CHAPTER-ONE

INTRODUCTION TO DEVELOPMENT ECONOMICS

The chapter deals with
 Current interest in development economics
 Definition and nature of development
 The meaning of economic growth and economic development
 Development gap
“while humanity shares a single planet, it is a planet on which there are two worlds, the world
of the rich and the world of the poor’….Ranan Weitz, 1986
Introduction
 About one/fourth, (the majority of people found in North America and Western
Europe) live in comfortable situation. For example
 Houses with many rooms
 More than enough to eat
 Well clothed
 Adequate medical treatment
 Reasonable degree of medical treatment
 Abou3/4th (most people in Africa, Asia, and Latin America) live in uncomfortable
situations. For example
 No shelter
 No adequate food
 Poor health
 Can’t read and write

1.1The meaning of economic growth and development

The term development is:- -used interchangeably with such terms as economic growth.
- To improve their economic welfare.
- Economic progress and secular change.
-The eradication of mass poverty with its correlates of illiteracy
-Disease and early death
-Changes in the composition of input and output and
-shifts in the underlying structure of production away from agricultural towards industrial
activities.

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The objective of development must be-
 To increase the availability and widen the distribution of basic life sustaining goods.
 To raise the level of living including more jobs better education, greater attention to
cultural and humanistic values all of which serve to generate individual and national
self-esteem.
 To expand the range of economic and social choice available to individuals and
nations bay freeing them from servitude.
 Economic growth -is a gradual and steady change in the long –run. which comes
about by a general increase in the rate of saving and population.
- is a more expansion of the economy without structural changes.
Note:-There can be economic growth without economic development.
Economic development- implies growth plus structural transformation
1.2 Definition and Nature of development economics.
Development economics-is a branch of economics that systematically studies the economic
development of the third world nations of Africa, Asia (except Japan) and Latin America.
- is one of the newest and most challenging branches of the broadest
discipline.
-It Deals with economic, social, political and institutional mechanisms
necessary to bring rapid and large-scale improvement in living standards of the poverty-
stricken peoples of Africa, Asia and Latin America
-is to improve the quality of a better life in the world’s poor countries.
The challenges of development improve the quality of life in the world’s poor countries: -
A better quality of life requires-
Higher income
Better education
Higher standards of health and nutrition
Less poverty
Cleaner environment
More equality and opportunity
Greater individual freedom.
Development economics draws on relevant principles and concepts from other branches of
economics such as
 Macroeconomics.
 Labor economics.
 Public finance.

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  Microeconomics …etc.
The nature of development economics is different from that of traditional economics and
political economy.
 Traditional economics
-It is concerned with the least cost allocation of resources and
-the growth of these resources overtime.
-It also deals with the advanced capitalist world of perfect market, consumer sovereignty, and
marginal and -individualistic based decision-making, market equilibrium etc.
 Political economy
-studies the social and institutional process through which certain groups of economic and
political elites/leaders/ dominate the allocation of resources.
There are three cores of developmental economics
I/Life sustenance
It refers to the ability to meet the basic needs such as food, shelter, health minimal education
and protection. In a condition where the basic needs are not met, we cannot say the country is
fully developed despite its high GDP or income level. Efforts to meet these basic needs are
known as the basic need approaches to development, which was initiated by World Bank
II. Self esteem
It is concerned with the feeling of self-respect and independence or not being used as a tool by
others. No country could be regarded as fully developed if others exploit it and does not have
the power and influence to conduct relation on equal terms.

III/ Freedom from servitude (to be able to choose)

It refers to the freedom from ignorance and poverty. Nobody is free if he /she cannot choose
and is imprisoned by living at the margin of subsistence with no education and skill.
Freedom also refers to political freedom including personal security, the rule of laws, freedom
of expression and political participation on equal footing.

1.3. The Obstacles to Economic Development

There are various obstacles to economic growth and development in developing countries.
Some of the basic obstacles observed in poor nations include;

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 Vicious circle poverty
It implies a circular association of forces tending to act and react up on one another in
such a way to keep a poor country in a state of poverty.
Diagrammatically
Demand side Supply side

Low productivity

Low productivity
Capital
deficiency Low income
Low income

Capital
deficiency

Low
investment

Low investment
**Additionally, in developing countries, underdeveloped natural
resources are both consequences and causes of backwardness.

Market imperfection

Underdeveloped natural
resources
Backward people
Low demand

Low rate of capital formation

In developing nations, shortage of capital is a great obstacle to economic development.

As the majority of the people in these nations are illiterate and unskilled, they use age-old
methods of production=> low marginal productivity=> low real income=> low saving=> low
investment and capital formation. Further, the consumption level is already low in developing
nations hence; it is very difficult to increase the level of saving (capital stock) by reducing

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consumption. On the other hand, the saving of the few rich does not flow to productive
channels but to durable consumer goods and Socio cultural obstacles

LDCs (least developed countries) have social institutions and attitudes, which are not
conducive or suitable to development. According to the UN’s report on the process’s and
problems of industrialization in LDCs, there are unfavorable factors or elements of social
resistance to economic change in LDCs, which include institutional factors like
 Rigid stratification of occupations reinforced by traditional beliefs and values
 Attitudes involving inferior valuation attached to business roles
 Backward social attitudes
 Unfavorable political conditions

C. International forces
Apart from local problems, international problems are also basic causes of poverty. To begin
with, historical factors such as colonialism and neo-colonialism have played a significant role
in hindering the development of many poor African nations. The gains from trade have also
gone mainly to the developed countries (DC s).

1.4 The Basic requirements for development

To be developed the poor nations must fulfill certain conditions. Some of the basic
requirements for development include,
i. An indigenous/local/ base
For a poor country to be developed a strong domestic economic base has to be created. This
will happen if there is an internal motivation for the growth process being firmly rooted
within the domestic economy.
ii. Removing market imperfections
Market imperfections lead to factor immobility and restrict sector expansion and
development. To avoid the problems associated with market imperfections the following
measures have to be taken,
Improving the existing socio-economic institutions or replacing them
with new ones
Expanding capital and money market
Making Cheap credit facilities available to traders and small business
persons.
Further, radical changes must be brought in the economy to push the
production frontier beyond the production possibility curve.

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 iii. Structural changes
It implies the transformation from a traditional agricultural society to a modern society or
industrial economy involving a radical transformation of existing institutions, social attitudes
and motivations. It transfers population from primary to secondary and territory sectors. It is
also the development of new social systems, which would replace the old social systems,
which are simply based on class, caste and religious differentials.
iv. Capital formation
It related to the process of developing investible funds and directing them to investment areas.
It involves three interdependent stages
i. An increase in the volume of real saving
ii. The existence of credit and financial institutions to mobilize these savings for
converting them in to investible funds.
iii. The use of these savings for the purpose of investment in capital goods
v. Socio cultural requirements
To bring development it requires changing people’s attitudes from backward and primitive
thinking to modern thinking and in this process education has to be used as a great tool of
enlightenment.
vi. Administrative requirements
The existence of a strong, competent and uncorrupt administration is crucial for economic
development. Government has to a strong one, capable of maintaining law and order and
defending the country against external aggression. In the absence of stable government and
peace, public policies change very often and create problems to ongoing investments. Further
economic plans cannot be implemented without efficient administration
** Government must offer
 Order, justice, good policy and security
 Rewards and incentives based on ability
 Assurance that business contracts would be kept
 Stability of the government itself to maintain a sense of order and future calculability
of expectations.
- According to Knox and Marston, the process of economic development can involve three
types of changes.
A, Changes in the structure of the region’s economy. E.g. a shift from agriculture to

