WERABE UNIVERSITY

COLLEGE OF BUSINESS AND

ECONOMICS
ECONOMICS DEPARTMENT

DEVELOPMENT ECONOMICS I

PREPARED BY
KEDIR ABDU (MSC)
 CHAPTER ONE
1. Economics of Development: Concepts and Approaches

1.1. Introduction
The study of economic development is one of the newest, most exciting and
most challenging branches of the broader disciplines of economics and
political economy.

According to the expression of economists such as M. Todaro, for the most

part development economics is a field of study that is rapidly evolving its
own distinctive analytic and methodological identity even though it often
draws on relevant principles and concepts from other branches of economics.
It is the systematic study of the problems and processes of economic
development in Africa, Asia and Latin America emerged only over the
past five decades.

Definition of Development Economics

From the above background, we can define development economics as

the use of economic analysis, methods and tools to understand the
problems, constraints and opportunities facing the developing world.
Development is the process of improving the quality of all human lives
and capabilities by raising people’s levels of living, self-esteem, and
freedom.
In particular, the Nobel laurate economist, Amartya Sen defined
development as a process of expanding the real freedoms that people
enjoy.
 Development is to give a substantive freedom to the poor people to
satisfy their hunger, or to achieve sufficient nutrition, or to obtain the
opportunity to be adequately clothed or sheltered or enjoy clean water or
sanitary facilities which is closely related to the lack of public facilities
and social care.

Economic Development refers to the process in which people in a

country become wealthier, healthier, better educated, and have a decent
quality of life

The definition of Development can be summarized as ‘‘Many different

things to many different people.’’
 1.2. The Scope and Nature of Development Economics

We can classify the scope of development economics into two: the

traditional and the modern views.

The traditional view

This is the view of traditional neoclassical economics which advocates the
fundamental tenets of capitalism. It assumes economic “rationality” and a
purely materialistic, individualistic, self-interested orientation toward
economic decision making. It also assumes the market perfection.

According to this view, sustained growth of per capita Gross National

Income (GNI) in a country indicates the achievement of development.
Economic development is seen as altering the structure of production and
employment in the economy to realize rapid industrialization.
This view assumed that rapid gains in overall and per capita GNI
growth would either “trickle down” to the masses in the form of jobs
and other economic opportunities or create the necessary conditions for
the wider distribution of the economic and social benefits of growth.

Problems of poverty, discrimination, unemployment, and income

distribution were of secondary importance to “getting the growth job
done.” The emphasis is often on increased output, measured by gross
domestic product (GDP).
The Modern View
Unlike traditional view, this paradigm asserts that development
economics, must be concerned with the economic, cultural, and political
changes for effecting rapid structural and institutional transformations of
entire societies that can bring the fruits of economic progress to the
broadest segments of their populations.
Due to the existence of market failure, a larger government role and
activities of NGO’s are usually viewed as essential components of
development economics

For this group of economists, economic development is not a mere

increase in growth of per capita GNI rather it also encompasses the
reduction or elimination of poverty, inequality, and unemployment
within the context of a growing economy.

Particularly, in the 1950’s , 1960’s and early 70’s many well known
economists accept this modified definition of development when
they witness that many developing nations achieve their GNI growth
target but the majority of their citizens are in the quagmire of
poverty.
 1.3. Economic Growth vs Economic Development

The terms ‘growth’ and ‘development’ are usually used to mean the
same thing. But they may not be necessarily the same due to the
following differences:

First, per capita income (PCI) of a given country may be higher but
its people standard of living might be very low. This is because PCI is
the ratio of total national income and total population.

This is the average figure which could be misleading since the

distribution of income must be taken into account before something can
be said about the general level of development.
Second, a fast growth rate in total output may indicate a healthy
state of the economy, but if population growth rate matches the
output growth rate, then per capita growth rate is negligible. Here
also growth without development is possible. The important
variable which is hindering the ‘development’ in this case is the
growth of population.

Third, the use of per capita real income or consumption data,

converted into the foreign exchange rate, may not always be an
adequate index to measure the development in a world of floating
exchange rates
Fourth, growth without development is supposed to be the feature of
‘dual’ societies in the LDCs. Such ‘dual’ societies are characterized
by contrasts between the very rich and the very poor, between the
towns and villages, between different social classes and so on.
Finally, the quality of life is to be regarded as an important index of
development. It is contended that such quality is not adequately
reflected in the index of per capita income growth.

