discussed the
theory of distribution.
❑ However, Smith’s model of growth remained the predominant model of Classical Theories of
Development & Classical Growth.
❑ David Ricardo (1817) modified it by including diminishing returns to land.
Assumptions
a) all land is used for production of corn
b) law of diminishing returns operates
c) supply of land is fixed
d) demand for corn is perfectly is elastic
e) labour and capital are variable inputs
f) state of technical knowledge is given
g) all workers are paid a subsistence wage
h) supply price and labour is given and constant
i) demand for labour depends upon accumulations
j) capital accumulation results from profit
k) there is perfect competition.
Main Features
• The Ricardian model is based on the interrelation of three groups in the economy. They are
landlords, capitalists and labourers among whom the entire produce of land is distributed.
❑ Rent, Profit and Wages
• According to the model, out of the total corn produced rent has the first right and the
residual is distributed between wage and profit while interest is included in profit.
❑ Capital Accumulation
• According to Ricardo capital accumulation is the outcome of profit because profit leads to
saving of wealth which is used for capital formations. Capital formation depends upon will to
save and capacity to save which is more important. The larger the surplus i.e. profit, the larger
will be capacity to save.

Capital accumulation are made up of

• The Profit Rate - The rate of profit is equal to the ratio of profit to capital employed. But
since capital consists of only working capital, it is equal to the wage bill. So long as the
rate of profit is positive, capital accumulation will take place.
• Increase in Wages – The wage rate increases when the prices of commodities forming
the subsistence of the workers increase. As the demand for food increases, less fertile
land is brought under control and more labourers are needed raising wage rate. Thus
wages would rise with the increase in the price of corn. In a situation rent also
increases, with the decline of capitalists’ profit capital accumulation also declines.
• Declining profits in other industries – The profits of the farmer regulate the profits of
all other trades. Therefore the money rate of profit earned on capital must be equal both
in agriculture and industry. If profit rate declines in the agricultural sector it will also
decline is the manufacturing industry.
❑ Stationary state
• When once profits starts declining, this process continues till profit become zero,
population and capital accumulation stop increasing and the wage rate reaches
subsistence level.
• According to Ricardo there is natural tendency for the rate of profit to fall in the
economy so that the country ultimately reaches the stationary state.
• When capital accumulation rises, with increase in profits, production increases which
raises the wage fund, population increases, which raise the demand for corn and its
price.
• Inferior grades of land are cultivated. Rents on superior land increase and reduce the
share of the capitalists and labourers. Profits decline and wages fall to subsistence.
• The process of rising rents and falling profits continues till the output from the
marginal land just covers the wages of labour employed and profits are zero.

CRITICISMS
 ❑ Neglects the impact of technology:
Ricardo pointed out that improved technology in industrial field leads to the displacement of
labour and other adverse consequences. But Ricardo failed to visualize the impact that
science and technology had on the rapid economic development of the new developed
nations.
❑ Wrong Notion of Stationary State:
The Ricardian view that the system reaches the stationary state automatically is baseless
because no economy attains the stationary state.
❑ Baseless Notion of Population:
The Ricardian view that wage rate can (does) not rise above. The subsistence level is wrong.
In western countries there has been rise in wage rate but population has decreased.
❑ Unnecessary Importance to the law of Diminishing Returns:
Ricardian theory is primarily based on the law of diminishing returns but the rapid increase of
farm produce in advanced nations has proved that Ricardo under-estimated the potentialities
of technological progress is counteracting diminishing returns to land.
❑ Impracticable laissez-faire Policy:
According to this theory there should be no government interference and the economy will
operate automatically through perfect competition. I reality no economy is free from
government interference and in which perfect competition prevails.
❑ Neglects Institutional factors and Interest-rate:
Institutional factors have been assumed as given but they are crucial in Economic
Development and cannot be overlooked. It neglects rate of interest also the does not
regard the interest rate as an independent reward of capital but includes it in profits. He does
not distinguish between capitalist and entrepreneur.
• Distribution rather than growth theory:
The Ricardian model is not a growth theory but a theory of distribution which determines the
share of workers, landlords and capitalists. Even is this he regards the share of land as
primary and the residual as the share of labour and profit. He did not determine the share of
each factor separately.
• Land also produces goods other that corn:
Ricardo believes that one product corn is produced on land. But this is an old notion because
land produces a variety of products other than corn.
• Capital and labour not fixed co-efficients:
The Ricardian assumption that capital and labour are fixed co-efficients of production is not
correct. This assumption is invalid.

MARXIAN THEORY OF ECONOMIC DEVELOPMENT

Karl Marx
❑ A German philosopher, economist, historian, political theorist, sociologist, journalist
and revolutionary socialist
❑ Father of scientific socialism
 ❑ His best-known titles are the 1848 - pamphlet The Communist Manifesto and the
three-volume Das Kapital (1867–1883).
❑ Gravest and the most penetrating examination of the process of capitalist development
Major assumptions:
1. There are 2 principal classes in society
a) Bourgeoisie (Capitalists)
b) Proletariat(Workers)
❑ Wages of the workers are determined at subsistence level of living
❑ Labour is the main source of value generation
❑ Factors of production are owned by capitalists
❑ Capitalists exploit workers
❑ Labour is homogenous and perfectly mobile
❑ National Income is distributed in terms of wages and profit
4 concepts
1. Materialistic Interpretation of history
2. Surplus value
3. Capital accumulation
4. Downfall of capitalism
Materialistic Interpretation of history
❑ All historical events are the result of continuous economic struggle between different groups
and classes in a society
❑ Main cause of the struggle is the conflict between mode of production and relation of
production
▪ Mode of production: Particular arrangement of production in a society that determines
the entire social, political and religious way of living
▪ Relation of production: relates to the class structure of society
Stages of growth
1. Primitive Communism (People lived in harmony, barter system)
2. Slave stage (exploitation by landlords)
3. Feudal Stage (Peasants & Land owners)
4. Capitalist Stage
▪ Entire economy is guided by market forces
▪ Profit motive of the society
▪ Means and factors are owned by capitalists
▪ Labour surplus
▪ Leads to struggle b/w capitalists and workers
 5. Socialist Stage
▪ Workers control means of production
▪ No class struggle
Surplus value
❑ Economic basis of the class struggle under capitalism
❑ Class struggle is the outcome of accumulation of surplus value in the hands of few capitalists
❑ Labour is the soul source of value in a community
❑ Capitalism is divided in to two groups
1. The workers who sell their labour power
2. The capitalists who own the means of production
❑ Marx calls the unpaid labour as surplus value (s)
❑ Marx separated the capital into Constant capital and variable capital
Constant Capital (c) : Capital invested in stocks or raw materials or equipment
which directly assist the productivity of the labour
Variable Capital (v) : Capital devoted to the purchase of labour power in the form of
wages or direct subsistence
❑ So the total value of output is given as
c+v+s
where y is output, ‘c’ constant capital, ‘v’ variable capital and ‘s’ surplus value.
❑ Organic composition of capital
Marx defined the "organic composition of capital" as the ratio of what he called constant capital
to variable capital. c/v
(c/c+v - some economists like Paul M Sweezy)
❑ Rate of Exploitation
• The ratio of surplus value to the variable capital
• Rate of exploitation = s/v
❑ Rate of profit can be expressed as a positive function of the exploitation rate (s/v) and a
negative function of the organic composition of capital (c/v)
❑ Declining Rate of Profit
• Marx then argued that the exploitation rate (s/v) tended to be fixed, while the organic
composition of capital (c/v) tended to rise over time, thus the rate of profit has a tendency to
decline.
❑ Increasing Rate of Exploitation
• There is a natural tendency for the rate of profit to fall. One way to prevent this decline in r
would be to increase the exploitation rate in proportion to which variable
• Capital declines relative to constant capital. The manner of increasing the exploitation rate,
Marx claimed, was up to the devilish imagination of the capitalist.
Criticisms
 ❑ Unrealistic surplus value
❑ Technological progress helpful in increasing employment
❑ Falling tendency of profits not correct
❑ Marx Could not understand flexibility in capitalism
❑ Static analysis

