15. The Economics of Development – Business Environment

15

THE ECONOMICS OF DEVELOPMENT

In this chapter, we will study the subject matter constituting the economics of development such as what constitutes development, the basic determinants and the criteria of development and finally evaluate the costs and gains of development. After reading this chapter, you will be able to relate all these concepts in relation to what are obtained in India, which is presently going through the metamorphosis of economic development.

THE SUBJECT AND ITS SPECTRUM

The economics of development—though it came to the forefront of discussion only after the 1940s with the emergence of a large number of politically free, but economically poor nations—is by no means a new discipline of thought. The problems of development, stagnation and the decline of national economies have always engaged the attention of economists, classical as well as modern. But in recent times, the problem of economic development of low-income countries has attracted worldwide attention because of the desperate attempts of these countries to attain quicker material growth with their limited resources and also due to the conflicts of interest that arise in international forums such as World Trade Organization (WTO) between them and developed countries on issues that mutually impact them. As a result, this branch of economics has now attracted a vast section of economists, economic planners and policymakers alike to its fold, who having recognized the importance of addressing issues concerning them have evolved new doctrines and models for growth. Besides, each country has to have its own model of development as “one cap does not fit all”. Economic doctrines reflect the conditions of the times in which they are enunciated and change becomes an essential ingredient of development, economic or otherwise.

There are several other issues concerning economic growth that defy a clear understanding. For instance, nobody has been able to provide a definite answer to the question whether the problem of poverty and economic stagnation among many nations is essentially economic, or is it technological or sociological, or political or a combination of all these. Or why is it that countries with the same set of factor endowments show vast differences in the incomes and wealth they enjoy? Or for that matter, are economic growth and inflation inseparable Siamese twins? Or would economic growth materialize on its own once markets are deregulated and trade and investments liberalized? Many people seemed to believe this assumption without any basis over the past two decades or so. Again, though the goal of all economic activities is the same, namely the realization of the greatest happiness to the largest number with the least social cost, the means suggested to achieve this end are as divergent as there are countries with different history, culture, social values, traditions and environments. These call for distinctly different economic organizations suiting the genius of the particular people, place and time. Even here, some countries might have adopted the same type of economic set-up and yet one could easily discern fine distinctions which might have improved, refined and even reshaped the system to suit the individual country's need. The exact process of development must necessarily be unique to every country that experiences it. The great number of critical variables involved in the process makes it unlikely that one nation will duplicate the experience of another with any degree of precision. This practical difficulty consequent to the individuality of each country in the process of development makes the problem of economic planners more difficult than it actually appears at first sight.

There is a tendency even among economists to use the terms economic growth and economic development interchangeably. Some writers on the subject like Meier and Baldwin, while agreeing that it is possible to draw some fine distinctions between these two terms, believe they do not dilate them, further contending that both are synonymous expressions. Arthur Lewis prefers to use the terms economic growth and economic progress interchangeably with economic development for the sake of variety!1 But others make the distinction clear to suit diverse contexts. Generally, growth implies greater output consequent to more inputs and improved efficiency leading to an increment in output per unit of input. Development goes beyond these to imply changes in the nuances underlying the terminology employed in the term. Generally, economists hold the view that growth is single-dimensional in as much as it denotes improvements in the real incomes of the people over time, whereas development is multi-dimensional in that it takes into account not only the economic growth factor, but also includes other economic parameters such as growth in science and technology, necessary transformation in socio-cultural and economic institutions, infrastructure development, building of social and economic overheads and the like—all of which would enable the country to quicken the process of overall development of the country.

WHY ECONOMIC DEVELOPMENT?

Economic underdevelopment of a vast majority of nations having more than three-fourths of the world's population was the most crucial socio-economic problem of the twentieth century. The problem continues to haunt them even in the twenty-first century, though some of them such as China, India, Brazil and Russia have grown faster than others by cutting into the “vicious circle of poverty” and promoting fast-track growth. The tremendous inequality that exists among nations regarding their incomes has assumed such proportions that its ramifications are felt not only by the poor countries but by the rich ones as well. If inequality of incomes among individuals is unjustifiable and undesirable within a country, vast differences in national incomes and living standards are threats to the peaceful coexistence of countries in the international community. Mass media and communications, the flow of statistical data comparing and contrasting the wealth and incomes of different nations, the fast emerging down-to-earth humanism of modern economists highlighting the grinding poverty of some nations and such other factors have awakened the so-far dormant conscience of richer nations. “Poverty anywhere constitutes a threat to prosperity everywhere” is no more an empty slogan or platform rhetoric, but a stark realization.

