Chapter Two

The Nature of Development Economics

2.1. 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.
• Adam Smith was the first “Development Economist” and that his
Wealth of Nations, published in 1776, was the first treatise on
economic development.
• The systematic study of the problems and processes of Economic
Development in Africa, Asia, and Latin America has emerged only over
the past few decades.
• Although Development Economics often draws on relevant principles
and concepts from other branches of economics in either a standard
or modified form, for the most part it is a field of study that is rapidly
evolving its own distinctive analytical and methodological identity.
2.2. Evolution of Developmental Economics

 Traditional Economics is concerned primarily with the efficient, least-

cost allocation of scarce productive resources and with the optimal
growth of these resources over time so as to produce an ever-
expanding range of goods and services.
• Traditional Neoclassical Economics deals with an advanced capitalist
world of perfect markets; consumer sovereignty; automatic price
adjustments; decisions made on the basis of marginal, private-profit,
and utility calculations; and equilibrium outcomes in all product and
resource markets.

• It assumes economic “rationality” and a purely materialistic,

individualistic, self-interested orientation toward economic decision
making.
• Political Economy goes beyond traditional economics to study, among
other things, the social and institutional processes through which
certain groups of economic and political elites influence the allocation
of scarce productive resources now and in the future, either for their
own benefit exclusively or for that of the larger population as well.

• Political Economy is therefore concerned with the relationship

between politics and economics, with a special emphasis on the role
of power in economic decision making.
• Development Economics has an even greater scope. In addition to
being concerned with the efficient allocation of existing scarce (or
idle) productive resources and with their sustained growth over time,
it must also deal with the economic, social, political, and institutional
mechanisms, both public and private, necessary to bring about rapid
(at least by historical standards) and large-scale improvements in
levels of living for the peoples of Africa, Asia, Latin America, and the
formerly socialist transition economies.
• Unlike the more Developed Countries (MDCs), in the less developed
countries, most commodity and resource markets are highly
imperfect, consumers and producers have limited information, major
structural changes are taking place in both the society and the
economy, the potential for multiple equilibria rather than a single
equilibrium is more common, and disequilibrium situations often
prevail (prices do not equate supply and demand).
• In many cases, economic calculations are dominated by political and
social priorities such as unifying the nation, replacing foreign advisers
with local decision makers, resolving tribal or ethnic conflicts, or
preserving religious and cultural traditions. At the individual level,
family, clan, religious, or tribal considerations may take precedence
over private, self-interested utility or profit-maximizing calculations.
• Thus Development Economics, to a greater extent than traditional
neoclassical economics or even political economy, must be concerned
with the economic, cultural, and political requirements for effecting
rapid structural and institutional transformations of entire societies in
a manner that will most efficiently bring the fruits of economic
progress to the broadest segments of their populations.
• It must focus on the mechanisms that keep families, regions, and even
entire nations in poverty traps, in which past poverty causes future
poverty, and on the most effective strategies for breaking out of these
traps.
• Consequently, a larger government role and some degree of
coordinated economic decision making directed toward transforming
the economy are usually viewed as essential components of
development economics.
• Yet this must somehow be achieved despite the fact that both
governments and markets typically function less well in the
developing world.
• In recent years, activities of nongovernmental organizations, both
national and international, have grown rapidly and are also receiving
increasing attention.
• Because of the heterogeneity of the developing world and the
complexity of the development process, Development Economics
must be eclectic, attempting to combine relevant concepts and
theories from traditional economic analysis with new models and
broader multidisciplinary approaches derived from studying the
historical and contemporary development experience of Africa, Asia,
and Latin America.
• Development Economics is a field on the crest of a breaking wave,
with new theories and new data constantly emerging.
• These theories and statistics sometimes confirm and sometimes
challenge traditional ways of viewing the world. The ultimate purpose
of Development Economics, however, remains unchanged: to help us
understand developing economies in order to help improve the material
lives of the majority of the global population.
2.3. What Do We Mean by Development?
 Because the term Development may mean different things to different
people, it is important that we have some working definition or core
perspective on its meaning. Without such a perspective and some
agreed measurement criteria, we would be unable to determine which
country was actually developing and which was not.
2.3.1. Traditional Economic Measures
 In strictly economic terms, Development has traditionally meant
achieving sustained rates of growth of income per capita to enable a
nation to expand its output at a rate faster than the growth rate of its
population.
 Levels and rates of growth of “real” per capita gross national income
(GNI) (monetary growth of GNI per capita minus the rate of inflation)
are then used to measure the overall economic well-being of a
population—how much of real goods and services is available to the
average citizen for consumption and investment.
• Economic Development in the past has also been typically seen in
terms of the planned alteration of the structure of production and
employment so that agriculture’s share of both declines and that of
the manufacturing and service industries increases.

