Development Economics

Answer Script

Section: A
Part a.) The capabilities approach was first articulated by the Indian economist and philosopher
Amartya Sen in the 1980s and remains most closely associated with him to this day. It has been used
extensively in the context of human development, for example by the United Nations Development
Programme, as a more in-depth alternative to purely economic metrics such as GDP per capita
growth. “Poverty” is understood here as deprivation of the ability to lead a good life, and
“development” as an increase in ability.
Definition By Sen
The capability approach is defined by its decision to focus on the moral significance of an
individual's ability to live the kind of life he or she can reasonably appreciate. This distinguishes them
from more established ethical appraisal approaches such as utilitarianism or resourceism, which
focus exclusively on subjective well-being or the availability of means for a good life. A person's
ability to lead a good life is defined in terms of the set of valued "beings and actions," such as B.
Good health or loving relationships with others to whom they have genuine access. In the philosopher
Martha Nussbaum delivered the most influential version of such an ability theory of justice derived
from the requirements of human dignity. a list of core capabilities to be embedded in national
constitutions and guaranteed to all up to a certain threshold. The development of the capability
approach of Sen first introduced the concept of ability in his Tanner Lectures on the equality of what?
(Sen 1979). (This was the original basis for Nussbaum's alternative capacity theory), with Adam
Smith and with Karl Marx. Marx discussed the importance of functioning and ability to human well-
being. For example, Sen often cites Smith's analysis of relative poverty in The Wealth of the Nation
regarding how a country's wealth and different cultural norms affected what material goods were
understood as "needs." Mastery of circumstance and chance over the individual through mastery of
the individual over chance and circumstance”.
Sen's Concerns
The capability approach attempts to address several concerns Sen had about contemporary
approaches to assessing well-being.

 Individuals can vary widely in their abilities to convert the same resources into valuable
functioning ("being" and "doing"). For example, people with physical disabilities may need
specific requirements to be mobile, and pregnant women have specific nutritional
requirements for good health. Therefore, an assessment that only focuses on the means
without considering what specific people can do with them is insufficient.
 People can internalize the harshness of their circumstances so that they don't want what they
hope never to achieve. This is the phenomenon of 'adaptive preferences', where people who
are objectively very ill say, for example, believing that their health is fine. Therefore, an
assessment that focuses only on subjective mental metrics without considering whether this is
consistent with what a neutral observer would perceive as his or her objective circumstances
is insufficient.
 Whether or not people use the options they have, the fact that they have valuable options
matters. For example, while the nutritional status of fasting and starving people is the same,
the fact that fasting is an option to not eating should be recognized. Therefore, the evaluation
must be sensitive to actual performance ("functioning") and freedom ("ability").
  Reality is complicated, and the assessment should reflect that complexity, rather than taking
a shortcut by excluding all types of information from consideration beforehand. For example,
although it may seem obvious to that happiness is important in judging how well people are
doing, it is not at all obvious that it should be the only aspect that matters and therefore
nothing else should be considered will. Therefore, the assessment of how well people is doing
should be as open as possible. (Note: This leads to a deliberate "under-theorizing" of the
capability approach, which has led to some criticism and led to the development of
Nussbaum's alternative capability theory.
"Capability type" refers to the three different levels, such as Maintaining the specified level of
performance and staying consistent (i.e., maintainability) Improving performance to some extent (i.e.,
improvability) Providers must be able to develop capabilities (i.e., capacity to improve)., evolutionary
capacity) based on the dynamic environment. The "scope of activity" refers to the expected spectrum
defined for the development of the provider. It can be on a broader scale, considering production and
non-production areas. The field of activity is constantly expanding over time. Therefore, the nature of
the capability spans maintenance, improvement, and advancement, and the scope of activity includes
the component production line, organization life, and other non-manufacturing areas, etc.
Part c.) Rostow was an American economist. According to him, economic development requires
going through the 5 stages of development. These 5 phases are the main process of economic
development. Rostow's 5 stages of economic growth are:

 Traditional Society – In this society, agriculture is the main activity and there is not much
technological advancement. And due to the lack of technology, there is labour-intensive
production. The products produced are self-consumed and no formal trade is introduced.
 Transitional Stage (Preconditions for Take-off) – Trade is gradually developing here and
there are also small manufactures. As trade improves, there is obviously a development in
transportation. There are also advances in people's thought processes and small business
owners are evolving. There is also a trend towards centralization.
 Take Off – This is the level wherein we will see a seen shift from agriculture to
manufacturing. As a result of this industrialization, political and financial system, begins
evolving accordingly. Since there may be extra earnings and investments, the financial
savings additionally increases. So, this level may be referred to as self-sustaining.
 Drive to Maturity – Industries are beginning to diversify, and this is their phase of urban
growth and technological advancement. The level of foreign trade also shows a visible
change.
 High Mass Consumption- Here is the stage of completed urbanization and intense
technological advancement. People's consumption styles are changing and there is more
luxury spending. Many multinational companies are formed, and foreign trade is increasing.
The service sector is also gaining in importance.
At present, developing countries do not have to go through these growth phases. A country's growth
depends on its resources, and countries may not always follow these five stages exactly. Foreign
policy and international organizations play a very different role today, and foreign aid plays a very
important role in a country's development. In addition, many developing countries receive advanced
technological assistance from developed nations long before they become technologically better.
The Rostow growth phase model has best described India's economic development situation in the
post-exit scenario phase, with technology as the core and focus area. Positive attitude and approach
to technical understanding with an established mindset in which training and adaptation to different
needs and mandatory business proposals are included. To provide a clear picture of the trends in the
Indian economy based maximally on agricultural productivity contributing to the country's GDP.
There are many regional differences in the Indian economy as the Rostov stages of the growth model
represent and place India between Stage 3 (Take-off) and 4 (Drive to Maturity). Urbanization has
increased with industrial change and fuelled by technological investments made mainly to boost the
economy. With the expansion of living standards with better services and health and insurance
benefits that have really improved economic and living conditions.

Part d.) Harris-Todaro migration model suggests that movement from provincial to urban areas
depends primarily on the distinction between rural and urban labour markets. Urban pay is
consistently higher than market equilibrium levels due to variables such as workers and government
policies such as lowest legal wage, pension design and unemployment benefits. Additionally,
companies set higher wages than other alternatives, with the specific end goal of attracting higher-
skilled workers and firing specialists who turn out to be mediocre. They generally buy a motivator for
profitability. In this sense, the pay in the urban segment is constantly set above the advertising
balance and the salaries in the provincial segment, on the other hand, are lower than the harmony
due to the surplus labour that this salary premium generates. This salary discrepancy makes regular
compensation unthinkable, as there is still a motivator to move to the higher salary bracket. The
group of undeclared workers of that Territory you spoke to should join the rural segment and reduce
wages to the lower limit above or face unemployment in the formal sector. Workers must decide
whether to relocate to their farm salary, considering their normal estimate of income in the formal
sector and the likelihood of employment. Urban migration will occur when the level of people
employed in the urban segment, doubled by the wage rate, is more pronounced than the rural
segment wage rate (equivalent to peripheral efficiency).

Academic Connotation of the Model:

While this measure is a decent predictor of predicted performance through labour redistribution, it is
believed to minimize the real social cost of using labour, which has other components that are likely
to be enormous. One of those parts is the powered movement. Push factors for the shift of internal
labour that occurs during the period of economic development from rural to urban. Such a shift may
result from optimal financial improvements in cities or from antagonistic advances in rural areas.
The Harris Todaro program coordinates these two arrangements. of powers in its review of the job
reallocation process likely to take place amid monetary improvement.
Policy Consequences of the Model:
The Harris-Todaro model has far-reaching implications from an arrangement perspective. For
example, if the legislation of the country in question effectively promoted modern advances in an
urban area, business would increase there. The effect is to increase the subjective profitability of
obtaining urban work in the urban area. Psyche of rural renters. Resettlement would increase, and
the inevitable effect of the new modern advance might be that urban unemployment would be above
the level it had reached before the new improvement. There will be a degree of urban work that
guarantees harmony unlike any other movement. It can take a long time for potential viewers to
contact you at an election. You can expect that after waiting a few months, their desire to work in the
city will increase. Therefore, consider the current estimate of the total expected city profit with the
country's expected income. You could be significant for quite some time to spot low wage in the urban
informal sector. This can be a balanced option on a long-haul premise. The basis of the problem is
the large difference between the profits in the advanced mechanical segment and those in the rural
areas. Typically, the above values are well above market clearing levels for changes. provincial
areas, which narrows the true salary disparity between the two areas.
Part e.) Concept of Backward and Forward Linkages:

 Backward Linkage: This concept is explained or defined as a relationship which is founded

by companies with the supplier to share information, knowledge, and financial resources.
Backward linkages are defined as "the growth of an industry that results in the growth of the
industries that supply inputs/raw material to it". For example, the growth of the textile
industry results the growth of the cotton industry, which will lead to higher incomes for
cotton farmers. If the project encourages investment in their earlier stages of production,
then it amounts to a backward linkage.
 Forward Linkage: This concept is explained when the products of one industry are used as
raw materials for another industry. For example, the development of forest resources for
trade and export in timber is prepared the way for the development of a saw-milling industry
using the similar kinds of basic resources-based inputs.
When a plan is commenced or investments are made to promote or incentives investment in future
then it is forward linkage and when efforts are focussed on promoting financing to help a project
succeed in its currently planned position of production, they are referred to as backward linkage.
Normally for industry backward linkages are directed towards suppliers on the contrary the forward
linkages are directed towards consumers. For e.g., in the mill industry, the mill needs feedbacks from
coal mining and iron ore mining. Thus, relation is known as backward linkages. When the steel mill
sells its produce, it needs to develop links with metal fabrication industry, construction companies,
wholesalers, and retailers of steel making, then this indicates the forward linkages for the mill.
The contributions of these two phenomena in our development of economies are:

 They help create remunerative employment opportunities as due to the linkage many
industries grow rapidly.
 They also most certainly help in increasing the foreign exchange reserves of the country.
 Most importantly, they help in allocation of goods and resources with an efficiency. This
results in attaining economies of scale. This phenomenon also supplements the efficiency.
The effect of backward and forward linkages can be explained by using the Indian Software and
Information Technology Services (SWIS) Sector. Our country has shown an enormous growth in IT
services, where the sector employed 2.5 million people with an output of U.S. $60 Billion in 2010-
2011.
From the years 2005 to 2008, the forward linkage has contributed around 15%. Also, 84% of the
inputs purchased from the backward linkage were produced domestically.
The effect of forward and backward linkage has proved positive for the low skilled workers as well
because this sector has generated employment to them in catering, housekeeping, construction,
security, and transport. Therefore, around 3.6 million non-IT jobs were created.
Increase in employment opportunities also created demand for education industry where every year
professionals and engineers were required to run the SWIS industry. Therefore, the influence of
forward and backward linkage has contributed 2.8% and 2.7 % respectively to the GDP and that is a
lot of contribution in such a short duration of time.

Part g.) Demographic transition is a spectacle and concept which refers to the historic shift from
excessive delivery fees and excessive loss of life fees in societies with minimum technology, education
(of women) and financial development, to low delivery fees and occasional loss of life fees in societies
with superior technology, education, and financial development, in addition to the levels among those
scenarios. Although this shift has befell in lots of industrialized nations, the concept and version are
often vague while carried out to man or woman nations because of unique social, political, and
financial elements affecting populations.
However, the lifestyle of demographic transition is extensively everyday withinside the social sciences
due to the well-mounted historic correlation linking losing fertility to social and financial
development. Scholars debate whether industrialization and better earning result in decrease
population, or whether decrease populations result in industrialization and better earning. Scholars
additionally debate to what volume diverse proposed and every so often inter-associated element
along with better consistent with capita income, decrease mortality, old-age security, and upward
push of call for human capital are involved.
The transition entails four stages, or possibly five which are:

 In stage one, in pre-industrial society, death and birth rates are high and balanced. All
human populations are believed to have had this equilibrium until the late 18th century when
this equilibrium ended in western Europe. In fact, growth rates were less than 0.05% in less
than the Agricultural Revolution more than 10,000 years ago. Population growth is usually
very slow at this point as society is constrained by the available food supply. therefore, unless
society re-develops Technologies to increase food production (e.g., discovering new food
sources or increasing crop yields) will soon be offset by fluctuations in birth rates with death
rates.
 In stage two, that in a developing country, mortality rates are falling rapidly due to
improvements in food supply and sanitation that increase life expectancy and reduce disease.
Concrete improvements in the food supply often include selective breeding and crop rotation,
as well as numerous cultivation techniques. Reducing mortality, especially infant mortality.
Prior to the mid-20th century, these public health improvements primarily related to food
handling, water supply, sanitation, and personal hygiene. One of the variables often cited is
the rise in female literacy associated with the public health education programs that emerged
in the late 19th and early 20th centuries. In Europe, the decline in mortality began in north-
western Europe in the late 18th century and spread southward. and in the east for about the
next 100 years. Without a corresponding fall in birth rates, this creates an imbalance, with
countries at this stage experiencing strong population growth.

 In stage three, birth rates are declining due to various fertility factors, such as B. Access to
contraception, rising wages, urbanization, decline in subsistence farming, increased status
and education of women, reduced value of child labour, increased parental investment in
child education, and other social changes. Population growth begins to level off. The decline
in the birth rate in developed countries began in northern Europe in the late 19th century. not
generally available or widely used in the 19th century and therefore probably did not play a
major role in its decline at the time. Importantly, the decline in the birth rate is also due to a
shift in values, not just the availability of contraception.
 In stage four, there are low birth rates and low death rates. Birth rates can fall well below
replacement levels, as has happened in countries like Germany, Italy, and Japan, leading to
population declines, a threat to many industries that depend on population growth. As the
large group born in stage two ages, there is a shrinking economic burden on the labour
force. Mortality rates may remain consistently low or increase slightly due to increases in
lifestyle diseases related to low physical activity and high obesity rates and population aging
in developed countries. By the late 20th century, birth and death rates in developed countries
stabilized at lower rates.
  The original demographic transition model has only four stages, but additional stages have
been proposed. Both the most fertile and least fertile futures were considered Phase Five.
Some countries have sub-replacement fertility (i.e., fewer than 2.1 to 2.2 children per
woman). Replacement fertility is generally slightly higher than 2 (the level that replaces both
parents and finds an equilibrium) because boys are born more frequently than girls (about
1.05 to 1.1 to 1) and to compensate for kills before full spawn. Many European and East
Asian countries now have higher death rates than birth rates. Population aging and
population decline may eventually occur when the fertility rate does not change and there is
no ongoing mass immigration.
Section: B

Answer 1.) Part a.) Statement: According to Harrod-Domar Model, if the capital output ratio in a
country is high, that country will grow faster.
The statement is false. The rate of growth of the economy can be heightened when we reduce the
capital output ratio i.e., increasing the quality and productivity of capital inputs.
Basic Harrod-Domar Model states-
Rate of growth of GDP= Saving ratio/ capital output ratio
With the following numerical examples, it can be proved that low capital output ratio leads to
country's growth.

