Contents

THE ECONOMICS OF DEVELOPMENT AND PLANNING

By the same author : MACRO ECONOMIC THEORY ADVANCED ECONOMIC THEORY MODERN MICROECONOMICS MONETARY ECONOMICS INTERNATIONAL ECONOMICS MANAGERIAL ECONOMICS ENVIRONMENTIAL ECONOMICS : THEORY MANAGEMENT AND POLICY MONEY, BANKING AND INTERNATIONAL TRADE & PUBLIC FINANCE MICROECONOMIC THEORY PRINCIPLES OF ECONOMICS PUBLIC FINANCE & INTERNATIONAL TRADE HISTORY OF ECONOMIC THOUGHT DEMOGRAPHY (Hindi Editions of all these Books are available)

(Punjabi Editions of the following Books are also available) Modern Microeconomics Macroeconomic Theory International Economics

THE ECONOMICS OF DEVELOPMENT AND PLANNING 40TH REVISED

AND

ENLARGED EDITION

M.L. JHINGAN Retired Deputy Director, Higher Education, Haryana

SIMPLY THE TEXT !

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First Edition : 1966 Thirty Ninth Revised & Enlaged Edition : 2007 Reprint : 2008, 2009 Fourty Revised & Enlarged Edition : 2011 Reprint:2012

© M.L. Jhingan, 1997 Registered with Registrar of Copyrights, Government of India vide Registration No- L-17755/98

All rights reserved. No part of this publication may be reproduced, copied or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording or by any information, storage and retrieval system, without written permission from the publishers.

ISBN 978-81-8281-385-4 (The Economics of Development and Planning – 40th Edition)

Typeset by : Harsimran Graphics, Delhi Printed at : Nisha Enterprises, Delhi

PREFACE TO THE 40th EDITION It is gratifying that this popular text book has been patronized by both teachers and students in India and abroad for more than four decades ever since it was first published in 1966. The present edition has been substantially revised, rearranged and presented in a new format with new diagrams. The text contains some significant alterations and additions in a number of chapters. Rewrite of Chapters: The Malthusian Theory Mill’s Theory The Classical Theory The Marxian Theory The Jorgenson Model The Models of Technical change. New Chapters: Economic Integration among Developing Countries WTO and Developing Countries Millennium Development Goals (MDGs). I hope the present edition will be of immense help to candidates preparing for M.A., N.E.T., I.E.S., Civil Services and other related examinations. Suggestions to improve the book are solicited.

M.L. JHINGAN

PREFACE TO THE FIRST EDITON This book examines the problems of economic development of underdeveloped countries. There is, however, no dearth of literature on the subject. But it is scattered in journals, reports and doctoral theses. Some of the books on the subject deal with particular aspects of the problems of underdevelopment, while others are in the form of lectures delivered by eminent economists from time to time. There are very few books written in the textbook style. But they are mostly occidental in nature. In certain cases, their appoach and presentation is abstract and difficult. I have endeavoured to present the subject in a lucid and intelligible manner as possible as in oriental setting. The book is intended to meet the requirements of M.A. and Honours students preparing for the paper on Economics of Development and Planning. It will also prove useful to the candidates for the various competitive examinations. The syllabi of all the Indian Universities and those of the Universities of Leeds, Manchester and London have been consulted for this purpose. I have drawn heavily on the writings of a vast galaxy of economists who have done much to enrich the subject matter of economic development within the last two decades. However, no amount of footnoting can ever repay the debt I owe to them. My interest in the subject was aroused when I was a student of the University of Delhi. I had the opportunity to listen to a series of lectures delivered by Dr J.B. Condliffe of the University of California and Mr Maurice Dobb of the University of Cambridge as Visiting Professors.* I imbibed further interest from the classroom lectures of Professors V.K.R.V. Rao, B.N. Ganguli and Raj Krishna on the different aspects of the subject though it was in its nascent state at that time. I wish to recall my indebtedness to all of them. I beg to acknowledge my sincere gratitude to the following publishers from whose publications I have borrowed copyright material: George Allen & Unwin Ltd., London; Prentice-Hall, New Jersey, USA; Oxford University Press, New York & London; Macmillan & Co., The Free Press; Yale University Press; Routledge and Kegan Paul, London; John Wiley & Sons, Inc. N.Y.; Orient Longmans; Cambridge Universiy Press; Asia Publishing House, Bombay; Kitabistan, Allahabad; Central Book Depot, Allahabad; Allied Publishers, Bombay; and to many others. No word of gratitude is sufficient to appreciate the encouragement I have been receiving from time to time from my revered teachers, Mr K.N. Bhattaharya, Professor of Economics, National Academy of Administration, Government of India, Mussoorie and Mr. N.K. Pant, Associate Director in Economics, School of Correspondence Courses, University of Delhi. Without their help, this book could not have been possible. Needless to say, I alone am responsible for any errors which may remain.

M.L. JHINGAN * J.B. Condliffe, Technological Progress and Economic Development; M. Dobb, Some Aspects of Economic Development, Delhi 1951.

