TOPIC 2

CONCEPTS OF ECONOMIC GROWTH AND DEVELOPMENT

Introduction
Our task in this topic is to look at the concepts of economic growth, economic development,
sustainable development and concept of underdevelopment. We shall also discuss
measurements of economic developments and human development index. All these are
necessary to appreciate the essential of planning in underdeveloped countries.

Learning outcomes for Topic 2

At the end of this topic, you should be able to:
2.1 Appreciate the difference between economic growth and economic development;
2.2 Understand the concept of underdevelopment
2.3 Explain the concept of sustainable development

2.1 Meaning and Concept of Economic Growth and Economic

Development
2.1.1 Meaning of Economic Growth and Economic Development
Broadly speaking, economic growth refers to the continuous increase in the level of output
produced which can be brought about by increase in savings and investment in a country.
Growth also involves not only more output derived from greater amounts of inputs but also
greater efficiency, i.e. an increase in output per unit. Thus, economic growth is referred to as
quantitative sustained increase in a country’s per capita output or income accompanied by
expansion in its labour force, consumption, capital and volume of trade. Development,
however, goes beyond this to imply changes in the composition of output and in the
allocation of inputs by sectors. Economic development implies both more output and changes
in the technical and institutional arrangement by which output is produced and distributed.
Therefore, economic development is a wider concept than economic growth. It is taken to
mean growth plus change. It is related to qualitative changes in economic wants, goods,
incentives, institutions, productivity and knowledge or the upward movement of the entire
social system. It describes the underlying determinants of growth such as technological and
structural changes. In fact, an economy can grow and not develop due to the absence of
technological and structural changes. However, it is difficult to imagine development without
economic growth. Therefore, for an economy to experience development, the basic social
indicators of good health care system, efficient education system, affordable housing,
constant electricity supply, good road network, available portable water supply and
availability of other infrastructural facilities have to be given priority.