A country (X) may have a lower per capita real income than the
other (Y), but the quality of life enjoyed by the citizens of X may be
better than that of Y.
There are several factors to measure quality of life among which are
the following:
 Education and literacy rate;
 Life expectancy;
 Level of nutrition as measured by the calorie supply per head
 Consumption of energy per head;
 Consumption of consumer durables per capita;
 The proportion of infant mortality per thousand of live population.
The ‘quality’ of life could also be measured by looking at the social
and political developments of different countries. The growth of PCI
may not necessarily related with the increase in economic and
political participation of the people.

Hence, to achieve greater political and economic quality, the case for
sociopolitical and institutional changes has been strongly advocated.
Without new institutions and policies specifically designed to improve
the lot of the poor, there is no realistic chance of social justice in the
underdeveloped world of our time.

The lack of major structural and institutional changes could only

enrich the ‘new elites’ in the LDCs without developing the standard of
living of the poor.
 The above analysis suggests that the per capita real income growth
rate is not a very satisfactory measure of economic ‘development’ and
that it needs to be supplemented by other indices such as per capita
real consumption, monetary, non-monetary, demographic and
socio-political variables.

The instances are many to mention few of them: life expectancy,

infant mortality, education, literacy, distribution of income among the
different classes, and level and extent of people’s participation in the
government and the degree of decentralization of economic and
political power.

On the other hand, although the level and rate of per capita real income
growth is an imperfect index, it is difficult to believe that significant
development could take place without a rise in per capita real income.
 1.4.The Three Core Values of Development
These core values—sustenance, self-esteem, and freedom—
represent common goals sought by all individuals and societies. They
relate to fundamental human needs that find their expression in almost
all societies and cultures at all times. Let’s elaborate each of them.

A. Sustenance: The Ability to Meet Basic Needs:

All people have certain basic needs without which life would be
impossible. These life-sustaining basic human needs include food,
shelter, health, and protection. When any of these is absent or in
critically short supply, a condition of “absolute underdevelopment”
exists. A basic function of all economic activity, therefore, is to provide
as many people as possible with the means of overcoming the
helplessness and misery arising from a lack of food, shelter, health,
and protection.
Rising per capita incomes, the elimination of absolute poverty,
greater employment opportunities, and lessening income
inequalities therefore constitute the necessary but not the sufficient
conditions for development.

B. Self-Esteem: To Be a Person:
All peoples and societies seek some basic form of self-esteem,
although they may call it authenticity, identity, dignity, respect,
honor, or recognition. The nature and form of this self-esteem may
vary from society to society and from culture to culture.
This days, national prosperity has become an almost universal
measure of worth. Due to the significance attached to material
values in developed nations, worthiness and esteem are nowadays
increasingly conferred only on countries that possess economic
wealth and technological power—those that have “developed.”
 C. Freedom from Servitude: To Be Able to Choose:
Freedom here is to be understood in the sense of emancipation
from alienating material conditions of life and from social
servitude to nature, other people, misery, oppressive
institutions, and dogmatic beliefs.

W. Arthur Lewis stressed the relationship between economic

growth and freedom from servitude when he concluded that
“the advantage of economic growth is not that wealth increases
happiness, but that it increases the range of human choice.”

Wealth can enable people to gain greater control over nature

and the physical environment (e.g., through the production of
food, clothing, and shelter) than they would have if they
remained poor.
 It also gives them the freedom to choose greater leisure, to have
more goods and services, or to deny the importance of these material
wants and choose to live a life of spiritual contemplation.

The concept of human freedom also encompasses various

components of political freedom, including personal security, the
rule of law, freedom of expression, political participation, and
equality of opportunity.

1.5. The measurement and Comparability of Per Capita Income

Though per capita income is not a sufficient condition to represent
development, we often use it to compare countries’ economy and to
classify countries into rich and poor. Even this per capita income
measurement has two major problems when we tend to make a
comparison between countries. Let’s see them one by one:
 1) Problems associated with national income accounting
The first point to bear in mind is that only goods that are produced
and then sold in the market are included in the value of national
income, measured by either the output or the expenditure method.

However most of the output in developing countries are non

marketable due to the infrastructure and marketing problems. This
will bias the calculation of national income downwardly and
therefore, the per capita income (PCI).