BRIEF CONTENTS PART ONE – BASIC PROBLEMS 1 2 3 4 5 6 7 8

Economics of Development : Concepts and Approaches Economic Growth and Income Distribution : The Kuznets Hypothesis Sustainable Development Characteristics of An Underdeveloped Country Obstacles to Economic Development Factors of Economic Growth: Economic and Non-Economic Chenery’s Patterns of Structural Change Meaning and Characteristics of Modern Economic Growth

3 24 29 38 50 56 68 72

PART TWO – SOME THEORIES OF ECONOMIC DEVELOPMENT 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Adam Smith’s Theory The Ricardian Theory The Malthusian Theory Mill’s Theory The Classical Theory The Marxian Theory The Schumpeterian Theory The Keynesian Theory Marx’ Stages of Growth Rostow’s Stages of Economic Growth Gerchenkron’s Great Spurt Theory Nurkse’s Theory of Disguished Unemployment as a saving potential Lewis Theory of Unlimited Supplies of labour Fei-Ranis Theory Jorgenson’s Neo-Classical Model of a Dual Economy Harris-Todaro Model of Migration and Unemployment Leibenstein’s Critical Minimum Effort Thesis Nelson’s Low-Level Equilibrium Trap The “Big Push” Theory The Doctrine of Balanced Growth The Concept of Unbalanced Growth Dualistic Theories The Dependency Theory of Underdevelopment The Limits to Growth Model Myrdal’s Theory of Circular Causation

83 88 94 101 106 109 117 124 131 136 147 152 159 165 172 179 186 192 195 199 206 213 223 233 238

PART THREE – SOME GROWTH MODELS 34 35

The Harrod-Domar Models The Kaldor Model of Distribution

245 257

viii 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

The Economics of Development and Planning The Pasinetti Model of Profit and Growth Joan Robinson’s Model of Capital Accumulation Meade’s Neo-Classical Model of Economic Growth The Solow Model of Long-Run Growth Kaldor’s Model of Growth The Model’s of Technical Change The Uzawa Two-Sector Growth Model The von Neumann Growth Model Steady State Growth The Golden Rule of Accumulation Growth Accounting The new Endogenous Growth Theory The Cambridge Capital Controversy in The Neo-classical Analysis of Growth The Fel’dman Model The Mahalanobis Model

262 266 272 278 285 291 300 307 312 318 232 331 344 355 360

PART FOUR – DOMESTIC MEASURES FOR ECONOMIC DEVELOPMENT 51 52 53 54 55 56 57 58 59 60

Capital Formation and Economic Development Role of Agriculture and Industry in Economic Development Monetary Policy in Economic Development Fiscal Policy in Economic Development Deicit Financing as an Instrument of Economic Development Price Policy in Economic Development Population Growth and Economic Development Human Capital Formation and Manpower Entrepreneurship in Economic Development Role of the State in Economic Development

371 382 388 393 404 411 415 424 439 444

PART FIVE – INTERNATIONAL MEASURES FOR ECONOMIC DEVELOPMENT 61 62 63 64 65 66 67 68 69 70

Foreign Trade and Economic Development The Debt Problem of LDCs New International Economic order (NIEO) Commercial Policy and Economic Development WTO and Developing Countries Foreign Capital and Aid in Economic Development Two-Gap Model and Costs-Benefits of Foreign Aid Private Foreign Investment and Multinationals Economic Integration Among Development Countries Millennium Development Goals (MDGs)

455 461 467 473 487 493 504 511 517 522

PART SIX – SOME PROBLEMS OF DEVELOPMENT PLANNING 71 72 73 74 75 76 77 78 79 80 81

Economic Planning Shadow Prices Project Evaluation and Cost-Benefit Analysis Controls under Planning Input-Output Analysis Linear Programming The Concept of Capital-Output Ratio The Choice of Techniques Transfer of Technology Investment Criteria in Economic Development Economic Planning and Price Mechanism

BiBliography

533 561 569 582 590 599 605 614 623 630 639 645-648

CONTENTS PART ONE – BASIC PROBLEMS Chapter-1 Economics of Development : Concepts and Approaches

3

Introduction ........................................................................................................................................................ 3 Economic Development and Economic Growth .......................................................................................... 4 Measurement of Economic Development ..................................................................................................... 5 Basic Needs vs Economic Growth ................................................................................................................ 10 Conclusion ........................................................................................................................................................ 11 Human Development Indices ....................................................................................................................... 12 Physical Quality of Life Index (PQLI) ......................................................................................................... 12 Construction of PQLI ...................................................................................................................................... 14 Human Development Index (HDI) .............................................................................................................. 15 Constructing the Human Development Index (HDI) ............................................................................... 18 Development Economics in Retrospect ....................................................................................................... 19

Chapter-2 Economic Growth and Income Distribution : The Kuznets Hypothesis

24

The Kuznets Hypothesis ................................................................................................................................ 24 Causes of Increase in Inequality with Development ................................................................................ 26 Causes of Reduction in Inequality with Development ............................................................................ 27 Its Critical Appraisal ....................................................................................................................................... 27