SCHUMPETERIAN THEORY OF ECONOMIC DEVELOPMENT

❑ Joseph Alois Schumpeter, Australian- American economist
❑ Book “ The Theory of Economics Development,1934” & “ Business cycle, 1936”
❑ The most influential economist of 20th century
❑ He popularized the term “Creative Destruction”
❑ Introduced “Dynamics of capitalist”
❑ 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 investments, and no involuntary unemployment.
❑ The equilibrium is characterised by the term “Circular flow”, which continues to repeat itself
every year. Same products are produced every year in the same manner.
❑ According to him economic development “is spontaneous and discontinuous change in the
channels of the circular flow, disturbance of equilibrium, which forever alters and displaces the
equilibrium state previuosely existing”
Development as Innovation
❑ Innovation may consists of :
1. Introduction of a new product
2. The introduction of new method of production
3. The opening up of a new market
4. The conquest of a new source of supply of raw materials and semi-manufactured goods
5. Carrying out of new organisation of industry like the creation of monopoly
❑ According to Schumpeter, it is the introduction of new product and the continual
improvements in the existing ones that lead to development
❑ Role of the Innovator is assigned to entrepreneur , not to capitalists
❑ The entrepreneur is one who introduces something entirely new. He is motivated by
❑ The desire to find a private commercial kingdom
❑ The will to prove his superiority
❑ The joy of creating, getting things done.
❑ To perform his economic condition, the entrepreneur requires two things;
❑ Existance of technical knowledge in order to produce new
 ❑ Power of disposal over the factors of production
❑ An entrepreneur innovates to earn profits
❑ Profits are conceived a ”s surplus over costs: a difference between total receipts and outlay” -
as a function of innovation
❑ According to Schumpeter under the competitive equilibrium the price of each products just
equals its cost of production and there no profits.
❑ Profits arise due to dynamic changes resulting from an innovation. They continue to exist till
the innovation becomes general
❑ The model starts with the breaking up of the circular flow with an innovation in the form of new
product
❑ In order to break circular flow, innovative entrepreneurs are financed by bank-credit expansion
❑ Investment in innovation is risky, they must pay interest on it.
❑ Innovation in one field may induce other innovations in related fields
❑ Bank credit – Investment – expansion of economy – Increase in purchasing power - Demand
for goods increase – increase in price – increase in profit – expansion of old industry –
innovation – new products – demand for old products decline – prices fall – Liquidation
❑ As though innovators start repaying bank loans out of profits, the quantity of money is
decreased and prices tends to fall – profit declines – Impulse for innovation is reduced -
Depression
❑ Three forces are discernible, that are the beginning of creeping death of capitalism. They are;
(1) The decadence of entrepreneurial function
(2) The disintegration of capitalist family
(3) The destruction of institutional framework of capitalist society
❑ As a result of clashing of groups, capitalism crumbles
❑ At the end capitalism would fade away
Criticisms
❑ Schumpeter’s analysis of process of transition from capitalism to socialism is not correct
❑ He gives too much importance to bank credit
❑ The downswings ang upswings are not essential for economic development
❑ Development not only depends on innovations but also on many economic and social changes
❑ Schumpeter’s view that cyclical changes are due to innovations is incorrect

Approaches to Economic Development

Vicious Circle of poverty
❑ Ragnor Nurkse
❑ Circular constellation of forces tending to act and react upon one another in such a way to
keep a poor country in a state of poverty
❑ ‘A country is poor, because it is poor’
Modern Economic Growth
❑ Simon Kuznet – Charecteristics of Modern economic growth
High rates of growth of per capita product
Substantial rates of population growth
Rise in productivity
High rate of structural transformation
urbanisation
Critical Minimum Effort Thesis
❑ Harvey Leibenstein – “Economic backwardness and economic growth” – 1957
❑ According to Prof. Harvey Leibenstein the overpopulated and underdeveloped countries are
characterized by the vicious circle of poverty.
❑ They have low per capita income. His ‘theory of critical minimum effort’ is an attempt to
provide a solution to this economic problem.
❑ According to him, critical minimum effort is necessary to achieve a steady economic growth
raising per capita income.
❑ This theory led to the development of theories of big push and balanced growth
❑ In order to achieve the transition from the state of backwardness to the more developed state
a minimum effort is needed
❑ Particular level of investment – ‘Critical minimum’
❑ Two forces of economy
Shocks
Stimulants
❑ Shocks refer to those forces which reduce the level of output, income, employment and
investment etc. In other words, shocks dampen and depress the development forces. Stocks
depress development forces which reverse the wheel of development.
❑ On the contrary, stimulants refer to those forces which raise the level of income, output,
employment and investment etc. In other words, Stimulants impress and encourage
development forces. They are called ‘Income Generating forces’ which lubricate the wheel of
development. Stimulants have the capacity to raise per capita income above equilibrium level.
According to Leibenstein, there are two types of incentives that are found in the
underdeveloped countries:
(i) Zero-sum Incentives:
❑ Zero-sum incentives are those which exercise zero effect on economic growth.
❑ They do not increase national income.
❑ It includes trading risk, non-trading or speculative activities and transference of income and
profit from one section of people to another.
(ii) Positive-sum Incentives:
❑ The positive-sum incentives lead to economic growth and enhance the national income.
❑ The positive- sum activities are essential for economic development.
❑ These activities consists the productive investment, use of technical know-how, exploration
and exploitation of the new markets and the use of scientific discoveries and innovations etc.
❑ These are conducive for economic growth as they change the attitudes, motivations and
aspirations of the people.
❑ They try to raise the level of income, output, investment, saving and employment.
❑ It is, thus, essential that the minimum effort should be enough to create such a favourable
environment congenial to the persistence of positive sum incentives.
Theory of Low level equilibrium trap
❑ The theory developed by Richard R. Nelson in his article A Theory of the Low-Level
Equilibrium Trap published in 1956.
❑ Based on Malthusian hypothesis – with the increase in per capita income of a country above
the minimum subsistence level, population also increases
❑ But when the growth rate reaches an upper physical limit as the per capita income increases,
the growth starts declining.
❑ If the per capita income is increased above the specific level through saving and investment, it
increases a growth in population. The increase in population growth as a result pushes down
per capita income to its stable level of equilibrium. Thus, the economy is caught in a low level
equilibrium trap. To come from this trap, the rate of increase of growth of income must be
higher than the rate of increase in population.
❑ There are certain conditions conducive to trapping as detailed below:
1. A high correlation between the level of per capita income and rate of population growth;
2. A low propensity to direct additional per capita income to increase per capita investment;
3. Scarcity of uncultivated arable land;
4. Inefficient production methods;
5. Cultural inertia and economic inertia.