The world is divided in terms of economic growth roughly into two broad distinct camps—one comprising three-fourths of the human race living in poverty, and the other one-fourth comprising the rich that enjoy an increasing affluence with the passage of time. Such divisions of “haves” and “have-nots” have been the harbingers of conflict among nations of the world in recent times. The poor countries consider that their present misery is the result of the ruthless exploitation by the imperialist powers in the bygone times. To them, the policy pursued by their colonial rulers resulted in an economic drain. The theory of economic drain is associated with the name of Dadabhai Naoroji and refers to the draining of wealth and resources of India by the British. Dadabhai Naoroji, a nationalist to the core and fondly called the “Grand Old Man of India”, was a mentor to Gopal Krishna Gokhale as well as to M. K. Gandhi. His book, Poverty and the Un-British Rule in India brought to limelight the economic drain theory according to which the British siphoned off India's precious wealth and resources and carried them to feed and speed up their own economic development.

WHAT IS ECONOMIC DEVELOPMENT?

If the crushing poverty of a large number of countries has aroused the social and political consciousness of the world, its eradication has become the new mantra of development economists. However, these economists do not agree on a common definition of economic development which, like socialism, means many things to many people, though the goal is undisputed. To some, economic development would mean, “a world-wide struggle to escape from the poverty and misery, and not less from the neglect and anonymity, which have heretofore constituted ‘life' to the vast majority of human beings.”2 To some others, it would refer to the improvements effected on the institutional framework as well as on the diverse sectors of the economy through some massive and concerted action. Some others interpret it as implying “both more output and changes in the technical and institutional arrangements by which it is produced.”3 Meir and Baldwin define economic development as a “process whereby a country's real national income increases over a long period of time.”4

As economic development is a process which occurs over a long period of time, it implies the operation of certain forces which result in the raising of a nation's income ultimately. It should be emphasized here that mere efforts to enhance national income do not constitute economic growth. They have to be accompanied by a number of other changes, the most important being the changes in fundamental factor supplies and the demand structure for products. Changes in factor supplies comprise the discovery of additional resources, capital formation, population growth and introduction of newer and better techniques of production, improvement in skill, and institutional and organizational changes. The change in the structure of demand for products is associated with developments in the size and composition of population, the level and distribution of income, tastes, fashion, and consumer's preference apart from other institutional and organizational arrangements.5

It is necessary here to clarify the precise meaning of economic development described as a process whereby an economy's real income increases over a long period of time. There are three key phrases in this definition—process, increase in national income in real terms (and not in money terms) and over a long period of time. As explained, the “process” refers to the changes introduced in factor supplies and structure of demand for products. The real national income—the second phrase—refers to the sum total of goods and services produced over a period, usually of a year, expressed not in monetary terms but in real terms. However, a distinction must be made between the gross national product (GNP) and the net national product (NNP). The rise in the net national real income is the true index of economic development. As money income alone does not determine the standard of living of people, it is relevant to know the real income of an individual. This rise in the real income has to be sustained over a long period of time. However, fluctuations in the national product due to business cycles and similar reasons do not strictly imply non-economic development. Such fluctuations may also be regarded as a part of economic growth, in which the relevant time units are decades rather than years. Hence, development should mean a sustained movement spreading over a period of at least 25 years' duration. From this, it is clear that the economic growth is realized not in a short period of say one year, but over a long period of time.

What constitutes development is subject to various interpretations. Some would consider it as a process by which the per capita real income of the people could be raised or maintained at a high level for an increased population. Some would interpret it to mean a process that results in the filling up of empty spaces, or urbanization or industrialization, even though the per capita income may be lowered. Zealous patriots may take it to refer to those means that increase the aggregate income/output for prestige or strategy considerations, even at the cost of the consumption needs of the people. To others, the living standard of a particular class or of a particular regional category may be a weighty consideration. A colonial power may develop its colonies as satellites or economic appendages to supply the necessary raw materials and serve as captive market for its finished products without any consideration for the economic well-being of the native colonial population. All of these considerations have at one time or the other been associated with economic development.6

The welfare economists, however, believe that economic development does not necessarily confine itself to increasing production but also includes the equitable distribution of the wealth produced in the economy. Economic development, thus, refers to raising the standard of living of all inhabitants and not a few. Since it is described as a process whereby the real per capita income of a country increases over a long period of time, this would necessarily raise the standard of living of all people and their economic and social welfare. There may be instances where the rise in the real national income may not lead to increase in the standard of living of the people of those countries which face demographic problems such as India, China, Pakistan and Bangladesh where the rate of population growth far exceeds the increase in income. Moreover, the wealth produced in the country goes into the pockets of a few, which means that the economic welfare of the masses is not likely to increase.