• Development strategies have therefore usually focused on rapid

industrialization, often at the expense of agriculture and rural
development.
• With few exceptions, such as in Development Policy circles in the 1970’s,
development was until recently nearly always seen as an economic
phenomenon in which 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.” Indeed, the emphasis is often on increased output, measured by
gross domestic product (GDP).
2.3.2. The New Economic View of Development

• The experience of the 1950’s and 1960’s, when many developing

nations did reach their economic growth targets but the levels of
living of the masses of people remained for the most part unchanged,
signaled that something was very wrong with this narrow definition of
development.
• An increasing number of economists and policymakers clamored for
more direct attacks on widespread absolute poverty, increasingly
inequitable income distributions, and rising unemployment. In short,
during the 1970’s, Economic Development came to be redefined in
terms of the reduction or elimination of poverty, inequality, and
unemployment within the context of a growing economy.
• “Redistribution from growth” became a common slogan.
• Dudley Seers posed the basic question about the meaning of
development succinctly when he asserted: The questions to ask about
a country’s development are therefore: What has been happening to
poverty? What has been happening to unemployment? What has
been happening to inequality? If all three of these have declined from
high levels, then beyond doubt this has been a period of development
for the country concerned.
• If one or two of these central problems have been growing worse,
especially if all three have, it would be strange to call the result
“development” even if per capita income doubled.

• This assertion was neither idle speculation nor the description of a

hypothetical situation. A number of developing countries experienced
relatively high rates of growth of per capita income during the 1960’s
and 1970’s but showed little or no improvement or even an actual
decline in employment, equality, and the real incomes of the bottom
40% of their populations.
• The situation in the 1980’s and 1990’s worsened further as GNI
growth rates turned negative for many developing countries, and
governments, facing mounting foreign-debt problems, were forced to
cut back on their already limited social and economic programs.
• Nor can we count on high rates of growth in the developed world to
trickle down to the poor in developing countries.
• Growth was rapid in much of the developing world in the 2000’s,
while many wondered if it was fueled by the bubbles in the West and
could be derailed by the financial crisis and later aftershocks.
• Development must therefore be conceived of as a multidimensional
process involving major changes in social structures, popular
attitudes, and national institutions, as well as the acceleration of
economic growth, the reduction of inequality, and the eradication of
poverty.
• Development, in its essence, must represent the whole gamut of
change by which an entire social system, tuned to the diverse basic
needs and evolving aspirations of individuals and social groups within
that system, moves away from a condition of life widely perceived as
unsatisfactory toward a situation or condition of life regarded as
materially and spiritually better.
• No one has identified the human goals of Economic Development as
well as Amartya Sen, perhaps the leading thinker on the meaning of
development.
2.4. Amartya Sen’s “Capability” Approach
 The view that income and wealth are not ends in themselves but
instruments for other purposes goes back at least as far as Aristotle.
 Amartya Sen, the 1998 Nobel laureate in economics, argues that the
“capability to function” is what really matters for status as a poor or
non poor person.
• As Sen put it, “Economic growth cannot be sensibly treated as an end
in itself. Development has to be more concerned with enhancing the
lives we lead and the freedoms we enjoy.”
• Sen argues that poverty cannot be properly measured by income or
even by utility as conventionally understood; what matters
fundamentally is not the things a person has—or the feelings these
provide—but what a person is, or can be, and does, or can do.
• What matters for well-being is not just the characteristics of
commodities consumed, as in the utility approach, but what use the
consumer can and does make of commodities.
• For example, a book is of little value to an illiterate person (except
perhaps as cooking fuel or as a status symbol).
• Or as Sen noted, a person with parasitic diseases will be less able to
extract nourishment from a given quantity of food than someone
without parasites.
• To make any sense of the concept of human well-being in general, and
poverty in particular, we need to think beyond the availability of
commodities and consider their use: to address what Sen calls
functionings, that is, what a person does (or can do) with the
commodities of given characteristics that they come to possess or
control.
• Freedom of choice, or control of one’s own life, is itself a central
aspect of most understandings of well-being.