Chapter-3 Sustainable Development

29

Meaning ............................................................................................................................................................ 29 Objectives of Sustainable Development ...................................................................................................... 30 Environmental Problems ............................................................................................................................... 30 Causes of Environmental Degradation ....................................................................................................... 32 Policies for Sustainable Development .......................................................................................................... 33 Measuring Sustainable Development .......................................................................................................... 35

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Chapter-4 Characteristics of An Underdeveloped Country

38

Meaning of the Term ‘Underdeveloped’ ..................................................................................................... 38 Different Criteria of Underdevelopment .................................................................................................... 39 Characteristics of an Underdeveloped Country ........................................................................................ 42 General Poverty ............................................................................................................................................... 42 Agriculture, the Main Occupation ............................................................................................................... 43 A Dualistic Economy ....................................................................................................................................... 43 Underdeveloped Natural Resources ............................................................................................................ 44 Demographic Features ................................................................................................................................... 44 Unemployment and Disguised Unemployment ....................................................................................... 45 Economic Backwardness ................................................................................................................................ 46 Lack of Enterprise and Initiative .................................................................................................................. 47 Insufficient Capital Equipment ..................................................................................................................... 48 Technological Backwardness ......................................................................................................................... 48 Foreign Trade Orientation ............................................................................................................................. 49

Chapter-5 Obstacles to Economic Development

50

Vicious Circles of Poverty .............................................................................................................................. 50 Low Rate of Capital Formation ..................................................................................................................... 52 Socio-cultural Constraints .............................................................................................................................. 53 Agricultural Constraint .................................................................................................................................. 54 Human Resources Constraint ....................................................................................................................... 55 Foreign Exchange Constraint ........................................................................................................................ 55

Chapter-6 Factors of Economic Growth: Economic and Non-Economic

56

Economic Factors ............................................................................................................................................. 56 Non-Economic Factors .................................................................................................................................... 62 Social Factors .................................................................................................................................................... 62 Human Factor .................................................................................................................................................. 65 Political and Administrative Factors ............................................................................................................ 66

Chapter-7 Chenery’s Patterns of Structural Change

68

Introduction ...................................................................................................................................................... 68 Development Processes .................................................................................................................................. 69 Accumulation Processes ................................................................................................................................. 69 Resource Allocation Processes ...................................................................................................................... 69 Demographic and Distributional Processes ............................................................................................... 70 Conclusion ........................................................................................................................................................ 71

Chapter-8 Meaning and Characteristics of Modern Economic Growth

72

Meaning ............................................................................................................................................................ 72 Characteristics of Modern Economic Growth ............................................................................................ 73 High Rates of Growth of Per Capita Product and Population ................................................................ 73

Contents

xi

The Rise in Productivity ................................................................................................................................. 74 High Rate of Structural Transformation ...................................................................................................... 75 Urbanisation ..................................................................................................................................................... 76 The Outward Expansion of Developed Countries .................................................................................... 77 International Flow of Men, Goods and Capital ......................................................................................... 77 Conclusion ........................................................................................................................................................ 80

PART TWO – SOME THEORIES OF ECONOMIC DEVELOPMENT Chapter-9 Adam Smith’s Theory

83

The Theory ........................................................................................................................................................ 83 A Critical Appraisal ........................................................................................................................................ 86 Its Applicability to Underdeveloped Countries ......................................................................................... 87

Chapter-10 The Ricardian Theory

88

Ricardo’s Theory .............................................................................................................................................. 88 A Critical Appraisal ........................................................................................................................................ 92 Underdeveloped Countries and Ricardo’s Theory .................................................................................... 93

Chapter-11 The Malthusian Theory

94

The Theory ........................................................................................................................................................ 94 Measures to Promote Economic Development .......................................................................................... 96 A Critical Appraisal ........................................................................................................................................ 98 Its Applicability to Underdeveloped Countries ......................................................................................... 99

Chapter-12 Mill’s Theory

101

Introduction .................................................................................................................................................... 101 The Theory ...................................................................................................................................................... 102 A Critical Appraisal ...................................................................................................................................... 104 Applicability of Mill’s Theory on Underdeveloped Countries ............................................................. 104

Chapter-13 The Classical Theory

106

The Theory ...................................................................................................................................................... 106 Its Criticisms ................................................................................................................................................... 107

Chapter-14 The Marxian Theory

109

Introduction .................................................................................................................................................... 109 The Marxian Theory ..................................................................................................................................... 110 The Marxian Process of Economic Development ....................................................................................110

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The Economics of Development and Planning Downfall of Capitalism ................................................................................................................................ 113 A Critical Appraisal ...................................................................................................................................... 114 The Marxian Theory and Underdeveloped Countries ........................................................................... 115

Chapter-15 The Schumpeterian Theory

117

The Theory ...................................................................................................................................................... 117 Criticisms of the Theory ............................................................................................................................... 121 Schumpeter’s Analysis and Underdeveloped Countries ...................................................................... 122

Chapter-16 The Keynesian Theory

124

Summary of Keynes Theory ........................................................................................................................ 124 Applicability of Keynes’ Theory to Underdeveloped Countries .......................................................... 125 Keynesian Assumptions and Underdeveloped Countries .................................................................... 126 Tools of Keynesian Economics and Underdeveloped Countries .......................................................... 127

