Development Economics :

Introductory Lectures

R P Pradhan
BITS Goa
January 2014
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Human Development Theories

1. Modernization Theory
2. Dependency Theory
3. World Systems Theory
4. State Theory
5. Theory of Uneven & Combined Development
Theory

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Economic Theories of Development

1. Comparative Advantage Model

2. Rostovian Take-off Model
3. Harrod - Domar Model
4. Dual Sector Model
5. Human Development Theory- It revised all of
them in the context of globalization

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Global Development Agenda
1. Millennium Development Goals
2. Adopted by 169 Nations
3. 125 countries are signatory
4. Creates bench mark targets 2008 ---
5. Adopted in 2000 UN Millennium Summit

 To be achieved by 2015
 21 targets
 60 Indicators
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Standard World Map

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World Population Distribution
 Japan

World GDP Distribution Profile

World Health Care Expenditure
Global Child Mortality Rate
World HIV Concentration
Green House Emission Profile
World Energy Consumption Profile
 Very
Low
High
High
Data
unavailable
World Human Development Index - 2011.
Medium
Rio+20 Stages set for debate on what next for development goals
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BITS Pilani, K K Birla Goa Campus
Development As an Idea!

Development Economics
as An Experimentation---- & a Tool

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philosophy of
Founder of modern Macro
Utilitarianism. Approach
of Welfare
Book- “Introduction to the
Principles of Morals” -1789 Economics Jeremy Bentham
1748 –1832

 Utilitarianism, in which human behavior is described as

motivated by pleasure and pain – their net satisfaction being
“utility.”

 Society’s well-being was the sum of these utilities, ---- Ethical

course of action was that which led to “the greatest happiness
for the greatest number.”
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 While a theory of well-being that can address neither
aggregate welfare nor inequality, seems of little practical or
conceptual use

 This modern definition of utility has nonetheless been the

dominant measure of human welfare used in mainstream
economic theory since 1930s onwards till 1990s.

 Measurement becomes increasingly central to the field of

economics & aggregate welfare begins to be defined ---------

 in terms of money, or, more specifically, as national income

per capita (ironically, a practice that violates neo-classical
utility theory, as will be analyzed).

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 The Fragility of Goodness 1986

 Modern theorists including Martha Nussbaum, John

Rawls, and Amartya Sen revised these concepts.

 The history of economic thought leading up to Sen’s

‘Capabilities Approach’ to human welfare and Idea of
‘Freedom of Choice’ – dominates the modern
Development Debate

A Theory of Justice 1971

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 Translating to Policy
 In 1990, UNDP transformed the landscape of development
theory and discourse, measurement, and policy.

 Published first annual Human Development Report (HDR) &

Human Development Index(HDI).

 HDR 1990 presented the concept of “human development” as

progress towards greater human well-being, and provided
country-level data for a wide range of well-being indicators.

 UNDP’s - HDR expanded measurement and comparison tools

used by governments, NGOs, and researchers, and our
common understanding of development itself.

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 The Human Development Index, (HDI), embodies
Amartya Sen’s “capabilities” approach to understanding
human well-being,

 Emphasizes importance of ends (like a decent standard

of living) over means (like income per capita).

 Key capabilities are three important ends of

development: access to health, education, and goods.

 Empowered by these, and other, capabilities, individuals

can achieve their desired state of being.

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Development As an Idea!

Deals with --------------- People

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Development Economics
as An Experimentation---- Economy

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Growth of Development
As an Idea & An Approach
 People Focus vs. Economic Focus has been the major
dividing line.
Colonial Times

 Colonies largely served either as source of Raw Materials or

Market for Finished Products.

 Development as a social need therefore was never a priority

theme during the Colonial Order.

Post Colonial Times

 From Bentham to Amartya Sen therefore there is a two

century Time Line Gap for the idea of Development to mature.
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Evolution of Development Idea!

 Around 2nd World War most countries became independent.

 It was an apprehension that the newly independent countries

might see & connect their ‘Underdevelopment’ to their
colonial experience & down grade western model of
governance gives rise to western interest in analyzing the
issue of underdevelopment.

 Also there was western fear that independent States might

evolve their native solutions/interpretations to the issue of
development vs. underdevelopment encouraged western
interests in analyzing the issue of development.

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 Essentially therefore, the idea of Development begins to take intellectual interest
only after 2nd World War. Within this, there were two parallel economic thoughts
coexisted i.e. Traditional Approach vs. Welfare Orientation.