❑ The following factors are suggested to escape from the low level equilibrium trap:
 1. There should be favourable socio political environment in the country.
2. Capital and income should be enhanced by obtaining funds from abroad/international
institutions.
3. Improved techniques should be used to utilize existing resources.
4. The requisite methods should be adopted to change distribution of income.
5. Social structure can be changed by laying stress on thrift and entrepreneurship so that
there must be ample opportunities, incentives to limit the size of family.
6. Solid investment programme should be introduced by the Government.
7. Efforts should be made to increase production with modern and latest techniques of
production.
Big Push Theory
❑ The originator of this theory was Paul Rosenstein-Rodan in 1943. Further contributions were
made later on by Murphy, Shleifer and Robert W. Vishny in 1989.
❑ Analysis of this economic model ordinarily involves using game theory.
❑ High minimum amount of investment to over come obstacles to development in an
underdeveloped country
❑ Necessitates the obtaining of external economies
❑ According to Rosenstein-Rodan, there exist three indivisibilities in underdeveloped countries.
These indivisibilities are responsible for external economies and thus justify the need for a big
push. The indivisibilities are as follows-
• (i) Indivisibilities in the production function, i.e., lumpiness of capital, especially in the
creation of social overhead capital.
• (ii) Indivisibility of demand, i.e., complementarity of demand.
• (iii) Indivisibility of savings, i.e., kink in the supply of savings.
Balanced Growth Theory
❑ Harmonious growth of different parts of the economy
❑ Balance between agriculture and industry, domestic and export sector etc
❑ Rosenstein Rodan, Ragnar Nurkse, Arthue Lewis, Scitovskey, Harvey Lebenstein
❑ Rosenstein rodan – serious obstacles:- lack of market - lack of infrastructure – absence of
ability to save
❑ He favours a comprehensive investment programme
❑ Ragnar Nurkse – lack of capital – low productivity - low real income
❑ He favours a more or less synchronised application of capital to a wide range of different
industries

Unbalanced Growth
❑ Criticism to balanced growth
❑ Investment should be made in selected sectors
 ❑ Hirschman, Singer, Kindleberger, Streeten
❑ Hirschman – Investment in strategically selected industries
❑ He regards the development as a “chain of disequilibria”
❑ Profits and losses are symptoms in a competitive economy
❑ Investing either in SOC (social overhead capital) or DPA ( Direct Productive Activities)
❑ Investment have 2 effects (Two Linkages):
1. Forward linkage – Encourage investment in subsequent stages of production
2. Backward linkage - Encourage investment in later stages of production

Rostow's stages of economic growth

❑ It was published by American economist Walt Whitman Rostow in 1960. The model postulates
that economic growth occurs in five basic stages, of varying length:
1. The traditional society – (static equilibrium –agrarian)
2. The preconditions for take-off – (slow changes in attitudes and organization)
3. The take-off – (Urbanization increases, industrialization proceeds, technological
breakthroughs occur- Secondary sector expands)
4. The drive to maturity ( Period of sustained growth)
5. The age of high mass-consumption (the industrial base dominates the economy; the
primary sector is of greatly diminished weight in the economy and society)
(1) Traditional Society:
❑ One whose production functions are based on pre-Newton science and technology.
❑ Method places a ceiling on productivity.
❑ Higher proportion of resources is devoted to agriculture.
❑ Humans valued on family basis, not on the basis of capabilities.
❑ The range of possibilities for a grand children are the same what they were for grand father.
❑ The society is ruled by those who owned or controlledand. (E.E. Medieval Ages in Europe)

(2) Pre Conditions to Take Off:

❑ Crucial Role By Agriculture: (a) To meet the increased needs of growing population.(b) With
agri. surplus foreign exchange can be earned to meet the import bill of capital goods.(c) The
overall increase in the productivity due to agri. development will provide stimulus to other
sectors of the economy.
❑ Agri. sector must supply expanded food, expanded markets and expanded funds to the
modern sector.
❑ (ii) Growing Outlays on SOC: SOC has three distinctive characteristics: (a) The gestation
period is long, (b)lumpy, (c) beneficial for the community.
❑ Duty of state to provide SOC as during 1815 to 1840(SOC was provided by state in US and
UK.)

(3) Take Off Stage:

❑ A break-through in the history.
❑ More than two or three decades.
❑ Three conditions must be satisfied: -
(i) rate of investment must rise from 5% to 10% of GNP
 (ii) development of one or more substantial manufactured sector with high growth rate
(iii) existence of social, political and institutional framework which could give impulses to
modern sector expansion.

(4) Drive to Maturity Stage:

❑ 40 years after the take-off stage long interval where economy experiences a regular growth
and modern technology extended to a bulk of resources.
❑ May be shift in emphasis from coal, iron and heavy engineering to machine tools,
chemicals and electrical equipment’s.
❑ Germany, France, UK and US passed through this period during the end of 19th century.
❑ 10% to 20% of GNP ploughed in investment, output grows more than increase in
population.
❑ Goods which were earlier imported now produced at home. Economy becomes a part of
international economy.

(5) Age of High Mass Consumption Stage:

❑ As societies achieved maturity in 20th century, real incomes rose and people became
aware/anxious to have a command overconsumption of fruits of mature economy.
❑ Leading sectors produced consumer durables(e.g. TV, fridges and automobiles, etc.)
❑ Society pays more attention on social welfare& social security than economic growth. (US
passed through stage in 1913-14, and postwar 1946-56.)

Criticisms
❑ 5 stages -against Marx stages of feudalism, bourgeoisie, capitalism, socialism and
communism. Exist certain dissimilarities in both these approaches. (e.g. Rostow did not
discuss the class conflict, while it is very much available in Marx's stage theory).
❑ Stage Making Idea is Misleading: all the nations have passed through these stages. Not all
the nations have followed this route due to different environment and resources etc.
❑ Leading Sectors: leading sectors are responsible for economic expansion, Kuznets says that
Rostow did not identify the chronology of leading sectors.

Models of Economic Growth

Harrod – Domar model

❑ Harrod-Domar Model: RF Harrod gave his model in 1939 and E Domar in 1946-47.
❑ Based on Keynesian saving – investment analysis
❑ But the H-D theory is based on both demand and supply side (Keynesian theory is based on
only demand side and short run)
❑ H-D model is dynamic and long run growth model
❑ According to H-D model capital is the crucial factor of economic growth
❑ Saving increases – Investment increases – MPK increases – Depreciation decreases –
Growth rate of output Increases
❑ The model concentrate on the possibility of steady growth through adjustment of supply and
demand of capital
❑ HD model assign 2 important roles to investment
❑ Capacity effect
❑ Income effect
Assumptions:
 1) Full employment of income
2) Laissez faire policy
3) Model is based on closed economy
4) Saving is the constant proportion of income
5) Technology is constant
6) Fixed proportions of factors
7) APS = MPS
8) APS, MPS, Capital output ratio are constant
9) Law of constant returns operate
10) No depreciation of capital goods
Harrod Model
Raised 3 issues
1. How can steady growth be achieved with fixed COR
2. How can be steady growth can be maintained
3. How do the natural factors put a ceiling on the growth rate of economy?

To solve these he adopted 3 concepts

1. Actual growth rate
2. Warranted growth rate
3. Natural growth rate
2. Actual growth rate:
1. Determined by actual rate of savings and investment in the economy
2. G is defined as the ratio of change in income to the total income
3. G=ΔY/Y
4. G is determined by saving income ratio and capital output ratio
s = S/Y
c = ΔK/ΔY
Ga.C = s
ΔY/Y . ΔK/ΔY = S/Y
ΔK = S
I = S ( Dynamic equilibrium)
2) Warranted growth rate
❑ Growth rate of the economy when it is working at full capacity
❑ Growth rate at which all saving is absorbed into investment
❑ Denoted as Gw
 ❑ Also called full capacity growth rate
❑ It is determined by Capital output and saving income ratio
❑ At steady equilibrium resources are fully utilised
❑ In Gw the demand for businessman is high enough
❑ Equilibrium = Gw Cr = S
❑ Cr = capital required for warranted growth rate S = saving income ratio
❑ According to Harrod economy can achieve steady growth rate when;
G = Gw and C = Cr
❑ Instability of growth:
1) If G > Gw, then C < Cr ( growth rate of income is more than growth rate of
output) – inflation ( Y increases – Demand Increases – Price Increase ) & Capital
deficiency
2) If G < Gw, then C > Cr ( growth rate of income is less than growth rate of output)
– Depression ( Y decreases – Demand decreases – Price derease ) & secular
decline in MEC would lead to chronic depression and unemployment – Secular
stagnation
❑ Steady growth implies balance between G and Gw
Fundamental equation of Harrod
𝑦 𝑠
❑ Growth rate = 𝑦
= 𝑣

