Chapter No.1

P A RT - I

INTRODUCTION

CHAPTER

1 Economics of De velopment : Dev Conce pts and Appr oac hes Concepts Approac oaches

INTRODUCTION The Economics of Development refers to the problems of the economic development of underdeveloped countries. Though the study of economic development has attracted the attention of economists right from Adam Smith down to Marx and Keynes, yet they were mainly interested in the problems which were essentially static in nature and largely related to a Western European framework of social and cultural institutions. It is, however, in the forties of the 20th century and especially after the Second World War that economists started devoting their attention towards analyzing the problems of underdeveloped countries and formulating theories and models of development and growth. Their interest in the economics of development has been further stimulated by the wave of political resurgence that swept the Asian and African nations as they threw off the colonial yoke after the Second World War. The desire on the part of new leaders in these countries to promote rapid economic development coupled with the realisation on the part of the developed nations that ‘poverty anywhere is a threat to prosperity everywhere,’ has aroused further interest in the subject. But the interest of the wealthy nations in removing widespread poverty of the underdeveloped countries has not been aroused by any humanitarian motive. The most cogent reason for aiding

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The Economics of Development and Planning

the underdeveloped countries had been the cold war between Russia and the West before the collapse of the Soviet Union, each trying to enlist the support and loyalty of underdeveloped countries by promoting larger aid than the other. Economic development has also an export value for both the aid-giving and aid-receiving countries. In order to avoid secular stagnation, rich countries need an ever-increasing rate of development which must be accompanied by an outlet for the use of their growing capital stock. Poor countries need an accelerating rate of development to increase their export potential for avoiding deficit in balance of payments. However, a study of the Poverty of Nations and the methods of removing poverty cannot be based on the experience of the rich nations. For ‘in the advanced countries there has been a tendency to take economic development for granted as something that takes care of itself and to concentrate on the short-term oscillations of the economy”.1 Therefore, Myrdal says that the underdeveloped countries should not accept our inherited economic theory uncritically but remould it to fit their own problems and interests.2

ECONOMIC DEVELOPMENT AND ECONOMIC GROWTH Generally speaking, economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries. Maddison makes the distinction between the two terms in this sense when he writes: “The raising of income levels is generally called economic growth in rich countries and in poor ones it is called economic developinerit:3 But this view does not specify the underlying forces which raise the income levels in the two types of economies. Mrs. Hicks points out in this connection that the problems of underdeveloped countries are concerned with the development of unused resources, even though their uses are well-known, while those of advanced countries are related to growth, most of their resources being already known and developed to a considerable extent. 4 In fact, the terms ‘development’ and ‘growth’ have nothing to do with the type of economy. The distinction between the two relates to the nature and causes of change. Schumpeter makes the distinction clearer when he defined development,” as a discontinuous and spontaneous change in the stationary state which forever alters and displaces the equilibrium state previously existing; while growth is a gradual and steady change in the long run which comes about by a gradual increase in the rate of savings and population.”5 This view of Schumpeter has been widely accepted and elaborated by the majority of economists. According to Kindleberger, “Economic growth means more output, while economic development implies both more output and changes in the technical and institutional arrangement by which it is produced and distributed. Growth may well involve not only more output derived from greater amounts of inputs but also greater efficiency, i.e., an increase in output per unit of input. Development goes beyond this to imply changes in the composition of output and in the allocation of inputs by sectors.”6 Friedman defines growth as an expansion of the system in one or more dimensions out a change in its 1. Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries. p.12. 2. G. Myrdal, Economic Theory and Underdeveloped Region, p. 99. 3. A. Maddison, Economic Progress and Policy in Developing Countries, 1970. 4. U. Hicks, “Learning about Economic Development”, O.E.P., Feb. 1957. 5. J.A. Schumpeter, The Theory of Economic Development, 1934. 6. C.P. Kindleberger, Economic Development, 2/e, 1965.

Economics of Development : Concepts and Approaches

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structure, and development as an innovative process leading to the structural transformation of social system. Thus economic growth is related to a quantitative sustained increase in the country’s per capita output or income accompanied by expansion in its labour force, consumption, capital and volume of trade. On the other hand, economic development is a wider concept than economic growth. “It is taken to mean growth plus change.” It is related to qualitative changes in economic wants, goods, incentives, institutions, productivity and knowledge or the “upward movement of the entire social system”, according to Myrdal. It describes the underlying determinants of growth such as technological and structural changes. In fact, economic development embraces both growth and decline. An economy can grow but it may not develop because poverty, unemployment and inequalities may continue to persist due to the absence of technological and structural changes. But it is difficult to imagine development without economic growth in the absence of an increase in output per capita, particularly when population is growing rapidly. Despite these apparent differences, some economists use these terms as synonyms. Arthur Lewis is his The Theory of Economic Growth writes that “most often we shall refer only to growth but occasionally for the sake of variety, to progress or to development”. These terms will also be used as synonyms throughout this text. MEASUREMENT OF ECONOMIC DEVELOPMENT

Change in National Income

Economic development is measured in four ways: 1. GNP. One of the methods to measure economic development is in terms of an increase in the economy’s real national income over a long period of time. This is explained in terms of Fig. 1 where time ∆Y / ∆T T is taken on the horizontal axis and change in GNP Yb in relation to time ∆Y/∆t on vertical axis. The curve Ya shows the level of GNP in country A and the curve Yb in country B. Upto time T, the increase in Ya GNP in country A is higher than in country B. But E in the long run with the starting of the development process in country B, GNP increases at a faster rate than in country A. This is clear from the figure where Yb > Ya after point T. But this. is not a satisfactory definition due to the following reasons: (1) “Real national income” refers to the country’s O Time total output of final goods and services in real terms T rather than in money terms. Thus price changes will Fig. 1 have to be ruled out while calculating real national income. But this is unrealistic because variations in prices are inevitable. In this measure, the phrase “over a long period of time” implies a sustained increase in real income A short-period rise in national income which occurs during the upswing of business cycles does not constitute economic development. (2) This measure fails to take into consideration changes in the growth of population. If a rise in real national income is accompanied by a faster growth in population, there will be no economic growth but retardation. 7. John Friedmann, in Growth Centres in Regional Economic Development, (ed.), N.M. Hansen, 1972.