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 manufacturing.
B, Changes in the form of economic organization. E.g. a shift from socialism to free market
capitalism.
C, Change in the availability and use of technology.
1.5. Human Development Index
In its annual series of Human Development Reports, UNDP constructs and refine a holistic
measure of living standards known as the Human Development Index (HDI).
The Human Development Report 1990 defined human development as the process of
increasing people's options. It stressed that the most critical choices that people should have
include:
 the options which lead to a long and healthy life,
 to be knowledgeable, and
 to find access to the assets, employment and income needed for a decent standard of
living.
Development, thus defined, cannot be adequately measured by income alone. The report
therefore proposed a new measure of development, the Human Development Index (HDI),
which is considered as latest and most ambitious attempt to analyze the comparative status of
socioeconomic development both in developing and developed nations. It composed of three
indicators:
1. Longevity measured by life expectancy at birth.
2. Measure of educational attainment (this takes the weighted average of adult literacy
(2/3), and combination of primary, secondary and tertiary level enrollment (1/3).
3. Real per capital income: - The indicator for living standards is based on the logarithm
of per capita GDP in PPP dollars.
 To get HDI, they just add the three components and divide by 3.
 Human Development Index creates for each country a final coefficient (number) its
values range from 0 to 1.
 The HDI attempts to rank all countries on a scale of 0(lowest human development) to
1(highest human development) based on the above three goals or end products of
development:
 HDI is interpreted as the fraction of “Ultimate Development “that a country has
achieved.
 The major advantage of the HDI are

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  It does reveal that a country can do much better than might expected at a low level of
income, and that substantial income gains can still accomplish relatively little in
human development.

 Moreover, the HDI reminds us that by development, we clearly mean broad human
development, not just only higher income. Many countries such as some of the higher
income oil producers have been said to have experienced “growth without
development.”
The HDI for 1994 was calculated on a different basis from that in the previous years.
Maximum and minimum values were fixed for the four basic variables:
1. Life expectancy (85 and 25 years),
2. Adult literacy (100 percent and 0 percent),
3. Combined primary, secondary, and tertiary gross enrollment rate(100 percent and 0
percent) and
4. Income adjusted for differences in purchasing power and expressed in terms of
Purchasing Power Parity (PPP) ($40,000 and $100).
The minimum and maximum values of component variables were fixed without reference to
particular countries, i.e., the values were norms. The minima were those observed historically,
going back about 30 years, and the maxima were the limits of what could be envisioned in the
next 30 years. This permitted more meaningful comparisons across countries and over time.
An index was prepared for each of the component variables of HDI, using the following
formula:
Actual value − Minimum Value
Component Index =
Maximum Value − Minimum Value
Illustration of the Procedure of Computing HDI
For illustration, we take a pair of countries, one industrial (USA) and one developing (India).
Their basic variable indices are as follows:
Life expectancy Adult Gross enrollment Income
Country
(years) Literacy (%) Rate (PPP $)
USA 77 93.8 95 34,142
India 63.3 57.3 55 2,358

1. Life Expectancy Index:

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 2. Adult Literacy Index

3. Calculating the combined primary, secondary, and tertiary gross enrollment rate:
Maximum combined primary,secondary, and tertiary grossenrollment rate = 100 and
Minimum combined primary,secondary, and tertiary grossenrollment rate = 0
 U.S. combined primary, secondary, and tertiary gross enrollment rate

 India’s combined primary, secondary, and tertiary gross enrollment rate

Educational Attainment

4. Calculating the GDP index:

Logarithm of the maximum GDP per capita (PPP US$) 40,000 = 4.6021
Logarithm of the minimum GDP per capita (PPP US$) 100 = 2.0000
Logarithm of U.S. GDP per capita (PPP US$) 34,142 in 2000 = 4.53329

Logarithm of India’s GDP per capita(PPP US$) 2,358 in 2000 = 3.3725

The indices for the three component variables, and the HDI thus computed for USA and India,
are presented in Table 2.1.
Table 2.1 Indices of Life Expectancy, Educational Attainment and Adjusted Income and HDI
for USA and India

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 Indexed Indexed
Indexed life
Country educational adjusted All three HDI
Expectancy
attainment income
USA 0.942 0.974 =2.621/3 0.927
India 0.565 0.527 =1.146/3 0.577

All countries have made substantial progress in human development between 1960 and 1992.
The overall HDI for developing countries increased from 0.260 to 0.541more than double
(UNDP 1994: 95). Countries having an HDI
 below 0.5 are considered to have a low level of human development,
 those between 0.5 and 0.8 a medium level, and
 those above 0.8 a high level.
The HDI has been used:
 to stimulate national political debate;
 to give priority to human development;
 to highlight disparities within countries; and
 to open new avenues for analysis.
1.6. Development gap
Eliminating the wide development gap between rich and poor countries is the prime objective
of the new economic order. But what are the gaps?
 Level of per capital GDP
 Level of unemployment
 Level of education
 Level and quality of infrastructure, public service, higher level of corruption
and inefficient institutions etc.

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 CHAPTER -TWO
2. DIVERSE STRUCTURE AND COMMON CHARACTERISTICS OF
DEVELOPING COUNTRIES.
This chapter will try to identify some of the most important structural differences and
common characteristic features observed in developing nations.

2.1 The diverse structure of developing economies

Any interpretation of structural diversity of developing countries requires an examination
of:
 The size of the country (including ,geographic area, population, and income)
 Its historical and colonial background.
 The endowment/award/ of physical and human resources.
 Its ethnic and religious composition
 The relative importance of its public and private sectors.
 The nature of industrial structure
 The degree of dependence on external economic and political forces
 The distribution of power and the institutional and political structure within the
nation.
1. The size of the country
The sheer physical size of a country, size of its population, and level of its per capita income
are:
 Important determinants of its economic potential, and
 Major factors differentiating one developing country from another
Large size (both in terms of population and in terms of physical area) usually presents
advantages of
 diverse resource endowments
 large potential markets, and
 A lesser dependence on foreign resources of materials and products.

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 2. Historical and colonial background
The colonial powers of the west had a dramatic and long lasting impact on the
economies and political and institutional structures of their colonies by their
introduction of new and tradition-shattering ideas like;
 private property
 personal taxation, and

 Pay the requirement that taxes in money rather than in kind.

 Generally, different colonial heritages/tradition/ have created different institutional and
social patterns in LDCs as much as similar colonial heritages have resulted in similar
institutional and social patterns.
3. Physical and human resources
A country is potential for economic growth is greatly influenced by its endowments of
 physical resources (land, minerals, and other raw materials), and
 human resources (numbers of people and their level of skills)
NB: high mineral wealth is no guarantee of development success. E.g., Congo
With respect to human resource endowments, the following aspects of people of a country
are important
 population size
 level and skill of the people
 people’s cultural outlooks
 attitudes towards work that people have
 people’s access to information
 willingness to innovate that people possess
 desire for self-improvement that people have
 Level of administration skill of the people, etc.
4. Ethnic and religious composition
 Ethnic and religious diversity need not necessarily lead to inequality and instability.
 Not that diversity leads to conflict or cooperation can be important determinants of
success or failure of development efforts.
 Ethnic and religious play a major role in the success or failure of development efforts.
 One/ more groups of these face serious problems of discrimination.
5. Relative importance of the public and private sectors
 Most developing countries have mixed economic system, featuring both public and
private ownership and use of resource. This division between the two and their relative
importance are mostly a function of historical and political circumstances of the
countries.