Thus, the rate of growth in national income alone is not enough to signify economic development. Per capita real income—the amount of goods and services one gets for his money income or simply the standard of living—is perhaps a better criterion to determine it. If the rate of growth of national income is greater than that of the population, then the per capita real income will increase; otherwise, if the rise in national income is offset by a rising population, there will be hardly any rise in the per capita real income of the people. It does not, however, mean that there is no economic development at all; only, there will not be any decisive impact on the standard of living of the people. In recent times, economists consider the quality of life index more relevant than the per capita real income as economic growth should not be achieved at the cost of ecology and environment.

We can look at what constitutes economic development from yet another angle. It is generally agreed among economists that some negative factors—obstacles to development—are ingrained in an economic system, the removal of which would facilitate economic progress. These are, inter alia: (i) low productivity functions consequent to the deficiency of either physical or mental resources, or both; (ii) scarcity of capital; (iii) a peculiar structure of foreign trade relations which works unfavourably for poor countries; and (iv) a rapid rate of increase of population. A country that removes these obstacles or at least overcomes their negative influences and simultaneously increases its aggregate wealth, aggregate income, total production, etc. despite a substantial rise in population, will have increased per capita wealth, income and production—all favourable economic indices. However, even in combination would they conclusively indicate economic development? Not necessarily; and by no means, completely. The favourable economic indices are not all in the complex phenomenon of development. An economy is not a mechanical system. A full interpretation of development requires considerations of non-economic forces as well.

Political, sociological and psychological factors are highly relevant critical variables in the process of economic development. There are socio-cultural forces inextricably intertwined in the functioning of an economic system and its development. As Ragnar Nurkse comments, “Economic development has much to do with human endowments, social attitudes, political conditions and historical accidents.” The type of government, the legal system, the standards of education and health, the role of family, the role of caste and creed, the psychological substratum of the masses which reflects itself in their outlook and approach to economic growth—all these contribute in no small measure to a country's economic development or lack of it. Thus, we would find that what constitutes economic development cannot be distinctly isolated. There are several criss-crossing forces that merge into one another to bring about a unity in the complexity of development. But for a working basis, we could take economic development to mean the process that maintains a rise in the average income of the population as a whole, the benefits accruing to a rising tide of population.

In this context, it is important to refer to another development that has taken place in measuring the quality of life. Since 1990, the United Nation's Development Programme (UNDP) has devised an index of measuring a country's progress towards improvement or otherwise of the quality of life of its people known as the human development index (HDI). The index takes into account a number of socio-economic parameters such as poverty, longevity of people, literacy, and gender-related issues to indicate the quality of life people of a country enjoy. According to the latest UNDP report, India has been ranked very low at 134 among 182 countries surveyed for measuring the HDI. According to the representative of UNDP in India, “Overall, however, India has made steady progress on the human development index (HDI). Its value has gone up from 0.556 in 2000 to 0.612 in 2007.”7 In the current HDI index, Norway continues to be number 1 while the rest of the top ten rankers are Australia, Iceland, Canada, Ireland, the Netherlands, Sweden, France, Switzerland and Japan. The United States has been placed at 13, China at 92, Sri Lanka at 102 and Bhutan at 132. Among our neighbours, Pakistan has been ranked at 141 and Nepal at 144.

BASIC DETERMINANTS

Generally, the following factors are deemed responsible for ushering in economic development in a country: (a) natural resources or the original endowment of an economy including not only land but also mineral, water, forest and other resources; the climate of the country, its geographical position and features, natural harbours, etc.; (b) the quantity and quality of its population, the size of the working population, the health and intelligence of the people, their sense of discipline, commitment, nationalism and spirit of cooperation, willingness to work, diligence, character, etc; (c) entrepreneurial skill available in the country; (d) social and institutional factors that would positively promote economic development; (e) a politically stable and socially conscious and responsible government, an efficient system of administration and a high sense of responsibility of the administrative personnel; (f) favourable external circumstances involving the attitude of neighbouring countries, prospects of foreign trade, the stimuli of external contacts, inflow of foreign capital; and above all (g) a rationalistic attitude of the people to yearn for development, to accept its challenges, to actively cooperate with the government in the processes of growth, to change whatever hinders progress and to sustain a continuous interest in all that is involved in economic development.

CRITERIA

There are a number of tests to identify the different levels of economic development attained by various countries of the world. These tests normally relate to either the technological or the demographic situation of a nation. D. W. Fryer uses the following criteria to determine the main patterns of development in the world: (a) per capita national product; (b) the occupational distribution of the population; (c) the urban-rural population ratio; and (d) the rate of economic growth.8 Figure 15.1 summarizes the various criteria that define and explain economic development.