Chapter-17 Marx’ Stages of Growth

131

The Primitive Communal Stage .................................................................................................................. 132 The Slave Stage .............................................................................................................................................. 132 The Feudal Stage ........................................................................................................................................... 133 The Capitalist Stage ...................................................................................................................................... 133 The Socialist or Communist Stage .............................................................................................................. 134 Marx vs. Rostow ............................................................................................................................................ 134

Chapter-18 Rostow’s Stages of Economic Growth

136

The Traditional Society ................................................................................................................................. 136 The Pre-conditions for Take-off .................................................................................................................. 137 The Take-off .................................................................................................................................................... 138 The Drive to Maturity ................................................................................................................................... 141 The Age of High Mass-Consumption ........................................................................................................ 141 Criticism of the Stages of Economic Growth ............................................................................................ 142 Importance and Limitations of Take-off for Underdeveloped Countries ........................................... 144 The Take-Off and India ................................................................................................................................ 145

Chapter-19 Gerchenkron’s Great Spurt Theory

147

Gerschenkron’s Great Spurt Theory .......................................................................................................... 147 Six Generalisations ........................................................................................................................................ 147 Common Characteristics of Nations .......................................................................................................... 148 How to Bring About the Great Spurt? ....................................................................................................... 148 Critical Appraisal .......................................................................................................................................... 150 Gerschenkron vs. Rostow ............................................................................................................................ 151

Contents

Chapter-20 Nurkse’s Theory of Disguised Unemployment as a Saving Potential

xiii

152

Meaning of Disguised Unemployment ..................................................................................................... 152 Nurkse’s Theory ............................................................................................................................................. 153 Limitations of the Concept ........................................................................................................................... 155 A Realistic View ............................................................................................................................................. 157

Chapter-21 Lewis Theory of Unlimited Supplies of labour

159

The Lewis Theory .......................................................................................................................................... 159 A Critical Appraisal ...................................................................................................................................... 163

Chapter-22 Fei-Ranis Theory

165

The Theory ...................................................................................................................................................... 165 Assumptions ................................................................................................................................................... 166 A Critical Appraisal ...................................................................................................................................... 170

Chapter-23 Jorgenson’s Neo-Classical Model of a Dual Economy

172

The Jorgenson Model .................................................................................................................................... 172 Assumptions of the Model ........................................................................................................................... 173 Conclusion ...................................................................................................................................................... 176 A Critical Appraisal ...................................................................................................................................... 177 Jorgenson Vs. Fei-Ranis ................................................................................................................................ 178

Chapter-24 Harris-Todaro Model of Migration and Unemployment

179

Assumptions of the Model ........................................................................................................................... 179 The Model ....................................................................................................................................................... 180 Policy Implications of the H-T Model ........................................................................................................ 183 Its Critical Appraisal ..................................................................................................................................... 184

Chapter-25 Leibenstein’s Critical Minimum Effort Thesis

186

Leibenstein’s Theory ..................................................................................................................................... 186 A Critical Appraisal ...................................................................................................................................... 190

Chapter-26 Nelson’s Low-Level Equilibrium Trap

192

Nelson’s Theory ............................................................................................................................................. 192 Sets of relations .............................................................................................................................................. 193 Factors that Avoid Trap ................................................................................................................................ 194

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Chapter-27 The “Big Push” Theory

195

Rosenstein-Rodan’s Thesis ........................................................................................................................... 195 Indivisibilities in the Production Function ............................................................................................... 196 Indivisibility of Demand .............................................................................................................................. 196 Indivisibility in the Supply of Savings ...................................................................................................... 197 A Critical Appraisal ...................................................................................................................................... 197

Chapter-28 The Doctrine of Balanced Growth

199

Meaning of Balanced Growth ..................................................................................................................... 199 Explanation of the Theory ........................................................................................................................... 200 Criticisms of the Doctrine of Balanced Growth ....................................................................................... 203

Chapter-29 The Concept of Unbalanced Growth

206

Introduction .................................................................................................................................................... 206 Hirschman’s Strategy .................................................................................................................................... 206 A Critical Appraisal ...................................................................................................................................... 209 Its Limitations ................................................................................................................................................ 210 Balanced Vs. Unbalanced Growth ............................................................................................................. 211 Conclusion ...................................................................................................................................................... 212

Chapter-30 Dualistic Theories

213

Social Dualism ................................................................................................................................................ 213 Technological Dualism ................................................................................................................................. 217 A Critical Appraisal ...................................................................................................................................... 219 Financial Dualism .......................................................................................................................................... 220

Chapter-31 The Dependency Theory of Underdevelopment

223

Introduction .................................................................................................................................................... 223 Meaning of Dependency .............................................................................................................................. 224 The Dependency Theory .............................................................................................................................. 224 Dependency : A Historical International Process .................................................................................... 225 Foreign Capital .............................................................................................................................................. 225 Technological Dependence .......................................................................................................................... 226 Trade and Unequal Exchange ..................................................................................................................... 226 Dualism ........................................................................................................................................................... 227 Policy Implications of Dependency Theory .............................................................................................. 228 Critical Appraisal .......................................................................................................................................... 229 Emmanuel’s Theory of Unequal Exchange ............................................................................................... 231