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(3) The GNP figure also does not reveal the costs to society of environmental pollution, urbanisation, industrialisation and population growth. It considers natural resources to be free and treats the earth “like a business in liquidation.” (4) Further, it tells us nothing about the distribution of income in the economy. (5) Moreover, there are certain conceptual difficulties in the measurement of GNP which are discussed as under: (a) GNP is always measured in money, but there are a number of goods and services which are difficult to be assessed in terms of money, e.g., painting as a hobby by an individual, the bringing up of children by the mother. According to a UN Report, on an average two-thirds of women’s work and a quarter of men’s work never enter into GNP calculations. By excluding all such services from it, the GNP will work out less than what it actually is. (b) Another difficulty in calculating GNP is of double counting which arises from the failure to distinguish properly between final and intermediate products. There always exists the fear of a good or a service being included more than once. If it so happens, the GNP would work out to be many times the actual. (c) As a corollary, it double counts both addictions and cures. First, when food and wine are consumed. Second, when money is spent on the food industry and for curing alcoholism. (d) GNP makes no distinction between such valuable services as bringing up children and manufacture of such products as wine or cigarettes injurious to health. Thus it equates goods with bads. (e) Income earned through illegal activities such as gambling, or illicit extraction of wine, etc. is not included in GNP. Such goods and services do have value and meet the needs of the consumers. But by leaving them out, GNP works out to less than the actual. (j) Then there arises the difficulty of including transfer payments in GNP. Individuals get pension, unemployment allowance and interest on public loans, but whether these should be included in national income is a difficult problem. On the one hand, these earnings are a part of individual income and, on the other, they are government expenditure. (g) Capital gains or losses which accrue to property owners by increases or decreases in the market value of their capital assets or changes in demand are excluded from the GNP because such changes do not result from current economic activities. It is only when capital gains or losses are the result of the current flow or non-flow of productive activities that they are included in the GNP. (h) All inventory changes whether negative or positive are included in the GNP. The procedure is to take positive or negative changes in physical units of inventories and multiply them by current prices. Then this figure is added to total current production of the firm. But the problem is that firms record inventories at their original costs rather than at replacement costs. When prices rise there are gains in the book value of inventories. Contrariwise, there are losses when prices fall. So the book value of inventories overstates or understates the actual inventories. (i) When we deduct capital depreciation from GNP, the resulting measure is GNP. Depreciation is a charge on profit which lowers national income. But the problem of estimating the current depreciated value of a piece of capital, whose expected life is, say, fifty years, is very difficult. The usual practice on the part of firms is to base their depreciation provisions on the original cost of their assets. When prices of capital goods are changing, the annual depreciation provision will then measure the cost of using fixed assets for some fifty years (i.e., the time when the assets were bought) rather than the current cost of using them. Unlike inventories, a depreciation valuation adjustment is full of statistical difficulties, such as the age-composition of the whole


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capital stock, and changes in prices of capital goods every year since the assets were bought. (j) The calculation of GNP in terms of money is the underestimation of real GNP. It does not include the leisure forgone in the process of production of a commodity. The income earned by two individuals may be equal, but if one works longer hours than the other, it would be correct to say that the real income of the former has been understated. Thus GNP places no value on leisure. (k) In calculating GNP, a good number of public services are also taken which cannot be estimated correctly. How should the police and military services be estimated? In the days of war, the forces are active, but during peace they rest in cantonments. Similarly, to estimate the contribution made to GNP by profits earned on irrigation and power projects in terms of money is also a difficult problem. Conclusion. The emphasis on GNP as the index of economic development is based on the application of experience of the developed countries on the underdeveloped countries which differ radically from the socio-economic setup of the former. An OECD Report emphasises in this connection that the developed countries “took for granted that the GNP growth, largely concentrated in the industrial sector, would bring with it automatically full employment and eradication of the poverty as it had seemed to do for them. They failed to remember that during their period of early industrialisation, population growth was slow, technology quite labourintensive, emigration was relatively easy if people could not find a job, and there was no competition from already highly industrialised societies or restriction by them on access to their markets.”8 Unfortunately, economists in underdeveloped countries and their Western advisers have viewed economic development in such countries as structural transformation whereby the share of agriculture declines and that of manufacturing and service sectors increases in GNP. Accordingly, they have laid stress on such development strategies which aim at rapid industrialisation alongwith urbanisation at the cost of rural and agricultural development. So far as the solutions of such problems as poverty, unemployment and income distribution are concerned, they have been given secondary importance. This is because it is thought that with increase in GNP such problems will be automatically solved in the long run when its benefits would automatically “trickle down” to the poor in the form of increased employment and income opportunities. But GNP as an index of economic development has not been successful in reducing poverty, unemployment and inequalities, and raising living standards in developing countries. Robert McNamara, the then Governor of the World Bank, admitted in February 1970 the failure of the GNP growth rate as an index of economic development in these words : “In the developing world, at the end of the decade : malnutrition is common, infant mortality is high, life expectancy is low, illiteracy is widespread, unemployment is endemic and growing, the redistribution of income and wealth is severely skewed.” Thus GNP cannot be regarded as a measure of economic development. 2. GNP Per Capita. The second measure relates to an increase in the per capita real income of the economy over the long period. Economists are one in defining economic development in terms of an increase in per capita real income or output. Meier defines economic development “as the process whereby the real per capita income of a country increases over a long period of time subject to the stipulations that the number of people below an ‘absolute povery line’ does not increase, and that the distribution of income does not become more unequal.”9 This indicator of economic 8. OECD, Development Cooperation 1973 Review, 1973, Italics mine. 9. G.M. Meier, Leading Issues in Economic Development, p.7.