❑ v = Capital Output ratio

❑ s = Propensity to save
3) Natural growth rate
❑ Denoted as Gn
❑ It is determined by natural conditions such as labour force, natural resources, capital
equipment and technical knowledge
❑ Also called welfare optimum and full employment growth rate
❑ Gn create a limit beyond which expansion is not possible. This limit is called full
employment ceiling
❑ Gn is maximum growth which an economy can achieve with its available natural
resources
❑ Knife – Edge equilibrium: ( G = Gw )
❑
When Gn > Gw
❑ employment increases to achieve full employment
❑ It implies there will be cumulative boom and full employment
❑ It creates an inflationary trend
 When Gw > Gn
❑ There is excess of capital goods and shortage of labour
❑ Capital becomes idle and there is excess capacity
❑ This will decrease output, employment and Income
❑ In such situation economy faces chronic depression

Domar Model

❑ Model developed in 1946

❑ Domar discuss 2 roles of investment
1) Investment generate income (Keynesian)
2) Investment increase productive capacity (Classical)
❑ Income is determined by investment through multiplier
Yt = It. 1/s (saving – income ratio constant)
Y = output
 I = Actual investment
s = saving income ratio in time period t
❑ Productive capacity is created by investment
Yt – Yt-1 = It. sigma

This Relation tells us that steady growth is possible when investment over a period of time equal the
product of saving income ratio, capital productivity and capital stock

SOLOW MODEL
❑ The Solow model is long run economic growth model set within the framework of neo-classical
economics
❑ The model was given by Robert Solow and Trevor Swan in 1956 ( A contribution to theory of
economic growth)
❑ In 1987 Solow was awarded the Nobel prize in Economics for his work ‘A contribution to the
theory of economic growth’ (1956)
❑ The model shows how the following 3 variables affect the economic growth
1. Saving rate
2. Population growth
3. Technical progress
❑ Technical progress is given exogenous in the model – Exogenous model
 ❑ Solow developed the model over H-D model (unrealistic assumptions)
- fixed proportion of factors
- MPK constant
- Knife edge equilibrium
- Demand side model
❑ He has shown that if technical coefficients of production are assumed to be variable, the
capital labour ratio may adjust itself to equilibrium ratio in course of time.
❑ Prof. Solow retains the assumptions of constant rate of reproduction and constant saving ratio
etc. and shows that substitutability between capital and labour can bring equality between
warranted growth rate (Gw) and natural growth rate (Gn) and economy moves on the
equilibrium path of growth.

Assumptions
❑ Closed economy
❑ Constant return to scale
❑ Full employment
❑ Production of only one good
❑ Possibility in labour and capital substitutions
❑ Planned savings = planned investment
❑ Labour effected by exogenous factors
❑ Flexibility in wage and saving
❑ Wage = MPP
❑ Cobb Douglas production function is used because it inhibits a couple of useful properties
which are close to economic reality (INADA conditions)
❑ According to the National Accounting Identity
(S-I) + (T-G) = (X-Z)
❑ In the long run, budget is balanced (T = G) and current account balance is also zero as X = Z.
We get: S = I
❑ This is basis for growth: save - invest - grow.
❑ Now, δ is the rate of depreciation of physical capital. The addition to capital Stock varies
according to:
1. Gross Investment – Amount of money spent on new capital
2. Depreciation – Old Machinery that wears out.
• Hence, the change in capital stock is given by
• ΔK = sY - δK in which
• ΔK means change in capital stock
• sY means gross investment (savings is a constant fraction of income)
• δK means Depreciation
• Steady State is a State in which the new Investment is exactly equal to depreciation and
the level in bathtub remains constant.
❑ In the Steady State, capital per worker does not change. k = 𝑘
❑ If it is less than 𝑘 e. g. k1 < 𝑘 ; Δk > 0. In this case, capital stock per capita and output per
capita will continue to rise.
❑ If k2 > 𝑘, capital stock per capita and output per capita will continue to fall.
❑ As the economy reaches the point of Intersection of Savings & depreciation line, growth slows
down.
 ❑ Increase in savings causes more investment which leads to higher Steady State Capital-
Output ratio and Output- labour ratio.
❑ But, an increase in saving rate has an effect on the level of GDP per Capita but not on the
growth rate of GDP per capita.
❑ This is because increase in capital stock also means more depreciation and more
replacement. However, resources for this are not forthcoming as the marginal productivity of
capital decreases.
❑ Eventually, addition to capital-labour leads to smaller and smaller increase in income.
To be noted
❑ Solow expanded H-D model of growth
❑ Third variable technology is exogenously given
❑ This model is also called exogenous growth model
❑ Only one single commodity is produced
❑ When labour and capital are separately used – Diminshing returns to scale
❑ When labour and capital are jointly used – CRS
❑ In Solow model price and wage are flexible
❑ In full employment technical progress is neutral
❑ Labour and capital are perfectly substitute
❑ The labour supply curve is vertical line
❑ Codd Douglas production function ( Linearly homogenous of degree one)

Joan Robinson Growth Model

❑ Joan Robinson in her book The Accumulation of Capital published in 1956 propagated a
simple growth model which reflects the working of a pure capitalist economy
❑ Second book – Essays in the theory of economic growth (1963)
❑ She gave only theoretical framework and the arithmatical formulation was given by Kenneth
K Kurihara
Besides this, she also used Kalecki’s saving function that states capitalists save all and workers
spend all.
❑ The focus of this theory is on the influence of population on the role of Capital
accumulation and profit maximization.

This model is based on two fundamental conditions:

 1. Capital accumulation depends on distribution of income
2. Utilization of labour depends on supply of labour and supply of capital

Important Assumptions are:-

1. Laissez faire and closed economy
2. There are 2 classes- Capitalist and workers
3. Entire income is divided into wages and profits.
4. Wage earners consume everything and do not save. Profit earners will invest everything and
consume nothing.
5. Labor supply is unlimited
6. Neutral technical progress.
7. Fixed technical coefficient
8. Prices are not changing
9. The factors of production are capital and labor only

❑ According to Joan Robinson, changes in the capital stock and population growth are the two
factors that determines the level of economic growth.
❑ Main idea of the theory was that rate of capital accumulation and rate of profits are to be
equilibrium.
y = wL+ ΠK
where y = income, w = wages, L = labour Π= rate of profit, K = capital

❑ The rate of growth of capital is capable of increasing if the net returns to capital rise in greater
proportion than the capital-labour ratio and vice-versa.
❑ The main feature of the model is that the rate of growth of capital is dependent on profit rate.
❑ Golden Age: Robinson also gave the concept of golden age. It is the situation of smooth
steady growth with full employment arising out of the equality of the desired and possible rate
of accumulation.
❑ Under the golden age, we consider the labour growth rate, capital growth rate and rate of
profits. The golden age is achieved when the equality is maintained between all the three
variables, that is,
ΔK/K = ΔL/L = ΔΠ
❑ The theory realized Potential growth rate. Potential growth rate is the maximum rate of capital
accumulation which can be maintained and achieved at constant profit rate.
 ❑ Curve OP shows production function. Each point on OP shows different combinations of
capital and labour.
❑ Tangent NT touches the curve OP at A and intersects y axis at W.
❑ Capital Labour ratio is OC at point A and productivity of labour is OD, out of which OW is the
wage rate.
❑ The point A shows the position of equillibrium. Because the slope tangent NT and the slope of
OP is the same.
❑ The growth rate of capital and labour are equal
Platinum Age
In the platinum age, the growth rate of output and employment are given from outside
and technical advance is zero.
Development parameters are considered to be rigid
Steady growth cannot occur in initial stages

Divergence from Golden age – state of disequilibrium

❑ ΔL/L > ΔK/K
Surplus labour problem – Money wage decreases – price level constant – real wage
decreases – total wage below producers decreases - profit increases – growth rate of
capital increases – additional capital use the excess labour force.