Chapter-32 The Limits to Growth Model

233

Contents

xv

Introduction .................................................................................................................................................... 233 The Model ....................................................................................................................................................... 234 Predictions of the Model .............................................................................................................................. 234 Its Graphic Explanation ................................................................................................................................ 235 Its Criticisms ................................................................................................................................................... 235 Its Implications ............................................................................................................................................... 237 Conclusion ...................................................................................................................................................... 237

Chapter-33 Myrdal’s Theory of Circular Causation

238

Introduction .................................................................................................................................................... 238 The Myrdal Thesis ......................................................................................................................................... 239 Regional Inequalities .................................................................................................................................... 239 International Inequalities ............................................................................................................................. 241 A Critical Appraisal ...................................................................................................................................... 242

PART THREE – SOME GROWTH MODELS Chapter-34 The Harrod-Domar Models

245

Introduction .................................................................................................................................................... 245 Requirements of Steady Growth ................................................................................................................ 245 Assumptions ................................................................................................................................................... 246 The Domar Model ......................................................................................................................................... 246 The Harrod Model ......................................................................................................................................... 247 A Comparative Study of the Two Models ................................................................................................. 251 Limitations of these Models ........................................................................................................................ 252 Application of Harrod-Domar Models to Underdeveloped Countries ............................................... 253 Limitations of these Models from the Standpoint of Underdeveloped Countries ............................ 254

Chapter-35 The Kaldor Model of Distribution

257

The Kaldor Model ......................................................................................................................................... 257 Its Criticisms ................................................................................................................................................... 260

Chapter-36 The Pasinetti Model of Profit and Growth

262

The Model ....................................................................................................................................................... 262 Comparison with the Kaldor Model .......................................................................................................... 265

Chapter-37 Joan Robinson’s Model of Capital Accumulation

266

The Robinson Model ..................................................................................................................................... 266 A Critical Appraisal ...................................................................................................................................... 270 Its Weaknesses ............................................................................................................................................... 270 Its Applicability to Underdeveloped Countries ....................................................................................... 271

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Chapter-38 Meade’s Neo-Classical Model of Economic Growth

272

The Meade Model .......................................................................................................................................... 272 A Critical Appraisal ...................................................................................................................................... 277

Chapter-39 The Solow Model of Long-Run Growth

278

Introduction .................................................................................................................................................... 278 Assumptions ................................................................................................................................................... 278 The Model ....................................................................................................................................................... 279 A Critical Appraisal ...................................................................................................................................... 282 Weaknesses ..................................................................................................................................................... 283 Applicability of Solow Model to Underdeveloped Countries .............................................................. 283

Chapter-40 Kaldor’s Model of Growth

285

Introduction .................................................................................................................................................... 285 Assumptions ................................................................................................................................................... 285 The Model ....................................................................................................................................................... 286 A Critical Appraisal ...................................................................................................................................... 290

Chapter-41 The Models of Technical Change

291

Introduction .................................................................................................................................................... 291 Neutral and Non-Neutral Technical Change ........................................................................................... 291 Hicks Neutrality ............................................................................................................................................ 292 Its Criticisms ................................................................................................................................................... 293 Hicks Non-Neutral Technical Change ....................................................................................................... 293 Disembodied and Embodied Technical Change ......................................................................................296 Embodied Technical Change Model-Vintage Approach ........................................................................ 298

Chapter-42 The Uzawa Two-Sector Growth Model

300

The Uzawa Model ......................................................................................................................................... 300 Equations of The Model3 ............................................................................................................................. 301 Working of the Model ................................................................................................................................... 303 A Critical Appraisal ...................................................................................................................................... 305

Chapter-43 The von Neumann Growth Model

307

The Neumann Growth Model ..................................................................................................................... 307 A Critical Appraisal ...................................................................................................................................... 311

Contents

xvii

Chapter-44 Steady State Growth

312

Meaning .......................................................................................................................................................... 312 Properties of Steady State Growth ............................................................................................................. 313 Flexibility of n ................................................................................................................................................ 313 Flexible Capital-Output Raio (v) ................................................................................................................ 313 Flexibility of Saving Ratio (s) ...................................................................................................................... 315 Flexible Saving Ratio (s) and Flexible Capital-Output Ratio (v) .......................................................... 315 Technical Progress ......................................................................................................................................... 316

Chapter-45 The Golden Rule of Accumulation

318

Introduction .................................................................................................................................................... 318 The Golden Rule Path ................................................................................................................................... 319 Representation of the Golden Rule ............................................................................................................ 320 The Neoclassical Case ................................................................................................................................... 321

Chapter-46 Growth Accounting

323

Introduction .................................................................................................................................................... 323 Solow’s Sources of Growth .......................................................................................................................... 324 Its Criticisms ................................................................................................................................................... 325 Denison’s Sources of Growth ...................................................................................................................... 325 Its Criticisms ................................................................................................................................................... 327 Jorgenson-Griliches’ Sources of Growth ................................................................................................... 328 Measurement of Sources of Growth .......................................................................................................... 329 Its Criticisms ................................................................................................................................................... 330