 

 

Figure 15.1 The Criteria of Economic Development

  1. Per capita national product: The per capita national product is arrived at by dividing the national product by the total population. This would not be an exact indicator to compare and contrast national economic developments for various reasons. For instance, incomes of countries which have overwhelmingly subsistent economies are inevitably undervalued because it is impossible to make an accurate assessment of the money value of all the goods and services that farmers and their families provide for them. Moreover, figures of per capita national product suggest a degree of precision which is quite unmerited because the difficulties of estimating all its various components and translating them into common monetary terms such as the US dollar are very great and often have to be settled by approximations based on the limited evidence available. But the differences that exist in per capita national product are nevertheless striking. For instance, USA had a per capita income of USD 44,970 for the year 2005–06, while it was a mere USD 820 for India.9
  2. Occupational distribution: A high per capita national product is almost without exception associated with diversified employment opportunities with a low concentration of the working population on agriculture. With greater economic development, improved technology raises agricultural productivity with a diminishing labour force. The excess labour is removed from the primary sector and fruitfully employed in other activities, such as manufacturing and commerce. As the economy grows further, these activities engage more and more proportions of the total work force. Manufacturing employs around 25 per cent of population in highly industrialized societies while the share of the tertiary sector consisting of transport, commerce and administration tends to grow and absorb a very large proportion of the labour force. Conversely, an increased percentage of labour engaged in the low-income-generating primary sector is a clear index of an underdeveloped economy; it cannot be anything else, for the working population is uncomfortably glued to the basic problem of providing enough to eat. This is the case with most, if not all, of the underdeveloped countries. It follows that the countries with low income desirous of raising their level of development must endeavour first to enlarge productivity in the agricultural sector of the economy and then to transfer workers to non-agricultural activities. In the case of India, for instance, the contribution of agriculture to the country's GDP which was 55.9 per cent in 1950–51 (at 1999–2000 prices) has declined to 19.4 per cent in 2007–08 while the services sector now contributes 55.7 per cent which contributed less than 29.2 per cent then.
  3. The urban–rural ratio: There is a close correlation between per capita national product and the proportion of the total population living in urban conditions. This is so because with increasing development, the excess labour force from rural-based agriculture comes to live in cities which develop with industries and the services they help to generate. The famous saying of M. K. Gandhi, “India lives in her villages” indicates that our country was vastly underdeveloped in the modern context of economic development. Even now, with so much of fast-track development especially after 1991, 72.2 per cent of India's population still lives in villages, as per the 2001 Census.
  4. The age structure of the population: As a result of economic development, changes are effected in the size and age structure of the population. In an industrial and urban society, powerful new forces are generated which gradually bring down birth rates, increase living standards, the fruits of a higher level of economic development, prolong the expectation of life, and gradually but inevitably the proportion of children in the total population declines. But countries with very low incomes have a large proportion of population below the age of 15 and those above 65 years. In India, for instance, out of the total estimated population of 1,019 millions in 2000–01 only 402.2 millions belonged to the working population, which means that the rest of them (617.8 million) belonged to the non-earning, non-producing population consisting of children, women and the aged people.10
  5. The rate of economic growth: It is very difficult to reckon the general rate of growth of all the countries because of the various difficulties involved. But from the available data we can easily draw the inevitable conclusion that in the majority of cases the growth rate is very small. Every country with a high average income saves a considerable proportion; the higher the proportion saved, the faster is the rate of economic growth because the savings are used as investments. Countries with low per capita national products can save little; thus investment in productive enterprises is low, and the cycle of poverty is made permanent. With the passage of time, the gap between the rich and the poor widens, creating ripples of repercussions in the pool of international community. In recent years, especially after the economy has been opened up in 1991, the rate of growth of India's economy has been the second highest amongst the bigger countries of the world and hovered around 7 and 9.4 per cent. This is a commendable achievement for a country like India which had been registering growth between 3 and 3.5 per cent, derisively nicknamed as the Hindu rate of growth in the 50s, 60s and 70s of the last century.
COSTS AND GAINS

Economic development is a mixed blessing. Both affluence and poverty are associated with their own set of problems. Each has been known to spark strong reactions. For instance, the nihilists— the Hippies and Yippies of America, the Beatles of England and their counterparts on the Continent—began their movements in 1970s as a reaction to, and as a by-product of an affluent society. These trends appeared to be far more dangerous to the development of an organic and orderly society than the poverty and misery that prevail in developing countries. But, it is an indisputable fact that there are certain benefits that accrue to the society as a result of economic development. As represented in Fig. 15.2, economic development is associated with a number of costs and gains that affect society.

