ECONOMICS OF GROWTH&

DEVELOPMENT
Module1
Development&Underdevelopment
 Background and beginning of
‘Development Economics’
in the post-world war era, its elements
• After World War II a number of developing
countries attained independence from their
former colonial rulers.
• One of the common claims made by
leaders of independence movements was that
colonialism had been responsible for
perpetuating low living standards in the
colonies.
• Thus, economic development after independence
became an objective of policy not only because of
the humanitarian desire to raise living standards but
also because political promises had been made
• At that early period, theorizing about development,
and about policies to attain development, accepted
the assumption that the policies of the industrial
countries were to blame for the poverty of the
developing countries
• Memories of the Great Depression, when
developing countries’ terms of trade had
deteriorated markedly, producing sharp
reductions in per capita incomes, haunted
many policymakers.
• Finally, even in the developed countries, the
Keynesian legacy attached great importance
to investment
• In this millennium, it was thought that a “shortage
of capital” was the cause of underdevelopment.
• It followed that policy should aim at an accelerated
rate of investment. Since most countries with low per
capita incomes were also heavily agricultural (and
imported most of the manufactured goods consumed
domestically),
• it was thought that accelerated investment in
industrialization and the development of
manufacturing industries to supplant imports through
“import substitution” was the path to development
 Background of Development
economics:-In short
• Balanced and Unbalanced growth strategies
• Capital accumulation
• Decline of trickle down growth theory
• Rise of Neoliberalism
• Development with a human face
Scope of development Economics
• Development means a positive change or qualitative
and quantitative advancement in different
dimensions of the economy
• Development economics deals with process by which
developing countries can be uplifted from
underdevelopment
• So it is said that development economics is what
development economics do
• Economic development is a process whereby an
economy’s real national income as well as per capita
income increases over a long period of time
 Scope
1.Efficient allocation of scarce resources
2.Activate social, economic, political and
institutional mechanisms to bring improvements
in standard of living of the people in
underdeveloped countries
3.Compare and analyze the constraints in
commodity and resource markets
4.It formulates strategies to break up poverty traps
5.It helps to formulate appropriate policies with
respect to socio ,economic and institutional
transformation of the state
 Core values of development
• There are three core values of development
1. Sustenance:- it means the ability to meet basic
needs for life sustenance
2. Self-Esteem:-to live with self esteem, self
respect and dignity
3. Freedom from servitude:- freedom from misery,
oppressive institutions and dogmatic beliefs
it involves wider opportunities to make choices
for societies and their members
Alternative Measures of Development
• 1. The Physical Quality of Life Index(PQLI) :-
• it developed by Morris David Morris,
• PQLI might be regarded as an improvement
but shares the general problems of measuring
quality of life in a quantitative way.
• Life expectancy at age 1, infant mortality, and
literacy are used as indicators of development
• It describing progress in health, sanitation,
education, and women’s status. Gross
National Product (GNP) is the standard
measure of progress
• PQLI= Life expectancy at age 1+ infant
mortality+ literacy/3
2.Human Development Index(HDI)
• it developed by Pakistani economist Mahabub
Ul Haq
• United Nations Development Programme
(UNDP) has made use of Human Development
index to analyse the level of economic
development
 3 Components of HDI
• 1.Longevity :- measured by life expectancy at
birth ( life expectancy index)
• 2.Knowledge:-measured by expected years of
schooling and mean years of
schooling(Education Index)
• 3. Decent standard of living:-GNI percapita
( GNI index)
# Indias HDI value is 0.645 and rank is 131,
Norway ranked 1
 3. Gender Development Index (GDI)
• It is the ratio of female to male HDI values
• In GDI, HDI values are estimated separately for
women and men
• The aim is to address gender gap in life
expectancy, education, income etc
• GDI measures gender inequalities
• Components:-
• 1.Life expectancy at birth
• 2.Expected years of schooling
• 3.Estimated earned income
• GDI= HDI of Female/HDI of Male
4.Gender Inequality Index(GII):-it is a composite
measure gender inequality using three
dimensions:
1.Reproductive health
2.Empowerment
3.Labour market
• 1.Reproductive health:-maternal mortality
ratio and adolescent birth rate
• 2.Empowerment Indicator:- % of
parliamentary seats held by women & % of
population with at least some secondary
education by gender
• 3.Labour market Indicator:- participation in
labor force by gender
• GII values ranges from 0 to 1
 5. Multidimensional poverty
Index(MPI)
• MPI captures multiple deprivation tha people
in developing countries face in their health,
education, and standard of living
• The MPI value is the product of
multidimensional poverty headcount ratio and
intensity of poverty
• MPI=H.A
• H=proportion of multidimensionally poor
people in population
• The headcount ratio (H)= q/n
• q=number of people who are
multidimensionally poor
n= total population