Chapter-47 The New Endogenous Growth Theory

331

Introduction .................................................................................................................................................... 331 The Solow-Swan Model ................................................................................................................................ 332 Implications of the Model ............................................................................................................................ 334 The Convergence-Divergence Controversy .............................................................................................. 334 Absolute or Unconditional Convergence .................................................................................................. 335 Empirical Evidence ....................................................................................................................................... 335 Conditional Convergence ............................................................................................................................ 336 Empirical Evidence ....................................................................................................................................... 336 Conclusion ...................................................................................................................................................... 337 Arrow’s Learning by Doing and Other Models ....................................................................................... 338 The Lucas Model ........................................................................................................................................... 339 Romer’s Model of Technological Change .................................................................................................. 340 Criticisms of New Growth Theory ............................................................................................................. 341 Policy Implications of New Growth Theory ............................................................................................. 342 Implications for Developing Countries ..................................................................................................... 342

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Chapter-48 The Cambridge Capital Controversy in The Neo-classical Analysis of Growth

344

Introduction .................................................................................................................................................... 344 The Capital Controversy .............................................................................................................................. 344 The Neo-Classical Capital Theory .............................................................................................................. 345 Assumptions ................................................................................................................................................... 345 The Cambridge Criticisms ........................................................................................................................... 347 Joan Robinson’s Critique .............................................................................................................................. 347 Samuelson’s Critique and the Surrogate Production Function ............................................................. 348 Assumptions ................................................................................................................................................... 348 Surrogate Production Function ................................................................................................................... 349 Its Criticisms ................................................................................................................................................... 351 More about the Cambridge Critique .......................................................................................................... 353 Conclusion ...................................................................................................................................................... 354

Chapter-49 The Fel’dman Model

355

The Model ....................................................................................................................................................... 355 Comparison with the Domar Model .......................................................................................................... 357 Implications for Economic Development .................................................................................................. 358

Chapter-50 The Mahalanobis Model

360

Introduction .................................................................................................................................................... 360 Two-Sector Model .......................................................................................................................................... 360 Relation of the Mahalanobis Two-Sector Model with the Domar Model ........................................... 363 Four-Sector Model ......................................................................................................................................... 364 A Critical Appraisal ...................................................................................................................................... 367

PART FOUR – DOMESTIC MEASURES FOR ECONOMIC DEVELOPMENT Chapter-51 Capital Formation and Economic Development

371

Meaning of Capital Formation .................................................................................................................... 371 Importance of Capital Formation ............................................................................................................... 372 Reasons for Low Rate of Capital Formation ............................................................................................. 373 Sources of Savings ......................................................................................................................................... 375 Sources of Capital Formation ...................................................................................................................... 376

Chapter-52 Role of Agriculture and Industry in Economic Development

382

Agriculture and Economic Development ................................................................................................. 382 Role of Industrialisation ............................................................................................................................... 384 A Critical Appraisal ...................................................................................................................................... 386 Interrelationship between Agricultural and Industrial Development ................................................ 386

Contents

Chapter-53 Monetary Policy in Economic Development

xix

388

Meaning and Importance ............................................................................................................................. 388 Main Features of Monetary Policy ............................................................................................................. 388

Chapter-54 Fiscal Policy in Economic Development

393

Meaning and Importance ............................................................................................................................. 393 Taxation as the Most Effective Instrument of Fiscal Policy ................................................................... 398 Role of Public Borrowing in Economic Development ............................................................................ 401 Role of Public Expenditure in Economic Development ......................................................................... 402

Chapter-55 Deicit Financing as an Instrument of Economic Development

404

Meaning .......................................................................................................................................................... 404 Role of Deficit Financing .............................................................................................................................. 405 Its Adverse Effects ......................................................................................................................................... 406 Safe Limits of Deficit Financing .................................................................................................................. 409

Chapter-56 Price Policy in Economic Development

411

The Nature of Price Policy ........................................................................................................................... 411 Objectives of Price Policy ............................................................................................................................. 411

Chapter-57 Population Growth and Economic Development

415

Introduction .................................................................................................................................................... 415 Effects of Population Growth on Economic Development .................................................................... 415 Factors Promoting Economic Development ............................................................................................. 416 Factors Retarding Economic Development .............................................................................................. 417 The Theory of Demographic Transition .................................................................................................... 420 Its Criticisms ................................................................................................................................................... 422

Chapter-58 Human Capital Formation and Manpower

424

Meaning and Importance of Human Capital Formation ....................................................................... 424 Problems of Human Capital Formation .................................................................................................... 426 Criteria for Investment in Human Capital ............................................................................................... 428 Manpower Planning in LDCs ..................................................................................................................... 432 Manpower Shortage ...................................................................................................................................... 432 Manpower Surplus ........................................................................................................................................ 433 Strategy for Manpower Planning ............................................................................................................... 434 Estimating Future Manpower Requirements ........................................................................................... 436

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Chapter-59 Entrepreneurship in Economic Development