 When the savings rate is 10% and capital output ratio is 2, then country growth will be 5%
per year.
 When savings rate is 20% and capital output ratio is 1.5, then the country growth will be
13.3% per year.
 When the savings rate is 8% and capital output ratio is 4% then country growth rate will be
2% per year.
Therefore, it is established that keeping capital output ratio at a lower rate and the savings rate at a
higher rate will attain the country a higher percentage of Growth Rate.
Part b.) Statement: Income gap ratio and the head count, as measures of poverty may lead to very
different uses of antipoverty resources by policy makers.
This statement is true.
The poverty gap index which utilizes the income gap ratio is an improvement over the poverty
measure headcount ratio which simply counts all the individuals below a poverty line, in each
population, and believes them equally poor. Poverty gap index estimates the extent of poverty by
contemplating how far, on the average, the impoverished are from that poverty line.
The income disparity does describe the intensity of poverty, but it is indifferent to the capacity of the
poor. The problem has been solved basically by doing the product of H and I and by calling the
outcome HI (Atkinson 1987). The idea is to measure the intensity of poverty by giving both
component’s H and I equal weight in the index, which is often suggested as the "income gap ratio”.
The major fragility of the measure is that, if a relative poverty threshold is applied, it does not offer
any profound analysis of poverty beyond the mathematical value of the index.
The income gap ratio has an interpretation as an indicator of the prospective expense for removing
poverty by targeting shifts to the poor (Ravallion 1992, 37-38). That pertains only in conditions
where stable poverty lines are used, or the poverty line is set by the median instead of the mean.
Tentatively, the best-known decomposition of poverty severity measures is the Forster-Greer-
Thorbecke (1984) measure, where the poverty gaps of the poor are assessed by those poverty gaps in
gauging cumulative poverty.

Part e.) Statement: In the dual economy Lewis model, the phase of disguised unemployment in
agriculture is associated with a horizontal supply curve of industrial labour.
This statement is false. The Lewis model describes the model of growth. It implies the change of
labour amongst two sectors. There exists a concealed unemployment when there are a greater
number of personnel in a sector. But the Horizontal supply curve does not correlate to hidden
unemployment.
Dual economy Lewis Model refers to the model for growth of developing economy when there is a
transition of labour between two sectors, i.e., capitalist and subsistence sector. Disguised
unemployment means concealed unemployment in agriculture when a greater number of people are
held in same work which requires lesser number of people. So, there is a hidden unemployment.
Horizontal supply curve of industrial labour is seen in case of perfect competition, so it is not
connected to disguised unemployment in agriculture.
In the situation of disguised unemployment, marginal productivity of labour is positive, which
decreases average surplus as workers move to the metropolis. There is a lesser amount of output
available for each worker, which indicates workers will only move about if the income increases in
times of industrial goods, leading to upward sloping supply curve.
Answer 3.) Done on paper (Due to graph and special symbols)
The above pages are the solution.
Answer 4.) The first part is done on paper. (Due to graph and special symbols)
The above ages are the solution to the first part.
Second Part
Hirschman argues that deliberately unbalancing the economy according to strategy is the best
method of development, and if the economy is to keep moving forward, the task of development policy
is to perpetuate tension, imbalances, and imbalances. The aim should not be balanced growth, but the
maintenance of existing imbalances, which are reflected in profits and losses. Complementarity is a
situation where increased production of one good or service creates demand for the second good or
service. If the second good or service is produced privately, this demand leads to imports or
increased domestic production of the second good or service product, as this is in the interest of the
manufacturers. Otherwise, the increase in demand will materialize in the form of political pressure.
This applies to public services such as law and order, education, water, and electricity, which cannot
reasonably be imported. Complementarity allows investment in one industry or sector to encourage
investment in others. This concept of induced reversal is like a multiplier as each reversal triggers a
series of subsequent events. Convergence occurs when the performance of external economies
decreases at each step. Growth sequences tend to move towards convergence or divergence, and
policy is generally keen to discourage rapid convergence and encourage the possibility of divergence.
Hirschman introduces the concept of backward and forward links. Forward linkage occurs when
investment in a particular project encourages investment in later projects. production stages.
Backlinking occurs when a project encourages investment in facilities that enable the project's
success. Typically, projects create both forward and backward links. Invest in the projects with the
highest total number of links. Hirschman called the industries with the greatest complementarities the
"sector leaders." Projects with many connections vary from country to country; Findings about
project links can be gained through input and output studies. Industries that convert semi-
manufactured goods into goods for final use are referred to as "next generation industries" or
"enclave import industries". Industry, pharmaceutical laboratories and assembly and mixing plants.
Such industries have many advantages, often requiring the smallest amounts of capital available in
such economies and need not rely on unreliable domestic producers. Therefore, the underdeveloped
countries established such "last These industries create long chains of reverse connections.
Colombia, Brazil, and Mexico are examples of countries that have followed this path. Protection and
subsidization of import-replacement industries was to come, but later. The latter industrial strategy
has disadvantages. It can slow down the creation of a domestic production. Industrialists who have
started working with imports may not accept alternative national products that reduce demand for
their production. Creating the last industries first can lead to loyalty to foreign products and distrust
of domestic products and their quality. Get in the habit of lending for ever-shorter capital
requirements. Therefore, this is how the governments choose leading sectors even while pursuing the
imbalanced growth model.

