Chapter 1.
Introduction
1.1The concept of Development & Growth
In strictly economic terms, development has traditionally meant achieving sustained rates of
growth of income per capita to enable a nation to expand its output at a rate faster than the growth
rate of its population.
Economic development in the past has also been typically seen in terms of the planned alteration
of the structure of production and employment so that agriculture’s share of both declines and that
of the manufacturing and service industries increases. Development strategies have therefore
usually focused on rapid industrialization, often at the expense of agriculture and rural
development. With few exceptions, such as in development policy circles in the 1970s,
development was until recently nearly always seen as an economic phenomenon in which rapid
gains in overall and per capita GNI growth would either “trickle down” to the masses in the form
of jobs and other economic opportunities or create the necessary conditions for the wider
distribution of the economic and social benefits of growth. Problems of poverty, discrimination,
unemployment, and income distribution were of secondary importance to “getting the growth job
done.” Indeed, the emphasis is often on increased output, measured by gross domestic product
(GDP).
The experience of the first decades of post–World War II and postcolonial development in the
1950s, 1960s, and early 1970s, when many developing nations did reach their economic growth
targets but the levels of living of the masses of people remained for the most part unchanged,
signaled that something was very wrong with this narrow definition of development. An increasing
number of economists and policymakers clamored for more direct attacks on widespread absolute
poverty, increasingly inequitable income distributions, and rising unemployment.
In short, during the 1970s, economic development came to be redefined in terms of the reduction
or elimination of poverty, inequality, and unemployment within the context of a growing economy.
“Redistribution from growth” became a common slogan. The phenomenon of development or the
existence of a chronic state of underdevelopment is not merely a question of economics or even
one of quantitative measurement of incomes, employment, and inequality.
Development must therefore be conceived of as a multidimensional process involving major
changes in social structures, popular attitudes, and national institutions, as well as the acceleration
of economic growth, the reduction of inequality, and the eradication of poverty.
Development, in its essence, must represent the whole range of change by which an entire social
system, turned to the diverse basic needs and evolving aspirations of individuals and social groups
within that system, moves away from a condition of life widely perceived as unsatisfactory toward
a situation or condition of life regarded as materially and spiritually better.
Development is a process that creates growth, progress, positive change in economic,
environmental, social and demographic component without damaging the resources of the
environment. It means making a better life for everyone. A better life for most people means,
essentially, meeting basic needs:
• Sufficient food to maintain good health.
• A safe healthy place to live.
• Affordable services available to everyone.
▪ Treated with dignity and respect.
The purpose of development is a rise in the level and quality of life of the population, and the
creation or expansion of local regional income and employment opportunities, without damaging
the resources of the environment.
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Economic Growth is the positive change in the indicators of economy. It refers to the increment in
amount of goods and services produced by an economy, an increase in real national income /
national output.
It is single dimensional in nature as it only focuses on income of the people. It is measured in terms
of GDP, Gross National Income (GNI) and Per Capita Income. Economic Growth is the precursor
and prerequisite for economic development. It relates a gradual increase in one of the components
of GDP; consumption, government spending, investment or net exports. It is also considered as a
traditional measure of development which indicates the quantitative rise of economy. Economic
growth only looks at the quantitative aspect. It brings quantitative changes in the economy. It is
concerned with increase in economy’s output, production of goods and services. Whereas
Economic development refers to:
• provision of sufficient and effective physical and social infrastructures
• equal access to resources
• participation of all in economic activities
• equitable distribution of dividends of economy.
Achieving economic development is linked with end of poverty and inequality.
1.2. The Core Values of Development
The appropriate answer for developing nations today is not necessarily the same as it would have
been in previous decades. But at least three basic components or core values serve as a conceptual
basis and practical guideline for understanding the inner meaning of development. These core
values sustenance, self-esteem, and freedom represent common goals sought by all individuals and
societies. They relate to fundamental human needs that find their expression in almost all societies
and cultures at all times.
A. Sustenance: The Ability to Meet Basic Needs
All people have certain basic needs without which life would be impossible. These life-
sustaining basic human needs include food, shelter, health, and protection. When any of these
is absent or in critically short supply, a condition of “absolute underdevelopment” exists.
A basic function of all economic activity, therefore, is to provide as many people as possible
with the means of overcoming the helplessness and misery arising from a lack of food, shelter,
health, and protection. To this extent, we may claim that economic development is a necessary
condition for the improvement in the quality of life that is development. Without sustained and
continuous economic progress at the individual as well as the societal level, the realization of
the human potential would not be possible. One clearly has to “have enough in order to be
more.” Rising per capita incomes, the elimination of absolute poverty, greater employment
opportunities, and lessening income inequalities therefore constitute the necessary but not the
sufficient conditions for development.
