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Civil Service Institute

Introduction to economic development

SOPHOMORE: DEVELOPMENT MANAGEMENT

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introduction

From the lecturer

From the students

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Course objectives
 Understanding the meaning and concept of ED.
 To assess the need for investment criteria in less-developed
countries.
 Domestic Resources for Development:-Here we shall chiefly
examine the roles of (a) monetary, (b) inflationary, and (c) fiscal
policies in financing growth ;
 To understand the Foreign Resources and Economic
Development ;
 To analyze in detail Green Revolution and Income Distribution.
 Understanding of Industrialization, Protection and Trade
Policies
 Environment and Development to highlight efficient use of
natural resources..
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Course Outline
CHAPTER ONE: Principles and Concepts of ED
CHAPTER TWO: Allocation Of Resources: Investment Criteria
CHAPTER THREE: Domestic Resources for Development
CHAPTER FOUR: Foreign Resources and Economic Development
CHAPTER FIVE: Green Revolution and Income Distribution
CHAPTER SIX: Industrialization, Protection and Trade Policies
CHAPTER SEVEN: Environment and Development
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In BREIFE What is

1. Economics?

2. Macro & micro economics?

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objectives of chapter one

 The Characteristics of Less-Developed Countries .

 Types Of Markets In Less-Developed Countries

 Production Conditions In Less-Developed Countries

 Growth and Development

 Human Development Index

 7 CHAPTER ONE:
INTRODUCTION
 Development economics is separate discipline that deal on the problems of
developing countries. It emerged as a separate course since 1950s to investigate
the problems of poor nation.

 Development economics focus on various development issues like:

Structural transformation, Sustainable development, Human capital development,
Infrastructural development, Economic growth and Macroeconomic stability.

 Development economic concerned with efficient resource allocation and at the

same time it study the elite behind efficient resource allocation.

 Development economics is the study of how economies are transformed from

stagnation to growth and from low income to high-income status, and overcome
problems of absolute poverty.
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Cont..

 The problem of the economic development of the poor countries of today’s world is one of
the most widely discussed topics of our time.

 Experts in various fields such as economics, politics, sociology and engineering have held
different views about the nature of underdevelopment and poverty, its causes and its
remedies.

 The understanding of the problem of underdevelopment requires a good knowledge of

certain basic characteristics of the less-developed countries (henceforward to be referred to
as LDCs).

 The analysis of these characteristics will shed some light on the peculiar economic and
social conditions of production, consumption and distribution of income and wealth in the
LDCs, which will help us to draw some policy implications.
9 1. Characteristics of The LDCs
A. Low per capita real income

 Per capita income indicate the ratio of gross domestic product to total
population in the country. (adjusted for inflation)
.
 Low per capita real income is generally regarded as one of the main
indicators of the socioeconomic conditions of the LDCs.
 A comparison with the economically developed countries (DCs) is
striking. It shows very clearly the difference between the DCs and the
LDCs.

 If the per capita income of the USA and India are considered, it is clear
that an average Indian earned about 1.5 per cent of the income of an
average American in 1991. Most of the LDCs show this very low ratio of
income to population.

 Low per capita real income is a reflection of low productivity, low saving
and investment and backward technology and resources.
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Cont.…
B. Population: Most LDCs generally experience a high population growth rate
or, where the population growth rate is not very high in comparison with other
LDCs, the size of the population may be very high (e.g. China and India).
C. Unemployment, Under-Employment & Disguised Unemployment and Low
Productivity:
 Unemployment is the absence of job opportunities, either because of the low
level of economic activity or because of the poor growth rate or both,
 underemployment is a situation whereby the type of employment has not
much relation to the qualification of the employees, wages are above the
marginal productivity of labour and a large portion of labour-hours remains
unused.
 Disguised unemployment is supposed to occur when the employment of an
additional unit of labour does not add anything to production. This situation
is also known as 'hidden unemployment'.
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Cont.…
D. Poverty is a state or condition in which a person or community didn’t met
the minimum amount of income needed to cover basic needs
E. Income Distribution: The pattern of income distribution within the LDCs
shows considerable variation. In general, there is evidence to suggest that the
pattern of income distribution tends to be more unequal in most LDCs in
comparison with the DCs (Ahluwalia 1974b).
F. Predominance of Agriculture in the National Economy: Agriculture
usually dominates the economies of many LDCs. It generally accounts for 45–
90 per cent of the total output and about 60–95 per cent of total employment.
Clearly, the economic growth and development of these countries will be
closely tied to the general development of agriculture.
G. Foreign Trade: Foreign trade generally forms a rather small part of the
national income in many LDCs. There are some exceptions, however, e.g. Hong
Kong and Taiwan. The pattern of foreign trade for most LDCs is usually
characterized by former colonial trade relationships.
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2. Types Of Markets In Less-Developed Countries