Second, growth rates may also be biased upwards by using

prices as weights when compiling national income totals from
the output statistics of different sectors of the economy (unless
the weights are revised frequently), since goods with high prices,
which subsequently fall, are usually the fastest growing.
This is more of a danger in developing countries than in developed
countries because of their less sophisticated accounting
techniques, the greater difficulty in revising price weights, and the
more widespread introduction of new goods with high initial
prices.
Third, a consideration of price is also necessary when deciding
what price index to use as a deflator of money national income in
order to obtain an index of real income.

The task of converting money income statistics into real income

raises all the difficulties not peculiar to developing countries,
connected with the use of index numbers, such as which base year
to take, how to take account of changes in the quality of products,
which weighting system to employ, and so on.
 2) Problem of converting each country’s per capita income
in domestic currency into a common unit of account

The other part of the story, and probably the major part, concerns the
understatement of living standards in developing countries when
their national incomes measured in local currencies are converted
into US dollars (as the common unit of account) at the official rate
of exchange. (PCI of Ethiopia at official exchange rate 511$ in
2016 but its PCI at PPP is 1608$).
For example, if the GNP of country X is 100 billion birrs, its
population is 5 million, and 10 birrs are exchanged with a dollar, then
the per capita income of country X in dollars is;

But if the living standards of the two counties are to be compared by this
method, it must be assumed that 10 birr in country X can buy the same
living standard as $1 in the United States.

It is well known, however that official exchange rates between two

countries’ currencies are not good measures of the purchasing power
parity (PPP) between countries, especially between countries at different
levels of development.
The reason is this: exchange rates are largely determined by the
supply of and demand for currencies based on goods that are
traded, the prices of which tend to be equalized internationally.

PPP however, depends not only on the prices of traded goods, but
also on the prices of non-traded goods, which are largely
determined by unit labor costs, and these tend to be lower the
poorer the country.

As a general rule, it can be said that the lower the level of

development and the poorer the country, the lower the ratio of the
price of non-traded goods to traded goods and the more the use of
the official exchange rate will understate the living standards of
the developing country measured in US dollars.
 GDP GDP
(PPP) (nominal) vs. World PPP
per capita per capita GDP per capita
# Country (2017) (2017) ($17,100)
1 Qatar $128,647 $61,264 752%
2 Macao $115,367 $80,890 675%
3 Luxembourg $107,641 $105,280 629%
4 Singapore $94,105 $56,746 550%
5 Brunei $79,003 $28,572 462%
6 Ireland $76,745 $69,727 449%
7 United Arab Emirates $74,035 $40,325 433%

170 Ethiopia $1,903 $757 11%

Let us give a simple example. The motor car is an internationally
traded good. Suppose that the dollar price of a particular model of car
is $10,000 and there are 10 birrs to the dollar. Ignoring transport costs,
tariffs and so on, the price of the car in Ethiopia will be $10,000 X 10
= 100,000 birr, otherwise a profit will be made by dealers buying in
the cheapest market and selling in the most expensive.

The forces of demand and supply (and arbitrage) will equalize the
price of traded goods. But let us now consider a non-traded good such
as a haircut. Suppose a haircut in the United States costs $10 at the
official exchange rate of 10 birr to the dollar, a haircut in Ethiopia
should be 100 birr. But suppose that in fact is only 25 birrs.

This would mean that as far as haircuts are concerned, the value of the
birr is underestimated by a factor of four. The PPP rate of exchange
for haircuts alone is $10 ÷ 25 birrs, or $1 = 2.5 birrs.
If the national income of country X measured in birr was divided by 2.5
instead of 10, the national income of country X in dollars, and therefore
per capita income in dollars, would now be four times higher: $8. 000
per head instead of $2.000 per head as in the example above. (Millikan
has suggested that the real incomes of many African and Asian
countries in 1950 were of the order of 350 per cent larger than
indicated by UN statistics in US dollars per capita,)

As development proceeds, the ratio of the price of non-traded goods to

traded goods tends to rise as wage levels in the non-traded goods sector
rise but productivity growth is slower than in the traded goods sector. To
make meaningful international comparisons of income and living
standards, therefore, what is required is a measure of PPP, or a real
exchange rate, between countries.
 Purchasing Power Parity (PPP)
Purchasing power parity is defined as the number of units of a
foreign country’s currency required to purchase the identical
quantity of goods and services in the local developing country
market as $1 would buy in the United States.)