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growth purports to emphasize that for economic development the rate of increase in real per capita income should be higher than the growth rate of population. But difficulties still remains. 1. An increase in per capita income may not raise the real standard of living of the masses. It is possible that while per capita real income is increasing, per capita consumption might be falling. People might be increasing the rate of saving or the government might itself be using up the increased income for military or other purposes. 2. There is another possibility of the masses remaining poor despite an increase in the real GNP per capita if the increased income goes to the few rich instead of going to the many poor. 3. Such a measure subordinates other questions regarding “the structure of the society, the size and composition of its population, its institutions and culture, the resource patterns and even distribution of output among the society’s members.” 4. The real per capita income estimates fail to measure adequately changes in output due to changes in the price level. Index numbers used to measure changes in the price level are simply rough approximations. Moreover, the price levels vary in different countries. Consumers’ wants and preferences also differ in each country. Therefore, the national income figures of different countries are often misleading and incomparable. 5. International comparisons of the real GNP per capita are inaccurate due to exchange rate conversion of different currencies into a common currency, i.e., US dollars, through the use of official exchange rates. These nominal exchange rates do not reflect the relative purchasing power of different currencies. Thus the comparisons of GNP per capita of different countries are erroneous. The use of a single currency unit for computing the total output of goods and services underestimates the per capita national incomes of underdeveloped countries as compared with the developed ones. The rates of exchanges are primarily based on the prices of internationally traded goods. But many goods and services in underdeveloped countries that are never traded internationally and are also priced low. Economists, therefore, prefer to measure GNP per capita in terms of the purchasing power parity of a country in dollars rather than in exchange rate. 6. The real GNP per capita fails to take into account problems associated with basic needs like nutrition, health, sanitation, housing, water and education. The improvement in living standards by providing basic needs cannot be measured by increase in GNP per capita. Despite these limitations, the real GNP per capita is the most widely used measure of economic development. 3. Welfare. There is also a tendency to measure economic development from the point of view of economic welfare. Economic development is regarded as a process whereby there is an increase in the consumption of goods and services of individuals. According to Okun and Richardson, economic development is “a sustained, secular improvement in material well-being, which we may consider to be reflected in an increasing flow of goods and services”.10 This indicator is also not free from limitations. First, limitation arises with regard to the weights to be attached to the consumption of individuals. Consumption of goods and services depends on the tastes and preferences of individuals. It is, therefore, not correct to have the same weights in preparing the welfare index of individuals. Second, in measuring economic welfare caution has to be exercised with regard to the composition of the total output that is giving rise to an increase in per capita consumption, and how this output is being valued. The increased total output may be composed of capital goods. It may be 10. O. Okun and R.W. Richardson, Studies in Economic Development. p.230.


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at the cost of a reduced output of consumer goods. Third, the real difficulty arises in the valuation of the output. The output may be valued at market prices whereas economic welfare is measured by an increase in real national output or income. In fact, with a different distribution of income, prices would be different and both the composition and value of national output would also be different. Fourth, from the welfare point of view we must also consider not only what is produced but how it is produced. The expansion of real national output might have raised the real costs (pain and sacrifice) and social costs in the economy. For instance, the increased output might have resulted from long hours and in the deterioration of the working conditions of the labour force. Fifth, it is not essential that with the increase in national income, the economic welfare might have improved. It is possible that with the increase in real national income/per capita income, the rich might have become richer and the poor poorer. Thus, mere increase in economic welfare does not lead to economic development till the distribution of national income is equitable or justifiable. Last, we cannot equate an increase in output per head with an increase in economic welfare, let alone social welfare without additional considerations. To specify an optimum rate of development, we must make value judgements regarding income distribution, composition of output, tastes, real cost and other particular changes that are associated with the overall increase in the real income. 4. Social Indicators or Basic Needs. Dissatisfied with GNP/GNP per capita as the measure of economic development, certain economists have tried to measure it in terms of social indicators. Economists include a wide variety of items in social indicators. Some are ‘inputs’, such as nutritional standards or number of hospital beds or doctors per head of population, while others may be ‘outputs’ corresponding to these inputs such as improvements in health in terms of infant mortality rates, sickness rates, etc. Social indicators are often referred to as the basic needs for development. Basic needs focus on alleviation of poverty by providing basic human needs to the poor. The direct provision of such basic needs as health, education, food, water, sanitation and housing affects poverty in a shorter period and with fewer monetary resources than GNP/GNP per capita strategy which aims at increasing productivity and incomes of the poor automatically over the long run. Basic needs lead to a higher level of productivity and income through human development in the form of educated and healthy people. The merit of social indicators is that they are concerned with ends, the ends being human development. Economic development is a means to these ends. Social indicators tell us how different countries prefer to allocate the GNP among alternative uses. Some may prefer to spend more on education and less on hospitals. Moreover, they give an idea about the presence, absence or deficiency of certain basic needs. Hicks and Streeten11 consider six social indicators for basic needs: Basic Needs

Indicator

1. Health 2. Education

Life expectancy at birth. Literacy signifying primary school enrolment as per cent of population. Calorie supply per head.

3. Food

11. Norman L. Hicks and Paul P. Streeten, “Indicators of Development : The Search for a Basic Needs Yardstick,” World Development, Vol. 7, 1979.

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4. Water Supply 5.

Sanitation

6.

Housing

Infant mortality and percentage of population with access to potable water. Infant mortality and percentage of population with access to sanitation. None.

Except for calorie supply per head, all other indicators are output indicators. Of these, infant mortality is both the indicator of sanitation and clean drinking water facilities because children are prone to water-borne diseases. It is also related to life expectancy at birth and nutritional deficiencies among infants. Thus, the infant mortality rate measures four of the six basic needs. Limitations. The following are the limitations of social indicators as the measure of economic development. Problems arise in constructing a composite index based on a rational weighting system. First, there is no unanimity among economists as to the number and type of items to be included in such an index. For instance, Goldstein takes only infant mortality as an indicator of basic needs to construct an index.12 Hagen,13 and UNRISD14 use eleven to eighteen items with hardly a few common. On the other hand, Morris uses only three items, i.e., life expectancy at birth, infant mortality and literacy rate in constructing a “Physical Quality of Life Index” relating to 23 developed and developing countries of the world for a comparative study. Second, there is the problem of assigning weights to the various items which may depend upon the social, economic and political setup of the country. This involves subjectivity. Morris D. Morris15 assigns equal weights to the three indicators which undermine the value of the index in a comparative analysis of different countries. If each country chooses its own list of social indicators and assigns weights to them, their international comparisons would be as inaccurate as GNP figures. Third, social indicators are concerned with current welfare and are not related to the future. Fourth, the majority of indicators are inputs and not outputs, such as education, health, etc. Last, they involve value judgements. Therefore, in order to avoid value judgements and for the sake of simplicity, economists and UN organisations use GNP per capita as the measure of economic development. BASIC NEEDS VS ECONOMIC GROWTH Is there any conflict between economic growth and basic needs strategy? As already noted above, basic needs are concerned with ends and economic growth is a means to these ends. So there is no conflict between basic needs and economic growth. Goldstein found a strong correlation between economic growth and basic needs, as measured by infant mortality rates. He indentifies economic growth with efficiency. To him, efficiency is the level of GDP required to reach the infant mortality target of below 5 per cent. Countries that spend a large percentage of their GDP for public health are more efficient because they are able to reduce their infant 12. J.S. Goldstein, “Basic Human Needs: The Plateau Curve”, World Development, Vol. 13, 1985. 13. E.E. Hagen, “A Framework for Analysing Economic and Political Development” in Development of Emerging Countries, (ed.) R.E. Asher, 1962. 14. United Nations Research Institute for Social Development (UNRISD), Contents and Measurement of Social Economic Development, 1970. 15. Morris D. Morris, Measuring the Condition of the World’s Poor : The Physical Quality of Life Index, 1979.