In many developing countries, legal and institutional foundations
for markets are extremely weak. Some aspects of market underdevelopment
are that they often lack of
 A legal system that enforces contracts and validates property rights;
 A stable and trustworthy currency;
 An infrastructure
 A well-developed and efficiently regulated system of banking and
insurance, loanable funds and enforce rules of repayment;
 Substantial market information for consumers and producers about prices,
quantities, and qualities of products and resources as well as the
creditworthiness of potential borrowers; and
 Social norms that facilitate successful long-term business relationships.
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3. Production Conditions In LDCs
 Let us assume, in line with standard economic theory, that total output produced within a
country (Q) is given by land (La), labour (L), capital (K) and organization (R). More formally
Q=f(La, L, K, R)
 Resource allocation will be optimal at the point where the marginal productivity of the
different factors is equal to the factor prices
Land:- Land in most LDCs is one of the major inputs, if not the major input, of production. The
pattern of land ownership in most LDCs suggests that a great proportion of cultivated land is
held by a small minority of landowners, whereas a great majority of the peasants frequently hold
a small proportion of such land.
Labour Market:- Most LDCs experience high growth rates of population which add to the flow
of labour supply every year. The labour market is far from homogeneous. Lack of skilled labour
is observed in many African and some Asian countries. The supply of labour tends to exceed its
demand by a significant amount which results in unemployment—open, disguised or under-
employment.
Lack of proper educational facilities, poor health and standard of nutrition, and paucity of both
physical and social capital could account for the low productivity that is often observed in the
labour market in most LDCs.
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Cont.…

Capital Market:-The capital market in the LDCs is often narrow and difficult to
measure. Usually, buildings, machinery and equipment are treated as parts of
capital. The definition of capital is always difficult and such a definition can only
be broad in the context of the LDCs.
Capital is one of the scarcest and important inputs in the LDCs and thus most
LDCs have given major emphasis to the role of capital formation for economic
growth.
Organization:-The lack of entrepreneurship is regarded as one of the major bottlenecks in
the development of the LDCs. Where the entrepreneur class existed, governments did not
provide sufficient incentives for its prosperity.
Commodity Market:-The commodity markets in most LDCs are also
characterized by duality. This is so because in parts of such markets (e.g. in
agriculture) barter forms of transaction, rather than monetary transactions, take
place.
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4. Growth and Development
Is per capita real income a valid index for measuring development of
the LDCs?
 The terms ‘growth’ and ‘development’ are usually used to mean the same
thing. A growth of the per capita income is supposed to contribute to a
general rise in the standard of living of the people in general. But growth
and development need not be the same.
 In other words, per capita real income figures are derived by dividing the
total real national income by the total population to obtain an average
figure and these averages could be misleading.
 A country’s gross domestic product (GDP) may grow at a very fast rate
and yet only a small proportion of its population could be the
beneficiaries of such growth, while the masses of its population may not
experience any improvement in their standard of living. There may be
growth but no development.
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Cont..
 Second, a fast growth rate in total output may indicate a healthy state of the
economy, but if population growth rate matches the output growth rate, then
per capita growth rate is negligible. Here also growth without development
is possible. The important variable which is hindering the ‘development’ in
this case is the growth of population.
 Third, the use of per capita real income or consumption data, converted into
the foreign exchange rate, may not always be an adequate index to measure
the development in a world of floating exchange rates .
 Finally, the quality of life is to be regarded as an important index of
development. It is contended that such quality is not adequately reflected in
the index of per capita income growth.
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Cont..
 A country (X) may have a lower per capita real income than the other (Y),
but the quality of life enjoyed by the citizens of X may be better than that of
Y.
Several factors are involved in the measurement of such ‘quality’, e.g.
1. Education and literacy rates;
2. Life expectancy;
3. The level of nutrition as measured by calorie supply per head or by some
such index;
4. Consumption of energy per head;
5. Consumption of iron and steel per head;
6. Consumption of consumer durables per capita;
7. The proportion of infant mortality per thousand of live population.

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Cont..
 The above analysis suggests that the per capita real income growth rate is
not a very satisfactory measure of economic ‘development’ and that it needs
to be supplemented by other indices such as per capita real consumption,
monetary, non-monetary, demographic and socio-political variables,
 e.g. life expectancy, infant mortality, education, literacy, distribution of
income among the different classes, and level and extent of people’s
participation in the government and the degree of decentralization of
economic and political power.

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5. Human Development Index
 It has been mentioned that a rise in per capita income is a necessary but not
sufficient condition to measure economic or human development.
 In 1990, the United Nations Development Programme (UNDP) published a
human development index (HDI)—a new yardstick that provides a broad
method by which inter-country and inter- temporal comparisons of living
standards can be undertaken.
 Since it has been widely acknowledged that national accounting concepts do
not capture all aspects of economic welfare, e.g. environmental pollutions
and quality of life, social justice etc., and neglect the important issue of
nonmarket goods in LDCs

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Cont..
 Penn World Tables (1993) provide a meaningful basis of comparative economic
development. They do not provide the exact index of the physical quality of life (PQLI).
The PQLI is generally based on three indicators:
1. Infant Mortality (IM)
2. Life Expectancy (e)
3. Basic Literacy (L), i.e.
PQLI=f(IM, e, L)
To construct the PQLI, we can write
PQLI = (IMI, eI, LI)/3
where IMI is an index of IM, eI is an index of e and LI is an index of L.
The last equation could be rewritten as

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Cont..
 The HDI attempts to rank all countries on a scale of 0 (lowest human
development) to 1 (highest human development) based on three goals or end
products of development:
 longevity as measured by life expectancy at birth,
 knowledge as measured by a weighted average of adult literacy (two-thirds) and
gross school enrollment ratio (one third), and
 standard of living as measured by real per capita gross domestic product adjusted
for the differing purchasing power parity of each country’s currency to reflect
cost of living and for the assumption of diminishing marginal utility of income.
 the HDI ranks countries into four groups: low human development (0.0 to 0.499),
medium human development (0.50 to 0.799), high human development (0.80 to
0.90), and very high human development (0.90 to 1.0).

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End