❑ ΔL/L < ΔK/K

Shortage of labour force – Unemployment of capital (short term) – There is excess
capital – technological improvement in labour saving technology – absorbs the excess
capital
KALDOR’S MODEL OF ECONOMIC GROWTH
❑ Nicholas Kaldor in his title A Model of Economic Growth originally published in economic
journal in 1957. postulated a growth model which follows the Harrodian dynamic approach and
the Keynesian techniques of analysis
❑ Keynes used linear saving and investment function but Kaldor does not use linear saving and
investment function.
❑ Kaldor gave importance to non-economic factors also in the development process.
❑ Kaldor maintains that for a steady state growth path, the hypotheses concerning economic
changes and development ought to rest on some contentions which he calls the “Stylized
Facts”.
❑ According to Kaldor, "The purpose of a theory of economic growth is to show the nature of
non-economic variables which ultimately determine the rate at which the general level of
production of economy is growing, and thereby contribute to an understanding of the question
of why some societies grow so much faster than others."

Assumptions:
❑ Full employment in the economy
❑ The technical progress depends on the rate of capital accumulation
❑ Short period supply of goods, Aggregate goods and services is inelastic and irresponsive to
any increase in the monetary demand.
❑ Technical progress depend upon the rate of capital accumulation. For this Kaldor postulates
the Technical progress function (growth of capital and growth of productivity) The capital
output ratio will be depend upon the relation between two.
❑ Income = wage and profit
❑ Total savings = Saving out of wages and profit
❑ Share of profit in total income is the function of investment
❑ Constant prices
❑ I = f (Y,K)
❑ S = f (Y,K)
❑ Kaldor’s trade cycle model is unique in nature. He has neither used the acceleration principle
nor the monetary factors in explaining the turning points of the trade cycle. He used non linear
S and I function along with the income distribution mechanism to demonstrate the generation
of business cycle.

1. Savings Function:
Kaldor expresses the savings function in terms of the sum of certain constant proportion of
profits and wages.
St = αPt + β (Yt-Pt ) Where 1 > α > β >= O

2. Investment Function:
Kaldor formulates his investment function on the presumption that there exists a strong
correlation between the share of profits on the on hand and investment on the other. To start
with, he formulates the capital stock function. This again is expressed in a linear form as
follows:

It = (Kt+1) – Kt
 3. Technical Progress Function:
Kaldor envisages the rate of growth of income as being determined by the rate of growth of
capital and the technical progress. This relationship is quantified by the following equation:

Kaldor gave the theory in two respects:

1) when population remains constant.
2) when population is expanding

1. Constant Population
❑ Under this, Proportionate growth rate of income or output = Proportionate growth rate of output
per head.
❑ Conditions to achieve stable equilibrium
1. Savings > Investment
2. Pt ≤ yt
3. Pt > minimum profit margin for investment to continue
Where Pt= Profits, Yt= Income

2. Expanding Population
❑ Under this, the proportionate growth rate of income or output is the sum total of proportion of
output per head and proportionate change in the working population.
❑ We assume that the population is an increasing function of increase in income up to a certain
point after which the population is stagnant.

LEWIS’ THEORY OF UNLIMITED SUPPLIES

❑ Developed by Arthur Lewis – Theory of Utilization of surplus manpower – 1950
❑ He wrote famous book “ Economic development with unlimited supply of labor”
❑ Lewis gave two sector surplus labor model
❑ He focused on structural transformation of primary subsistence economy
❑ His model is based on the existence of disguised unemployment in underdeveloped countries
❑ Underdeveloped countries face scarcity of capital formation. If they use their unlimited supply
of labor judiciously domestic capital accumulation can be accelerated.
ASSUMPTIONS:
❖ It is a two sector model (Primary subsistence sector, Urban industrial sector
❖ Supply of labor is perfectly elastic
❖ Surplus labor in rural sector (cheap labour)
❖ Marginal productivity of labor is Zero
❖ Capital formation accelerated by more utilization of unlimited supply of labor
❖ Real wage is constant in subsistence sector
❖ Saving is done only by capitalist
❖ Negative aggregate demand
❖ The theory is applicable in LDCs
❖ Rise in profit of capitalist called – capitalist surplus
❖ Capital formation may increased with bank credit
 ❖ As there is increase in bank credit there could be inflationary pressure

❑ Capitalist sector – High productivity – High income – High level of capital formation
❑ Primary Sector – Low productivity – Low income – Low level of capital formation – Supply is
more than demand – They get wages equal to the subsistence level
❑ But in capitalist sector wages ae higher and Marginal productivity is also higher.
❑ According to Lewis profit in capitalist sector are on rise and they reinvest their profit which will
stimulate the process of capital formation and also national growth
❑ The process of capital formation and economic growth would continue to grow as long as
worker from the primary sector are shifted to capitalist sector. And it will stop where the
workers demand wages equal to wages in capitalist sector.
❑ He suggested two situations
❑ Migration of workers from other countries
❑ Capital can be exported to the other less developed nations

Features of Lewis model

1. Mobilisation of labour: Migration to capitalist sector – Increased work force from increased
population
2. Capitalist Sector : Demand increases due to increase in investment
3. Wages will be demanded higher.
4. Growth of capitalist sector stimulate the growth of subsistence sector
5. Capital formation is done through bank credit

End of growth process:

▪ Increased demand for labour tends to rise wages
▪ High wages in subsistence sector
▪ Marginal Productivity in subsistence sector is high
▪ Trade union pressure to raise the wages
▪ Rise in food grains

Fei – Ranis model

❑ Also called utilization of surplus man power. It is an extension of Lewis model
❑ Developed by John C H Fei and Gustav Ranis in 1964
 ❑ This model is called surplus labour model
❑ There is existence of dual economy
1. Rural subsistence sector
2. Urban Industrial sector
❑ The model suggests that Economic development would be taking place if agricultural laborers
are transferred to industrial sector where their productivity will increase.
❑ Agricultural sector generates surplus to finance development of industrial sector
❑ MPL is Zero in subsistence sector
❑ Generation of agricultural surplus through commercialisation is the growth tool in the model
The amount of labor that is shifted and the time that this shifting takes depends on
1. The growth of surplus generated within the agricultural sector, and the growth of industrial
capital stock dependent on the growth of industrial profits
2. The nature of the industry’s technical progress
3. Growth rate of population

Three fundamental ideas used in this model:

i. Agriculture growth and industrial growth are equally important
ii. Agricultural growth and industrial growth are balanced
iii. Only if the rate at which labour is shifted from the agricultural to the industrial sector is
greater than the rate of growth of population, the economy will be able to lift itself up from
the Malthusian population trap.

Three stages of the model

The first stage:
The first stage of FR model is very similar to Lewis.
Disguised unemployment comes into being because the supply of labour is perfectly elastic
and MPL = 0.
Such disguised unemployment is transferred to industrial sector at the constant institutional
wage.
Second Stage: AP > MP
Agricultural workers add to agricultural output, but they produce less than institutional wage
they get.
In the second stage, the labour surplus exists where APL > MPL, but it is not equal to
subsistence wage
Accordingly, such disguised unemployed also have to be transferred to industrial sector
Third Stage : MP > CIW (Constant Institutional Wage)
The take off situation comes to end and there begins the era of self sustained growth where
the farm workers produce more than the institutional wage they get.
In this stage of economic growth the surplus labour comes to an end and the agri. sector
becomes commercialized sector.

Meade’s model of Economic growth

❑ Meade Model: It is also known as Steady Growth rate model. Given in his work “A
Neo-Classical Theory of Economic Growth” in 1961.
❑ The model of economic growth which has been constructed by JE Meade describes those
conditions which will be helpful for a sustainable economic growth in the presence of constant
technical progress and a constant increase in population of a country.
❑ According to Meade along with economic growth:
i. The production of capital equipments increases because savings are made out of
current incomes.
 ii. The ratio of working force increases
iii. Because of technical progress it is possible to produce goods and services in the
presence of fixed resources

Assumptions
• Closed economy
• Laissaize fair economy
• Perfect competition in goods and factor markets
• Constant returns to scale exists
• The machines constitute the capital goods and all machines are alike
• The ratio of labor to machines can easily be changed in short run and long run
• The production of consumer goods and capital goods is substitutable
• A certain proportion of machines becomes prey to depreciation. Therefore, there rises the
need for replacement of machines

Production function:
Y = F (K, L, N, T)
where:
Y = Net production of the economy
K = Stock of machines
L = Amount of labour
N = Land or productive resources
T = State of technology which goes on to change along with change in time.