Traditional Approach

 Defined Development strictly from Economic Point of View.

 Proposed sustained annual increase in GNP varying from 5- 7%.

 Also changes in Structure & Composition of Production & Employment leading

to growth / expansion of Manufacturing base & Tertiary Sector.

 Coupled with decline of production/Employment in Agriculture Sector.

 Means greater Industrialization at the cost of Agriculture.

This should Lead to --------
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 Poverty Elimination.
 Employment Generation.
 Reduction of Economic Inequality.
 These are of passing importance & shall naturally happen as
industrialization occurs.
Classical Economists

Poor countries in Development Economics are variedly referred Adam Smith,

as Backward / Under Developed / Less Developed / Developing.
Jean-Baptiste Say,
The choice of label largely depends on the sensitivity of the David Ricardo,
audience or platform or the analysts (Jagdish Bhagwati). Thomas Malthus &
Since first three labels arrear derogatory & offensive, now John Stuart Mill
largely all the underdeveloped countries are referred as Karl Marx
Developing Nations & Keynes too
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Rosenstein-Rodan
Ragnar Nurkse- RN

Welfare Economics
Revisited
Growth
vs.
Development
Kurt Mandelbaum
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Robert Solow  The need to mobilize savings,

 The need for infrastructure,

 The extent of disguised rural

unemployment,

 The need for calculating inter-

industry calculations and
anticipating the use of input-
output analysis.

Kurt Martin moved to Manchester and with his colleague W. Arthur Lewis
helped establish the Department of Economics at the University of Manchester
as a major center in Development Economics research and teaching. After
retiring from Manchester he worked for a further seventeen years at the
Institute of Social Studies at The Hague.
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 Growth &
Development
Debate
Michael Todaro
Paul Baran Thorstein Veblen

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 Viner- noted opponent of John Maynard
Keynes during the Great Depression.

 Agreed for Keynesian Govt. Spending

Approach, Viner argued that Keynes's
analysis was flawed and would not stand in
the long run.

 Worked on economic modeling of the firm,

including the long- and short-run cost curves.

 Viner is known for "trade creation" and

"trade diversion" approach in 1950.

 His most influential work, Studies in the

Theory of International Trade (1937) on
Terms of Trade(TOT)

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Classical Vs. Neo Classical
Value of a Product  The value of a Table, for example, was
thought to depend on the costs
involved in producing that Table.
Value
 The output or product of an economy
Theory
was thought to be divided or distributed
among the different social groups in
Distribution accord with the costs borne by those
Theory groups in producing the output.

 This roughly, was the "Classical

"value" so defined has problem - ? Market at times can pay more than the "worth“ which
challenges the Classical ‘theories of value’, Approach Fundamentals.

Gradually it gave way to a perspective in which value was associated with the relationship
between the object and the person obtaining the object.
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 The classical "substance" theories of value, which took value to be
a property inherent in an object, begins to be rejected.

 Several economists around1870s - 1880s began to base value on

the relationship between costs of production and "subjective
elements," later called "supply" and "demand."

 This came to be known as the Marginal Revolution in

Economics, and the overarching theory that developed from
these ideas came to be called neoclassical economics.

 American Economist Thorstein Veblen first used the term

"neoclassical economics” in 1900.
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 Synthesizing Smith to Sen
Economic Development Economic Growth
Implies changes in income, savings,
Economic growth refers to an increase in the
investment & progressive changes in socio-
Implications real output of goods and services in the
economic structure of country
country.
(institutional and technological changes).
Development relates to growth of human capital Growth relates to a gradual increase in one of
indexes, a decrease in inequality figures, & other the components of GDP: consumption,
Factors
structural changes that improve the general government spending, investment, net
population's quality of life. exports.
Qualitative. HDI (Human Development Index),
Quantitative. Increase in real GDP. Shown by
Measurement gender- related index (GDI), Human poverty
index (HPI), infant mortality, literacy rate etc. PPF/ LIC etc.

Brings qualitative & quantitative changes in the

Effect
economy
Brings quantitative changes in the economy
Concept Normative concept Narrower concept than economic development

Economic growth is a more relevant metric for

Economic development is more relevant to
progress in developed countries. But it's widely used
Relevance measure progress and quality of life in developing
in all countries because growth is a necessary
nations.
condition for development.
concerned with structural changes in the Growth is concerned with increase in the economy's
scope
economy output
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Development Economics
as An Experimentation -------
 Shall Deal with What Causes Development
& Underdevelopment.

