SEM-VI/ECO DEV/ Unit-1/Economic Development: Meaning/Income & Capability Approach

Before 1970s, growth in per capita income or national income of a country was considered to be the
indicator of economic development of any country. However, economists like Arthur Lewis, Theodore
Schultz, Dudle Seers, Denis Goulet, etc. gave emphasis on the qualitative aspects of economic progress of
a country alongwith some quantitative aspects. Thus, the factors such as poverty, unemployment, income
inequality, malnutrition, infant mortality, gender inequality, etc. also received some importance in the
analysis of economic prosperity of a nation. If the process of economic growth of a country improves the
standard of living of the common people and if it leads to some positive reforms in the social and
economic infrastructure of the country, then that growth process would signify economic development of
the country.
According to Walter Elkan, “Economic development is a process which makes people in general better
off by increasing their command over goods and services and by increasing the choices open to them.”
Economist like Michael P. Todaro and Stephen C. Smith are of the opinion that “Development must ...
be conceived 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.”
So, it become evident that in the process of economic development, the purchasing power of the common
people of a country should rise alongwith the rise in per capita income so that they can consume different
goods and services in accordance with their preference pattern. Further, this process should accompany
necessary changes in social taboos and institutions that often stand in the way of some positive changes in
the production structure. There should also be a decline in unemployment, poverty, malnutrition,
illiteracy, etc. in the society.
Denis Goulet has indicated three core values of economic development :
(a) Life sustenance (i.e., continuous supply of minimum necessities of life) ;
(b) Self-esteem (i.e., development of self-respect) ; and
(c) Freedom from poverty and ignorance.
Hence, it can be safely said that economic development = An increase in per capita income & purchasing
power
+ Increase in per capita consumption
+ Increase in average life expectancy at birth
+ Expansion of economic infrastructure
+ Fall in poverty & unemployment
+ Fall in infant mortality rate
+ Fall in illiteracy
+ Fall in the inequality in income distribution etc.
Thus, economic development is a broader concept compared to economic growth.

Measuring Economic Progress in terms of income growth: Income-based approach

Continuous expansion of national output or per capita output in any economy signifies economic growth.
Economic growth indicates the quantitative aspect of economic progress of a nation. Generally, an
increase in the growth rate of GDP (Gross Domestic Product) or per capita GDP reflects the economic
growth of a country.
According to Kindleberger, continuous expansion of national output through the efficient utilization of
economic resources of a country, can be considered as economic growth of that country.
While defining economic growth, Simon Kuznets states that economic growth of a country means “... a
long-term rise in capacity to supply increasingly diverse economic goods to its population”, and this
growing capacity is based on advancement in technology and the institutional and ideological adjustments
that it demands.

Dr. D.Mazumdar, Professor & HOD, Eco, THC 1

According to Thirlwall, an increase in real national income of a country signifies its economic growth.
An increase in national income in money terms (i.e., nominal national income) may not signify such
growth since this increase can happen because of an increase in the average price of different goods and
services without any corresponding rise in national output. Hence, growth in real national income, i.e.,
valuation of national output at constant prices, is supposed to be more relevant for measuring economic
growth of a country.
Thus, we can now consider the following indicators of economic growth of a country :
a) Sustained increase in real national income or national output of a country,
b) Sustained rise in the productive capacity of different sectors (say, agriculture, industry, etc.) in an
economy so that the country would be able to supply different goods and services to fulfil the
growing needs of the people.
c) Sustained increase in per capita real income of the country (i.e., the increase in real national
income becomes more than the increase in the population of the country.)
Now, based on several estimates of national income of a country, we can show the income-based growth
indicators :
a) Growth rate of GNP (Gross National Product) per annum (p.a.) of a country ;
b) Growth rate of real GNP p.a. of a country ;
c) Growth rate of NNP (Net National Product) p.a. of a country ;
d) Growth rate of real NNP p.a. of a country ;
e) Growth rate of GDP (Gross Domestic Product) p.a. of a country ;
f) Growth rate of NDP (Net Domestic Product) p.a. of a country ;
g) Growth rate of per capita income of a country ;
h) Growth rate of per capita real income of a country.