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CONCLUSION

Consumption Per Head

mortality rates. He found that a few developing countries have used very modest resources to meet the basic needs of health and education. In his cross-sectional study, he took school enrolment and female educational attainment alongwith health. He found that a few UDCs had used very modest resources to meet the basic needs of education and health. He came to the conclusion that those UDCs that concentrate on primary school education and women’s education can develop more by spending less to meet these basic needs. Fei, Ranis and Stewart16 found that meeting basic needs do not reduce productive investment in developing countries. They took a sample of nine countries. Their study revealed that Taiwan, South Korea, the Philippines, Uruguay and Thailand provided good basic needs and had above average investment ratios, whereas Columbia, Cuba, Jamaica and Sri Lanka had average investment ratios with good basic needs. They also related above average and below average economic growth and performance in providing basic needs for nine different countries. Of these, Taiwan, South Korea and Indonesia which had provided good basic needs had also above average economic growth. Brazil with bare minimum basic needs had also above average economic growth. On the other hand, Somalia, Sri Lanka, Cuba and Egypt had below average economic growth even by providing good basic needs. One country, Male, with bare minimum basic needs had below average economic growth. They concluded that the provision for more basic needs does lead to economic growth. Norman Hicks has also shown in his study that the basic A3 needs strategy had led to increase in the growth rate A1 of a number of developing countries. C B

A2

Let us compare the effects over time of GNP/GNP per capita, welfare and basic needs approaches to economic development. Figure 2 shows three paths A1’ A2 and A3. Time is taken on the horizontal axis and the growth rate as measured by the consumption per head of the poor on the vertical axis. Path A1 relates to the GNP/GNP per capita strategy. It shows that in the beginning the consumption per head of the poor declines up to O T2 T3 Time T1 time T1 because with rapid industrialisation and Fig. 2 urbanisation, poverty, unemployment and inequalities increase. When the gains from the growth of GNP/GNP per capita “trickle down” to the poor, their employment and incomes increase and per capita consumption also increases from time T1 upwards. Path A2 relates to the welfare approach which shows a gradual increase in per capita consumption of the poor. It lags behind path Al from time T2. Path A3 relates to the basic needs approach. In the beginning, high priority is given meeting the basic minimum current consumption level of the poor which may be below the consumption levels of the GNP/GNP per capita and welfare approaches up to time T3 . When the basic needs of the poor are met over time and their levels of productivity and incomes increase, growth is steeper from time T3 upwards. Path A3 overtakes first path A2 at point B and then path A1 at 16. C.H. Fei, G. Ranis and F. Stewart, Basic Needs : A Framework for Analysis, 1979.

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point C. Thus, the basic needs strategy is better than the GNP/GNP per capita and welfare strategies of economic development.

HUMAN DEVELOPMENT INDICES Economists have tried to measure social indicators of basic needs by taking one, two or more indicators for constructing composite indices of human development. We study below the Physical Quality of Life Index (PQLI) of Morris and the Human Development Index (HDI) as developed by the United Nations Development Programme (UNDP). 1. PHYSICAL QUALITY OF LIFE INDEX (PQLI) The Physical Quality of Life Index was the most serious challenge to GNP per capita as the index of development. It was invented by M.D. Morris in 1979. He constructed a composite Physical Quality of Life Index (PQLI) relating to 23 developing countries for a comparative study. He combined three component indicators of infant mortality, life expectancy at age one and basic literacy at age 15 to measure performance in meeting the most basic needs of the people. This index represents a wide range of indicators such as health, education, drinking water, nutrition and sanitation. The PQLI shows improvement in the quality of life when people enjoy the fruits of economic progress with increase in life expectancy (LE), fall in infant mortality rate (IMR) and rise in basic literacy rate (BLR). Each indicator of the three components is placed on a scale of zero to 100 where zero represents an absolutely defined worst performance and 100 represents an absolutely defined best performance. The PQLI index is calculated by averaging the three indicators giving equal weight to each and the index is also scaled from 0 to 100. If the indicators of life expectancy and basic literacy rate are positive, the best performance is shown as the maximum and the worst as the minimum. Infant mortality rate being a negative indicator, for this the best indicator is shown as the minimum and the worst as the maximum. To find out the achievement level of the positive variable, its minimum value is deducted from its actual value and the balance is divided by the difference (range) between maximum value and minimum value i.e.