 Also Analyze What are the Obstacles to

Development

 Distinction between Growth &

Development etc.

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Human
Capital

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 Economic development is a normative concept i.e. it applies in the
context of people's sense---.

 Michael Todaro defines economic development as “an increase in living

standards, improvement in self- esteem needs and freedom from
oppression as well as a greater choice”.

 HDI by far is more efficient instrument for measuring development &

takes parameters like literacy rates & life expectancy which is linked to
productivity and could lead to Economic Growth.

 It also leads to the creation of more opportunities in the sectors of

education, healthcare, employment and the conservation of the
environment.

 Human Capital Focus

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 OBSTACLES TO GROWTH AND DEVELOPMENT

 Objective ?

 To understand the factors which impede the process of economic

development of certain countries (under-developed/poor countries)
by:
1) explaining theories of why some countries continue to remain poor
and under-developed.
2) thereafter discuss certain factors and processes which impede
economic growth and development.

Development Economics
19th Jan 2014
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Theory of under-development :
Vicious Cycle of Poverty Theory
[Background] Rosenstein-Rodan (1943) suggested that in case of
under-developed countries there were a number of factors which
worked in complementary ways in order to create obstacles to
development.

(Ragnar Nurkse’s vicious circle)

Ragnar Nurkse (1953) took Rosenstein-Rodan’s
analysis further by proposing that under-developed
countries are unable to develop because they face ‘a
circular constellation of forces which tend to act
and react upon one another in such a way as to
keep a country in a state of poverty’.
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How???

 Many disadvantages (factors or events) come together to work

collectively in a circular process making it difficult to break;
i.e. vicious circle.
 Once these factors set into motion they reinforce each other to
create a low-level equilibrium (a sub-optimal functioning) which
results in a ‘poverty trap’ or a ‘development trap’ which
perpetuates poverty and economic stagnation.

 Through this idea he drew attention to economic dynamics (the

relationship between various factors) which perpetuate under-
development.

 Nurkse argues that as a result of this, growth promoting incentives

get distorted and the status quo is perpetuated.
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 Implications on capital accumulation: The most serious effect
of the vicious circle is in its operation to prevent the
accumulation of capital which is vital for the economy to
develop.
 This occurs in two ways:
Supply-side
 The ability to save in poor countries is curtailed because
much of the income is spent on survival; as a result of this,
the supply of capital for investment is low.

 Thus the availability of capital for development is low.

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Demand-side
 Agriculture and industry are characterized by low levels of productivity in
poor countries.

 Low levels of productivity result in low returns. Low returns imply low
incomes and this means lower disposable incomes.

 This in turn means that the size of markets is constricted. A small market
means that the incentive to invest (demand for capital) in the market is low.
[Prescription]
 Nurske advocated that the solution was ---
 Balanced economic growth;
 Coordinated investments in multiple sectors of economy which he said would
eventually create a virtuous circle moving the economy out of stagnation.

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 Factors & Processes which impede
economic development
1) Low levels of capital formation [Why?]

1. Persistence of feudal relations of production: [Which results in...]

A. The tenants lose their surplus production, which cannot be then re-invested to
modernize agriculture,

B. land-lords use rents to live lives of conspicuous consumption which means that
neither agriculture is modernized nor the surplus invested in non-agricultural
sectors.

2. Supply-side constrains Low incomes imply low savings and this means that the
availability of capital is low for making investments in the economy. Further the small
size of the economy means that investors are reluctant to invest as returns are likely to
be small.

3. Demand-side constrains Demand for capital is also low in these countries because
markets are either small or not well developed.
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2) Inappropriate technology

a- Persistence of traditional technologies

b - Problems with imported technologies

 Technology may not be suited for third world conditions.

 Repeated reliance on imported technologies impairs the local capacity for

innovation. Green Revolution Case

 Rarely have developing countries developed a competitive edge in capital

goods which have been produced by using imported technology.

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– 3) Population explosion

a) As these countries develop, they undergo a demographic transition where

mortality rates decline but fertility rates remain high, and the two take
many decades to stabilise.

b) Many argue that as a result, the gains of development are negated.

 [Some argue] that if the fertility rate leads to increases in the labour force,
then this will not have a negative implication on overall development (Coale
& Hoover).