According to Meade the production of the economy can increase if:

i. The stock of capital goods increases – Savings of the people increases – Increase in the real
capital accumulation in the economy
( If we represent the change in capital stock as ΔK and value of marginal product of machine
by “V”, then the increase in output of the economy will be represented as VΔK )

ii. The working force of the economy (L) increases which is represented by ΔL.
(If we accord W as the value of marginal product of labour, then the increase in output of the
economy will be represented as WΔL )

iii. Even no change occurs in capital, labour and natural resources , the production of the economy
can change due to technical progress which is shown ΔY’

ΔY = VΔK + WΔL + ΔY’

Dividing this equation by basic factors of production of the economy shown in production function. In
other words by dividing ΔY equation:
ΔY/Y = VK/Y * ΔK/K + WL/Y * ΔL/L + ΔY’/Y
Here ΔY/Y shows annual rate of growth of income of the economy. While ΔK/K shows the annual rate
of growth of stock of capital. ΔL/L shows the annual rate of growth of labour and ΔY’/Y means the
annual rate of growth of income due to technical progress.

ΔY = VΔK + WΔL + ΔY’

ΔY/Y = VΔK/Y + WΔL/Y + ΔY’/Y
By multiplying with the corresponding marginal product, we get
ΔY/Y = VK/Y * ΔK/K + WL/Y * ΔL/L + ΔY’/Y
We use y,k,l and r to represent such proportionate rates of growth. The term VK/Y shows the proportion
of capital in total output while WL/Y shows the relative share of labor in total production. Out of VK/Y a
certain percentage of national income is accrued to the owners of capital in the form of net profits which
is shown by U. While a certain proportion of national income is which is accrued to labour in the form of
wages is shown by Q
y = Uk + Ql + r

Investment Criteria

❑ The investment criteria are considered to be a conventional technique of project evaluation

and it provides as a base for the micro planning.
❑ In the developing countries the resources are scarce and therefore the allocation of resources
rationally among different projects becomes a major problem.
❑ This includes three aspects:
1. How much investment should be made in various sectors of the economy,
2. The choice of various projects within the sector
3. Source choice of various techniques for a particular project.
❑ Different economist have different investment criteria in order to achieve the objective of
economic development and these criteria can be categorized into 4 parts:
1. The first part includes that the criteria which accept present factor endowment at
constant.
2. The second part includes that the criteria which aims at maximizing the rate of growth.
3. The third part emphasizes on time factor involved.
4. The fourth part aims at controlling the special problems occurring in the economy.
❑ On this basis the investment criteria can be classified into 6 types
1. Rate of turnover criteria,
2. Social marginal productivity criteria,
3. Marginal reinvestment quotient criteria for marginal growth contribution criteria,
4. Time series criteria and
5. Criteria for special purposes which includes maximization of employment criteria,
6. Balance of payment criteria and balanced growth versus unbalanced growth criteria.

Rate of Turnover Criteria

❑ This was given by Professor JJ Polak.

❑ According to him, the investment should be chosen in such a way that is according to the rate
of turnover or ratio of output to capital.
❑ The projects should be ranked according to the output capital ratio of a project that is the
projects which have lowest capital output ratio should be ranked at number 1 and so on.

Social Marginal Productivity (SMP) Criteria

❑ This criterion was given by Kahn and Chenery in 1963. The criteria suggested that investment
should not only be based upon the private marginal productivity.
❑ The social marginal productivity is defined as the total net contribution of marginal unit to
national product and it also includes externalities.
❑ Prof. Chenery was of the view that in the developing countries, private value and private cost
may deviate from social value and social cost. Therefore, the investment should be based
uponthe social marginal productivity.

Marginal Reinvestment Quotient Criteria or G-L Criteria

❑ Galinsen and Leibenstein criticized the previous criterion saying that it is static in nature and is
a short run criteria.
 ❑ They felt that only maximization of national income may not lead to economic development
and the ultimate objective is to raise the per capita consumption and standard of living as well.
❑ They proposed a social welfare index which is the increasing function of per capita output
potential and this index depends on two factors:
❑ One is the quality of labour force and other is the capital availability per worker.
❑ Therefore, according to them, the important part is the subsequent reinvestment and for this
they gave these criteria.
❑ For understanding the same, they highlighted the following factors:
Wage good consumed per worker, gross productivity per worker, replacement and repair of
capital, attitude and aptitude of people, decline in the mortality rate, decline in the fertility rate,
direction of reinvestment.
❑ According to them, the per capita investment is determined by the first six factors and the last
factor deals with its allocation.
❑ On this basis, the reinvestment quotient can be computed and the project ranked at the top will
be the one with highest reinvestment quotient.

Marginal Growth Contribution Criteria or Otto-Eckenstein Criteria

❑ Both of them published an article in which they gave a criteria in view of the market
imperfections especially the imperfections in the capital market of developing countries like
India.
❑ According to them, in developing countries, the investment is made in those enterprises where
internal rate of return exceed the market rate of interest.

Time Series Criteria or Sen Dobb Criteria

❑ This criterion has been put forward by Amartya Sen and Maurice Dobb. They criticised the G-L
criteria because it neglects the time period involved. According to them, in the choice of
projects we should find the best guess of time series real income flows of each project.
❑ This is essential because of two reasons: first, the diminishing marginal utility of income
increases with increase in income. Second, due to uncertainty of future.
❑ Therefore, in this context, the time period taken into account is very important and that period
is known as period of recovery.
 ❑ For example, there are two projects H and L. Project H gives low return initially and then after
the period of recovery gives high returns whereas project L is other way round. Thus,
according to them, that project will be selected on the basis of time at the disposal of economy
and in this context, period of recovery is very important.
❑ That period of recovery is the period for which the society is prepared to wait (say T*).
Therefore, that project will rank first which has the high net real income flows but low period of
recovery.

Criteria for Special Purposes

Maximization of employment criteria:

❑ In developing country like India, there is a problem of factor proportions that is labour is
abundant and capital is scarce.
❑ Therefore, that criterion should be developed which maximises the employment opportunities
for labour.
❑ In other words, those projects shall be started where labour can be used in capital formation
and hence, employment should be maximised.

Balance of Payment criteria:

❑ In developing country, the foreign exchange is scarce. Therefore, the investment should be
made in those industries which have more export content or use less foreign exchange as an
import content.
❑ So that the effect on balance of payment is positive. Due to this reason, government
encourage foreign direct investment and allow MNCs to produce with social labour force.
 Balanced growth, growing points and leading sector criteria:
❑ Various economists suggested various criteria to develop the economy like Nurkse put
emphasis on leading sectors, Hirschman on growing points, Rostow suggested for take off and
so on.
❑ But the modern economists emphasized that all these can be used as a complementary so
that the economy can be freed from vicious circle.