Actual Value – Minimum Value Max. Value – Min.Value To find out the achievement level for a negative indicator, its actual value is deducted from its maximum value and the balance is divided by the difference (range) between maximum value and minimum value i.e. Achievement Level =

Achievement Level = For life expectancy and infant mortality rate, there is no natural maximum and minimum value. But there is need to select the right values. According to Morris, each of the three indicators measures results and not inputs such as income. Each is sensitive to distribution effects. It means that an improvement in these indicators signifies


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an increase in the proportion of people benefiting from them. But none of the indicators depends on any particular level of development. Each indicator lends itself to international comparison. Taking Gabon’s infant mortality rate of 229 per thousand live births as the worst rate in 1950, Morris sets it at 0. At the upper end, the best achievement is set at 9 per thousand for the year 2000. Again, taking Vietnam’s life expectancy at age one as 38 years in 1950, Morris sets it at 0 of the life expectancy index. The upper limit is set at 77 years for men and women combined for the year 2000. Lastly, the basic literacy rate at 15 years is taken as the literacy index. This set of values is presented in Table 1. Table 1: Maximum and Minimum Values of Component Indicators Dimension

Maximum

Minimum

Range

229 77 180

9 38 0

220 39 100

Infant Mortality Rate Life Expectancy at Age One Basic Literacy Rate

One this basis, Morris presents the following correlation : (N = 150)

Infant Mortality Rate

Life Expectancy

–0.919 –0.919

–+ 0.897

Life Expectancy at Age One Literacy Rate

The coefficient of correlation between life expectancy at age one and infant mortality is of a high degree and negative. Similar is the correlation between literacy and infant mortality rate i.e., with literacy the infant mortality rate declines. The coefficient between literacy and life expectancy shows a high degree of positive correlation i.e., with literacy, the life expectancy also increases. Morris regards life expectancy at age one and infant mortality rate as very good indicators of the physical quality of life. So are literacy and life expectancy. In fact, the literacy indicator reflects the potential for development. We present in Table 2 the PQLI performance and GNP per capita of two LDCs and two developed countries. Table 2 : PQLI Performance and GNP Per Capita Growth Rate Country India Sri Lanka Italy USA

1950

PQLI 1960

1970

Average annual GNP Per capita Growth Rate

14 65 80 89

30 75 87 91

40 80 92 93

1.8 1.9 5.0 2.4

Source : Morris D. Morris and M.B. McAlpin, Measuring the Conditions of India’s Poor, 1982. The above table reveals that India which Morris calls a “basket case” exhibited slow but not insignificant improvement in its PQLI from 14 to 40 over a period of two decades from, 1950 to 1970, despite its low growth in average GNP per capita of 1.8. On the other hand, Sri Lanka’s

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PQLI was much higher than India’s during this period, though its average GNP per capita was almost the same. Of the two developed countries, both Italy and USA had very high PQLI. But Italy’s average GNP per capita was more than double the USA. In this connection, Morris observes that here is no automatic link between GNP per capita and PQLI. In fact, the presence or absence of social relations, nutritional status, public health, education and family environment determine a society’s PQLI. Further, it takes considerable time to build institutional arrangements that can generate and sustain a high PQLI. Its Limitations. The PQLI tries to measure “quality of life” directly rather than indirectly. But it has its limitations. 1. Morris admits that PQLI is a limited measure of basic needs. 2. It supplements but does not supplant the GNP. It fails to dislodge GNP from its lofty perch. 3. It does not explain the changing structure of economic and social organisation. It, therefore, does not measure economic development. 4. Similarly, it does not measure total welfare. 5. Morris has been criticised for using equal weights for the three variables of his PQLI which undermine the value of the index in a comparative analysis of different countries. According to Meier, “Non-income factors captured by the PQLi are important, but so are income and consumption statistics and distribution-sensitive methods of aggregation that are ignored by it.”17 Conclusion. Despite these limitations, the PQLI can be used to identify particular regions of underdevelopment and groups of society suffering from the neglect or failure of social policy. It points towards that indicator where immediate action is required. The state can take up such policies which increase the PQLI rapidly alongwith economic growth. CONSTRUCTION OF PQLI On the basis of the values of the component indicators given in Table 1, we can construct the PQLI on the basis of the three indices in the following manner : IMRI = LEI = BLI = We calculate the PQLI for India on the basis of 2001 Census data for these variables : IMR = 67, LE = 65 years, and BL = 65%. IMRI = LEI =

229 – 67 = 0.74 220 = 0.69

17. G.M. Meier, Leadng Issues in Economic Development, p. 9.


BLI =

= 0.65

PQLI = =

15

= = 0.69

Thus the Physical Quality of Life Index for India in 2001 was 0.69. 2. HUMAN DEVELOPMENT INDEX (HDI) Lord Meghnad Desai and Nobel Laureate Amartya Sen invented the Human Development Index and UNDP incorporated it into its first Human Development Report in 1990. Since then, the UNDP has been presenting the measurement of human development* in its annual report. The HDI is a composite index of three social indicators : life expectancy, adult literacy and years of schooling. It also takes into account real GDP per capita. Thus, the HDI is a composite index of achievements in three fundamental dimensions : living a long and healthy life, being educated and having decent standard of living. The HDI value of a country is calculated by taking three indicators : 1. Longevity, as measured by life expectancy at birth. 2. Educational attainment, as measured by a combination of adult literacy (two-thirds weight) combined primary, secondary and tertiary enrolment ratio (one-third weight). 65– IMRI 0.74 Actual 2.080++0.69 Value LEI++0.65 –BLI Minimumand Value 3. Decent standard of living, as measured by real GDP per capita based on purchasing power 100 3 Max.33Value – Min.Value parity in terms of dollar (PPP$). Before the HDI is calculated, an index is created for each of these dimensions: Life Expectancy Index, Education Index and GDP Index. To calculate these indices, minimum and maximum values or goal posts are chosen for each indicator as shown in Table 3. Table 3: Goalposts for Calculating the HDI Indicator Life Expectancy at Birth (yrs) Adult Literary Rate (%) Combined Gross Enrolment Ratio (%) GDP Per Capita (PPP US$)

Max. Value

Min Value

85 100 100 40,000

25 0 0 100

Performance in each dimension is expressed as a value between 0 and 1 by applying the following formula : Dimension Index = The HDI is then calculated as a simple average of the three dimension indices. * For the meaning of Human Development refer to the last section of this chapter.