B. Self-Esteem: To Be a Person
A second universal component of the good life is self-esteem a sense of worth and self-respect,
of not being used as a tool by others for their own ends. All peoples and societies seek some
basic form of self-esteem, although they may call it authenticity, identity, dignity, respect,
honor, or recognition. The nature and form of this self-esteem may vary from society to society
and from culture to culture. However, with the proliferation of the “modernizing values” of
developed nations, many societies in developing countries that have had a profound sense of
their own worth suffer from serious cultural confusion when they come in contact with
economically and technologically advanced societies. This is because national prosperity has
become an almost universal measure of worth. Due to the significance attached to material
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values in developed nations, worthiness and esteem are nowadays increasingly conferred only
on countries that possess economic wealth and technological power those that have
“developed.” Development should promote pride and human dignity.
C. Freedom from Servitude: To Be Able to Choose
Freedom here is to be understood in the sense of emancipation from alienating material
conditions of life and from social servitude to nature, other people, misery, oppressive
institutions, and dogmatic beliefs, especially that poverty is predestination. Freedom involves
an expanded range of choices for societies and their members together with a minimization of
external constraints in the pursuit of some social goal we call development.
Amartya Sen writes of “development as freedom.” W. Arthur Lewis stressed the relationship
between economic growth and freedom from servitude when he concluded that “the advantage
of economic growth is not that wealth increases happiness, but that it increases the range of
human choice.” Wealth can enable people to gain greater control over nature and the physical
environment (e.g., through the production of food, clothing, and shelter) than they would have
if they remained poor. It also gives them the freedom to choose greater leisure, to have more
goods and services, or to deny the importance of these material wants and choose to live a life
of spiritual contemplation. The concept of human freedom also encompasses various
components of political freedom, including personal security, the rule of law, freedom of
expression, political participation, and equality of opportunity.
Development is about:
• Having enough to live (Life-Sustenance)
• Feeling respected (Self-Esteem)
• Having choices and opportunities (Freedom)
Development is both a physical reality and a state of mind in which society has, through some
combination of social, economic, and institutional processes, secured the means for obtaining a
better life. Whatever the specific components of this better life, development in all societies must
have at least the following three objectives:
A. To increase the availability and widen the distribution of basic life-sustaining goods such
as food, shelter, health, and protection.
B. To raise levels of living, including, in addition to higher incomes, the provision of more
jobs, better education, and greater attention to cultural and human values, all of which will
serve not only to enhance material wellbeing but also to generate greater individual and
national self-esteem.
C. To expand the range of economic and social choices available to individuals and nations
by freeing them from servitude and dependence, not only in relation to other people and
nation-states, but also to the forces of ignorance and human mise.
1.3. Indicators of Economic Development
Economic development refers to economic growth, which is accompanied by an improvement in
the well-being of the people. To expand economic potential, economic development needs
political stability, capital, and a combination of public and private initiatives. It indicates a
progressive change in socio-economic structure in the economy and focuses on both quantitative
and qualitative growth of the economy. It measures all aspects like Wealth, Health, Education, etc.
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✓ Real GDP per capita – gross domestic product. Gross Domestic Product represents the
economic production and growth of a nation and is one of the primary indicators used to
determine the overall well-being of a countries and standard of living. It is the total market
value of all finished goods and services produced within a country in a set time period. GDP
(Y) is the sum of consumption (C), investment (I), government Expenditures (G) and net
exports (X – M). Here is a description of each GDP component:
C (Consumption) is normally the largest GDP component in the economy, consisting of
private expenditures in the economy (household final consumption expenditure). These
personal expenditures fall under one of the following categories: durable goods,
nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and
medical expenses, but not the purchase of new housing.
I (Investment) include, for instance, business investment in equipment, but does not
include exchanges of existing assets. Examples include construction of a new mine,
purchase of software, or purchase of machinery and equipment for a factory. Spending
by households (not government) on new houses is also included in investment
G (Government spending) is the sum of government expenditures on final goods and
services. It includes salaries of public servants, purchases of weapons for the military and
any investment expenditure by a government. It does not include any transfer payments,
such as social security or unemployment benefits.
X (Exports) represents gross exports. GDP captures the amount a country produces,
including goods and services produced for other nations' consumption, therefore exports
are added.