The most common way of constructing a PPP ratio between two

countries is to revalue the national incomes of the two countries
by selecting a comparable basket of goods and services in each
country and estimating the purchasing-power equivalent of each
item in country A relative to country B.
Thus if P­ia is the price of item i in country A and P­ib is the price
of item i in country B, the purchasing-power equivalent of item i
in country A relative to country B is P­ia/ P­ib.
By extending this calculation to all goods and applying the price
ratios to the average quantities consumed of each item in the two
countries, we obtain a formula for the overall purchasing-power
equivalent in country A relative to country B:

Q P i ia
i
PPP
Q P
i
i ib

Where Qi is the quantities of each good consumed in the two

countries. The purchasing-power-equivalent ratio can then be
used to convert one country’s national income measured in local
currency into another country’s currency.
Example, suppose that the official exchange rate between the
Ethiopian (country A) birr and the US (country B) dollar is 10:1,
while the purchasing-power-equivalent ratio is calculated as
follows with some assumptions.

Assume also that:

- Only motor car and the service of hair cut are produced in the two
countries
- The production of motor cars in country A and country B are 10000
and 1,000,000 in a year, respectively
- There are 10,000,000 and 1,000,000 haircuts in country A and
country B, respectively
- The population size of country A is 80,000,000
- The population size of country B is 10,000,000
Note that GNP of country A is 1,250,000,000 birrs while GNP of
country B is 10,010,000,000
Therefore, PCY of country A is 15.63 birrs per year while PCY of
country B is 1001 dollars per year.

If we compare the per capita income of these countries in terms of the

official exchange rate (10 birrs to 1 dollar), PCY of country A in
terms of dollar is 15.63/10 = 1.563. But if we compare the per capita
income of these countries in terms of PPP, it will be 15.63/8 = 1.954.
(1/0.125=8) This shows that the comparison of PCY of the two
countries in terms of dollar underestimates the actual living standard
of the people in country A.
 1.6. Welfare-based measures and social indicators of
development (Alternative measures of development)

In this section we shall discuss about the different social indices

and their respective limitations. Economists have tried to measure
social indicators of basic needs by taking one, two or more
indicators for constructing composite indices of human
development.

We will study below the Physical Quality of Life Index (PQLI) of

Morris and the Human Development Index (HDI) as developed
by the United Nations Development Program (UNDP) and the
Multidimensional Poverty Index (MPI).
 1.6.1. Physical Quality of Life Index (PQLI)
Morris D. Morris constructed a composite Physical Quality of Life
Index (PQLI) in 1979 relating to 23 developing countries for a
comparative study. He combines three component indicators of
welfare or development of societies to measure the performance in
meeting the most basic needs of the people.
These are infant mortality rate, life expectancy at age one and basic
literacy at age 15. This index represents a wide range of indicators
such as health, drinking water, nutrition, sanitation and education.

Each indicator of the three components is placed on a scale of zero to

100 where zero represents an absolutely defined worst performance
and 100 represents an absolutely defined best performance. The PQLI
is calculated by averaging the three indicators giving equal weight to
each and the index is also scaled from 0 to 100.
 Example: Consider the following hypothetical assumption of scaling
PQLI Absolute figure Scale given
Infant mortality rate per thousand Less than or equal to 10 per thousand 100
Between 11 and 50 per thousand 80
Between 51 and 100 per thousand 60
Between 101 and 150 per thousand 40
Between 151 and 200 per thousand 20
Greater than or equal to 200 per thousand 0
Life expectancy at age of one Less than or equal to 30 0
Between 31 and 40 20
Between 41 and 50 40
Between 51 and 60 60
Between 61 and 70 80
Greater than or equal to 70 100
Literacy at years of 15 Less than or equal to 50 per thousand 0
Between 51 and 230 per thousand 20
Between 231 and 410 per thousand 40
Between 411 and 590 per thousand 60
Between 591 and 770 per thousand 80
Greater than or equal to 771 per thousand 100
With regard to each component; the higher the infant mortality rate, the
nearer will be the scale to zero; the higher the rate of the life expectance
at age one, the nearer will be the scale to 100; and the higher the rate of
literacy at years of 15, the nearer will be the scale to 100.

Consider that in a given developing country X; infant mortality rate is

130 per thousand, the average life expectancy at age one is 40 years and
the literacy rate at age 15 is 100 per thousand. If equal weight is given
for each of the following components (i.e. 33.33 is given for each), the
physical quality of life index is calculated as:
According to Morris, each of the three indicators is sensitive to
distribution effects. It means that an improvement in these indicators
signifies an increase in the proportion of people benefiting from them.
But none of the indicators depends on any particular level of
development. Each indicator lends itself to international comparison.