2.1.2 Measurements of Economic Development

According to Jhingan (2011), economic development is measured in four ways, these are:
1. Gross National Product (GNP) – This is the total monetary value of goods and services
produced in a country including net incomes from abroad in a year. One of the methods to
measure economics development is in terms of an increase in the economy’s real national
income over a long period of time. The phrase “over a long period of time” implies a
sustained increase in real income. A short period rise in national income which occurs during
the upswing of the business cycles does not constitute economic development. However, this
is not a satisfactory definition due to the following reasons.
i. Nominal national income instead of the real national income which refers to the
country’s total output of final goods and services in real terms rather than in money
terms. Thus, price changes will have to be ruled out while calculating real national
income. But this is unrealistic because variations in prices are inevitable.
ii. This measure fails to take into consideration changes in the growth of population. If
a rise in real national income is accompanied by a faster growth in population, there
will be no economic growth but retardation.
iii. The GNP figure also does not reveal the costs to society of environment pollution
due to urbanization and industrialization.
iv. This measure tells us nothing about the distribution of income in the economy.
v. Moreover, there are certain conceptual difficulties in the measurement of GNP
which are discussed as under.
2. GNP per Capita – The second measure relates to an increase in the per capital real income
of the economy over the long period. In the opinion of Meier, economic development is seen
as the process whereby the real per capita income of a country increase over a long period of
time, subject to the stipulations that the number of people below an absolute poverty line does
not increase and that distribution of income does not become more unequal. This indicator of
economic growth purports to emphasize that for economic development the rate of increase
in real per capita income should be higher than the growth rate of population. However, this
measure is also fraught with some difficulties.
 i. An increase in per capita income may not raise the real standard of living of the
masses. It is possible that while per capita real income is increasing, per capita
consumption might be failing. People might be increasing the rate of saving or the
government might itself be using up the increased income for military or other
purposes.
ii. There is another possibility of the masses remaining poor despite an increase in the
real GNP per capita if the increased income goes to the few rich instead of going to
the many poor.
iii. Such a measure does not consider the structure of the society, the size and
composition of its population, its institutions and culture, the resource patterns and
even distribution of output among the society members
iv. The real per capita income estimates fail to measure changes in output due to
changes in the price level as it makes use of index numbers which are simply rough
approximations.
v. International comparisons of the real GNP per capita are inaccurate due to
exchange rate conversion of different currencies into a common currency, i.e. US
dollars, through the use of official exchange rates. These nominal exchange rates do
not reflect the relative purchasing power of different currencies. Thus, the
comparisons of GNP per capita of different countries are erroneous.
Despite these limitations, however, the real GNP per capita is the most widely used measure
of economic development.
3. Welfare – This is another measure of economic development from the point of view of
economic welfare. Economic development is regarded as process whereby there is an
increase in people’s welfare as a result of the increase in the consumption of goods and
services. According to Okun and Richardson, economic development is a sustained, secular
improvement in material well- being, which we may consider to be reflected in an increasing
flow of goods and services.
This indicator is also not free from limitations. Some of these limitations includes:
i. The first limitation arises with regard to the weights to be attached to the
consumption of individuals as consumption of goods and services depends on the
tastes and preferences of individuals.
ii. In measuring economic welfare caution has to be exercised with regard to the
composition of the total output that is giving rise to an increase in per capita
consumption, and how this output is being valued. The increased total output may be
 composed of capital goods which may be at the cost of a reduced output of consumer
goods.
iii. The output may be valued at market prices whereas economic welfare is measured
by an increase in real national output of income.
iv. The expansion of real national output might have raised the real costs (pain and
sacrifice) and social costs in the economy. For instance, the increased output might
have resulted from long hours and in the deterioration of the working conditions of
the labour force.
v. It is possible that with the increase in real national income/ per capita income, the
rich might have become richer and the poor poorer due to high level of income
inequality. Thus, mere increase in economic welfare does not lead to economic
development till the distribution of national income is equitable or justifiable.
4. Social Indicators – Dissatisfied with GNP and GNP per capita as the measure of economic
development, certain economists have tried to measure it in terms of social indicators. This is
done by including a wide variety of items in social indicators. Some are inputs such as
nutritional standards or number of hospital beds or doctors per head of population, while
others may be output corresponding to these inputs such as improvements in health in terms
of infant mortality rates, sickness rates, etc. The merit of social indicators is that they are
concerned with ends, the ends being human development. Economic development is a means
to these ends. Social indicators tell us how different countries prefer to allocate the GNP
among alternative uses. Some may prefer to spend more on education and less on hospitals.
Moreover, they give an idea about the presence, absence or deficiency of certain basic needs.

2.1.3 Human Development Index (HDI)

Human Development Index (HDI) is a tool developed by the United Nations in 1990 to
measure and rank countries levels of social and economic development based on four criteria
– life expectancy at birth, mean years of schooling, expected years of schooling and gross
national income per capita. The HDI makes it possible to track changes in development levels
over time and to compare development levels in different countries. It is also a global index
utilized to rank the development of countries by examining the achievements of the
inhabitants of the country. The index factors in three important elements: standard of living,
life expectancy, and literacy level. The index is not 100% accurate in its determinations due
to inconsistencies and lack of data in certain parts of the world.
Human Development Report (HDR) combines three dimensions which are:
1. A long and healthy life: Life expectancy at birth
2. Education index: Mean years of schooling and Expected years of schooling
3. A decent standard of living: GNI per capita (PPP US$)

2.2 Concept of Underdevelopment

Here, our focus is on the concept of underdevelopment, meaning of underdevelopment,

visible criteria or indicators of underdeveloped countries and obstacles to economic
development. An attempt will be made to provide an in-depth explanation of the above issues
which we hope will assist in the assimilation and proper understanding of this unit.