The reasons for considering growth in real national income or per capita real income as true
indicator of economic growth of a country, are as follows :
(a) An increase in real national income actually signifies an increase in national output during any
particular time period.
(b) An increase in per capita real income implies that the growth in real national income has been more
than that in total population of a country.
We can also show that the growth rate in national output depends on : (i) the productivity of capital, and
(ii) the proportion of investment in national output.

Let Y = Real National Income of a country at any particular time period,

∆Y = Change in Y during any period,
∆Y
g = Growth rate of Y =
Y
∆K = Change in the stock of capital during any time period,

I = Investment made during any particular time period (where ∆K = I),

∆Y
= Change in Y due to a change in K, or the marginal productivity of capital.
∆K
∆K
= Incremental capital-output ratio (i.e., amount of additional capital needed to produce one additional unit of
∆Y
output).
If Y t = Rs.1,000 crore at the time period t, and
Y t + 1 = Rs. 1,050 crore at the time period t + 1,
then Y t + 1 – Y t = ∆Y = 1,050 – 1,000 = 50

Dr. D.Mazumdar, Professor & HOD, Eco, THC 2

 ∆Y 50
=
So, g = Growth rate of Y = ×100 =5%
Y 1000
∆Y ∆Y ∆K 1 I 1 i
Again,g= = × = × = ×i = where i = Investment-income ratio, and v =
Y ∆K Y ∆K Y v v
∆Y
Incremental capital-output ratio. Economists like Harrod and Domar estimated economic growth in the
manner stated above.
Here, given the value of v, an increase in i would lead to an increase in g. An improvement in capital
productivity can also lead to a rise in g.

Again, if P = Total population of the country at any particular time period.

Y
then = Per capita real national income of the country at that time period.
P
Y
If the growth rate in ‘Y’ becomes more than that of ‘P’, then will rise.
P
Y
From the above discussion it becomes clear that if =m
P

Y 
then log(m)= log   =log(Y) – log (P)
P

∂ (log m) ∂ (log Y ) ∂ (log P )

So from total differentiation of this function we get: .dm = .dY − dP
∂m ∂Y ∂P

dm dY dP
Or, = −
m Y P

dm dY dP
Hence, > 0 if > . Thus, the growth rate of output has to be higher than that of population to ensure a
m Y P
positive growth of per capita output.

This can also be explained in terms of the growth of average productivity of labour. We can write

Y Y L Y
= × where L= size of the work force, and = AP L .
P L P L

Y
Now, given, L/P, if there is an increase in = AP L , then per capita output will increase.
L

So far the Classical Theory is concerned, the gloomy pessimistic approach of Ricardo, Malthus
and Mill shows that economic progress will ultimately end in stagnation. But this approach
seems to be unfounded. The population growth and diminishing returns have not been uniformly
depressive to the extent that Ricardo and Malthus supposed. The Classical development
economics greatly underestimated the beneficial role of technological progress and
international trade in the development process. However, the neo-classical economics has taken

Dr. D.Mazumdar, Professor & HOD, Eco, THC 3

into account the contribution of those factors in the growth process. However, the neoclassicists
believed that the growth the per capita real GDP is the true indicator of economic development
of any country. This view was challenged by the modern proponents of development economics
during 20th century (say, Hollis Chenery, Paul Krugman, Gunnar Myrdal, Theodre Schultz,
Joseph Stiglitz, etc.).

Per Capita Output (PCO) as an indicator of economic development—A debate.