439

Role of the Entrepreneur .............................................................................................................................. 439 Factors Impeding the Growth of Entrepreneuship ................................................................................. 440 How to Encourage Entrepreneurship ........................................................................................................ 442

Chapter-60 Role of the State in Economic Development

444

Introduction .................................................................................................................................................... 444 Changes in Institutional Framework ......................................................................................................... 445 Organisational Changes ............................................................................................................................... 446 Social and Economic Overheads ................................................................................................................. 447 Agricultural Development ........................................................................................................................... 450 Industrial Development ............................................................................................................................... 451 Monetary and Fiscal Policies ....................................................................................................................... 452 Increase in Foreign Trade ............................................................................................................................. 452

PART FIVE – INTERNATIONAL MEASURES FOR ECONOMIC DEVELOPMENT Chapter-61 Foreign Trade and Economic Development

455

Introduction .................................................................................................................................................... 455 Importance of Foreign Trade ....................................................................................................................... 455 Direct Benefits ................................................................................................................................................ 456 Indirect Benefits ............................................................................................................................................. 457 Its Criticisms ................................................................................................................................................... 458 Overview ......................................................................................................................................................... 459 Conclusion ...................................................................................................................................................... 460

Chapter-62 The Debt Problem of LDCs

461

Introduction .................................................................................................................................................... 461 The Debt Crisis ............................................................................................................................................... 462 Causes of the Debt Crisis ............................................................................................................................. 462 Measure to Solve the Debt Crisis ................................................................................................................ 463 Long-Term Suggestions ................................................................................................................................ 465

Chapter-63 New International Economic order (NIEO)

467

Origin ............................................................................................................................................................... 467 Objectives (or Features) of NIEO ................................................................................................................ 468 Implementation of NIEO Programme ....................................................................................................... 469 Conclusion ...................................................................................................................................................... 472

Contents

Chapter-64 Commercial Policy and Economic Development

xxi

473

Meaning .......................................................................................................................................................... 473 Arguments For and Against ........................................................................................................................ 473 Export Promotion Vs. Import Substitution ............................................................................................... 485 Conclusion ...................................................................................................................................................... 486

Chapter-65 WTO and Developing Countries

487

Introduction .................................................................................................................................................... 487 The WTO ......................................................................................................................................................... 487 Its Objectives ................................................................................................................................................... 488 Its Functions ................................................................................................................................................... 488 WTO Agreement ............................................................................................................................................ 489 WTO and Developing Countries ................................................................................................................ 489 The Doha Round ............................................................................................................................................ 490

Chapter-66 Foreign Capital and Aid in Economic Development

493

Types of Foreign Aid ..................................................................................................................................... 493 Role of Foreign Aid In Economic Development ...................................................................................... 494 Case For Foreign Aid .................................................................................................................................... 495 Case Against Foreign Aid ............................................................................................................................ 497 Tied Vs. Untied Aid ...................................................................................................................................... 498 Factors Determining the Amount of Foreign Aid for Economic Development ................................. 500 Aid or Trade .................................................................................................................................................... 502

Chapter-67 Two-Gap Model and Costs-Benefits of Foreign Aid

504

Two-Gap Model ............................................................................................................................................. 504 Its Limitations ................................................................................................................................................ 506 Importance of Two-Gap Analysis ............................................................................................................... 507 Costs and Benefits of Aid ............................................................................................................................. 508 Its Implications ............................................................................................................................................... 510

Chapter-68 Private Foreign Investment and Multinationals

511

Nature .............................................................................................................................................................. 511 Merits of Private Foreign Investment ........................................................................................................ 511 Demerits of Private Foreign Investment ................................................................................................... 512 Multinational Corporations and LDCs ..................................................................................................... 513 Meaning .......................................................................................................................................................... 513 Spread of MNCs ............................................................................................................................................ 514 Merits of MNCs ............................................................................................................................................. 514 Demerits of MNCs ......................................................................................................................................... 515 An Overview .................................................................................................................................................. 516

xxii

The Economics of Development and Planning

Chapter-69 Economic Integration Among Development Countries

517

Need for Economic Integration ................................................................................................................... 517 Benefits from Economic Integration .......................................................................................................... 518 Problems of Economic Integration ............................................................................................................. 519 Measures to Encourage Economic Integration among Developing Countries .................................. 520 Conclusion ...................................................................................................................................................... 521

Chapter-70 Millennium Development Goals (MDGs)

522

Introduction .................................................................................................................................................... 522 Goals and Targets .......................................................................................................................................... 522 Strategies ......................................................................................................................................................... 523 How to Achieve the Goals ........................................................................................................................... 524 Implementation of Millennium Development Goals (MDGs) in India ............................................... 526 Progress of Millennium Development Goals ........................................................................................... 528