• As Sen explains: The concept of “functionings” ...reflects the various

things a person may value doing or being. The valued functionings
may vary from elementary ones, such as being adequately nourished
and being free from avoidable disease, to very complex activities or
personal states, such as being able to take part in the life of the
community and having self-respect.
• Heterogeneity Sen identifies five sources of disparity between
(measured) real incomes and actual advantages:
1) Personal heterogeneities, such as those connected with disability,
illness, age, or gender;
2) Environmental diversities, such as heating and clothing
requirements in the cold, infectious diseases in the tropics, or the
impact of pollution.
3) Variations in social climate, such as the prevalence of crime and
violence, and “social capital”;
4) Distribution within the Family: Economic statistics measure incomes
received in a family because it is the basic unit of shared consumption,
but family resources may be distributed unevenly, as when girls get less
medical attention or education than boys do.

5) Differences in Relational Perspectives, meaning that the commodity

requirements of established patterns of behavior may vary between
communities, depending on conventions and customs.
• For example, being relatively poor in a rich community can prevent a
person from achieving some elementary “functionings” (such as
taking part in the life of the community) even though her income, in
absolute terms, may be much higher than the level of income at
which members of poorer communities can function with great ease
and success.

• For example, to be able to “appear in public without shame” may

require higher standards of clothing and other visible consumption in
a richer society than in a poorer one.
• In a richer society, the ability to partake in community life would be
extremely difficult without certain commodities, such as a telephone, a
television, or an automobile; it is difficult to function socially in Singapore or
South Korea without an e-mail address. Thus looking at real income levels or
even the levels of consumption of specific commodities cannot suffice as a
measure of well-being.
• One may have a lot of commodities, but these are of little value if they are
not what consumer’s desire. One may have income, but certain commodities
essential for well-being, such as nutritious foods, may be unavailable. Even
when providing an equal number of calories, the available staple foods in
one country (cassava, bread, rice, cornmeal, potatoes, etc.) will differ in
nutritional content from staple foods in other countries.
• Moreover, even some sub varieties of, for example, rice, are much
more nutritious than others. Finally, even when comparing absolutely
identical commodities, one has to frame their consumption in a
personal and social context. Sen provides an excellent example

• Consider a commodity such as bread. It has many characteristics, of

which yielding nutrition is one. This can—often with advantage—be
split into different types of nutrition, related to calories, protein, etc.
In addition to nutrition-giving characteristics, bread possesses other
characteristics as well, e.g., helping get-togethers over food and
drinks, meeting the demands of social conventions or festivities. . . . But
in comparing the functionings of two different persons, we do not get
enough information by looking merely at the amounts of bread (and
similar goods) enjoyed by the two persons respectively.

 The conversion of commodity-characteristics into personal

achievements of functionings depends on a variety of factors—
personal and social. In the case of nutritional achievements it
depends on such factors as
1) Metabolic Rates, (2) Body Size, (3) Age, (4) Sex (and, if a woman,
whether pregnant or lactating), (5) Activity levels, (6) Medical
Conditions (including the absence or presence of parasites), (7) Access
to Medical services and the ability to use them, (8) Nutritional
Knowledge and Education, and (9) Climatic conditions.
• In part because such factors, even on so basic a matter as nutrition,
can vary so widely among individuals, measuring individual well-being
by levels of consumption of goods and services obtained confuses the
role of commodities by regarding them as ends in themselves rather
than as means to an end.
 In the case of Nutrition, the end is health and what one can do with
good health, as well as personal enjoyment and social functioning.
Indeed, the capacity to maintain valued social relationships and to
network leads to what James Foster and Christopher Handy have
termed external capabilities, which are “abilities to function that are
conferred by direct connection or relationship with another person.”