Generally economic growth of a country is defined as substantial and sustained increase in the PCO.
There are two aspects of this definition: (1) Rise in PCO must be substantial so as to improve the standard
of living of the average people and (2) The increase in PCO must be sustained so as to make it different
from cyclical fluctuations in income.
The neo-classical approach to economic development identifies the process of development with the
growth rate of PCO. They believed that with the growth in PCO, different sections of people can equally
benefit from such income growth. This is known as the ‘trickle down’ theory of growth.
But the modern development economists believe that the PCO cannot be regarded as the true indicator of
economic development of a country. They have emphasized on some non-monetary aspects of economic
progress which show the improvement in the physical quality of human life as well as in human
capabilities. Some social variables like education, health and nutrition are given more importance in
explaining the development process. In fact, economic growth based on the growth rate of PCO is only
one aspect of the whole process of economic development.
We can now indicate some basic difficulties in treating the PCO as the true indicator of economic
development of any country:
(1) Problem associated with the national income accounting: In most of the Less Developed
Countries (LDCs) a large part of the national output is used for home consumption (particularly in the
subsistence sector) and that part of output is not marketed. To that extent, the national income (NI) is
under-estimated. If no allowance is made for the subsistence sector, this will lead to a downward bias
in the estimation of NI. In such cases, inter-country comparison of development on the basis of their
respective PCOs might be misleading. Again, proper selection of price index can create problem in
estimating the real GDP from the nominal GDP. Further, difficulty also arises due to the improper
maintenance of statistical data in the unorganized sector of the LDCs.
(2) Greater weightage to high-priced goods: If goods with high prices (say, costly luxury items)
receive greater weightage in NI accounting, then growth rate might be biased upwards. But this
growth does not ensure greater supply of mass consumption items in LDCs. Thus, the GDP growth
indicates very little about the content of growth.
(3) Problem in representing the income distribution pattern: The PCO of a country may grow but
along with this the income distribution pattern may become more unequal. For instance, the per capita
GNP of Brazil was more than doubled during 1967-87, but income inequality also increased in Brazil
during that period (The Gini coefficient of income inequality increased from 0.6 to about 0.7). Hence,
the PCO cannot be regarded even as the crude indicator of income distribution.
(4) Conceptual and statistical inadequacy: The PCO of a country cannot also be considered as an
index for measuring the incidence of poverty in any LDC due to some conceptual and statistical
reasons. According to Hla Myint, conceptually the standard of living in a country depends more on
per capita consumption expenditure rather than the PCO. Again, statistically, the PCO is only a
simple arithmetic mean. So, it is not a true reflection of the standard of living of each people in the
country.
(5) Level of unemployment is not reflected: High rate of PCO growth does not also reflect the level of
unemployment in an economy. Because that high rate of PCO growth might be achieved by the
introduction of labour-saving technology in a labour-surplus economy. In a globalised world, the
PCO of any LDC may grow due its greater connection with world market through trade and
commerce. But in this process it also becomes more volatile to the fluctuations in the demand and

Dr. D.Mazumdar, Professor & HOD, Eco, THC 4

 supply in the world market. This also affects the employment situation. The recent global financial
crisis(which started from USA and other European countries) affected the employment situation in
many LDCs.
(6) The productive capacity of the country is not reflected: the growth rates of GDP or per capita
GDP do not even provide the measure of productive capacity or economic self-reliance of a country.
A.P.Thirlwall has indicated that a country with low PCO may show different growth possibilities: (a)
it may have enormous future growth possibilities based on its indigenous resources, (b) it may have
lower future growth possibilities due to resource constraints, (c) it may have enough resources but its
PCO may remain relatively stagnant, etc.
(7) Difficulty in making comparison between the living standards of different countries: There may
be under-statement of living standards in LDCs when their NIs measured in local currencies are
converted to US $ at official exchange rate. If US $ is used as an unit of account, then per capita GDP
of a country is given by (per capita GDP) ÷ official exchange rate. For instance, if per capita GDP=
Rs. 30,000/- in India and the official exchange rate is US $ 1=Rs.50 then India’s per capita GDP in
terms of US $ would be Rs.30,000 ÷ 50 = $ 600. If living standards in two countries are to be
measured by this method then it must be assumed that Rs.50 in India can buy the same living
standard as US $ 1 in the USA. But this official exchange rate is not a good measure of Purchasing
Power Parity (PPP) between countries. (A country’s PPP is defined as the number of units of
country’s currency required for buying the same amount of goods and services in the domestic market
as a dollar in the USA). Let us suppose that a hair cut in a beauty parlour in USA costs $ 10 and the
same style of hair cut in beauty parlour of India costs Rs. 200. It implies $10 = Rs.200 or $1 = Rs.20.
In that case, India’s per capita GDP in terms of US $ would be Rs.30,000 ÷ 20 = $ 1,500. Thus, the
true value of India’s per capita GDP is understated at the official exchange rate. Though the World
Bank and the UNDP measure the per capita GDP of different countries of the world in terms of PPP $
for comparison, still there remains some difficulties. There arises difficulties of finding comparable
baskets of goods for the purpose of comparing the purchasing power between countries.
(8) Environmental degradation is not reflected: Increase in GDP or per capita GDP of a country does
not also reflect the level of environmental pollution created out of that growth process. Modern
development economists believe that the increase in the per capita GDP in a country can be achieved
at the cost of growing environmental pollution and ecological imbalance. It badly affects the process
of sustainable human development in any country. So, they now emphasize on ‘green GDP’.
(9) Problem of dependency not reflected: Economists like Paul Baran and Andre Gundre Frank have
indicated that the PCO of any LDC may grow. But in that process it might become more and more
dependent on some developed capitalist countries that would ultimately lead to net outflow of
resources from the LDC to the developed countries.
(10) Some arbitrariness in separating the developed countries from the developing countries:
Problem also arises in using the PCO for separating the developed countries from the developing or
less developed countries. Several modern economists feel that this process (often followed by the
World Bank) seems to be somewhat arbitrary in nature.