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The HDI value for each country indicates the distance it has travelled towards the maximum possible value of 1 and how far it has to go to attain certain defined goals : an average life span of 85 years, access to education for all and a decent standard of living. The DHI ranks countries in relation to each other. A country’s HDI rank is within the world distribution i.e., it is based on its HDI value in relation to each developed and developing country for which the particular country has travelled from the minimum HDI value of 0 towards the maximum HDI value of 1. Countries with an HDI value below 0.5 are considered to have a low level of human development, those between 0.5 to 0.8 a medium level, and those above 0.8 a high level. In the HDI, countries are also ranked by their GDP per capita. The Human Development Report, 2004 presented the HDI values, HDI rank, and real GDP per capita ranks for the year 2002 relating to 177 developed and developing countries. Table 4 shows HDI values and HDI ranks for some of the countries. Table 4 : Human Development Index for Selected Countries, 2002 Country

1.

2.

3.

High Human Development Norway Australia USA Japan United Kingdom France Costa Rica Medium Human Development Russian Federation Malaysia Mauritius China Sri Lanka India Bhutan Nepal Low Human Development Pakistan Uganda Zimbabwe Kenya Nigeria Tanzania Zambia

HDI Value

HDI Rank

0.956 0.946 0.939 0.938 0.936 0.932 0.834

1 3 8 9 12 16 45

1 9 –4 6 8 0 14

0.795 0.793 0.785 0.745 0.740 0.595 0.536 0.504

57 59 64 94 96 127 134 140

3 –2 –15 5 16 –10 0 11

0.497 0.493 0.491 0.488 0.466 0.407 0.389

142 146 147 148 151 162 164

–7 4 –25 11 ? 15 3

Source : Human Development Report, 2004.

GDP Per Capita Rank minus HDI Rank


17

Of the 177 countries for which the HDI was calculated, 55 were in the high development category (with an HDI value of 0.80 or more); 86 in medium category (0.5 to 0.79); and 36 in the low category (less than 0.50), Norway, Australia and USA led the HDI rankings in the high HD category. In the medium category, Bulgaria led with HDI rank of 56, Sri Lanka 96, India, 127, Bhutan 134, Bangladesh 138, and Nepal 140. In the Low category, Pakistan led with 142 rank, Uganda 146, Zimbabwe 147, Nigeria 151, Tanzania 162 and Zambia 164. Thus the DHI reveals wide disparities in global human development. For instance, Norway’s HDI value of 0.956 was more than three times of Sierra Leone’s of 0.273 which was at the bottom. The HDI reveals that countries can have similar GDP per capita levels but different HDI values or similar HDI values but very different GDP per capita levels. Thus the HDI ranking of countries differ significantly from their ranking by GDP per capita. Countries whose GDP rank is higher than their HDI rank have considerable potential for distributing the benefits of higher incomes more equitably. But they have been less successful in channelising economic prosperity into better lives from their people. Of the 177 counties in 2002, there were 71 such countries whose HDI rank was lower than their GDP per capita rank. Prominent among them were Algeria (– 103), India (–10), USA (–4), Pakistan (–7) and Zimbabwe (–25). On the other hand, countries whose HDI rank is higher than their GDP rank, suggest that they have effectively made use of their incomes to improve the lives of their people. There were 106 such countries in 2002. Prominent among them were Cuba (39) and Tajikistan (45). It is said that the DHI led to the dethronement of GDP per capita. As a matter of fact, these two concepts do not measure the same thing. The HDI tries to measure the level of human capabilities, the set of choices available to people. On the other hand, GNP per capita is an indicator of well being, utility or welfare, the subjective enjoyment people get from consumption. Thus the HDI is an alternative measure of development. It supplements rather than supplants GNP per capita measure of development and provides different information from GNP per capita. Its Limitations. The HDI is not free from certain limitations. 1. It is a crude index which attempts to catch in one simple number a complex reality about human development and deprivation, according to Prof. Amartya Sen. 2. The three indicators are not the only indicators of human development. There can be others like infant mortality, nutrition, etc. 3. The HDI measures relative rather than absolute human development so that if all countries improve their HDI value at the same weighted rate. The low human countries will not get recognition for their improvement. 4. The weighting scheme for calculating the four components of HDI seems arbitrary. 5. Even giving equal (1/3rd) weight to each of the very different three indices for calculating the HDI is arbitrary. To the extent one component index has a different variance than another, equal weights seem unsatisfactory and unjustify. 6. A country having high HDI may shift the focus from the high inequality, unemployment and poverty found within it. Conclusion. Despite these weaknesses, by measuring average achievements in health, education and income, the HDI provides a better picture of the state of a country’s development than its income alone.

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CONSTRUCTING THE HUMAN DEVELOPMENT INDEX (HDI) The HDI is based on three indicators : longevity, as measured by life expectancy at birth; educational attainment, as measured by a combination of adult literacy (two-thirds weight) and combined primary, secondary and tertiary enrolment ratios (one-third weight); and standard of living, as measured by real per capita (PPP$). For the construction of the index, fixed minimum and maximum values have been set for each of these indicators : (i) Life expectancy at birth : 25 years and 85 years for calculating the Life expectancy Index. (ii) Adult literacy : 0% and 100% for calculating the education Index. (iii) Combined gross enrolment ratio (0% and 100%) (iv) Real GDP per capita (PPP$): $100 and $40,000 (PPP US$) for calculating GDP Index. For any component of the HDI, individual indices can be computed by applying the formula: Dimension Index = 1. Life Expectancy Index. It the life expectancy at birth of a country is 78 years, then the life expectancy index for that country would be Life Expectancy Index =

=

= 0.884

2. Education Index. The education Index is the combination of adult literacy index and gross enrolment index. If the adult literacy rate of this country is 92, then its adult literacy index would be Adult Literacy Index =

= 0.920

If the combined gross enrolment in this country is 60, then its gross enrolment index would be Gross Enrolment Index =

= 0.600

Education Index = 2/3 (Adult Literacy Index) + 1/3 (Gross Enrolment Index) = 2/3 (0.920) + 1/3 (0.600) = 0.813 3. GDP Index. The GDP per capita (PPPUS$) of this country is $8,840, then the GDP index would be GDP Index =

=

log 8740 = 0.748 log39,900

4. Human Development Index. The HDI is a simple average of the Life Expectancy Index, Education Index and adjusted GDP per capita (PPP$) Index. It is derived by dividing the sum of these three indices by 3, HDI = 1/3 (0.884) + 1/3 (0.813) + 1/3 (0.784) = 0.295 + 0.271 + 0.249 = 0.815 This country comes under the category of high human development.