PART SIX – SOME PROBLEMS OF DEVELOPMENT PLANNING Chapter-71 Economic Planning

533

Meaning of Economic Planning .................................................................................................................. 533 Need for Planning in Underdeveloped Countries .................................................................................. 534 Plan Formulation and Requisites for Successful Planning .................................................................... 536 Problems of Development Planning .......................................................................................................... 539 Planning by Direction and Planning by Inducement ............................................................................. 540 Financial and Physical Planning ................................................................................................................ 543 Perspective Planning and Annual Planning ............................................................................................ 545 Indicative Planning and Imperative Planning ......................................................................................... 547 Democratic Planning and Totalitarian Planning ..................................................................................... 549 Rolling and Fixed Plans ............................................................................................................................... 551 Planning under Capitalism and Socialism ............................................................................................... 554 Centralised and Decentralised Planning .................................................................................................. 556 Corrective Planning and Development Planning ................................................................................... 557 Planning in a Mixed Economy .................................................................................................................... 558 Planning Models ............................................................................................................................................ 559

Chapter-72 Shadow Prices

561

Introduction .................................................................................................................................................... 561 Need For the Use of Shadow Prices ........................................................................................................... 561 Meaning of Shadow Prices .......................................................................................................................... 562 Determination of Shadow Prices ................................................................................................................ 563 Difficulties of Shadow Price ........................................................................................................................ 566 Uses of Shadow Prices .................................................................................................................................. 567

Contents

xxiii

Chapter-73 Project Evaluation and Cost-Benefit Analysis

569

Meaning .......................................................................................................................................................... 569 Its Stages .......................................................................................................................................................... 570 Methods of Evaluation ................................................................................................................................. 570 Cost-benefit Analysis .................................................................................................................................... 570 Evaluation on the basis of Cost-Benefit Criteria ...................................................................................... 571 Evaluation on the Basis of Benefits ............................................................................................................ 576 Evaluation on the Basis of Costs ................................................................................................................. 577 Importance of Data for Evaluation ............................................................................................................. 577 Limitations of Cost-Benefit Analysis ......................................................................................................... 578 Use of Cost-Benefit Analysis in Developing Countries .......................................................................... 579 Its Difficulties ................................................................................................................................................. 579 Use of Cost-Benefit Analysis in India ........................................................................................................ 580 Some Suggestions .......................................................................................................................................... 581

Chapter-74 Controls under Planning

582

Need for Controls .......................................................................................................................................... 582 Types of Controls ........................................................................................................................................... 583 Aims of Physical Controls ............................................................................................................................ 583 Limitations of Physical Controls ................................................................................................................ 587

Chapter-75 Input-Output Analysis

590

Meaning .......................................................................................................................................................... 590 Use of Input-Output Model in Planning ................................................................................................... 591 Feasibility and Consistency of the Plan .................................................................................................... 592 The Leontief Solution .................................................................................................................................... 594 The Dynamic Input-Output Model ............................................................................................................ 585 Limitations of Input-Output Analysis ....................................................................................................... 596 Use of Input-Output Technique in Planning ............................................................................................ 597

Chapter-76 Linear Programming

599

Meaning .......................................................................................................................................................... 599 Conditions and Generalisations ................................................................................................................. 600 Assumptions ................................................................................................................................................... 600 Programming Technique—Its Application in Planning ......................................................................... 601 Limitations of Linear Programming .......................................................................................................... 602 Uses of Linear Programming in Planning ................................................................................................ 603

Chapter-77 The Concept of Capital-Output Ratio

605

Meaning .......................................................................................................................................................... 605 Capital-Output Ratio in Underdeveloped Economies ........................................................................... 606 Factors Determining Capital-Output Ratio .............................................................................................. 607 Nature of Capital-Output Ratio .................................................................................................................. 609

xxiv

The Economics of Development and Planning Case for Low or High Capital-Output Ratio ............................................................................................ 610 Limitations ...................................................................................................................................................... 611 Importance in Planning ................................................................................................................................ 613

Chapter-78 The Choice of Techniques

614

Meaning .......................................................................................................................................................... 614 Process of Technological Development ..................................................................................................... 615 Labour-intensive Techniques ...................................................................................................................... 615 Capital-intensive. Modern Techniques ...................................................................................................... 616 Use of Abandoned Techniques of Advanced Countries ......................................................................... 617 Intermediate Technology ............................................................................................................................. 618 Appropriate Technology .............................................................................................................................. 618 Labour-intensive vs Capital-intensive Techniques ................................................................................. 620 Conclusion ...................................................................................................................................................... 622

Chapter-79 Transfer of Technology

623

Introduction .................................................................................................................................................... 623 Need for Transfer of Technology ................................................................................................................ 624 Channels of Technology Transfer ............................................................................................................... 626 Problems in Technology Transfer ............................................................................................................... 627 Appropriate Package of Technology Transfer .......................................................................................... 628

Chapter-80 Investment Criteria in Economic Development

630

Introduction .................................................................................................................................................... 630 The Capital-Turnover Criterion .................................................................................................................. 630 The Social Marginal Productivity Criterion ............................................................................................. 632 The Reinvestment Criterion ........................................................................................................................ 634 The Time Series Criterion ............................................................................................................................ 636 Conclusion ...................................................................................................................................................... 638

Chapter-81 Economic Planning and Price Mechanism

639

Introduction .................................................................................................................................................... 639 Price Mechanism in a Planned Economy .................................................................................................. 640 Price Mechanism in an Underdeveloped Economy ................................................................................ 641

Bibliography

645-648