2.2.1 Meaning of Underdevelopment

Simply put, underdevelopment is a situation whereby the resources are not fully utilized to
their socio-economic potential, with the result that local or regional development is slower
than it should be in most cases. Furthermore, it results from the complex interplay of internal
and external factors that allow less developed countries only a lop-sided development
progression. According to the United Nations, an underdeveloped country is one in which per
capita real income is low when compared with the per capita real income of the United States
of America, Canada, Australia and Western Europe. By this definition an important feature of
underdevelopment is poverty. Also, a country is be underdeveloped when the resources both
human and natural which may be used for production to raise per capita income and
standards of living of the people are unutilized or underutilized. Furthermore,
underdeveloped countries are characterized by a wide disparity between their rich and poor
populations, and an unhealthy balance of trade.
Other features of underdevelopment include;
Lack of access to job opportunities, health care, drinkable water, food, education and
housing. It is usually believed that economic development takes place in a series of capitalist
stages and that today’s underdeveloped countries are still in a stage of history through which
the now developed countries passed long ago. However, the developed countries of this
world have never been underdeveloped in the first place, though they might have been
undeveloped. All economies of the world have been classified into developed economies and
underdeveloped economies. However, some are more developed and advanced than others.
According to Professor Viner, an underdeveloped country is one which has good potential
prospect for using more capital or more labour or more available natural resources, or all of
these to support its present population on a higher level of living or if its per capita income
level is already fairly high to support a larger population on a lower level of living. Thus, the
emphasis is that for a country to be called underdeveloped there must be possibilities and
potentialities for its development.
It can therefore be concluded that undeveloped country is one which is poor but which has
the future possibility and prospect of removing poverty and raising the levels of living of its
people by utilizing the idle and underutilized resources for production. Since there exists
potential prospects for development in almost all poor countries, therefore all poor countries
are generally described as underdeveloped. These days the underdeveloped countries of
which Nigeria is part of are usually called developing or less developed countries (LDCs) or
the Third World countries

2.2.2 Indicators of an Underdevelopment Country

According to Jhingan (2011), an underdeveloped country is one which has no potentialities of
development. A poor country does not mean a young country. Poverty simply refers to the
low level of per capita income of a country. Some indicators or criteria of underdeveloped
countries are:
1. Ratio of industrial output to total output. This may also be termed as the ratio of industrial
population to total population. According to this criterion, countries with a low ratio of
industrial output to total are considered underdeveloped. This ratio tends to increase with the
increase in the per capita income. However, the degree of industrialization is often a
consequence rather than a cause of economic prosperity in a country.
2. Ratio of capital to per head of population. Underdeveloped countries are defined as those
which compared with the advanced countries are underequipped with capital in relation to
their population and natural resources. However, capital deficiency is not related to the
absolute size of a country’s stock of capital but to the ratio of capital to population or to some
other factor.
3. Another indicator is poverty which is the main cause of underdevelopment. An
underdeveloped country is characterized by mass poverty which is chronic and not the result
of some temporary misfortune and by obsolete methods of production and social
organization, which means that poverty is not entirely due to poor natural resources and
hence could presumably be lessened by methods already proved in other countries. This
definition points towards some of the important characteristics of underdeveloped countries.
It cannot be denied that underdeveloped countries have unexploited natural resources,
scarcity of capital goods and equipment, obsolete techniques of production and defects in
socio- economic organization, cannot be.
4. Thus one of the most commonly acceptable criteria of underdevelopment is the low per
capita real income of underdeveloped countries as compared with the advanced countries.
United Nations uses the term underdeveloped country to mean countries in which per capita
real income is low when compared with the per capita real incomes of other developed
countries