Answer 6.) The concepts of reversal of fortune are:

 Reversal of fortune is where the zones and the areas which were rich before are now
developing and the areas which were poor before are rich now.
 There has been reversal of fortune where rich became poor, and poor became rich.
 Reversal of fortune is reversal of incomes which states that colonized nations that were
relatively rich earlier are now comparatively poor and colonies that were relatively poor
earlier are now relatively rich.
 This occurrence has been largely observed in US Colonies as hypothesis from 1500 to 1995.
The big reason for this is economic development.
 Citizens and organizations with private property took benefit of opportunities of
industrialization and those who were already developed stopped to scale ahead. This resulted
in paradigm shift in incomes and hence known as reversal of fortune.
About institutional reversal linked with reversal of fortune:

 Reversal of fortune can be explained with the help of institutional reversal.

 During the era of colonisation, when Europeans had its colonies spread over several regions
across the world, the areas or regions which were poor were sparingly populated.
 Therefore, this gave lot of space for Europeans to settle down.
 Therefore, a huge number of Europeans settled in poor regions and opened establishments
for themselves which encouraged investment, thus positively impacting the native population
of that area also.
 On the other hand, regions which were rich were densely populated, gave no space for
Europeans to settle and thus that led to no venture capital opportunities.
 Rather Europeans taxed such wealthy areas, leading to decline in their pay packet amount.
 According to Douglas North's 'Institutional Hypothesis', powerful groups within a society
will, unless appropriately constrained, manipulate their nation's economic institutions in
their own interests, with potentially detrimental effects on economic development.
 The focus is on the institutions that specify and enforce contracts and property rights to
reduce transaction costs. Existing powerful groups block the use of property rights and hence
investment in new technology to protect their economic rents. Societies can only make
technological advances if they can defeat such groups. The literature on the interaction
between economic institutions and international trade shows that poor institutions can be a
source of income for some groups, while institutions can also be a source of comparative
trade advantages.
 Consequently, the welfare consequences of institutional comparative advantage are often
ambiguous. In contrast, another branch of the literature focuses on the interaction between
international trade and political institutions, examining, for example, the effects of
restrictions imposed by executive democratic institutions. Trade and growth expand much
more in countries where the executive branch cannot use its power to monopolize the gains
from trade.
 It is argued that countries in the developing world have experienced a "reversal of fortunes"
in which those who were once rich in the pre-colonial era became poor, while those who
were poor are now rich. Rather than explaining this change in terms of geographical factors,
they claim that different institutions imposed by the colonial government have led to different
patterns of industrialization over the past two hundred years, and that this phenomenon
persisted throughout the colonial world of, regardless of type occurred the colonial power.
 His dissertation has attracted considerable attention for its strong emphasis on European
colonial rule as the main explanation for the divergence in modern world income
distribution. Of course, the biggest problem with any analysis of long-term income trends is
the lack of accurate data on premodern income levels. They represent premodern income in
two ways, namely urbanization and population density. In both cases, they argue that higher
value represents higher total income, since only high-income societies could support dense
urban populations.

Thank you