Due to all such difficulties PCO is not treated as the true measure of economic development of any
country.

Economic development in terms of entitlement and capability

Amartya Sen has explained the concept of economic development on the basis of the concepts of
‘entitlement’ and ‘capability’. In his book ‘Poverty and Famine — An Essay on Entitlement and
Deprivation’, he has given a lucid explanation to these concepts. In any economy where the right to own
private property is accepted, entitlement over some endowments or income-earning assets can be created
in the following ways :

Dr. D.Mazumdar, Professor & HOD, Eco, THC 5

 a) Trade-based entitlement or exchange entitlement: Some people may enjoy the right to consume
some goods and services which they have received in exchange of some other goods and services
owned by them.
b) Production-based entitlement : Some people can use their own factors of production or some hired
factors to produce some goods and services, and they are entitled to use or sell those goods and
services produced by them.
c) Own labour entitlement : Any worker has an entitlement over his/her own labour power, and
he/she can earn money income in exchange of this labour power.
d) Inheritance and transfer entitlement : If someone inherits some property, then he or she is entitled
to use that property.
In any market economy where the people are to acquire different goods and services at market prices in
exchange of the labour power or the goods or services possessed by them, exchange entitlement
becomes important.
Amartya Sen further believes that this exchange entitlement is again determined by the following
factors :
i) the employment opportunity, the security of employment and the wage rate ;
ii) the market prices of the products to be purchased by a person, and the market price of the product to
be sold by that person ;
iii) the type of product that can be produced with the help of labour power, and the type of factor or
resource he/she can purchase or command ;
iv) the market prices of the factors of production to be purchased from the market ;
v) the type of social security enjoyed (e.g., pension, unemployment benefit, etc.) and the type of taxto be paid.

Thus, a country is said to be more developed that experiences an expanded exchange entitlement for the
maximum part of the people.
Amartya Sen has also emphasised on the concept of ‘capability’. According to him, “the freedom that a
person has in terms of the choice of functionings, given his personal features and his command over
commodities”.......can be termed as capabilities.
The concept of ‘functionings’ of a commodity for any individual becomes very important at this juncture.
For example, a normal bi-cycle is useless for a person who is physically challenged; an English novel is
of no use to an illiterate person ; and so on. Thus, even when a person is entitled to have some resources,
that entitlement is not sufficient to improve his/her well-being. Further, depending upon the social,
economic and climatic environment, the functionings of a particular commodity may be different for
different persons. For example, the clothes used by some tribal people in the desert regions would be of
no use for the Eskimos.
Entitlement over
Endowments Health facilities
Educational facilities

Capacity of converting the characteristics of different commodities

into their functionings

Capability
Amartya Sen believes that when any person is able to purchase a commodity and can convert the
characteristics of that commodity into its functionings with his or her knowledge and physical health, they
only the entitlement over a commodity can lead to well-being of any person.
In any society, when maximum number of common people enjoys the freedom of choosing from among
different goods and services according to their needs, and can properly use those goods with their
improved knowledge and health, then that would imply ‘capability’.Thus, economic development can be
defined as an expansion of capability.

Dr. D.Mazumdar, Professor & HOD, Eco, THC 6