ENDOGENOUS GROWTH MODELS

❑ Endogenous growth models, also known as New Growth Theory, treat technical progress to be
endogenous in nature. They also assume that similar technical conditions are not available to
all countries.
❑ These theories consider the spillover effects or externalities of investment in technology.
Moreover, they do not assume constant returns to scale to be a necessary condition.
According to them, increasing returns to scale is also possible.
❑ According to these models, “Investment in Human capital, Innovation and Knowledge are
significant contributors to economic growth”
❑ These are called endogenous because, here economic growth is affected by internal factors
like learning, knowledge, innovation etc

Important Models
• Arrow’s Model
• A K Model
• Levhari and Sheshinski Model
• King – Robson Model
• Romer Model
• Lucas Model

Assumptions
• There are many firms in the market
• Knowledge or Technological advance is a non-rival good
• Increasing returns to scale – When capital and labour jointly used
• Constant returns to scale – When separately used
• Technological advance comes from creation of new ideas

ARROW MODEL (1962)

❑ This model is based on concept of learning by doing
❑ Capital can be accumulated by knowledge and experiences
Yi= A(K) F(Ki,Li)
Where,
Yi = Output
Ki = Capital stock
A = Technical factor
K = Aggregate capital stock

AK MODEL OF GROWTH
❑ The AK model is actually considered the first version of endogenous growth theory.
❑ Frankel (1962) developed the first AK model with substitutable factors and knowledge
externalities
❑ It is special case of Cobb-Douglas production function with constant returns to scale
Y = AKαL1- α
Where,
 Y = Output
A = Technological factor
L = Labour
α = Output elasticity of capital
1- α = Output elasticity of labour

• In alternative form, it can be written as

Y = Ak
Where k = both physical and human capital
❑ Special case when α=1, production function does not have decreasing returns to capital
❑ Here output is a linear function

Levhari & Sheshinski Model

❑ Model in 1962
❑ They extended Arrow’s model.
❑ Each firms investment is source of knowledge
❑ Knowledge is a public good – others can have it at zero cost

Learning by Watching
• This model is based on ‘learning by watching’
• King and Robson emphasise learning by watching in their technical progress function. (1993)
• Investment by a firm represents innovation to solve the problems it faces. If it is successful, the
other firms will adapt the innovation to their own needs. Thus externalities resulting from
learning by watching are a key to economic growth.
• Demonstration effect of innovation

Romer’s Model
❑ It is based on Arrow’s model
❑ The model is also known as Learning by Investment and was given in 1986 by Paul
Romer.
❑ According to Romer’s Model, creation of knowledge is a sub-product of Investment.
Knowledge is considered to be a non-rival good. The model also considers the possibility of
externalities, that is, returns to investment help in creating more knowledge. However, it is
quite possible that knowledge may show decreasing returns.
❑ The focus of the theory was on Research & Development which helps in creating more
knowledge.
❑ Features of knowledge:
1. Sub-product of Investment 2. Non-rival good 3. Knowledge may show decreasing returns
Assumptions of the theory
• a. Growth is derived from a firm/industry.
• b. Industry produces under constant returns.
• c. The model assumes a Cobb-Douglous type of production function.
• d. Assumes a steady state of growth, that is, 𝐝𝐲/ 𝐝𝐭= 𝐝𝐊/𝐝𝐭
• e. Labour is allocated for two purposes:
• i) For current production ii) For creation of knowledge

Lucas Model
❑ The Lucas Model was given in 1988.
❑ It is based on Uzawa model.
❑ The theory focused upon investment in education leads to human capital.
❑ Effects of Human capital
▪ Internal – Training more Productive
 ▪ External – Increases productivity of capital
❑ According to the theory, growth rate is defined as:
g= Growth rate of labour + Growth rate of per capital Investment in human capital

TECHNICAL PROGRESS
• By technical progress we mean inventing a new technology and improving it through
innovation and diffusion in the society

1) Labour saving technical progress(Capital Deepening)

❑ Same amount of output can be produced with lesser amount of labour.

❑ Technical progress is capital-deepening (or capital-using) if, along a line on which the
K/L ratio is constant, the MRSL K increases.
❑ This implies that technical progress increases the marginal product of capital by more
than the marginal product of labour.

2) Capital Saving technical progress:

❑ Same amount of output can be produced with lesser amount of capital.

❑ Technical progress is labour-deepening if, along a radius through the origin (with
constant K/L ratio), the MRSL, K increases.
❑ This implies that the technical progress increases the MPL faster than the MPK.
3) Neutral Technical Progress:
❑ Produce more of output with increase in capital and labour in the same proportion, that
is, keeping K/L ratio the same.
❑ Technical progress is neutral if it increases the marginal product of both factors by the
same percentage, so that the MRSL K (along any radius) remains constant.
❑ The isoquant shifts downwards parallel to itself.

Models of Technical Change

1) Hicks’ Neutral technical Progress:

❑ According to Prof. Hicks, neutrality is “An invention which raises the marginal
productivity of labour and capital in same proportion”.
❑ Thus, a technical change is neutral if the ratio of marginal product of capital to that of
labour remains unchanged at constant capital labour ratio.
❑ A technical change is labour saving if it raises the marginal product of capital relative to
labour at constant capital labour ratio. The given output would require less labour
relatively to capital i.e. for a given K
❑ A technical change is capital saving if it raises the marginal product of labour relatively
to capital, at constant capital labour ratio. The given output will require less capital
relative to labour.
 2) Harrod’s Neutral Technical Progress:
❑ Prof. Harrod in his book “Towards a Dynamic Economics” has defined neutral
technical progress in a different way. His definition is based on capital output ratio.
❑ According to him, neutral technical progress is one which leaves capital output ratio
unchanged, provided that rate of profit remains constant.
❑ Thus, Harrod’s neutrality of technical progress requires the constancy of both the rate
of profit r and capital output ratio K/Y.
❑ If the rate of profit remains unchanged and the capital output ratio increases, the technical
progress would be labour-saving.
❑ On the other hand, if after the technical progress, the capital output ratio falls, while the rate of
profit remains constant, the technical progress would be capital saving.

Disembodied Technical Change

❑ During 1956, M. Abramovitz wrote papers followed by J.W. Kendrick and R.M. Solow to
measure the contribution of technical change to economic growth. They treated technical
change as disembodied.
❑ Disembodied technical change is purely organizational which permits more output to be
produced from unchanged input, without any new investment.
❑ It refers to any kind of shift in the production function that leaves balance between capital and
labour undisturbed in the long run.

Embodied Technical Change

❑ Solow – ‘Investment and technical progress’ - 1960

❑ Solow modified the residual approach himself based on disembodied technical change where
in capital stock is regarded as homogeneous and technical change floats down from the
outside.
❑ In this model, new capital accumulation is regarded as the vehicle of technical progress.
❑ Technical progress increases the productivity of machines built in any period compared with
machines built in previous period, but it does not increase productivity of machines already in
existence.
❑ Technical progress is embodied in new machines.

INEQUALITY – CONCEPTS AND MEASUREMENT

INEQUALITY
❑ Inequality is “the unfair situation in society when some people have more opportunities, etc.
than other people” - The Cambridge dictionary
❑ It is more simply as “the state of not being equal, especially in status, rights and
opportunities”. - United Nations
❑ There are a wide variety of types of economic inequality, most notably
measured using the distribution of income (the amount of money people are paid)
measured using the distribution of wealth (the amount of wealth people own).
❑ There are many methods for measuring economic inequality,
Gini coefficient being a widely used one.
Inequality-adjusted Human Development Index, which is a statistic composite index that
takes inequality into account.

Lorenz curve
❑ The Lorenz curve is a graphical representation of the distribution of income or of wealth.
❑ Developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.
 ❑ The Lorenz curve shows the cumulative share of income from different sections of the
population.
❑ If there was perfect equality – if everyone had the same salary – the poorest 20% of the
population would gain 20% of the total income. The poorest 60% of the population would get
60% of the income.

Gini Coefficient
❑ The Gini coefficient sometimes called the Gini index or Gini ratio, is a measure of statistical
dispersion intended to represent the income inequality or wealth inequality within a nation or
any other group of people.
❑ It was developed by the Italian statistician and sociologist Corrado Gini and published in his
1912 paper Variability and Mutability .
❑ The Gini coefficient measures the inequality among values of a frequency distribution (for
example, levels of income).
❑ A Gini coefficient of zero expresses perfect equality, where all values are the same (for
example, where everyone has the same income).
❑ A Gini coefficient of one (or 100%) expresses maximal inequality among values (e.g., for a
large number of people where only one person has all the income or consumption and all
others have none, the Gini coefficient will be nearly one).