Costs

Economic development is a costly and painful process; it is costly because it involves a heavy and deliberate investment in terms of human and material resources in the present for an uncertain future; it is painful because it involves sacrifice. No developed country has reached where it finds itself today without paying the price that development demanded. The following analysis would bring to sharp focus the various real costs involved in the process of development:

  1. Sacrificing the pleasures of today for an uncertain tomorrow: When the vast majority of people of a poor country have an income below the subsistence level, mobilization of resources through taxes and savings keeps the consumption standard pegged down to the lowest level. The pain and privation people have to undergo by restricting their present consumption for an uncertain future prosperity sometimes reach such an unendurable limit that people express their discontent through unseemly violence and riots.

    Economic development also calls for a greater amount of hard work, less leisure and sacrifice at the initial stage of economic growth. As Jawaharlal Nehru said, “This generation is condemned to hard work so that our children may live better.” Besides, since there is an all-round scarcity of resources in underdeveloped countries, wastage either in conspicuous consumption or unequal distribution could cause more problems for the economy.

  2. Individualism on the ascent and group loyalty on the way out:It is always noticed that economic development “is associated, both as cause and effect, with the disappearance of extended family and joint family systems; with the erosion of social systems based on status” and “their substitution by systems based upon contract and upon equality of opportunity; with a high level of vertical social mobility, and with the decline of tribal bonds, and, the reduced recognition generally of the claims of social groups”. In India, for instance, with a certain degree of economic growth with the ethos it has generated, individualism is substituting for family, caste and community spirit that pervaded the country for centuries.
  3. Political authoritarianism: Economic growth of poor countries cannot be achieved through the same processes as were followed by the Western democracies. They have to avoid waste and duplication of efforts; scarce resources have to be used for higher social purposes and should not be frittered away in unplanned individual actions. Again, every country, be it rich or poor economically, aims not only at increasing its output but also at an equitable distribution. Full employment is another socio-economic objective of today's industrial society. All these, especially the goal of full employment, lead to central planning and a totalitarian society.11 Even when a country has adopted democracy, the state may be prompted to adopt almost regimental measures to quicken the process of development. The state of Singapore is a classic example. Once the state extends its monopoly over various economic activities, its caprice will have no bounds. Once individual freedom is lost, everything is lost. As Goethe says, “The first is freedom; the second, bondage”. Analysis of modern economic and political realities confirms this old truth. Once recognized, however, it enables economic policy to set conditions of a general political order that preclude unwanted tendencies.
  4. Reason is ranged against superstition: One of the important reasons for the lack of development of poor countries is that their social and religious institutions are not conducive to economic growth. With the advent of modern scientific ideas and an accompanied quest for change, there is bound to be a growing tension between the “God-seekers” and the “growth-sponsors”. The technological revolution, which is a sine qua non for economic progress, may come into a head-long clash with a number of social and religious institutions. Religion, in its narrow sense, with all its superstitious beliefs can become an obsession or “opium of the people” and retard economic growth. Abolition of poverty, illiteracy and disease, can hardly be realized if people desperately hang on to the beliefs, habits and social arrangements which are the very causes of the poverty they deplore. The conflict between faith and reason has to be settled peacefully to reach the path of economic growth.
  5. Promotion of “machine culture” and destruction of aesthetic artefacts : Economic growth is often identified with industrialization. With the advent of the machine-made goods which are cheaper, finer and more durable, the handicrafts industries have been destroyed. This happened in England after the Industrial Revolution and was repeated in the case of almost every other developing country. The Dacca Muslin once noted for its delicacy and exquisite texture at the beginning of the nineteenth century disappeared completely under the severe strain of the competition from the British machine-made goods. The death of these industries resulted in untold sufferings for the workers. Such is the price we have often to pay to achieve economic growth.
  6. Man becomes a mere cog in the wheel of production: Industrialization leads to division of labour and specialization through machines. This creates mental drudgery and fatigue for those who have to do the same job again and again throughout their lives. Machine promotes large scale production. Large scale organizations impose discipline; day after day men must rise at the same hour, arrive at their place of work at the same hour, do much the same things and return home at the same time. This makes life drab and monotonous and reduces human beings to the mechanical role of cogs in some vast wheel. In addition to this, man is reduced to an insignificant “hand” in production. His creativity is lost and his personality is nowhere breathed into the product he helps to produce. He no more enjoys the joys of “creation” nor is he able to extend or mirror the artistic side of his personality into the products. Man becomes a slave of machine and everything in life is impersonal and devoid of any kind of beauty. Gadgets replace hands. Life is no more a challenge; these machines came as a human reaction to the challenges of the life. This is perhaps the greatest loss mankind has experienced in its bargain with economic development.
  7. Problems of concentration: Industrialization helps the transference of the excess population in agriculture to centres of industrial activity and thereby promotes urbanization. Such a transfer leads to the congregation of people in towns and cities with all its attendant discomforts. Excessive population in an area creates problems of housing, water, transport, etc. thereby making it difficult to lead a decent life, let alone enjoy it. This problem is made more acute in unplanned industrial towns where the workers suffer a great deal owing to the lack of accommodation. In almost all urban conglomerates in the country, most of the poor persons reside in improvised and unhygienic structures.12 Their sufferings are part of the process of development.
  8. Polarization into “haves” and “have-nots” causing social tensions: Economic development brings in its wake large scale business organizations owned by men with large capital. In the process, most men are separated from the ownership of their tools, and are proletarianized. These organizations are run on hierarchical lines, in which a few command while the majority obeys. As a natural corollary to this on the monetary side, there arises the problem of inequality of incomes and wealth which promotes class-consciousness and social tensions. Apart from these, the process of economic growth is replete with frictions and fractions.