A= intensity of poverty in terms of average

deprivation score of poor people
 Development v/s Growth

• Economic growth refers to a rise in national or

per capita income and products
• Economic development implies more, particularly
improvements in health, education and other
aspects of human welfare.
• Income as a measure of Growth:-
• The general belief is that a rise in per capita income is
supposed to contribute an increase in standard of living
of the people
• There was a time ,when Kuwait's per capita
income was the highest in the world, yet the
standard of living of an average citizen of
Kuwait was less than that of an American
• It means growth in per capita income need
not produce any improvement in the standard
of living of laymen
 What are the issues for treating
income as a measure of growth?
1.Population growth rate:- per capita income
growth rate inversely related to population
growth rate
2.Unaccounted economic activity:-
3.Underestimation of GDP;-
4.Not accounting exchange
5.Overestimation of GDP
6.Does not account the “bads” in society
7.Does not account depreciation
8.Problem in exchange rate conversion
 Human Development(HD)

• UNDP defines “Human development as a process

of enlarging peoples choices”
• Since the choices are infinite, the major choices
listed are:-
1. Access to resources
2. Long& healthy life
3. Access to education
# the objective of HD is to create an enabling
environment for people to enjoy long, healthy
and creative lives
 Essential components of HD
1. Equity:- equity in access to education, health
political rights etc
2. Sustainability
3. Productivity
4. Empowerment:- it depends on the expansion
of peoples capabilities, enlargement of
choices
 Sen’s capability Approach
• This approach considered development as the
expansion of capabilities
• This approach is rooted in welfare theory
• To him, a society's standard of living is not judged
by income level alone, but by peoples capabilities
also
• Sen argues that mere industrialization and capital
accumulation cannot bring concrete changes in
the standard of living of common people
• He clearly defines ends and means of
development
• To him income is a means not a ends of human
development
• If income is means, capability is the end and the
latter to be reflected in terms of quality of life
• Capability is defined as those characteristics,
which enables peoples to enjoy a high standard
of living, being healthy, literate and the ability to
participate actively in community life are
capabilities
• Rather than income, consumption is to be given
primary importance in the path of development
• Being educated and well-nourished are
capabilities
# Deprivation means lack of basic capabilities when
people are unable to reach a certain level of
essential human achievement or functioning
# Functioning are people’s “doings” and “beings”
which determine whether a person is really in a
good state
 Elements of a set of functioning
1.To be free from hunger
2. To be free from diseases
3.To be able to participate in social and political life
4.To be able to express freedom of choice
5.To be able to enjoy freedom
Capability set thus denotes ones freedom to choose
the kind of life one wants to lead over and above
the positive freedoms implicit in the bundle of
functionings
 Development as Freedom
• Sen explain the core of human well-being is
freedom of choice
• Development is the process of expanding real
freedoms
• The development consist of the removal of
various types of unfreedoms that restraints
the rights of people to choose from
opportunities
 Features of Underdeveloped
Economies:
1. Low Level of Income:
2. Mass Poverty
3. Lack of Capital Formation:
As the level of per capita income in these countries is
very low thus their volume and rate of savings are
also very poor.
4. Heavy Population Pressure
 5. Agricultural Backwardness:

The underdeveloped countries are also suffering from

agricultural backwardness. Although being the most
important sector, agricultural sector in these countries
remains totally underdeveloped
# Nearly 60 to 70 per cent of the total population of these
countries is depending on agriculture and about 30 to 40
percent of the total GNP of these countries is generated from
agricultural production
• 6. Unemployment Problem
• 7.Unexploited natural resources
• 8. Shortage of Technology and Skills:
• 9. Lack of Infrastructural Development
• 10. Lack of Industrialization:
• 11. Lack of Proper Market:
• 12.Mass Illiteracy
 Major sources of unfreedoms
• Poverty
• Inequality
• Autocracy
• Poor economic opportunities
• Social deprivation
• Lack of public utilities
 Dualism
• : it means the coexistence of advanced and
modern modes of production with primitive
and traditional modes of production
 Development Gap
• Development gap refers to the difference
between the standards of living of richer and
poorer countries of the globe
• It refers to the difference between developed and
under developed countries on many dimensions
of development
• Here divide the world on the basis of the GNP
percapita
• World bank divided the world into-
Low, lower –middle,, upper middle, and high
income countries
 What are the dimensions of the gap?
in equality in precipita income or GNP or standard of
living?
@ development gap is mainly analysed in terms of
percapita income
# the disparity( development gap) between Developed
and under developed countries are mainly on the basis
of the following areas-
1. Trade: there will be favourable terms of trade in
developed countries toUDC
2. Debt: led to BoP crisis
3. Technological divide
• The above mentioned three gaps have many
dimensions of development such as ---
• 1.unemployment
• 2.Educational opportunities
• 3.income distribution
• 4.health& Nutrition
• 5. Basic needs
• 6.Ownership pattern
Strategies to reduce the development
gap:
• 1. Investment
• 2. Industrial development
• 3. Aid
• 4. Intermediate technology
• 5. Free trade
• 6. Fairtrade
• 7.Microfinance
• Debt relief
 Multiple Equilibria
• Complimentarity between several actions are
necessary for development
• It means actions taken by one agent that
supplement the actions taken by other agent
• E.g: Government and workers
• When a agent fail to coordinate their
behaviour, there may be a worse off outcome
to all agents and this is called coordination
failure
 Example for complementarity:-
# a software firm will not set up its branch if
software experts are not available
# the software engineers will not acquire skills if
there are no firms to employ them
# complementarities creates classic” chicken& egg
problem” ie which comes first the skills or the
demand for skills
#the answer is that complementarity must come at
the same time, through coordination
• Coordination is not practical if there s time lag
between initial investment and return generation
• Here, Govt can push the economy to break
underdevelopment and to better equilibrium by
coordinating workers and employees
• In a competitive economy ,there is always a
tendency to restore market equilibrium, example-
if there is excess demand, there will be counter
pressure to raise prices, restoring equilibrium
• This equilibrium may settle the economy either to
underdevelopment or sustainable equilibrium
• If it is underdevelopment equilibrium,
economy may get stuck to development trap
• Or if it is sustainable development
equilibrium, it may tend to stimulate further
development
•
 Low level equilibrium trap

This theory was formulated by R.R. Nelson.

The theory states that if per capita remains
below a critical level, a population growth rate
that exceeds the income growth rate will
always bring economy back to ‘Low Level
EquilibriumTrap
• This theory can be explained in the context of
complementarity principle:-
• If all agents can efficiently coordinate, they can
reach a sustainable equilibrium.
• When the agents fail to coordinate their
behaviour, there will be worse off outcome to all
the agents and this leads to underdevelopment.
• If there is massive coordination failure,
complementary investments will not be
forthcoming to stimulate further investment and
economy may settle at low level equilibrium trap