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 In general, Latin American and south East Asian nations have larger private sectors than
south Asian and African nations.

6. Industrial structure
 The majority of developing countries are agrarian in economic, social, and cultural
outlook. Agriculture, both subsistence and commercial, is a principal economic
activity in terms of the occupational distribution of the labor force, if not in terms of
proportionate contributions to the gross national product. Nevertheless, there are
great differences between the structure of farm systems and patterns of land
ownership among developing countries.
It is in the relative importance of the agricultural, manufacturing, and service sectors that we
find the widest variation among developing nation.
7. External Dependence: Economic, Political, and Cultural
The degree to which a country is dependent on foreign economic, social, and political forces
is related to its size, resource endowment, and political history.
 Even beyond economic dependence, developing countries are dependent on developed
countries through transmission of institutions (e.g., systems of education and governance),
values, patterns of consumption, and attitudes toward life, work and self.
8. political structure, power, and interest groups
 In general, most developing countries are ruled directly or indirectly by small and
powerful elites/leaders/ largely than the developed nations are. Effective social and
economic change thus requires either that the support of elite groups be enlisted/registered
or that the power of the elites be offset by more powerful democratic forces.

2.2 Common characteristics/features in developing nations

i. Low level of living
These low levels of living are manifested quantitatively and qualitatively in the form of:
-low income (poverty)
-inadequate housing
-poor health
-limited/no education

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 -high infant mortality
-low life and work expectancies and in many case a general sense of
malaise and hopelessness.
Per capital national income is one common distinguish features of developing countries as
compared to developed nations is extremely low level of income in 1997, the total national

product of all the nations of the world was valued at more than 29 trillion dollar, from these
more than 22 trillion dollar originated in the economically developed nations and less than 7
trillion dollar was generated in developing nations.
ii. Low level of productivity
Developing countries are characterized by relatively low levels of labor productivity.
Production function systematically relating outputs to different combinations of factor inputs
for a given technology.
In less developing countries the concept technical engineering concepts of production
function must be broadened by adding some important factors, this factor includes managerial
competence, access to information, workers motivation and institutional flexibility.
 Low levels of living and low productivity are self-reinforcing social and economic
phenomena in poor countries.
iii. Demographic characteristics (population growth and dependence burden)
Very poor countries are characterized by high birth rate and high death rate. As economic
development proceeds, death rate declines because of improvement in health conditions &
access to health services. However, for birth rate to decline it requires substantial/large/
economic development.
The as population growth rate = Birth rate - death rate.
iv. High and Rising Levels of Unemployment and Underemployment
Inefficient use of labor is one of the reasons for low level of living in LDCs. There are two
kinds of labor underutilization:
 Open unemployment.
 Underemployment.
Labor underutilization occurs as an underemployment because people both in rural &
urban areas work less hour than they are willing to work. Underemployment may also
include those who are working full time but whose productivity is very low that a reduction
in the hours of labor supply would have negligible effect on output. This kind of under
employment is known as disguised unemployment. E.g. farming practice of Ethiopian
farmers.

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Open unemployment rate in the world is 10 - 15%. By open unemployment, we mean the
proportion of labor willing to work but unable to get a job. In Ethiopia:
 open unemployment = 8%
 Disguised unemployment = 17%
 Total unemployment = 25%

 Open unemployment is very high in urban areas than rural areas, but
underemployment is higher in rural areas. Open unemployment is higher in urban
areas because of rural urban migration other features.
V.Substantial dependence on agricultural production and primary product exports
- The vast majority people in developing countries live and work in rural areas, 58% of the
labor force is engaged in agriculture. Dependency on primary exports
- The production of primary products (agriculture, fuel, forestry and raw materials) and
opposed to secondary (manufacturing) and tertiary (service) activities.
vi. International relations
- Economically the dominance powers of rich nations control the patterns of international
trade.
- They have also the ability to dictate the terms where by technology, foreign aids and
Private capitals are transferred to developing countries.
vii. Imperfect market and incomplete information
- The existence of imperfection markets and incomplete information systems remains a
common characteristic of developing countries and an important contributing factor to
their state of underdevelopment.
- Information limited and costly to obtain there by often causing goods, finances and
resources to be misallocate

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 CHAPTER: 3
3. THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT AND THE
STATE OF DEVELOPMENT THEORY

In this chapter, we explore the recent historical and intellectual evolution in scholarly thinking
about how and why development does or does not take place. We do this by examining four
major and often competing classic development theories. These are:
 the linear-stages-of-growth model
 theories and patterns of structural change
 the international dependence revolution, and
 The neoclassical, free-market counterrevolution.
3.1. The linear-stages-of-growth models:
Theories of the 1950s and early 1960s viewed the process of development as a series of
successive stages of economic growth through which all countries must pass. It was primarily
an economic theory of development in which the right quantity and mixture of saving,
investment, and foreign aid were all that was necessary to enable developing nations to
proceed along an economic growth path that historically had been followed by the more
developed countries.

3.1.1.Rostown’s Stages of Growth Model

According to Rostown, the transition from underdevelopment to development can be
described in terms of a series of steps or stages through which all countries must proceed.
These stages are
(i) The traditional society:
 The world was in this stage before the 19th century “industrial revolution”.
 All stage of development from the stage of savagery to horticulture, animal
husbandry and pre-agricultural development, primitive agricultural development,
feudalism etc, it was the time in which the economy was dominated by subsistence
activities i.e. output was consumed by producers and was not traded.

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  Agriculture was the most important industry
 Production was labor intensive as capital was limited
 Resource allocation was determined by traditional methods of production
 It was a period of stagnation and, more or less, the society remained traditional.
 Technical conditions and economies of scale were static.
 Birth rates and death rates used to be high.

(ii) Precondition for take-off into self-sustaining growth

 Specialization started to generate surplus
 The transport infrastructure emerges to support trade
 External trade occurs on primary products
 As income saving and investment grow entrepreneurs emerge
 The entrepreneurial class mobilizes savings and investment.
 The entrepreneurs also bring the political unification of the country, provide it with
some infrastructural facilities i.e. transport, education, and organized medical help.
 Agriculture starts developing
 Death rates start falling but not the birth rates.
 A few industries develop on small scale
 Investment ranges around 5% of the GDP
(iii) The take-off stage
 At this stage, the barriers to growth are overcome and growth becomes a normal
condition at least in one sector of the economy (the leading sector).
 Industrialization increases and this begins to switch workers from the agricultural
sector to the manufacturing sector.
 Growth is concentrated in few regions or one or two manufacturing industries.
 Growth begins to generate its own new investment from the earning of its previous
investment i.e. the growth in this stage is self-sustaining.