 [Others criticise this] saying that the creation of employment is itself a

serious problem in these countries and therefore the ability of the economy
to absorb additional labour numbers is limited.
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 – 4) Political and Administrative Obstacles [How?]

1. Long periods of colonial rule have impaired the development of their political
institutions:
 Many have inherited colonial administrative structures which are not effective
for economic development.

2. Many developing countries face political instability which creates a disincentive for
investment and business.

3. In many political systems, powerful interest groups (landed interests, cartels

fundamentalists, etc.) operate which impair economic development.

4. In democracies, the management of various interests becomes difficult when

making economic policy.

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5. Inefficient and corrupt administrations impair economic
development.

6. While PSUs / MNCs have played an important role in the

development of many third world countries these have often
become inefficient and corrupt over a period of time.

5) Socio-cultural obstacles

 Sociological analysis on the process of development has focused

on the role of social values, attitudes and beliefs in terms of their
effect on economic development.
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 [One view]: is that prevailing social attitudes and institutions are
responsible for India’s poverty and backwardness (Vera Anstrey &
L. C. A. Knowles).

 [Alternate view]: that the prevailing structure of production (i.e.

the manner in which economic production is organised)
determines the super-structure (i.e. the cultural system of values
and institutions in society) (Marx, Leon Mears and Adamantios
Pepelas).

 According to this view, the prevailing socio-cultural system in

India would be a reflection of the backward level of economic
development.
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"Max" Weber (Karl Emil Maximilian) was a
German sociologist, philosopher, and
political economist whose ideas
influenced social theory, social research,
and the entire discipline of sociology.

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– 6) External bottlenecks
Refers to the option of export led growth
• Neo-classical view – HO Model or
Factor Endowment Model

• According to the Heckscher-Ohlin trade theory if every country

focuses on the production of those commodities which embody
those factors which they possess in abundance (labour vs.
capital) then if the two trade it would benefit each other more
than if they tried to produce both commodities.

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[Alternative views]
• Gunnar Myrdal argues that free trade mainly benefits developed countries and
further it results in limiting industrialisation of third world countries .

Gunnar Myrdal
Swedish Nobel Laureate Economics
Asian Drama – An Inquiry
into the Poverty of Nations
Published in 1968,

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 Myrdal’s book was about the countries of South & South East Asia. He was
pessimistic about their development prospects. His analysis & pessimism was
mainly focused on India, but he extended this to Indonesia & other countries as
well.

 He believed that traditional power structures were likely to persist, but unless
there was change, the chances of economic take-off were slim. He believed that
governments in the region were too “soft”–

 Coined the term ‘soft state’ – unable to enforce the discipline that was needed
to implement their development plans.

 Concluded reluctantly that democracy might not be the best system for
achieving this and – overriding his concern for individual liberty – that
authoritarian regimes might do it better.
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Raul Prebisch argues that free trade has mainly proved beneficial to
countries with a large industrial base while developing countries have
incurred deficits in their Balance of Payments (BoP) and deteriorating
Terms of Trade (ToT).

Thomas E. Weisskopf proposes a centre-periphery dynamic where

post-colonial economic growth and industrialisation is propelled by
foreign capital and techniques rather than indigenous capital and
technology. In this respect the types of products and techniques are
based on conditions dictated by the centre.

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Obstacles for Development-

1) Low levels of capital formation – Economic & Structural

2) Inappropriate technology- Economic & Tech
3) Population explosion- Socio-Political
4) Political and Administrative Obstacles- Political & Structural
5) Socio-cultural obstacles - Socio
6) External Bottlenecks – Economic

Solution The Problem State therefore is two fold-

therefore has
to in both the 1. Economic & Structural
areas. 2. Socio-Political
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REFERENCES

Misra, S. K. and Puri, V. K. (2010), ‘Obstacles to Growth and

Development’, in Development and Planning: Theory and Practices, 13th
ed. Himalaya Publishing House Pvt. Ltd. Mumbai, pp. 72-82.

Perala, M. J. (2011) ‘Early Development Theory from Sun Yat Sen to

Ragnar Nurkse’, in Ragnar Nurkse (1907-2007): Classical Development
Economics and Its Relevance Today, eds. R. Kattle, J. A. Kregel, E. S.
Reinert, Anthem Press, London, pp. 90-97.

Thank You
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