INEQUALITY-ADJUSTED HUMAN DEVELOPMENT INDEX (IHDI)

❑ This is a list of countries by inequality-adjusted human development index (IHDI), as
published by the UNDP in its 2019 Human Development Report.
❑ According to the 2016 Report, "The IHDI can be interpreted as the level
of human development when inequality is accounted for," whereas the Human Development
Index itself, from which the IHDI is derived, is "an index of potential human development (or
the maximum IHDI that could be achieved if there were no inequality).“
❑ First Rank – Norway, India – 94
POVERTY

❑ Poverty is not having enough material possessions or income for a person's needs. Poverty
may include social, economic, and political elements.
❑ Absolute poverty is the complete lack of the means necessary to meet basic personal needs,
such as food, clothing, and shelter. The threshold at which absolute poverty is defined is
always about the same, independent of the person's permanent location or era.
❑ Relative poverty occurs when a person cannot meet a minimum level of living standards,
compared to others in the same time and place.

Poverty Estimation India

❑ Poverty estimation in India is carried out by NITI Aayog’s task force through the calculation of
poverty line based on the data captured by the National Sample Survey Office under the
Ministry of Statistics and Programme Implementation (MOSPI).
❑ Poverty line estimation in India is based on the consumption expenditure and not on the
income levels.
❑ Poverty is measured based on consumer expenditure surveys of the National Sample Survey
Organisation. A poor household is defined as one with an expenditure level below a specific
poverty line.
❑ The incidence of poverty is measured by the poverty ratio, which is the ratio of the number of
poor to the total population expressed as a percentage. It is also known as head-count ratio.
❑ Alagh Committee (1979) determined a poverty line based on a minimum daily requirement of
2400 and 2100 calories for an adult in Rural and Urban area respectively.
❑ Subsequently different committees; Lakdawala Committee (1993), Tendulkar Committee
(2009), Rangarajan committee (2012) did the poverty estimation.
❑ As per the Rangarajan committee report (2014), the poverty line is estimated as Monthly Per
Capita Expenditure of Rs. 1407 in urban areas and Rs. 972 in rural areas.

Reasons for Rural Poverty

❑ Rapid population growth
❑ Lack of capital
❑ Lack of alternate employment opportunities other than agriculture
❑ Excessive population pressure on agriculture
❑ Illiteracy
❑ Regional disparities
❑ Joint family system
❑ Child marriage tradition
❑ Indifferent attitude towards investment
❑ Lack of proper implementation of PDS

Reason for Urban Poverty

❑ Migration of rural youth towards cities
❑ Lack of vocational education/training
❑ Limited job opportunities of employment in the cities
❑ Rapid increase in population
❑ Lack of housing facilities
❑ No proper implementation of PDS
Multidimensional Poverty Index (MPI)
❑ The Global Multidimensional Poverty Index (MPI) was developed in 2010 by the Oxford
Poverty & Human Development Initiative (OPHI) and the United Nations Development
Programme and uses health, education and standard of living indicators to determine the
incidence and intensity of poverty experienced by a population.
❑ It has since been used to measure acute poverty across over 100 developing countries. The
Global MPI is released annually by UNDP and OPHI and the results published in
their websites. It replaced the Human Poverty Index.

Social Sector Development: Health, Education, Gender

Social sector
❑ Social sector is one of the key sectors in the economy because
▪ It improves the quality of human life
▪ It helps to stimulate economic development.
▪ It make strong, healthy mind set and give power to produce knowledge.
Social sector includes such as
▪ Education
▪ Medical facilities
▪ Public Health
▪ Family Welfare
▪ Water Supply and Sanitation
▪ Housing
▪ Nutrition
▪ Urban Development
▪ Welfare of SC/ST and OBC sections of the people
▪ Labour and Labour Welfare
▪ Natural Calamities
▪ Rural Development
▪ Food Storage
▪ Warehousing

Social Development:
❑ Social development is the process of planned institutional change to bring about better
adjustment between human needs and aspirations on the one hand and social policies and
programmes on the other' (Ahuja, 1993).
❑ It encompasses a wide range of issues
1) Social and economic equality
2) Universal education
 3) Health and food security
4) Provision of house and sanitisation conditions
5) Safeguarding environment

❑ According to Ram Ahuja (1993), social development involves four things:

(i) Assessing the needs of the people
(ii) Introducing some structural changes in society such as discarding some old institutions
and creating some new institutions, or changing some existing institutions:
(iii) Making institutions responsible to people
(iv) Associating people with decision-making.

Six Several Models of Development:

"In a very general way, we can say Development means the securing of social and economic
growth by changing the conditions of under-development through organized and planned efforts
aimed at the control of poverty, hunger, disease, illiteracy, and economic and industrial
under-development”

1) Western Liberal Model of Development

❑ In this model, it is held that all societies undergo changes from traditional, transitional and
modern stages of development
❑ It regards political development as the condition for economic development.
❑ It supports the autonomy, rights and self- interest of the individual as the basis of all
development.
❑ It stands for rapid industrialization, technological advancement, modernization, full
employment and continuous process of liberalization of society, economy and polity.
❑ The goals of development are to be achieved on the basis of free-market economy,
competitiveness and all-round individual development.

2) Welfare Model of Development

❑ The welfare model of development accepts and strongly advocates the role of state in the
economic sphere for promoting the socio-economic welfare and common interests of
the society.
❑ It conceptualizes the state as a welfare state and advocates that state planning and organised
efforts are essential for rapid industrialization, economic growth and socio-economic
development.

3) Socialist/Marxist Model of Development

❑ The Socialist model of development is a general model in which several socialist thinkers
advocate several different views about development goals and means.
❑ Some socialists accept democratic means for securing socialist goals to development.
❑ However, the Marxist Socialists and the Revolutionary Socialists advocate revolutionary
means and a centralized system of economic and political relations or rapid industrialization,
progress and development.
❑ The welfare state can provide various types of social services for the people, like education,
health, employment, social security and public distribution system.
❑ It acts as the agency for promoting desired social change and development.
❑ It takes special steps for protecting the interests of the weaker sections of society.
❑ Welfare State protects all social, economic and political rights of all the people and in turn the
people act in a socially responsible way.
4) Democratic-Socialist Model of Development
❑ This model advocates development through the securing of socialist goals by using
democratic means.
❑ India and several other Third World countries decided to adopt this model.
❑ In fact, these states combined the democratic socialist model and welfare state model for rapid
industrialization, economic growth and development.
❑ Organised planning and democratic process of politics were adopted by them.

5) Gandhian Model of Development:

❑ Gandhian Model is totally different from Western materialistic model of development.
❑ It gives place of primacy to moral development and ethical view of socio-economic-political
development.
❑ Truth and non-violence are advocated as the basis of all human activities and decisions.
❑ It stands for complete decentralization of functions and powers with each village acting as a
self-regulating and self-sufficient unit of development.
❑ Development must ensure food, clothing, shelter, education and employment for all
❑ Emphasis upon cottage industries, handicrafts, agriculture and labour.
❑ Total emphasis upon social equality, non-violence, truthful living, social responsibilities, dignity
of labour and moral and spiritual happiness.
❑ Development has to be measured on the scale of happiness and not consumerism and
profit-making.
❑ All development must ensure environmental health and happiness.

(6) Sustainable Development Model

❑ Unprincipled and over-exploitation of natural resources, Air, Water, Soil and Sound Pollution;
climate change and its adverse affect on human life, increase in radiation levels:
❑ Depletion of ozone layer; and disturbances and pressures on the eco-systems, all have amply
demonstrated the fact that the past socio-economic development has not been a real
development.
❑ Its human cost has been excessively high.
❑ It has created a situation of a social-economic-environmental imbalance.
❑ It has made it essential for us to work for securing social sustainability, economic sustainability
and environmental sustainability. i.e. Sustainable Development.
❑ The greatest need of the hour is to put in comprehensive and coordinated efforts for securing
development which is socially, economically and environmentally stable and enduringly
sustainable.