Investment => income => saving => Investment

(iv)The stage of “Drive to Maturity”

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  The economy diversifies in to new areas (sectors), and also it produces wide range
of goods and services
 Technological innovation provides a range of investment opportunities
 There will be less reliance on imports
 the rate of investment increases from 10% of the GDP to higher limits up to 20 %
 important industries come up and technical knowledge spreads to other sectors
 real income per head starts rising as GDP growth rate becomes substantially higher
than population growth rate
 real Per Capital Income increases as the growth rate of GDP exceeds the
population growth rate
 specialization and division of labor become complex and compound
(v) Stages of self-sustained growth and mass consumption
 the economy moves to mass consumption
 consumer durable industries flourish
 The service sector gets dominance.
 Per capita real income becomes so high that consumptions transcends beyond
food, clothes and shelter to goods of comforts and luxuries on a mass scale.
 Urbanization and industrialization change the values of society and development
consciousness increases.
3.1.1.The Harrod-Domar Growth Model
HDM of economic growth is based on the assertion that every economy must save a certain
proportion to its national income to
 Replace worn-out or impaired capital goods (buildings, equipments, and materials)
 Finance new investments representing net additions to the capital stock that is
required to bring about growth in GDP.
According to this model, if we assume that there is some direct economic relationship
between the size of total capital stock (K) and total GNP (Y) – for example if $3 of capital is
always necessary to produce a $1 stream of GNP – it follows that any net additions to the
capital stock in the form of new investment financed from saving will bring about
corresponding increases in the flow of national output, GNP. Note that this relationship
between the size of total capital stock and total GNP is known in economics as incremental
capital output ratio (ICOR).
The HDM of economic growth is outlined as follows. Suppose:
t = time variable

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 Yt = total output at time t
Ct = consumption at time t
St = saving at time t
It = investment at time t

 The policy implication of the model is that growth of GDP can be raised by pushing
up saving rate. Note that for an open economy, policy options related to overseas
borrowing and foreign investment can be considered in case it faces financial gap i.e.
difference between required saving and actual saving.
 Criticisms of HDM
 However, necessary conditions, investment and saving are not sufficient
conditions for economic growth. We need some kind of skills and managerial
capacity to transform the potentials of capital investment (saving) into growth in
GDP.
 There is no consideration for population and demographic explosion.
 In reality, saving rate and ICOR are not as exogenous as treated in HDM.
Specifically, since in the real world we are likely to encounter diminishing returns
to scale, ICOR cannot be a fixed parameter as assumed in the model
3.2 Lewis theory of development
Using a two sector economy (agriculture and industry), professor W. Arthur Lewis has
developed a theory of economic development with excess agricultural labor. He assumed the
existence of an unlimited supply of labor at a subsistence wage, in developing countries.
Economic development takes place when capital accumulates .because of the withdrawal of
surplus labor from the subsistent agricultural sector to the capitalist or industrial sector. The
capitalist or industrial sector is the sector, which uses reproducible capital and pays capitalists
for the use of capital from profits earned. The subsistence sector is the one, which does not
use reproducible capital. Output per head (average product) in the subsistence sector is lower
than the capitalist sector.

LDCs are with large population as compared to capital and natural resources so that the
marginal productivity of labor is negligible, zero or even negative. Further, as the supply of
labor is unlimited, new industries can be established or existing industries can be expanded
without limit at the current wage by shifting labor from the subsistent sector to the capitalist
sector. The main source from which workers would be coming for employment at the

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subsistent wage as economic development proceeds includes farmers, casuals, and petty
traders, women in the household and population growth.
The problem of having skilled workers can be solved by giving training to unskilled workers.
The subsistent wage at which the surplus labor is available for employment in the capitalist
sector depends on the minimum earnings required for subsistence. That is the wage level
cannot be less than the average product of the worker in the subsistence sector. It may,
however, be higher than this, in case if the farmers are to pay higher food costs or rents or
perhaps if they feel disutility’s of leaving home. Even if the earnings in the subsistent sector
provide the flour to wage rate in the capitalist sector, practically capitalist wages are more that
30% higher than subsistent wage because of;
a) An increase in the output of the subsistent sector will raise the real income of farmers
which will cause them to ask for a higher capitalist wage before offering themselves
for employment.
b) If with the withdrawal of labor from the subsistence sector total product remains
constant or the same, the average product and, hence, the real income of those
remaining behind in the subsistent sector will rise and the withdrawn workers might
insist on a higher wage in the capitalist sector.
c) The higher cost of living and some humanitarian considerations may move the
employers to raise real wages. Additionally government and trade unions may
pressure for the rise in wages.
** The supply of labor is considered perfectly elastic at the existing capitalist wage.
 Limitation of the Lewis model
The Lewis theory is applicable to over populated countries under certain assumptions, which
are the bases of its criticism.
1. wage rate is not constant in the capitalist sector
The theory assumes a constant wage rate in the capitalist sector until the supply of labor is
exhausted from the subsistent sector. However, in reality the wage rate continues to rise
overtime in the industrial sector even when there is open unemployment in the rural sector.
2. labor saving capital accumulation
The theory assumes that the surplus is reinvested in productive capital.
3. skilled labor shortage
Skilled labor shortage is not a simple and temporary problem as assumed in the theory i.e.
skilled manpower formation is a serious constraint as it takes a long time to educate and
train a person.
4. capitalist class

20
 The theory assumes that the capitalist class already exists. In reality, however, poor
countries lack capitalists with the necessary potential and incentive to work.
5. multiplier process
The multiplier process doesn’t operate in poor nations and the theory assumes that capital
accumulation takes place when the capitalist class continues to reinvest profits, implying
investment multiplier which won’t apply to LDCs.

6. one sided theory

The theory does not consider the possibility of progress in the agricultural sector but as the
industrial sector develops, the demand for food and raw material will rise which will inurn
lead to the growth of the agricultural sector.
7. neglect of total demand
Lewis did not study the problem of aggregate demand. He assumes that whatever is produced
in the capitalist sector is either consumed by itself or exported. He didn’t analyze the
possibility of the capitalist sector selling its products to the subsistent sector.
8. mobility of labor is not easy
Higher capitalist wage will not necessarily lead to the movement of surplus labor from the
subsistent sector to the capitalist sector. People are so intensely attached to their family
and land that they don’t like to leave their kin. Further differences in languages and
custom, problem of housing and high cost of living in the urban industrial sector inhabit
the mobility of labor.
9. marginal productivity of labor is not zero
MPL in the rural sector is not zero or negligible in LDCs as argued by the theory. if it was
so, the subsistent wage would also be zero.
10. with migration of labor from the subsistent sector, production falls
Lewis assumes that the agricultural production remains the same (unaffected) with the
withdrawal of the surplus agricultural labor. However, in reality the reduction of workers
from the farm reduces farm output.
11. low income groups also save
High-income groups are not the only ones to save. People with low incomes also save for
capital accumulation while many people in the high-income group spend much for various
consumer durable goods and luxurious items i.e. they are extravagant.
3.3 balanced vs. unbalanced growth theories
 balanced growth

21
Balanced growth requires a balance between different consumer durable goods industries and
capital goods industries. It also implies a balance between industry and agriculture, and
between the domestic and export sector. Further it refers to the balance between social and
economic overheads and directly productive investments and also between the vertical and
horizontal external economies. In short, the theory states that there should be a simultaneous
and harmonious development of different sectors of the economy so that all sectors grow
together.

This doctrine requires a balance between different sectors of the economy during the process
of economic growth. There should be a proper balance between investment in agriculture and
industry, which are complementary sectors. An increase in the industrial sector’s output
requires an expansion of agricultural output if employment increases in the industrial sector, it
will lead to an increase in the demand for food. This necessitates the rise in food supplies.
Similarly supplies of raw materials should also rise with the expansion of the industrial sector.
In short, the agricultural sector must also develop along with the industrial sector’s
development.

There must also be a balance between the domestic and foreign sector. Export revenue is an
important source for financing development. As production and employment increase, the
domestic sector requires increasing imports of necessary materials (raw materials and
machineries). To pay for these rising imports and to allow exports to finance development, the
country must expand its foreign sector along with the expansion in the domestic sector.