19

DEVELOPMENT ECONOMICS IN RETROSPECT18 Over the past fifty years, development economics has undergone many changes. The emphasis has shifted from growth in GNP per capita to the creation of employment, to redistribution of income, to basic human needs, to structural adjustment and sustainable development. GNP Per Capita. In the 1950s, economic development had been identified with the growth of GNP/GNP per capita. The United Nations in a resolution set the target rate of 5 per cent in GNP of LDCs (less developed countries) for the development decade of the 1960s. To achieve the targeted growth rate, economists in LDCs suggested rapid industrialisation alongwith urbanisation. This view was based on Rostow’s thesis of the stages of growth, whereby development proceeded along a linear path through a number of stages. The most important stage which caught the fancy of LDCs was the ‘take-off’. So far as the problems of poverty, unemployment, and income distribution were concerned, they were given secondary importance. It was believed that the gains from the growth of GNP per capita would automatically ‘trickle down’ to the poor in the form of increased employment and income opportunities. This linear view was further strengthened by the Nurksian dictum of ‘vicious circles’ of low savings, small markets and population pressures. It was believed that the removal of these vicious circles would set free the natural forces which would lead to higher growth. For this, Rosenstein Rodan advocated the Big Push; Nurkse, the Balanced Growth; Hirschman, the Unbalanced Growth; and Leibenstein, the Critical Minimum Effort. But greater emphasis was laid on international aid to provide the ‘missing components’ in the form of capital, technical know-how, foreign exchange, etc. The rationale behind foreign aid was the ‘two-gap model’ and industrialisation via import substitution so that aid might be gradually dispensed with by LDCs.19 David Morawetz’s estimates showed that as a result of the adoption of these development strategies, the GNP per capita of the developing countries grew at an average rate of 3.4 per cent per annum during 1950-75. This was faster than the rate at which either the developed countries or LDCs had grown in any comparable period prior to 1950, and exceeded both official goals and private expectations.20 But the growth of GNP per capita failed to solve the problems of poverty, unemployment and inequalities in such countries. The criticism against GNP as an index of economic development had been gaining momentum among economists in the 1960s. But the first public salvo was let loose by Dudley Seers in his presidential address at the Eleventh World Conference of the Society for International Development held in New Delhi in 1969. He posed the problem thus: “The questions to ask about a country’s development are therefore: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development for the country concerned. If one or two of these central problems have been growing worse, 18. Revised version of a paper presented at the Haryana Economic Association Conference held at Arya College, Panipat on 10-11 March, 1984. 19. All concepts, theories and models mentioned in this section have been discussed in subsequent chapters in the book. 20. D. Morawetz, Twenty-Five Years of Economic Development, 1977.

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especially if all three have, it would be strange to call the result ‘development’ even if per capita income doubled.” Robert McNamara, the then Governor of the World Bank, admitted in February 1970 the failure of the GNP growth rate as an index of economic development in LDCs in these words: “In the first Development Decade, the primary development objective, a five per cent annual growth in GNP, was achieved. This was a major accomplishment. But this relatively high rate of growth in GNP did not bring satisfactory progress in the development. In the developing world, at the end of the decade : malnutrition is common, infant mortality is high, life expectancy is low, illiteracy is widespread, unemployment is endemic and growing, the redistribution of income and wealth is severely skewed.” From the 1970s, the emphasis shifted from the growth rate in GNP to the quality of the development process of progressive reduction in absolute poverty, unemployment and inequalities. All those engaged with the development process gave attention to three different, though largely complementary strategies: increasing employment, reducing inequalities in income and wealth, and meeting basic human needs. Employment Creation. During the 1950s and 1960s, the LDCs had high rates of growth of industrial production and economic growth, but these rates failed to create enough employment. It was in 1954 that Arthur Lewis21 advocated that the problem of unemployment in LDCs would be solved automatically with the movement of the subsistence and landless labourers to the higher-wage urban capitalist industries. This process would increase inequalities in the early stages of growth but when the growth process gains momentum, the rural unemployed workers would be absorbed in the modern capitalist sector, and both unemployment and inequalities would be removed. The Lewis view continued to prevail in LDCs for almost two decades but it failed to solve the problem of unemployment due to three reasons: (a) Population and labour force grew at a faster rate than expected; (b) the gap between the capitalist wage and the subsistence wage was much higher than assumed by Lewis due to wage differentials and trade union influences in urban areas; and (c) the LDCs adopted labour-saving technologies in the urban capitalist sector which increased output per man without creating additional jobs. So employment became a major policy issue of LDCs and international agencies since the 1970s. The emphasis shifted from output or growth approach to income or poverty approach to the employment problem which laid emphasis on the quality rather than on the quantity of employment. Industrial development having failed to provide large employment opportunities, increasing attention was paid on the adoption of employment generating schemes specifically directed towards the urban and rural poor so as to increase their productivity and incomes. Income Inequality. In the 1950s and 1960s, the thinking on income inequality and development was influenced by Kuznets’ inverted U-shaped curve.22 Kuznets suggested on the experience of the developed countries that historically there was a tendency for income inequality to increase first, and then to be reduced as countries developed from a low level. Accordingly, it was believed that a high degree of inequality in the distribution of income had a favourable effect on economic growth in the early stage of development and as development gained momentum its benefits would automatically ‘trickle down’ to the lower income groups over the long run. So this development approach emphasised the maximisation of the growth rate of the economy by 21. W.A. Lewis : “Economic Development with Unlimited Supplies of Labour”, The Manchester School, May 1954. 22. S. Kuzents, “Economic Growth and Income Inequality”, A.E.R., March, 1955.