2.2.3 Obstacles to Economic Development

There are many obstacles to economic growth and development in developing countries. Let
us look at a few of them.
i) Leadership problem and bad governance. Leadership is very important to driving
economic development as its coordinates and determines how resources are to be
utilized. Governance among others is defined as a system of values, policies, and
institutions by which a society manages its economic, social, and political affairs
through interactions within the state, civil society and private sector. Thus,
governance comprises the mechanisms and processes for citizens and groups to
articulate their interests, to work together and mediate their differences, and exercise
their legal rights and obligations with rules, institutions, and practices that set limits
and provide incentives for individuals, organizations and firms. Good governance
promotes people centered development and ensures equality of opportunity, social
and economic justice for all citizens.
ii) Corruption: Most underdeveloped countries and Nigeria in particular appear to suffer
the most from corruption because the leaders are ‘fantastically’ corrupt. Everyone
appears to believe that the nation has a culture of corruption. Over the years, Nigeria
has earned huge sum of money from crude oil, which has gone down the sinkhole
created by corruption. Top public servants are very rich as they engage in corrupt
practices.
iii) Lack of commitment and sincerity on the part of public officers: This greatly hampers
development in the sense that certain policies which are supposed to be executed by
public officer’s, if not sincerely overseen will lead to backwardness and jeopardy on
the part of the country‘s economic development.
 iv) Infrastructural and Institutional challenges: One of the major challenges being faced
by Nigeria is poor social infrastructure and institutions; bad roads, erratic power
supply, limited access to potable water and basic healthcare, ineffective regulatory
agencies, and much more.
v) Market challenges: Lack of genuine competition is another major challenge facing
underdeveloped economy. Real capitalistic economies are controlled by market forces
or what is called the invisible hand of the market. Although every economy -
developed, developing or underdeveloped needs some form of government
intervention, the self-regulating nature of the market determines the effective and
efficient allocation of resources.
vi) Cultural issues: It has been argued that some countries lack the right culture for
economic development. Their people might not want to take risks in order to start new
businesses. Their people might feel that traditional cultural duties are more important
than showing up to work every day. These sorts of cultural issues can slow down a
country’s growth.
vii) Foreign debt: Most underdeveloped countries are repressed by heavy debt, the serving
and the repayment of which constitute a major burden on the economy. Resources that
would have been used for infrastructural development and for other investment
purposes are used to service loan. Lack of adequate human resources: This may not be
a major problem in Nigeria but most underdeveloped countries suffer from this. Many
developing countries lack the educational infrastructure needed to develop a
workforce that could support a more modern economy.
viii) Foreign competition: Developing countries have to compete against companies from
the developed world. This can be very difficult. It can force developing countries to
stay with making low value-added products using cheap labor instead of becoming
more modernized

2.3 Concept of Sustainable Development

It is good that we have familiarized ourselves with economic growth and development as well
as its measurements and human development indices. We shall again be looking at
sustainable developments bearing in mind its meaning, objectives, and elements of policies
for sustainable development. An attempt would be made to provide an in-depth explanation
of the above issues. You are encouraged to pay rapt attention to the details as given below.
2.3.1 Meaning of Sustainable Development
Sustainable development is the management of human, natural, and economic resources that
aims to satisfy the essential needs of humanity in the very long term According to the United
Nations World Commission on Environment and Development, sustainable development is
defined as development that satisfies the needs of the present without compromising the
ability of future generations to satisfy their own needs. It involves the need to protect the
diversity of genes, species, and all terrestrial and aquatic ecosystems in nature. This is
possible in particular via measures to protect the quality of the environment, and by the
restoration, development, and maintenance of habitats that are essential to species.
Sustainable development implies the fulfillment of several conditions some of which are:
 Respect for the environment,
 Preserving the overall balance between resource extraction and regeneration
 Preventing the exhaustion of natural resources and reduction in the production of
waste
Sustainable development is presented as a more or less clean break from other modes of
development, which have led and are still leading to worrying social and ecological damage
on locally and the world at large. In order to be sustainable, development must combine three
main elements:
 Fairness,
 Protection of the environment, and
 Economic efficiency.
A sustainable development project must be based on a better- developed mode of
consultation between the community and the members it comprises. The success of such a
policy also depends on consumers accepting certain constraints and citizens observing certain
requirements with regard to transparency and participation. Although these three factors can
work in harmony, they are often found to conflict with one another. During the latter half of
the 20th century economic development for a better standard of living has been instrumental
in damaging the environment. We are now in a position whereby we are consuming more
resources than ever, and polluting the Earth with waste products. More recently, society has
grown to realize that we cannot live in a healthy society or economy with so much poverty
and environmental degradation. Economic growth will remain the basis for human
development, but it must change and become less environmentally destructive.