Taking Gabon’s infant mortality rate of 229, per thousand live births as
the worst rate in 1950, Morris sets it as 0. At the upper, the best
achievement is set at 7 per thousand for the year 2000 for which Morris
sets 100. Again, taking Vietnam’s life expectancy at age one as 38 years
in 1950, Morris sets it at 0 of the life expectancy index.
The upper limit is set at 77 years for men and women combined for the
year 2000 for which Morris sets 100. Lastly, the literacy rate at 15 years
is taken as the literacy index. Table 2.1 presents the PQLI performance
and GNP per capita of two LDCs and two developed countries.
 Country PQLI Average annual GNP Per capita
1950 1960 1970 growth rate (1950-1970)

India 14 30 40 1.8
Sri Lanka 65 75 80 1.9
Italy 80 87 92 5.0
USA 89 91 93 2.4
Table 2.1 Physical quality of life index and GNP per capita
Source: Morris D. Morris and M.B. McAlpin, Measuring the Conditions of India’s Poor, 1982.

The above table reveals that India which Morris calls a “basket
case” exhibited relatively slower rate of per capita growth in GNP
but not insignificant improvement in its PQLI from 14 to 40 over a
period of two decades from, 1950 to 1970, despite its low growth
in average GNP per capita of 1.8
 On the other hand, Sri Lanka’s PQLI was much higher than
India’s during this period, though its average GNP per capita
was almost the same. Of the two developed countries, both Italy
and USA had very high PQLI. But Italy’s average GNP per
capita was more than double the USA.
In this connection, Morris observes that there is no automatic
link between GNP per capita and PQLI. In fact, the presence or
absence of social relations, nutritional status, public health,
education and family environment determine a society’s PQLI.
Further, it takes considerable time to build institutional
arrangements that can generate and sustain a high PQLI.
(N = 150) Infant Mortality Life Expectancy
Life expectancy at age one - 0.919
Literacy - 0.919 0.897

Table 1.2 Correlation among literacy, infant mortality and life expectancy
The coefficient of correlation between life expectancy at age one and
infant mortality is of a high degree and negative. Similar is the
correlation between literacy and infant mortality rate i.e., with
literacy the infant mortality rate declines.
The coefficient between literacy and life expectancy show a high
degree of positive correlation i.e., with literacy the life expectancy
also increases. Morris regards life expectancy at age one and infant
mortality as very good indicators of the physical quality of life. So are
literacy and life expectancy. In fact, the literacy indicator reflects the
potential for development.

Limitations: Morris admits that PQLI is a limited measure of basic

needs. It supplements but does not supplant the GNP. It does not
measure economic growth. Further, it does not explain the changing
structure of economic and social organization.
It, therefore, does not measure economic development by itself.
Similarly, it does not measure total welfare. However, it
measures the qualities of life which are essential for the poor.

Morris has been criticized for using arbitrary weights for the
three variables of his PQLI. According to Meier, non-income
factors captured by the PQLI are important but so are income
and consumption statistics and distribution-sensitive methods of
aggregation by which to obtain an overall poverty index.

Conclusion: Despite these limitations, the PQLI can be used to

identify particular regions of under-development and groups of
society suffering from the neglect or failure of social policy. It
points towards that indicator where immediate action is
required; thereby the state can take up such policies which
increase the PQLI rapidly along with economic growth.
 1.6.2. Human Development Index (HDI)
Since 1990, the UNDP has been presenting the measurement of
human development in terms of a Human Development Index
(HDI) in its annual Human Development Report.