21

building up capital, infrastructure and productive capacity of the economy and leaving the distribution of income untouched. It was like riding the horse of economic development and leaving the horse of economic equality to feed for itself. Arthur Lewis23 was the principal supporter of this strategy. He outlined the process through which income inequalities led to the economic growth of the 19th century England, 19th century Western Europe and the early 20th century Japan. He advocated the same for LDCs. He contended that the voluntary savings formed a significantly large share of the national income where the inequality of income distribution was such that profits were relatively large share of the national income. With development, the modern sector grew faster than the traditional sector and the relative share of profits in national income also increased. This tended to perpetuate income inequalities. In the long run, when employment opportunities increased all-around and the traditional sector also developed, the distribution of income would stabilise. This was an automatic process and was only a side effect of the growth of the economy. Despite the inadequacy and non-comparability of data and the controversy over the use of the indicators of inequality, a number of empirical studies revealed that income inequalities had widened in the majority of LDCs. They convinced the policy makers and economists in LDCs and international organisations that the living standards of the very poorest in such countries had declined both in absolute and relative terms. Basic Human Needs. Dissatisfied with growth, employment and income distribution approaches of development, economic thinkers turned towards the “basic human needs” strategy for promoting human well-being, especially that of the poor. The World Bank’s first mission to an LDC, Columbia, in 1950 had stated its objective in terms of meeting “basic human needs”. But this objective was not taken due note on account of the multiplicity of planning objectives in LDCs in those early years. It was, however, at the World Employment Conference of 1976 that the ILO espoused the concept of a “basic needs strategy”. India was the first among LDCs to adopt this in its Fifth Five-Year Plan in 1974, two years ahead of the ILO declaration. The basic human needs strategy laid emphasis on providing basic material needs in terms of health, education, water, food, clothing and shelter. The basic needs strategy had three components. First, it aimed at raising productivity and incomes of the rural and urban poor in labour surplus LDCs through labour-intensive production techniques by providing them basic needs. Second, it emphasised the removal of poverty by providing such public services as education, drinking water and health. Third, such public services were financed by the government. But in actuality, the focus was only on the second item—the delivery of basic public services. As a result, the basic strategy was criticised as a prescription to “count, cost and deliver”, i.e., count the poor, cost the number of public services and deliver them to the poor. It was thus regarded as state action from top to bottom. Fourth, it was criticised for not providing the poor with productive assets and capital. Stabilisation and Structural Adjustment. In the early 1980s, the decline in the growth rate of developed countries, the rise in oil prices, the debt crisis in developing countries and the worsening of their terms of trade, pushed the basic needs strategy in the background. Many countries embarked on programmes of stabilisation and structural adjustments. Initially, stabilisation measures, supported by the IMF and World Bank, aimed at reducing inflation, both budget and trade deficits, cutting public spending, reducing wages and raising interest 23. A.W. Lewis, The Theory of Economic Growth, 1955.

22


rates. But these measures often led to recession in some countries. Moreover, these were shortterm measures. Goaded by the World Bank and IMF, many developing countries switched to long-term structural adjustment programme. It is a domestically designed programme of reforms by following the policies of liberalisation, adjustment and privatisation. These “involve reducing the role of the state, removing subsidies, liberalising prices and opening economies to flows of international trade and finance.” These often include measures to reduce the fiscal deficit. The majority of LDCs are still pursuing structural adjustment programmes. But these have led to reduction in government spending on social services like health and education. Poverty and unemployment have increased and the concern for the poor has been pushed into the background. Human Capabilities. During this period of liberalisation, adjustment and privatisation, Prof. Amartya Sen emphasised on the concept of promoting ‘human capabilities’. According to him, at the core of human well-being is freedom of choice by enhancing people’s capabilities for attaining higher standards of health, knowledge, self-respect and the ability to participate actively in community life. The standard of living of a society should not be judged by GNP per capita and the supply of particular goods but by people’s capabilities, i.e., what a person can or cannot do, can or cannot be. It is entitlements, the set of alternative commodity bundles that a person can command in society that generate these entitlements. The relevant capabilities are: being free from starvation, from hunger, from undernourishment; participation in communal life; being adequately sheltered and so on. The expansion of these capabilities implies freedom of choices— political, social, economic and cultural freedom.24 Sen’s human capabilities concept has been criticised on the following grounds: First, the freedom of choices goes beyond economic development when freedom from servitude, freedom from religion and political freedom are included. Second, the problem is of measuring each of these items. How to measure the achievement of social and political objectives when data for measuring economic indicators are not available in LDCs. It is, therefore, advisable to confine the concept of human capabilities to only freedom from starvation, hunger, etc. which relate to economic capabilities. Human Development. The UNDP incorporated Sen’s view in its first Human Development Report in 1990. According to it, human development goes far beyond income and growth to cover all human capabilities the needs, aspirations and choice of the people. It defined human development as “a process of enlarging people’s choices” that are created by expanding human capabilities. Income is one of the choice but it is not the only choice. Rise in income is not the same thing as the increase in human capabilities. Besides higher income, poor people put a high value on adequate nutrition, access to safe drinking water, better medical facilities, better schooling for their children, affordable transport, adequate shelter, secure livelihood and productive and satisfying jobs. Human development is a broad and comprehensive concept. It is as much concerned with economic growth as with its distribution, as with basic human needs as with variety of human aspirations, as with the distress of the rich countries, and as with the human deprivation of the poor. The Report also explained the relationship between economic growth and human development. It emphasised that there is no automatic link between the two. Economic growth is important because no society has been able to sustain the well being of its people without 24. A.K. Sen, “Development as Capability Expansion”, Journal of Development Planning, (1971, 1989.


23

continuous growth. So economic growth is essential for human development. But human development is equally important because it is healthy and educated people who contribute more to economic growth through productive employment and increase in income. Thus, human development and economic growth are closely connected. In reality, economic growth is a means to an end, and the end is human development. Policy-makers should, therefore, pay more attention to the quality of growth so as to support all-round human development. Sustainable Development. In 1987, the World Commission on Environment and Development (Brundtland Commission) used a new concept of ‘sustainable development’. It defined the term ‘sustainable development’ as “meeting the needs of the present generation without compromising the needs of the future generation”. Economic development must be sustainable which means that it should “keep going”. The World Development Report 1999-2000 emphasises the creation of sustainable improvements in the quality of life for all people as the principal goal of development policy. According to it, sustainable development has many objectives. Besides increasing economic growth and meeting basic needs, the aim of lifting living standards includes a number of more specific goals: “bettering people’s health and educational opportunities, giving everyone the chance to participate in public life, helping to ensure a clean environment, promoting intergenerational equity, and much more.” Thus meeting the needs of the people in the present generation is essential in order to sustain the needs of future generations.

Chapter No.1

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