2.3.2 Objectives of Sustainable Development

The aim of sustainable development is to achieve prosperity for now and for the future
generations by maintaining equilibrium in our economic, environmental and social needs.
Sustainable development encourages us to conserve and enhance our resource base, by
gradually changing the ways in which we develop and use technologies. Countries must be
allowed to meet their basic needs of employment, food, energy, water and sanitation. If this is
to be done in a sustainable manner, then there is a definite need for a sustainable level of
population.
Four basic objectives of sustainable development have been identified. These include:
 Social progress and equality.
 Environmental protection.
 Conservation of natural resources.
 Stable economic growth.
Everybody has the right to a healthy, clean and safe environment. This can be achieved by
reducing pollution, poverty, poor housing and unemployment. No one, in this age, or in the
future should be treated unfairly. Global environmental threats, such as climate change and
poor air quality must be reduced to protect human and environmental health. The use of non-
renewable resources such as fossil fuels should not be stopped overnight, but they must be
used efficiently and the development of alternatives should be encouraged to help phase them
out. Everybody has the right to a good standard of living, with better job opportunities. To
achieve this, we need a workforce equipped with suitable skills and education within a
framework to support them.

2.3.3 Elements of Policies for Sustainable Development

Below are some important elements that must be considered in sustainable development
policies:
1. Cost-effectiveness – Policies should aim at minimizing their economic cost. This will
require ensuring that the costs of each extra resource spent are equal across the range of
possible interventions. Cost-effectiveness allows the minimization of aggregate costs and the
setting of more ambitious targets in the future.
2. Environmental effectiveness – Policies should also secure the following:
i. Regeneration – i.e. renewable resources should be used efficiently and their use
should not be permitted to exceed their long term rates of natural regeneration;
 ii. Substitutability– i.e non- renewable resources should be used efficiently, and their
use limited to levels that can be offset by renewable resources or other forms of
capital;
iii. Assimilation – i.e. releases of hazardous or polluting substances to the
environment should not exceed its assimilative capacity, and concentrations should be
kept below established critical levels necessary for the protection of human health and
the environment.
iv. Avoiding irreversibility– i.e. irreversible adverse effects of human activities on
ecosystems and on bio-geochemical and hydrological cycles should be avoided. The
natural processes capable of maintaining or restoring the integrity of ecosystems
should be safeguarded from adverse impacts of human activities.
3. Policy integration – Unsustainable practices may result from incoherent policies from
different sectors. Improving policy coherence requires better integration of economic,
environmental, and social goals in different policies.
4. Policy Precaution – Threats of exceeding critical thresholds in the regenerative capacity of
the environment are subject to uncertainty. Accordingly, when designing policies for
sustainable development, countries should apply precaution as appropriate in situations where
there is lack of scientific certainty.
5. International co-operation – With deepening international interdependency, spill overs
become more pervasive. A narrow focus on national self-interest is not viable when countries
are confronted with a range of environmental and social threats that have global implications.
7. Transparency and accountability – A participatory approach is important to successfully
meet the challenge of sustainable development, as the criteria for sustainability cannot be
defined in purely technical terms. This requires that the process through which decisions are
reached is informed by the full range of possible consequences, and is accountable to the
public. Invariably, sustainable development policies should be all encompassing to achieve
economic development goals.

Summary of topic 2
In this topic, we have learnt the following:
1. The meaning of economic development and economic growth was discussed with
clear distinction made about them. It was shown that economy can only be said to
 grow and develop when there is an improvement in people’s standard of living, life
expectancy, and literacy level.
2. Different measurements of economic development as well as their shortcomings were
also considered.
3. We discussed the meaning of underdevelopment, highlighted the visible criteria or
indicators of underdeveloped countries, and understand the obstacles to economic
development.
4. For a country to be referred to as being underdeveloped, there must be unutilized or
underutilized natural resources which may be used for production to raise per capita
income and standards of living of the people.
5. Sustainable development encourages us to conserve our resource base, by gradually
changing the ways in which we develop and use technologies.