 Criticism of the balanced growth doctrine

1. Rise in costs
Simultaneous establishment of a number of industries is likely to raise money and real cost of
production.
2. demand side problems
When the new industries are established, the demand for the products of existing firms will
decrease. The demand for factors of production, on the other hand, rises causing a rise in price
of inputs (factors). This makes the industries unprofitable.
3. doesn’t consider the capacities of poor nations( shortage of resources)
The doctrine doesn’t consider the capacities of poor nations. The resources (human and
physical) those are required for simultaneous development of multiple sectors is lacking in
developing countries.

22
When investments are undertaken in all sectors simultaneously, the demand for factors would
be competitive but the supply of factors would be inelastic in poor nations.
4. scarcities and shortages encourage growth
Scarcities and bottlenecks provide the stimulus to inventions and inventions in turn created
new scarcities and bottlenecks. Some economists argue that had the world depended on
balanced development, it would have reduced or eliminated the incentives for discoveries.
5. the concept of balanced growth is only applicable to developed or rich nations
According to Keynes, simultaneous and multiple developments during upswing of the trade
cycle can lead to balanced recovery of economic activity as the industries, machines,
managers, workers and consumption habits are all there, only waiting to take up once again
their suspended functions. In LDCs, however, there is no temporary suspension of economic
activities. Many of the economic activities are static or permanently missing.

 unbalanced growth
*** This theory is the direct opposite of the doctrine of the balanced growth.
It argues investment should be made in selected sectors rather than simultaneous investment
in all sectors. No poor country owns capital and other resources in such quantities as to enable
it invest simultaneously in all sectors. Hence, investment should be made in a few selected
sectors or industries for their rapid development, and the economies accruing from them can
be utilized for the development of other sectors. Thus, the economy moves gradually from the
path of unbalanced growth to balanced growth.
The process of unbalancing the economy to bring about development can be undertaken
through investing in social overhead capital or in directly productive activities.
 Limitations (criticisms) of the unbalanced growth doctrine.
A. neglects resistance
When development is the outcome of deliberate unbalancing of the economy, the business
attitudes change due to shortages and tensions. Hence, there will be a lot of opposition and
hostility. The theory neglects the reaction on the part of existing institutions in poor countries.
B. inflationary pressure
When large doses of investment are being injected in to the economy at a certain strategic
points, income will rise which may tend to increase the demand for consumer goods relative
to their supply. Shortages lead to inflationary rise in price level.
C. too much emphasis on investment decisions

23
Poor countries not only need investment decisions but also administrative, managerial and
policy decisions. The theory lays too much emphasis on investment decisions as compared to
other important decisions required for development
D. lack of basic facilities
There may be difficulties in having technical personnel, raw materials, and basic facilities like
power, transport, markets for products etc.
E. lack of factor mobility
In LDCs, it is difficult to shift resources from one sector to another.

3.4 The international dependence model

There are three major streams of thought within this general approach.
A/the neo-colonial dependence model
-It is an indirect outgrowth of Marxist thinking.
-To the historical evolution of a highly unequal international capitalist system of
Relationship between rich country- poor countries.
-Where the rich countries are playing the central (decisive) role and
- The where the poor countries are playing the peripheral role.
-Certain groups in developing countries (landlords, entrepreneurs, military rulers,
Merchants, salaried public officials, and trade union leaders) enjoy high incomes,
Social status and political power.
-They rewarded by international special power interest groups including
Multinational corporations, national bilateral aid agencies and multilateral
Assistance organizations like World Bank and IMF.
B/ The false paradigm model
-It attributes underdevelopment to broken-down and
- Inappropriate advice provided by uninformed, biased and ethnocentric international expert
advisers from developed country assistance agencies
-multinational donor organizations.
-experts lead to inappropriate and incorrect policies because they fail to consider institutional
factors in LDCs.
-the leading university intellectuals,
-trade unionists and
- High-level government economists etc.
C/The dualistic development thesis

24
-the existence and persistence of increasing divergence between rich and poor nations and
rich and poor people. The concept of dualism embraces four key arguments;
1. The ‘superior’ and ‘inferior’ can coexist in a given space.
2. This coexistence is chronic and not merely transitional.
3. The degrees of superiority and inferiority fail to show any sign of diminishing
and they are rather with a tendency to increase, widening the gap between
them.
4. The interrelationship between the superior and the inferior is such that the
superior does little or nothing to pull up the inferior.

3.5 The neo-classical counter-revolution (market fundamentalism)

It includes three types of approach
 free market approach
 public choice approach
 market friendly approach
A/free markets approach
- To flourish, privatizing state owned enterprises, promoting free trade and export expansion.
-welcoming investors from developed countries
- eliminating government regulations
- Price distortions in markets,
- Economic efficiency and growth will be stimulated.
-Growth and development of poor countries is promoting free market and
- Laissez faire conditions.
B/Public choice approach
- is also known as the new political economy approach and
- It argues that governments can do nothing right.
- States act solely from a self-interested perspective, using their power and
- The authority of government for their own selfish ends.
-. States use their power to remove private property from individuals.
- To the miss allocation of resources.
Note:-the conclusion is that minimum government is the best government.
C/ Market friendly approach.
- The various imperfections in developing countries’ product and factor markets and
-Governments have a key role to play in facilitating the markets through market friendly
interventions. E.g. investment in social infrastructures, health care facilities, education, etc.

25
 CHAPTER-4
4. THE HISTORICAL GROWTH AND THE STATE OF DEVELOPMENT THEORY
The source of economic progress can be attributed to a variety of factors but generally,
investments that improve the quality, quantity and productivity of resources through
innovation and technological progress have been the primary factors in bringing growth.
The economic growth through capital, labor and technology.
There are three major components of economic growth;
(A) Capital accumulation
It occurs when some proportion of current income is saved and invested. New machineries
and equipments increase the physical capital stock and help to expand output. These directly
productive investments are mostly supplemented by socio economic infrastructures like roads,
electricity, water etc.
Investment in human resources through formal schooling, vocational training and other sorts
of training increases human skills, thereby improving the quality of the labor force.
Capital accumulation may add new resources or upgrade the quality of existing resources.
(B) Population and the labor force
Theoretically, population growth and the consequential increase in the labor force are
stimulants of economic growth. In reality, however, this depends on the ability of the
economy to absorb (employ) the additional workers.
(C) Technological progress
It results from improved ways of accomplishing a given task. There are three basic types of
technological progress.
I. neutral technological progress

26
It is when the technological progress results in more productive use of both existing capital
and labor.
II. Labor augmenting (capital saving) technological progress
It occurs when the quality and skills of the labor force is upgraded i.e. the technological
progress is such that it comes up with more productive use of existing labor.
III. Capital augmenting technological progress
It is when the technological progress results in the more productive use of existing capital
goods.
4.1The historical record Kuznets’s six characteristics of modern economic growth
Kuznets isolated six characteristic features manifested in the growth process of almost every
developed nation.
(1) High rate of per capita output and population growth
For the capitalist developed countries, annual growth rates over the past 200 years averaged
2% for per capita output, 1% for population and 3% for total output (real GNP). These rates,
which imply a doubling time of roughly 35 years for per capita output, 70 years for population
and 24 years for real GNP, were far greater than what was experienced in the pre – industrial
revolution period.
* In short, these countries experienced large multiples of their previous historical rates in
recent times.
(2) High rate of productivity increase
Relatively high rate of rise in total factor productivity (output per unit of all inputs) was
observed in these countries’ growth.
The rates of productivity increase were large and were 50% to 75% of the historical growth of
per capita output in developed countries. Technological progress (including the upgrading of
existing physical and human resources) accounts for the historical increase in the per capita
output of these nations
(3) High rate of economic structural transformation
It refers to the gradual shift away from the agricultural to non agricultural activities and away
from small family and personal enterprises to impersonal organizations of huge national and
multinational corporations.
In the contemporary developed nations, there was a high rate of structural and sector change
inherent in the growth process.
(4) High rates of social, political and ideological transformation