The HDI is a composite index of three social indicators: life

expectancy, adult literacy and years of schooling and real GDP
per capita. Thus, the HDI is a composite index of achievements
in three fundamental dimensions: a long and healthy life,
knowledge and a decent standard of living
The HDI value of a country is calculated by taking three indicators:
 Longevity (Health Index): as measured by life expectancy at
birth: the range is 25 to 85 years.
 Educational attainment (Education index): as measured by a
combination of adult literacy (two-thirds weight) and combined
primary, secondary and tertiary enrolment ratios (one-third
weight). The range for adult literacy is 0% to 100% and
combined enrolment ratio: 0% to 100%.
 Standard of living (income index): as measured by real GDP
per capita based on purchasing power parity in terms of dollar
(PPP$): $ 100 and $ 40,000.
 Where,
Actual value of X = value calculated from data for indicator X.
Min of X = minimum value that indicator X can obtain
Max of X= minimum value that indicator X can obtain
The minimum and maximum values for different indicators are
proposed by UNDP and these are mentioned in the following text.
Education Index
The education index is an aggregate index derived from two indices. One is the
adult literacy rate i.e. the literacy rate of the population of age 15 years and
above. The other is the gross enrolment ratio which is obtained by combining
primary, secondary and tertiary gross enrolment in age 6 to 14 years. These two
indices are combined, giving two-third (2/3) weights to adult literacy and one-
third (1/3) weights to gross enrolment, to obtain education index. The following
mathematical form is thus used to obtain the education index.
The index takes ranges from 0 to 1. If the actual value is the
minimum value, the index is zero. If the actual value is equal to the
maximum value, the index is one. The HDI is a simple average of
life expectancy index, educational attainment index, and the
adjusted real GDP per capita (PPP$) index.
It is calculated by dividing the sum of these three indices by 3. The
maximum and minimum value for each variable which are fixed, are
reduced to a scale between 0 and 1, with each country at some point
of the scale.
The HDI value for each country indicates the distance it has traveled
towards the maximum possible value of 1 and how far it has to go to
attain certain defined goals: an average life span of 85 years, access to
education for all and a decent standard of living. The HDI ranks
countries in relation to each other.
A country’s HDI rank is within the world distribution i.e., it is based
on its HDI value in relation to each developed and developing country
for which the particular country has traveled from the minimum HDI
value of 0 towards the maximum HDI value of 1.

Countries with an HDI value below 0.549, between 0.550 and 0. 699,
between 0.770 and 0.799, and above 0.800 are considered to have a
low level, a medium level and a high level and very high, respectively.
In the HDI, countries are also ranked by their GDP per capita.
 The Human Development Report, 2021 presented the HDI values,
HDI rank, and real GDP per capita ranks for the year 2021 relating to
174 developed and developing countries. Table shows HDI values,
HDI ranks and real GDP per capita ranks of some of the countries.
Country HDI HDI Real GDP Per Real GDP Per capita
Value Rank Capita Rank Rank minus HDI
(PPP$) Rank

1. Very High Human Development (≥ 0.800)

Norway 0.957 1 13 12
Ireland 0.955 2 5 3
Switzerland 0.955 2 11 9
Hong Kong 0.949 4 19 15
United Kingdom 0.932 13 37 24
United States 0.926 17 15 -2
United Arab Emirates 0.890 31 14 -17
Qatar 0.827 45 6 -39
Country HDI HDI Real GDP Per Real GDP Per capita
Value Rank Capita Rank Rank minus HDI
(PPP$) Rank
1. High Human Development (0.700–0.799)
Trinidad and Tobago 0.796 67 78 9
Iran 0.783 70 123 53
Cuba 0.783 70 130 60
Ukraine 0.779 74 120 46
Peru 0.777 79 126 47
Brazil 0.765 84 111 27
China 0.761 85 100 15
Algeria 0.748 91 138 47
Country HDI HDI Real GDP Per Real GDP Per capita
Value Rank Capita Rank Rank minus HDI
(PPP$) Rank
1. Medium Human Development (0.550–0.699)
Morocco 0. 686 121 153 32
Iraq 0. 674 123 144 21
Bhutan 0. 654 129 135 6
India 0. 645 131 155 24
Bangladesh 0. 632 133 171 38
Sao Tome and Principe 0. 625 135 182 47
Ghana 0. 611 138 165 27
Kenya 0. 601 143 176 33
Country HDI HDI Real GDP Per Real GDP Per capita
Value Rank Capita Rank Rank minus HDI
(PPP$) Rank
1. Low Human Development (≤ 0.549)
Mauritania 0.546 157 169 12
Benin 0.545 158 191 33
Uganda 0.544 159 203 44
Rwanda 0.543 160 206 46
Nigeria 0.539 161 172 11
Ivory Coast 0.538 162 170 8
Djibouti 0.524 166 168 2
Ethiopia 0.485 173 201 28
Thus, the HDI ranking of countries differ significantly from their
ranking by real GDP per capita. Countries whose GDP ranking is
higher than their HDI rank have considerable potential for
distributing the benefits of higher incomes more equitable. But they
have been less successful in channeling economic prosperity into
better lives for their people.