 

Figure 15.2 The Costs and Gains of Economic Development

 

The rising expectations of the masses which cannot be fulfilled easily, the emerging conflicts between a settled culture based on religion and tradition and a newly evolved culture based on materialism, the inevitable clash that occurs between those who emphasize on more production and those who insist on equitable distribution, problems of administration, choice of politico-socio ideologies, etc. are but a few points of frictions in a society when it moves up in the ladder of economic development.

Gains

Arthur Lewis13 draws three main conclusions from an analysis of the costs of development: (i) some of the alleged costs of economic growth are not necessary consequences of growth at all—for instance, the ugliness of towns or the impoverishment of the working classes; (ii) some of the alleged evils are not in fact intrinsically evil—for example, the growth of individualism, or of reasoning, or of towns; (iii) the rate of economic growth can be too high for the health of society; excessive growth may result in, or be the result of, excessive materialism, individualism, mobility of population, inequality of income, etc. If the society chooses wisely, correctly and in proper measure, the gains of development can be greater than the costs.

Faster economic development is an urgent need of the hour and something that is greatly desired because of the positive advantages it brings to those who experience it. Many such advantages are taken for granted while the costs of it are often ignored as there is hardly anything in life that can be achieved without making a sacrifice. But the very fact that nations seek development proves that the gains are greater than the costs incurred. The following are some of the more important gains of economic development:

  1. Human welfare is widened: Arthur Lewis observes that “the advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice.”14 Economic growth, as we have seen earlier, implies the production of more goods and services; in other words, economic activities are directed towards raising the wealth of the nation. This, in turn, increases the standard of living of people and thereby enhances their welfare. People in fast developing economies such as India and China have more income to spend on a wide variety of consumer products, automobiles, entertainment and leisure. Rising incomes enable them to travel to new and far-off destinations, both within the country and abroad, and execute many of their pent-up demands.
  2. From a life of struggles to the life of leisure: At a primitive stage of economic growth, man struggled for his survival. Even to get the essentials of his subsistence, he had to wrest them from the soil with unceasing toil. But with his tenacity and ingenuity, he harnessed Nature and conquered it and made it serve him. Thanks to economic growth, he is able to produce in abundance. By controlling the menaces of nature such as famines and epidemics, he enjoys a life of ease and plenty. With further development, he can afford to live better with less work and command greater leisure to relax and enjoy “the bliss of being alive”. Besides, thanks to innovations and improvements, irksome and heavy works are entrusted to machinery.
  3. Improved standard of living: Development brings about a tremendous change in the economic structure of society. An underdeveloped country is predominantly agricultural where the incomes of the people are low and therefore they have low consumption standards. Economic development, through industrialization, would increase incomes and by introducing sectoral changes increase the amount of goods and services for consumption. The transfer of population from agriculture to other economic activities enables the country to embark upon a multidimensional growth. Besides, people have more time and income to enter into the higher activities of life such as the arts, literature and education which help to expand the horizons of their thinking though the benefit may not come in equitable terms to all sections of people. Women benefit more from these changes than men. In most poor countries, woman is involved in drudgery, doing the routine household chores which in more advanced countries are done by mechanical power—grinding grains for hours, walking miles to fetch water and so on are now taken over by labour-saving devices in advanced countries. Economic growth transfers these and many other tasks such as spinning and weaving, teaching children, minding the sick and invalid, etc. to external establishments, where they are done with greater capital and specialization and with all the advantages of large scale production.
  4. Spreading humanism : Economic growth brings in its wake a change in social consciousness to the advantage of the underdog. It is almost an inevitable process that development “humanizes” the people to the extent that they hasten to help their less-privileged brethren. Poverty would be no more made a virtue but an evil to be fought against with grit and determination to arrest the spreading cancer of social tensions eating up the vitals of human civilization. Epidemic diseases can be lessened, if not completely eradicated, through medical research. Governments can invest large resources on social service schemes such as education, unemployment insurance, old age pensions, etc. thereby raising the material standard of living of the less privileged classes. These days, business corporations too are realizing their responsibility towards society and set aside part of their financial and human resources to undertake numerous social welfare projects for helping the underprivileged sections of the society. Tata Steel, Infosys and Wipro, for instance, render yeoman service to the cause of the poor, sick and needy through corporate social responsibility programmes.
  5. Ensuring greater political freedom: There are more than a hundred developing countries in the world today, of which over sixty have gained their independence recently. But these countries are unable to enjoy their hard-won political freedom as their economies exhibit the shackled underdevelopment. Economic growth alone will allow them to preserve their political freedom, as democracy and concepts of “liberty, equality and fraternity” will be mere empty political slogans unless there is freedom from hunger, misery, starvation and debilitating diseases. Many underdeveloped countries which have achieved independence in recent times are experiencing great hardships on their political and social fronts. One of the main causes, if not the sole cause, of these tensions, disturbances and even civil war is the economic discontent of the masses. Economic growth endeavours to accomplish the avowed goal of political freedom coupled with economic freedom through centralized planning. Development is also based on social justice as it is desirable not only to raise the national income but also to distribute the additions made to it on a more equitable basis through the necessary fiscal measures. It may not be possible to achieve all these objectives immediately but the fact remains that economic growth provides a scope for a greater amount of opportunities to the people.
  6. Influence in the comity of nations: The importance of any country in the world arena is primarily due to the economic strength it displays. Even in the UN and other international political-finacial agencies, the voice of advanced countries rings louder and prevails upon those of the weaker nations. The concept of “might is right” is true more in the economic than in the political sense. The dictum of the mercantilists, “Pecunia nervus belle” can be applied in a wider context in the world of today than ever before. No wonder underdeveloped countries make an all-out effort to strengthen their material position which can be realized only through economic development.
  7. For lasting peace among nations: Conflicts and cold wars between nations may be initially based on political ideologies. But underneath the cover of political misconceptions lie economic considerations. The gap between the rich and the poor countries of the world provokes war and international peace will be in constant jeopardy if this gap is not bridged. And this is possible only through economic development.

The above analysis has listed the costs and gains of development. But no nation considers the cost of development first such as no subject reckons the cost of freedom. Economic development, like political independence, is the birth-right of nations, and they must achieve it if this chequered history of human civilization is to be prolonged. This is not to minimize the costs involved. They are forbidding indeed. But, if we weigh the advantages and disadvantages, taking the long-range view, the former far outweigh the latter and we conclude that economic growth is indeed desirable. After all, nothing worthwhile can be achieved without making a sacrifice; the people of today have to sacrifice their comforts and put up with a number of inconveniences in order to ensure economic prosperity to posterity. And that requires the willing cooperation of the people in the fight against poverty and backwardness and also against the outmoded social and political customs and traditions that have been the stumbling blocks to economic progress in bygone times.