27
Transformations in attitudes, institutions, and ideologies are often necessary to bring an
ideal structural change. Examples include the urbanization process and modernization ideals
which include;
(I) Rationality
The substitution of modern methods of thinking, acting, producing, distributing and
consuming for age old traditional practices
(ii) Economic planning
The search for a rationally coordinated system of policy measures that can bring about an
accelerated economic growth and development
(iii) Social and economic equalization
The promotion of more equality in status, opportunities, wealth, income and levels of living
(IV) Improved institutions and attitudes
Improved institutions will be necessary to increase labor efficiency, promote effective
competition, social and economic mobility etc...
(5) International economic outreach
Rich countries reached out to the rest of the world in search of primary products, raw
materials and cheap labor and further to find markets for their products. Such outreach was
made possible by technological advances in transport and communication. This had the effect
of unifying the globe and bringing out the socioeconomic and political domination of the poor
nations by the rich nations. E.g. colonialism and neo- colonialism
(6) Limited international spread of economic growth
The spread of modern economic growth is limited to the less than ¼ of the world’s
population found in the developed regions.
There are even widely seen tendencies where the rich grow at the expense of the poor.
4.2.The limited value of the historical growth experience/Initial condition/.
Economic growth theories and models were based up on the experience of the west and,
hence, they gave too little emphasis to the very different and less favorable initial economic,
social and political conditions currently available for developing countries.
At least eight significant differences may be identified in the initial conditions;
1/ The physical and human resource endowment
Developing countries, on the average, are less endowed with natural resources than the
currently developed nations at their initial or early days of development. Even if natural
resources are found in some developing countries, heavy investment in capital is required to
exploit them.

28
The labor force of the developing countries on the whole is less educated, less experienced
and less skilled than the early period situation of currently developed countries.
2/ The relative levels of per capita income and GNP
The population living in developing countries have, on the average, a much lower level of per
capita income than what the current developed countries used to have many years ago while
they were developing.
Further, the modern developed nations were economically far better than the rest of the world
at the early days of their economic growth. Hence, they could take advantage of their
relatively strong financial and economic position to widen the income gaps between
themselves and other less fortunate countries. However developing countries begin their
growth starting from very low per capita income. Such a situation creates economic and
psychological frustration in growth.
3/The climatic differences
The extreme heat and humidity in many developing countries contributes to the deteriorating
soil quality and the rapid depreciation of many natural goods.
Climatic un-favorability also causes crops to have low productivity, weakens regenerative
growth of forests and leads to poor health of animals.
It also causes discomfort to workers, weakens their health and lowers their levels of
productivity and efficiency.
4/ The population size, distribution and growth
During their early growth years, western nations experienced a very slow rise in population
growth. The population in most developing countries, however, is growing and multiplying at
very high rates.
5/.The historical role of international migration
As to the current developing countries, there is little chance of reducing population pressure
through massive international emigration because of factors such a great geographical
distance and very restrictive immigration laws in developed countries.
Some who manage to migrate, despite the restrictions, are mostly the professional and
technical manpower and this process of brain drain makes developing countries loose the
very valuable part of the labor force and, hence, adversely affects their growth.
6/ The growth stimulus of international trade
Free trade was the engine of growth for the currently developed countries during the
nineteenth and early twentieth century. North American and European countries were able to
participate in international exchange mainly on the basis of free trade, free capital movement
and international migration of unskilled surplus labor. However the today’s developing

29
countries face many difficulties in their trial to exploit international trade to their advantage
and growth. Developing countries face declining terms of trade and, further, developed
countries substitute the traditional commodities of the poor nations with synthetic products
using their technological advance.

7/The basic scientific and technological research and development capabilities

The contemporary developed nations utilized the outcomes of scientific research and
technology in their growth experience. These countries also spent large sums of money to run
and finance different researches and they actively utilize their outcomes.
The current poor countries are not engaged in a production process that invited technological
advancement. They produce simple materials by saving capital (making less use of capital)

and using more labor. Further, they neither have the financial resources nor the know how to
undertake research and development activities.
8/The stability and flexibility of political and social institutions
The current developed countries were independent consolidate states able to undertake
national policies on the quest to modernization. They were culturally homogeneous and
politically unified. However, most of the current poor nations have only recently got their
independence and have not yet become fully consolidated nations states with effective ability
to formulate and follow national policies.

30
 CHAPTER FIVE
INCOME,INEQUALITY,POVERTY AND DEVELOPMENT
INTERCONNECTION
5.1. Measurement of inequality and poverty
5.1.1. Measurement of inequality (Distribution of income)
Policy makers are worried about the distribution of income for two reasons.
1) Intrinsic reason
2) Functional reason
1. Intrinsic Reason (Ethical reason) - They want to reduce inequality for its own sake.
(eg. Religion do not want to see people with unequal wealth)
2. Functional Reason: Inequality is not important because it has an impact on other
economic features. Inequality in wealth and income for example, might lead to
reducing the possibility of overall growth such as by increasing violence and crime. If
you reduce inequality in education and health, all the population will be educated or
cared. This will increase productivity and hence growth.
Development Economists have interested not only how much people earn but how do
people earn it. This interest leads us to the distinction between the functional and personal
income distribution.
There are basically two type of income distribution
1. Personal ( size) distribution
2. Functional distribution
1. The personal distribution of income measures the total income received by each
individual and its distribution. Here what matters is how much each earns irrespective of
the source of income.
The personal or size distribution of income is the measure most commonly used by
economists. It simply deals with individual persons or households and the total income

31
 they receive. The way in which that income was received is not considered. What matters
is how much each earns irrespective of whether the income was derived solely from
employment or came also from other sources such as interest, profits, rents, gifts or
inheritance. Moreover, the locational (urban or rual) and occupational sources of the
income (e.g. agriculture, manufacturing, commerce, services) are neglected. If Ato Abebe
and W/ro Mulu both receive the same personal income, they are classified together
irrespective of the fact that W/ro Mulu may work 15 hours a day as a doctor which Ato
Abebe does not work at all but simply collects interest on his inheritance.

2. The functional distribution of income: measures the return to different factors of

production such as labor (for which wage is paid), capital (for which interest is paid), land(for
which rent is paid). It also involves profit which is distributed to share holders.
Aggregate measures of Inequality
There are several methods of measuring inequality. Some of them are:
1. The ratio of income by the bottom 40% of the population to the upper 20% of the
population.
2. Lorenz curve 3) Range 4) Kuznet ratio 5) Gini Coefficient
Note:- Lorenz curve is not an aggregate measure rather it is a pictorial representation.
1. The ratio of income by the bottom 40% of the population to the upper 20% of the
Population
Economists and statisticians, therefore, like to arrange all individuals by ascending personal
incomes and then divided the total population in to distinct groups or sizes. A common
method is to divide the population in to successive quintiles (fifths) or deciles (tenths)
according to the ascending income levels and then determine what proportion of the total
national income is received by each income group.