Of more than 200 countries in 2019, there were several countries

whose HDI rank was lower than their GDP per capita rank.
Prominent among them which are mentioned here were UAE (- 17)
and USA (- 2) (last column of Table). On the other hand, countries
whose HDI rank is higher than their GDP rank, suggest that they
have effectively made use of their income to improve the lives of
their people. There were also significant number of countries in
2019. Prominent among them were Norway (1) and Ireland (2).
The HDI is an alternative measure of development which
supplements rather than supplants the GNP measure of economic
development.

Limitations: The HDI is not free from certain limitations, although, it

is reality about human development and deprivation, according to Prof.
Amartya Sen.
 First, the three indicators are not the only indicators of human
development. There can be others like infant mortality, nutrition, etc.
 Second, the HDI measures relative rather than absolute human
development so that if all countries improve their HDI value at the
same weighted rate, the low human development index countries
will not get recognition for their improvement.
 Third, the attachment of weights to each of these items is arbitrary.
 Fourth, HDI of a country may shift the focus away from the high
inequality found within it.
 Last, the alternative approach of taking the GNP per capita
ranking and supplementing it with other social indicators is
still a better one.
 1.7. Obstacles to Economic Growth and Development
Throughout our study of economic development, we will confront
repeatedly the perplexing problem as to why some countries are more
developed than others are.
Why is Great Britain more developed than Angola, or the United
States than Colombia? The very simple answer, since it is basically a
truism, is that the level and pace of economic development are lower
the greater are the barriers to economic progress and transformation
in a country, and more rapid the fewer and less intractable are those
obstacles.
The challenge for the development analyst is thus to attempt to
identify the most significant obstacles to development in each country
and to formulate effective measures, including public policy, that can
begin to undo, remove, or at least minimize the effects of these
obstacles to progress that slow or thwart the development process.
 1.7.1. Potential internal barriers to development

A. Inequalities in the existing distributions of income and wealth

B. The level and efficiency of physical infrastructure (roads, electricity,

water, communication services, port facilities, and so on);
C. The role and level of development of organized banking and lending
activities and of equity (stock) and other financial markets and
financial intermediaries;

D. An ineffective or underdeveloped educational system, including low

levels of general literacy and an imbalance between allocations of
financing to primary, secondary, and higher education; (in short, lack
of skilled human power.). peoples are poorly educated, low skilled,
lacks work ethics and time management.
E. Prevailing ideological concepts and their impact on thinking and
behaviour, including the influence of religious thinking, the accepted
role of women and ethnic or religious minorities, the prevailing
economic orthodoxy, and so on; (in short, Socio‐cultural
constraint);

F. The initial endowment of natural resources;

G. Governance and institutional constraints

H. The existence of substantial “market failures” such that market

signals are not fully, completely, or accurately transmitted to
economic agents, thus distorting resource allocation, production
decisions and spending patterns;
I. Geographic characteristics, for example, land-locked nations,
mountainous terrain, extensive deserts, and even small country
size;
J. Diseases specific to certain locations;

K. civil war;

L. Agricultural constraints;

M. Vicious cycle of poverty; it shows the circular relationship

between variables that hinders development in least developing
countries. Poverty begets poverty!!. Let’s look at from both
demand side and supply side.
 Low Productivity

Low income
Low investment

Low demand for

industrial products

Demand Side
 Low Per capita income

Low saving
Low level of productivity

Low level of investment

Supply Side
 1.7.2. Potential external barriers to development:

 Multinational corporations that control national resources;

 The operation of the organized institutional structure of the
international trade system, the effects of the World Trade
Organization’s negotiations
 The functioning of international financial institutions, including
not only the international private commercial banks but also the
World Bank and the International Monetary Fund (IMF);
 The influence of the geopolitical and strategic interests of larger
economic powers vis-à-vis smaller and weaker economic
entities;
  The economic policies of more developed nations on
interest rates, for example, or on tariffs or non-tariff
barriers on the global economic system;
 External debt;
 The availability of foreign aid;
 Foreign exchange constraint.

1.8. Development Gap

The statement that 'the rich countries get richer and the poor countries
get poorer' has become a popular cliche in the literature on world
poverty, but without much discussion of the facts or the precise
magnitude of the development task facing the developing countries if
the per capita income gap between rich and poor nations is to be
narrowed.
Since living standards in all countries tend to rise absolutely
over time, it obviously refers to the comparative position of poor
countries, but is the comparative position being measured taking
absolute or relative differences in per capita income? How
should the 'development gap' be assessed?