SUMMARY
  • Meir and Baldwin offer the best definition of economic development: It is a “process whereby a country's real national income increases over a long period of time.” However, per capita real income alone does not reflect fully a country's development. For welfare economists, it is how equitably wealth is distributed that reflects real economic development.
  • Economic development is multi-dimensional in that it includes other catalysts such as growth in science and technology, socioeconomic overheads, socio-cultural and economic institutions apart from growth. The obstacles to development include: (i) low productivity functions; (ii) scarcity of capital; (iii) foreign trade which works unfavourably for the poor countries; and (iv) a rapid rate of increase in population.
  • Generally, the following factors are needed for ushering in economic development in a country: (a) natural resources; (b) the quantity, quality and character of its population; (c) entrepreneurial skill available in the country; (d) favourable social and institutional factors; (e) a politically stable and responsible government; (f) favourable balance of trade and payments and inflow of foreign capital; and (g) a strong desire on the part of the people to achieve development.
  • There are a number of tests to identify the different levels of economic development. These are: (a) per capita GNI; (b) occupational distribution; (c) the urban-rural ratio; (d) the age structure of the population; and (e) the rate of economic growth.
  • There are both costs and gains of development. Costs include: (i) Painful sacrifice of the present for an uncertain tomorrow; (ii) Family, caste, community and group interests are substituted by individual interests; (iii) Leads to a certain degree of political authoritarianism; (iv) Conflict between faith and reason; (v) A machine culture is promoted at the cost of aesthetic artefacts; (vi) Man is reduced to a cog in the wheel of production; (vii) Conflicts between “haves” and “have-nots”; and (viii) Problems of concentration leading to civic problems.
  • There are several gains of economic growth too that include (i) widening of human welfare; (ii) substitution of a life of struggle by a life of leisure; (iii) improvements in living standards; (iv) spreading of humanism; (v) leads to the emergence of greater political freedom; (vi) a developed country earns the respect and recognition in the comity of nations; and (vii) economic growth of all nations provide a ground for lasting peace among all nations.
KEY WORDS
comity of nations demographic situation ecology and environment
economic indices economic stagnation equality of opportunity
harbingers of conflict human welfare humanism
inequality of incomes institutional framework life of leisure
low productivity functions machine culture material resources
multidimensional growth occupational distribution psychological substratum
rate of economic growth rising expectations scarcity of resources
socio-cultural institutions urban–rural ratio welfare economists
DISCUSSION QUESTIONS
  1. What do you understand by “economic growth”? What are the main factors that contribute to the growth of an economy?
  2. Describe the conditions which ensure steady growth of national income of a country.
  3. What are the major determinants of economic development? How are they present in India?
  4. Distinguish between growth and development. What are the non-economic factors which are relevant to the development of an economy? Briefly discuss the importance of social and institutional factors in economic development.
  5. Is economic development an unmixed blessing? In this context, discuss the costs and gains of economic development with special reference to India.
SUGGESTED READINGS

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Fields, G. S. Poverty, Inequality and Development. Cambridge: Cambridge University Press, 1980.

Hirschman, A.O. “The rise and decline of development economics”, in Trespassing: Economics to Politics and Beyond. Cambridge: Cambridge University Press, 1981.

Hlamyint, U. Economic Theory and the Underdeveloped Countries. New York, NY: Oxford University Press, 1971.

Hlamyint, U. The Economics of the Developing Countries. New York, NY: Praeger, 1965.

Jones, C. I. Introduction to Economic Growth. New York, NY: W.W. Norton, 1998.

Lebenstein, H. Economic Backwardness and Economic Growth: Studies in the Theory of Economic Development. New York, NY: Wiley, 1957.

Lewis, W.A. “Development economics in the 1950s” in Meier, G. M. and D. Seers (Eds.), Pioneers in Development, New York, NY: Oxford University Press for the World Bank, 1984.

Lewis, W.A. Development Planning: The Essentials of Economic Policy. London: Allen & Unwin, 1966.

Lewis, W.A. “Economic development with unlimited supplies of labour”, The Manchester School, reprinted in Agarwala, A. N. and S. P. Singh, (Eds.), The Economics of Underdevelopment. Oxford: Oxford University Press, 1958.

Lewis, W.A. Theory of Economic Growth. London: Allen & Unwin, 1955.

Meier, Gerald M. Biography of a Subject: An Evolution of Development Economics. New York, NY: Oxford University Press, 2005.

Meier, G. M. (ed.) From Classical Economics to Development Economics. New York, NY: St. Martin's Press, 1994.

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Nurkse, Ragnar. Problems of Capital Formation in Underdeveloped Countries. Oxford: Blackwell, 1953.

Ray, Debraj. Development Economics. Indian edition. Oxford: Princeton University Press, 1998.

Schumpeter, J. A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, and the Business Cycle. New York, NY: Oxford University Press, 1961.New York

Seligson, Mitchell and John Passe-Smith (Eds.). The Five Stages of Growth. Development and Underdevelopment: The Political Economy of Global Inequality. Third edition. Boulder, CO: Lynne Rienner Publishers, 2003, pp. 123–131.

Streeten, P. “Development ideas in historical perspective” in Hill, K.Q. (Eds.), Toward a New Strategy for Development: A Rothko Chapel Colloquium. Oxford: Pergamon Press, 1979.

The Complete World Development Report, 1978–2009 (Single User DVD): 30th Anniversary Edition World Bank Publications, Washington DC (2009), ISBN 978-0-8213-7270-8.

Tinbergen, J. and H. C. Bos. Mathematical Models of Economic Growth. New York, NY: McGraw-Hill, 1962.

Toye, J. Dilemmas of Development: Reflections on the Counter-revolution in Development Theory and Policy. Oxford: Basil Blackwell, 1987.

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World Bank. Global Economic Prospects and Developing Countries. Washington DC: World Bank, 2000.