Example * Share of the bottom

Village -A 5+ 9
Individuals Personal income Quantiles 40 %= =14 %
The bottom 20% 1 100 of
0.8
40% of the the income.
2 1.0
population 3 1.4
on income * Share of the top
4 1.8
scale . 51
20% 5.0 20 %= =51 %
5 1.9 100
6 2.0 of the income
7 2.4
8 2.7 * the ratio of the bottom
9.0 40% to the top
20% 9 2.8 14
20 %= =0 . 28
10 3.0 51
11 3.4
12 32
3.8 14
13.0 =1 :3 .7
13 4.2 N.B: 51
14 4.8
represents the ratio of
 20%

20%

The total or national income of all individuals amounts to 100 units and is the sum of all
entries in column 2. In column 3, the population is grouped in to quintiles of four individuals
each. The first quintile represents the bottom 20% of the population on the income scale.
This group receives only 5% (i.e. a total of 5 money units) of the national income. The
second quintile (individuals 5 - 8) receives 9% of the total income. Alternatively the bottom
40% of the population (quintiles 1 plus 2) is receiving only 14% of the income, while the top
20% ( the fifth quintile) of the population receives 51% of the total income.

A common measure of income inequality that can be derived from column 3 is the ratio of the
incomes received by the bottom 40% and top 20% of the population. This ratio is often used
as a measure of the degree of inequality between the too extremes of very poor and very rich
in a country. In our example, this inequality ratio is equal to 14 divided by 51, or
approximately 1 to 3.7 or 0.28 in village A. Follow similar procedures for village B below and
compare inequality both village.

Village - B

Individuals Personal income Quantiles

1 0.8
2 1.0
3 1.4
4 1.8
5.0
5 1.9 1:10.
6 2.0 9
7 2.4
8 3.7
9.0
9 4.8
10 5.3
11 6.7
12 6.8 33
21.2
13 7
14 7.4
 *Share of the bottom 40% = 2%+3.6%=5.6%.

* Share of the top 20% = 61.1%.

5.6%
20 %= =0. 09
Ratio of bottom 40% to top 61 .1 %

Note:- The greater the ratio the lower inequality will be .Therefore income inequality is high
in village B than A.
2. Lorenz Curve
To construct a Lorenz cure we put the number of income recipients in cumulative percentage
on the horizontal axis, and share of income received by each group (%) on the vertical axis.

 The diagonal line shows

proportion

perfect equality.
100
80 Diagonal line (line of equality)
Cumulative Cummulative
Lerenz
60 Population(%) income(%)
Cumulative

curve
of income

20% 5.0%
40 20 40% 14.0%
20 60% 27.0%
80% 49.0
100% 100%
20 40 60 80 100
Cumulative percentage of people
Fig . Lorenz curve for Village A.
Exercise Draw the Lorenz curve for village B
 The Lorenz curve shows the actual relationship between the percentage of income
recipients and the percentage of total income they receive during certain period of time
such as a year.
 If the Lorenz curve overlaps with the diagonal line, there is perfect income equality.

34
 If the Lorenz curve overlaps with the bottom horizontal or right vertical axis, the whole
income is received by one person.
 Because no country exhibits either perfect equality or perfect inequality, the Lorenz curve
will lie to the right of the diagonal line.
 The more the Lorenz curve is away from the diagonal line, the more unequal the
income distribution is.
 The criterion for inequality comparison in using Lorenz curve is called the Lorenz
criterion. It says that if the Lorenz curve of a distribution lies at every point to the right of
the Lorenz curve of some other distribution, the latter should be judged as more unequal
than the former.
 When the Lorenz−curve cross to each other, they cannot provide a useful inequality
ranking.
There are m distinct income groups and in each income class j, the number of individuals in
m
∑ nj
each income group is nj, so that total population= j=1 .
m
∑ njyi
And each income class has an income of Yi; total income = i=1

m
1
( μ )= ∑ njyj
n j =1
The mean income
1
R= ( y −y )
μ m 1 , where y m=max .income
3. Range: - is given by:
y 1 =min . income
Range is a very crude measure that doesn’t take the whole income distribution in
consideration.
1
Range= ( 15−0 . 8 )=2 . 9
Example:- In the above data 5 (In village A)
4. The Kuznet Ratio: is the ratio of income of the richest X% to the poorest Y%
income 20 %
K r=
income 40 %
5. Gini Coefficient:- is a number that summarizes inequality among individuals. It is the ratio
of the area between the Lorenz curve and the 45 0 line of perfect equality to the area of the
triangle below the 450

AreaA
G=
A ⏟
AreaA + AreaB
B .
35
Note: - The higher the Gini coefficient, the higher the inequality.
- If G= 0 ⇒ Lorenz−curve = 450 line.

- If G= 1, the whole income is obtained by one person. So 0≤G≤1 .

5.1.2. Poverty, Its Manifestations and Measurement

5.1.2.1. Manifestations of Poverty
It is difficult to provide precise definition of what poverty is. Schubert (1992) provides a
universally quoted definition of poverty - the inability to lead a decent life. Of course what is
a decent life raises a number of questions and issues. Some other authors understand poverty
as a state of individual or household having an income or consumption below a certain
standard, usually known as poverty line. In this sense what exists in Africa is chronic mass
poverty. According to Lamin (2000), mass poverty as it exists in Africa is a process whereby
the bulk of the population is:
1. surviving at the daily subsistence local dietary requirement;
2. housed in squatter-type shelters; clothed with bare minimum protective clothing;
3. without the means to acquire productive assets;
4. with very low organizational capabilities and participatory role, and
5. With inadequate endowment of energy supplies for productive and other uses.
Poverty can also be conceived as a situation consisting of:
1. deficiency in consumption;
2. high level of morbidity and mortality;
3. poor sanitary and housing conditions;
4. Low levels of education.
In this situation, the magnitude of ignorance and dependency and the prevalence of diseases
precludes the poor from effectively responding to the demands of and participating in the
economic, social and political life of their societies (Lamin, 2000).

Just like inequality, poverty is both intrinsic and functional. Most people may say removal of
poverty is fundamental way of economic development for ethical reason. Poverty is not only
intrinsic interest but it has enormous implication for the way in which the entire economy
functions. There are different conceptual approaches in measuring the wellbeing at individual
level.
1) Welfare approach.

36
 2) Non-Welfare approach
1. The Welfare approach compares welfare and public policy decision based on the
preference of individuals. This approach avoids subjective judgment and it uses well
articulated theory of consumer behavior. It uses utility theory to drive poverty line.
2. The non-welfare approach assesses the well being of individuals based on some
elementary achievements such as being able to be adequately nourished or clothed. It
is very subjective. Another way of assessing the well being of individuals is developed
by Sen(1987).It is a non –welfare approach. He did not rely on command commodities
and on utility theory. He defined poverty as the lack of capability. According to Sen
capability means being able to live long, being well nourished, being healthy, literate
and so on. According to Sen, the task of poverty analysis is to determine those
capabilities achieved by a society, and who fails to reach them. He said Mortality rate
is the main indicator of under development.
In order to define population into poor and non-poor, one may need a cut-off line (or poverty
line) below which a person is classified as poor, the welfare approaches are used in the
definitions of poverty line. Three alternatives approaches, namely absolute, relative and
subjective, are used in setting a poverty line.
Absolute poverty
 Absolute poverty can be viewed as the inability to secure the minimum basic needs for
human survival.
 Absolute poverty is a poverty thresh-hold below which living becomes mere physical
survival.
 It is a state of existence in which the overall needs of the individual is not satisfied due
to lack of enough purchasing power or means of self-provisioning (food, shelter,
clothing, health etc.).
 It is a condition where deprivation is so severe that the basic needs of life can scarcely
be met at the minimum level required for survival.
 In general, a person is considered to be in absolute poverty if he/she lacks resources to
obtain enough food, clothing and warmth, and shelter to maintain a tolerable standard
of physical health and efficiency.
In defining absolute poverty lines, welfareristic framework compares welfare and public
policy decisions on the basis of preferences (utilities) of individuals, while the non-
welfareristic approach is usually based on the basic needs or minimum caloric requirements.
Accordingly, there are two commonly used methods of defining poverty lines. These are:
(i) Direct caloric intake method, which defines poverty as consumption below the