M (Imports) represents gross imports
✓ Purchasing Power Parity is defined as the number of units of a foreign country’s currency
required to purchase the identical quantity of goods and services in the local developing
country market as $1 would buy in the United States. Purchasing power parity refers to the
price point at which the people in one country could purchase the same goods as the people in
another country.
✓ Levels of absolute poverty, e.g., % of population with income less than minimum necessary
to meet basic necessities of life.
✓ Malnutrition levels. Percentage of population with insufficient food – levels of malnutrition.
✓ Access to safe water. Percentage of population with access to safe water supply and sanitation
✓ Literacy rate – The percentage of a population that can read and write. Also consider gender
discrepancy.
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✓ Mean years of education – Length of education gives indication on deeper education
standards.
✓ Number of doctors per 1,000 of population.
✓ Average life expectancy. Life expectancy generally rises with economic development.
✓ Quality of nation’s infrastructure – quantity and quality of roads, railways and airports.
✓ Political stability and security.
1.4. Diverse structure of Developing Countries
Developing countries are not all the same. Although they share some common characteristics (like
low income or high population growth), they differ widely in their economic, social, political, and
institutional structures. This is called the diverse structure of developing countries. Developing
countries are considered to be different from one another on broad categories. These are: -
A. The size of the country (geographic area, population, and income)
➢ Physical size of a country, the size of its population, and its level of national income per
capita are important determinants of its economic potential and major factors differentiating
one developing country from another. Large and populated nations like Brazil, India, Egypt,
and Nigeria exist side by side with small countries like Paraguay, Nepal, Jordan, and Chad
➢ Large size usually presents advantages of diverse resource endowment, large potential
markets, and a lesser dependence on foreign sources of materials and products. But it also
creates problems of administrative control, national cohesion, and regional imbalances.
There is no necessary relationship between a country's size, level of per capita income, and
the degree of equality or inequality in its distribution of that income
B. Historical and colonial background
➢ Colonial rule usually has a large influence on the pre-existing institutions and culture of a
colonized country. Some of these influences were good but some were very harmful. Once
the colonial rule ended, it took a long time for the newly independent countries to find its
own foot hold. Colonialism exposed African and Asian countries to new forms of potential
exploitation and have resulted in different institutional and social patterns
C. Endowments of physical and human resources
➢ A country's potential for economic growth is greatly influenced by its endowments of
physical resources (its land, minerals, and other raw materials) and human resources (both
numbers of people and their level of skills).The countries in the developing world differ
very much in terms of owning these physical resources, Example- Persian Gulf oil states,
are rich in mineral ,but countries like Chad, Yemen, Haiti, and Bangladesh--endowments
of raw materials and minerals and even fertile land are relatively minimal.
➢ Some countries may have a small but highly skilled, educated and innovative population.
While some countries may have a very large but mainly very low skill population with very
little or no education. Yet there can be countries which may have large population with
average to high levels of skill and education.
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D. The relative importance of its public and private sectors
➢ Most Third World countries have mixed economic systems, featuring both public and
private ownership and use of resources. The division between public and private as well as
their relative importance are mostly a function of historical and political circumstances.
➢ In general, Latin American and Southeast Asian nations have larger private sectors than
South Asian and African nations. The degree of foreign ownership in the private sector is
another important variable to consider when differentiating among LDCs.
E. The nature of its industrial structure
➢ Developing countries development strategies may vary depending on the nature, structure,
and degree of interdependence among its primary, secondary, and tertiary industrial
sectors.
• The primary sector consists of agriculture, forestry, and fishing;
• the secondary, mostly of manufacturing; and
• the tertiary, of commerce, finance, transport, and services.
➢ Most Latin American countries, possess more advanced industrial sectors. Taiwan, South
Korea, Hong Kong, and Singapore are rapidly becoming industrialized states. Majority of
developing countries are agrarian and agriculture is a way of life for the people
F. Its degree of dependence on external economic and political forces
➢ External dependence can be of economic, political or cultural in nature. Developing
countries being mostly small and underdeveloped, have to depend a lot on the developed
countries for trade, technology and training. However, the extent of dependence varies
among countries and is influenced by the size, resource endowment, history and the
location of the country. Almost all small nations are dependent on the importation of
foreign and often inappropriate technologies of production. This exerts an extraordinary
influence on the character of the growth process in these dependent nations.