 But measuring well-being using the concept of utility, in any of its

standard definitions, does not offer enough of an improvement over
measuring consumption to capture the meaning of development.
• As Sen stresses, a person’s own valuation of what kind of life would be
worthwhile is not necessarily the same as what gives pleasure to that
person.
• The functioning of a person is an achievement; it is what the person
succeeds in doing with the commodities and characteristics at his or
her command.
• A functioning is thus different both from (1) having goods (and the
corresponding characteristics), to which it is posterior, and (2) having
utility (in the form of happiness resulting from that functioning), to
which it is, in an important way, prior.
• To clarify this point, in his acclaimed 2009 book “The Idea of Justice”
Sen suggests that subjective well-being is a kind of psychological state
of being—a functioning—that could be pursued alongside other
functionings such as health and dignity.

• Sen then defines capabilities as “the freedom that a person has in

terms of the choice of functionings, given his personal features
(conversion of characteristics into functionings) and his command
over commodities.”
• Sen’s perspective helps explain why development economists have
placed so much emphasis on health and education and more recently
on social inclusion and empowerment, and have referred to countries
with high levels of income but poor health and education standards as
cases of “growth without development.”

• Real income is essential, but to convert the characteristics of

commodities into functionings, in most important cases, surely
requires health and education as well as income.
• The role of health and education ranges from something so basic as
the nutritional advantages and greater personal energy that are
possible when one lives free of certain parasites to the expanded
ability to appreciate the richness of human life that comes with a
broad and deep education.

• People living in poverty are often deprived—at times deliberately—of

capabilities to make substantive choices and to take valuable actions,
and often the behavior of the poor can be understood in that light.
• For Sen, human “well-being” means being well, in the basic sense of
being healthy, well nourished, well clothed, literate, and long-lived
and more broadly, being able to take part in the life of the community,
being mobile, and having freedom of choice in what one can become
and can do.
2.5. Three Core Values of Development
• But at least three basic components or core values serve as a
conceptual basis and practical guideline for understanding the inner
meaning 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.
2.5.1. 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.
• To this extent, we may claim that economic development is a
necessary condition for the improvement in the quality of life that is
development. Without sustained and continuous economic progress
at the individual as well as the societal level, the realization of the
human potential would not be possible.
• One clearly has to “have enough in order to be more.” 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.
2.5.2. Self-Esteem
 To Be a Person A second universal component of the good life is self-
esteem—a sense of worth and self-respect, of not being used as a tool
by others for their own ends. 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. However, with the proliferation of
the “modernizing values” of developed nations, many societies in
developing countries that have had a profound sense of their own
worth suffer from serious cultural confusion when they come in
contact with economically and technologically advanced societies.
• This is because 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.”
• As Denis Goulet put it, “Development is legitimized as a goal because it is
an important, perhaps even an indispensable, way of gaining esteem.”
2.5.3. Freedom from Servitude
 To Be Able to Choose A third and final universal value that we suggest
should constitute the meaning of development is the concept of human
freedom.
 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,
especially that poverty is predestination.
• Freedom involves an expanded range of choices for societies and their
members together with a minimization of external constraints in the
pursuit of some social goal we call development.
• Amartya Sen writes of “development as freedom.” 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.
• Although attempts to rank countries with freedom indexes have proved
highly controversial, studies do reveal that some countries that have
achieved high economic growth rates or high incomes, such as China,
Malaysia, Saudi Arabia, and Singapore, have not achieved as much on
human freedom criteria.
2.6. The Three Objectives of Development

• We may conclude that development is both a physical reality and a

state of mind in which society has, through some combination of
social, economic, and institutional processes, secured the means for
obtaining a better life.
• Whatever the specific components of this better life, development in
all societies must have at least the following three objectives:

1. To increase the availability and widen the distribution of basic life-

sustaining goods such as food, shelter, health, and protection .
2. To raise levels of living, including, in addition to higher incomes, the
provision of more jobs, better education, and greater attention to
cultural and human values, all of which will serve not only to enhance
material wellbeing but also to generate greater individual and national
self-esteem.

3. To expand the range of economic and social choices available to

individuals and nations by freeing them from servitude and
dependence not only in relation to other people and nation-states but
also to the forces of ignorance and human misery.