37
 minimum caloric intake. Hence this method equates poverty with malnutrition. The
drawback of this method is that it does not take into account non-food requirements
and the cost of getting the basic caloric requirements.
(ii) Cost of basic needs (CBN) method is the common and practical way of measuring
absolute poverty. It involves first defining the food poverty line by selecting a basket
of food items and non-food goods typically consumed by the poor. They provides a
monetary value of a poverty line that accounts for the food and non-food components.
CBN is expressed as: z= Cf + Cnf, where Z is the poverty line, Cf is the minimum cost
of food, and Cnf is minimum cost of non-food items.
Relative poverty
Relative poverty is a state of having welfare level (measured in income or expenditures or
other wellbeing indicators) less than others. This does not necessarily mean those people who
live a life standard of below the poverty line. Thus, the relatively poor are those whose
incomes are low compared to others even if they secure adequate level of survival. Thus
relative poverty is a global phenomenon reflecting the existence of inequality.

Relative poverty points to that some people are poorer than others. It is recognized as a
problem when the difference between the richest and the poorest is intolerable in the sense
that, the poor while not actually destitute or starving, are nevertheless deprived of many of the
goods and services which others take for granted. Relative poverty is thus associated with
inequality, as one of the poverty dimension.

The procedure of relative poverty measuring involves disaggregating the population into
various income or expenditure percentiles and then subjectively labeling the lowest 'x'
percentage of the population as the poor. The approach in general suffers from the following
weaknesses (Ravalli on, 1992).
 It lacks clarity as to whether it is an indicator of poverty or measurement of income
inequality;
 It is entirely dependent on the value judgment of the researcher that it is difficult to
monitor poverty over time and space;
 The relative poverty line is arbitrary and always assumes a constant percent of the
population in the bottom as poor, even if living standards for the whole population have
risen over time;
 The method is technically feasible for developed countries, and is less important for
developing countries whose bulk of population live in absolute poverty.

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Subjective poverty
The concept of subjective poverty is based on the premise that people are the best judges of
their own situation and that their opinions should ultimately be the decisive factor in defining
welfare and poverty. It implies that poverty is subjective judgments people place on what
constitutes a socially acceptable minimum standard of living in their-own societies. In this
case subjective poverty measures are therefore based on responses of individuals to attitudinal
questions on household income and welfare like what level of income do you personally
consider absolutely minimal. It involves opinions of households whether their income is
sufficient to meet their needs or ends.

In general, however, although poverty could be explained in absolute, relative and subjective
terms, experience and applied research have indicated that the most relevant and widely used
definition of poverty especially for developing countries is absolute poverty line. Similarly
although both income and consumption (expenditures) measures are used to measure welfare
or utility status, expenditure method is a widely used and recommended criterion of welfare
(please refer consumption expenditure as a measure of rural development in this chapter
above).
5.1.2.2.Measurement of major indicators of Poverty
World development report (2001) identified four major dimensions of poverty that may
interact and reinforce with each other.
1. The first is the material deprivation (lack of opportunity), which is measured by an
appropriate concept of income or consumption,
2. the second is low achievement in education and health (low capabilities),
3. the third is vulnerability (low level of security) and
4. The fourth is voicelessness (powerlessness).
1. Measure of Income Poverty (lack of opportunity)
We use income or consumption as a measure of poverty. In developing countries consumption
expenditure measure is preferred because:
a) People underreport income
b) Consumption is a smooth version of income and a better indication of wealth.
Poverty line: - is a level of consumption below which a person is considered to be poor.
Poverty line is the cost of bundles of goods deemed sufficient for a basic need. (able to buy
2200k cal / day/ adult and essential non- food expenditure).

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To estimate the poverty line, first we have to define a representative basket of goods and then
determine the amount of each good in the basket in such a way that the total amount gives
2200k/calori.

2. Low Capability
Here the level of achievement in education and health are used as an indicator of poverty.
Education:
Education is an input in to the material wellbeing of a society. It helps people to earn more
income. Education is not an input only but by itself it is an achievement because it allows
individual to participate in decision making that determines the wellbeing of his society and
himself. Hence literacy enrollment rate are taken as indicator of wellbeing. Literacy is
measured above 15 years (a person who could read and write is literate).
Health: – Health status of a household can be taken as an indicator of wellbeing. In addition
to struggling on improving their per capita income, many people in developing countries fight
a constant battle against malnutrition, disease and ill health. The health status of individuals
can be assessed by infant mortality rate and under 5 mortality rate(both measured out of 1000
live births), and life expectancy.
Nutrition:
According to M.P.Todaro, in most Asian and African countries, over 60% of the population
barely met minimum caloric requirements necessary to maintain adequate health.
Anthropometry Measures: Anthropometry can be used to asses nutritional status at individual
and population level . A decline in an individual’s anthropometric index from one point in
time to another could indicate illness and /or nutritional deficiency. At population level,
similarly it indicates the prevalence of diseases and malnutrition. To construct an
anthropometric indices we need weigh , height and age of individuals.
There are three measures.
1) Stunting
2) Wasting Children <5
3) Body mass Index
Stunting: is measured by dividing the height of the child by its age. Low height to age ratio is
an indication of stunting ( shortness). It is associated with poor overall economic condition
and repeated exposure to adverse condition.

Wasting: - is measured by dividing the weight of the child by its height. Low weight (kg) to
height (meter) is an indication of thinness. It is a short run measure of malnutrition

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Body Mass Index (BMI): This is a measure of adult malnutrition. This measure is obtained
by dividing the weight (kg) of an individual by the square of his/her height (meter). This
measure does not hold for pregnants and individuals with some health problems.
- If BMI > 18.4 , the individual is normal.
- If 17 < BMI < 18.4 , the individual is in Grade -I chronic energy deficient.
- If 16 < BMI < 17 , the individual is in Grade -II chronic energy deficient.

- If BMI<16 , the individual is in Grade- III chronic energy deficient.

3. Vulnerability:- is the probability of an individual being exposed to various shocks that

makes him to be poor. At micro level the most important risk that affects the poor are the risk
of illness, death, injury, disability, harvest failure and unemployment. At meso (community)
level vulnerability includes deforestation, harvest failure, soil degradation, natural calamities
such as earth quick, flood and civil war. At Macro level: food, drought, inflation, balance of
payment etc could be some of the risk. These sources of vulnerability can reduce the live
hold of house hold capacity to get out of poverty. While the micro level risks can be offset by
actions at house hold level, the macro level risks require a public action.
4. Voicelessness:- refers to lack of voice, power and independence as well as
humiliation ,shame, exploitation by institutions of the state and the society.
Example:-Gender discrimination.
The absence of rule of law, lack of protection against violence, lack of civility and
unpredictability of public officials are some of the indicators of voicelesness. Voicelessness in
general means being prevented to involve in decision making that affects his life. The solution
for voicelessness is empowering people. Empowerment is an active process which occurs at
different levels.
At house hold level: empowerment refers to intra- house hold equality and access to and
control over resources as well as decision making.
At community, regional and national level: empowerment means equality in access to
resources and social interactions that affect gender inequality. Empowerment also includes
representativeness in decision making bodies at local, regional and national level of
governments.

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