Unfortunately, there is no easy answer to this question, yet the

answer given has a profound bearing on the growth of per capita
income that poor countries must achieve either to prevent a
deterioration of their present comparative position or for an
improvement to be registered.
Relative differences will narrow as long as the per capita income
growth rate of the developing countries exceeds that of the
developed countries; and this excess of growth is a precondition
for absolute differences to narrow and disappear in the long run.
.In the short run, however, a narrowing of relative differences
may go hand in hand with a widening absolute difference,
given a wide absolute gap to start with, and thus the rate of
growth necessary to keep the absolute per capita income gap
from widening is likely to be substantially greater than that
required to keep the relative gap the same.

But suppose the relative gap does narrow, and the absolute gap
widens, are the poor countries comparatively better or worse off?

In comparing rich and poor countries, however, it is not difficult

to argue that even if a relative per capita income gap is
narrowed, the comparative position of the poor may have
worsened because the absolute gap has widened.
On welfare grounds there would seem to be a case for paying
as much attention to absolute differences in per capita income
between rich and poor countries as to rates of growth of per
capita income.
As we mentioned before, however, in the two Development
Decades 1960 -79, both the relative and absolute gap
between rich and poor countries seems to have widened, as
indicated by the per capita income growth
To avoid the issue of whether strategy and assessment should
be concerned with absolute or relative per capita income
differences, and to facilitate quantification, matters will be
made simple by assuming that the desirable goal is to narrow
and eliminate both the absolute and the relative gap. We shall
take as a target the average per capita income of the
industrialized countries and attempt to answer four specific
questions as reliably as the data will allow:
A. Given the recent growth experience of the poor countries, how
long would it take for them to reach the current average level
of per capita income in the industrialised countries?

B. Given the recent growth experience of the poor countries

relative to the industrialised countries, how many years would it
take for the per capita income gap to be eliminated?

C. Given the rate of growth of the industrialised countries from

now until the year 2038 (say), how fast would the poor countries
have to grow for per capita incomes to be equalised by that date?

D. Given the rate of growth of the industrialised countries, how

fast would the poor countries have to grow merely to prevent the
absolute per capita income gap between rich and poor countries
from being any wider in the year 2038 than now?
The required growth rate is 18 per cent per annum and hardly
feasible. The magnitude of the development task is clearly colossal if
defined in terms of achieving roughly comparable living standards
throughout the world by the beginning of the next century.
For most of the poor countries a quadrupling of per capita income
growth would be required over the next two decades, necessitating a
ratio of investment to national income of 50 per cent or more.
Investment ratios of this order are simply not feasible, and in any case
the countries themselves could not absorb such investment
All the above calculations are sensitive to the assumed future
growth rate of the industrialized countries, the choice of the target
year in the future, and the base year level of per capita income
taken for the poor countries.

No one can possibly know with precision what the future rate of
advance of the industrialized countries will be, and 4 per cent per
capita income growth – which has been the average for the last 20
years - would seem to be as reasonable an assumption as any. But
the lower the growth rate, the less formidable the growth effort
of the poor countries to achieve parity of living standards.

. No special significance should be attached to the year 2038 as

the choice of target year: Some year has to be taken to make these
'catching up' calculations not too close to the present to give no
hope and not too far away for the goal to be lost sight of.
As far as the base year level of per capita income in the poor
countries is concerned, a note of caution is in order.

To the extent that income statistics invariably understate the

value of production in poor countries, the calculations of the
catching up time and the growth rate required for parity of
living standards will be exaggerated.

The degree of overestimation, however, is not likely to be so

great as to invalidate the conclusion that the growth rates
required for parity of living standards by the year 2038 are
not feasible, and that on current growth performance some
countries will never catch up.
It can be argued, of course, that world income equality is an
impracticable ideal, and that the primary aim is not equality of
living standards throughout the world but 'tolerable' living
standards in all countries, which is a very different matter.
The problem is to define 'tolerable' living standards, and
especially to guarantee a reasonably equitable distribution of
that average level of real income.

The time scale involved to reach 'tolerable' living standards is

obviously less than that required to eliminate the gap entirely,
but even so, if the average level of per capita income now
enjoyed in the industrial countries is regarded as the tolerable
level, we estimate it will take almost a century for the average
poor country on current performance to attain it. Can these
countries wait that long?