➢ But even beyond the strictly economic manifestations of dependence in the form of the
international transfer of goods and technologies is the international transmission of
institutions (most notably systems of education and governance), values, patterns of
consumption, and attitudes toward life, work, and self. A country's ability to chart its own
economic and social destiny is significantly affected by its degree of dependence on these
and other external forces
G. Political structure within the nation
➢ The developing countries also vary in terms of the size of the vested interest group and its
influence on the political power structure. Most developing countries are ruled directly or
indirectly by small and powerful elite to a greater extent than the developed nations are
➢ Mostly:
In Latin America: The industrialists, and the large landowners
In Africa: the politicians and high-level civil servants;
In Middle East: the oil sheiks and financial dynasts;
In Asia: the landlords, moneylenders, and wealthy industrialists
H. Ethnic and Religious Composition
➢ The more diverse a country is, in terms of ethnic and religious composition, the more will
be internal strife and political instability. This will lead to violent conflicts and even self-
destructive wars which would cause waste of valuable resources which could definitely be
used to promote other valuable development goals.
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E.g., Afghanistan, Sri Lanka, Bosnia, Zaire, etc.
➢ In general, the more homogeneous a country is the easier it is for that country to become
successful in their development effort.
E.g., Korea, Taiwan, Singapore, Hong Kong.
1.5. Common Characteristics of Developing Countries
Developing countries share a number of economic, social, demographic, and institutional features.
Although the level and intensity may vary from country to, many characteristics are similar. The
similarities among developing countries can be classified into different broad categories.
A. Low levels of living
In developing nations, general levels of living is very low for the vast majority of people These
low levels of living are manifested quantitatively and qualitatively in the form of:
✓ low incomes (poverty), inadequate housing, poor health, limited or no education, high
infant mortality, low life expectancy, and in many cases a general sense of dissatisfaction
and hopelessness
B. Low levels of productivity
Developing countries are characterized by relatively low levels of labor productivity (output per
worker). Low levels of labor productivity can be explained by the absence or severe lack of
"complementary" factor inputs such as physical capital or experienced management (quality labor)
C. High rates of population growth and dependency burdens
Birth rate and death rate are both higher in developing countries compared to developed countries.
This contributes to high dependency burden in the developing countries
A major implication of high birthrates in developing countries is that children under age 15 make
up large proportion from total population in these countries. Thus, in most developing countries,
the active labor force has to support proportionally almost twice as many children as it does in
richer countries children are often referred to as an economic dependency burden in the sense that
they are nonproductive members of society therefore must be supported financially by a country's
labor force (usually defined as citizens between the ages of 15 and 64).
D. Substantial Dependence on Agricultural Production and Primary Product Exports:
Most developing countries have a very large agricultural sector and most of their exports are
usually primary agricultural products. The type of agriculture in the developing countries is also
very different from that in the developed countries.
✓ It is primarily small scale and noncommercial peasant farming
✓ highly labor intensive and primitive technologies,
✓ poor organization, and limited physical and human capital inputs.
E. Dominance, Dependence, and Vulnerability in International Relations
In international relations, the developing countries frequently have to deal with the rich and
powerful nations. They have to depend on the developed countries for trade, technology, foreign
aid and expertise. This dominance of the rich industrial nations and the dependence of the
developing countries on them often leads to the adoption of inappropriate technologies,
educational structures and cultural values in the developing countries.
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The influence of the rich lifestyle of the developed countries can lead to elite lifestyle, private
accumulation of capital, brain drain and transfer of capital all of which retards economic
development in the developing countries.
The net effect of all these factors is to create a situation of vulnerability among developing
countries in which forces largely outside their control can have decisive and dominating influences
on their economic and social well-being
F. Prevalence of Imperfect Markets and Incomplete Information
The success of a developed market economy depends heavily on the existence of certain
institutional, cultural and legal prerequisites. strong judiciary, clearly defined property rights,
stable currency, infrastructure of roads and utilities, functional transport and communication
system, free flow of information. In the developing countries these legal and institutional
foundations are either absent or extremely weak. The result is misallocation of resources.
G. High and Rising Levels of Unemployment and Underemployment
Relatively inadequate or inefficient utilization of labor in comparison with the developed nations.
Underutilization of labor is manifested in two forms.
1. Underemployment people who are working less than they could (daily, weekly, or
seasonally). Underemployment also includes those who are normally working full-time
but whose productivity is so low that a reduction in hours would have a negligible impact
on total output.
2. Unemployment people who are able and often eager to work but for whom no suitable
jobs are available.
1.6. Obstacles to Economic Development
Why have some developing nations made progress towards modernization and others fail to
achieve their economic goals?
Generally, we can classify obstacles to economic growth and development in to the following
broad categories
A. POLITICAL
B. SOCIAL
C. ECONOMIC
D. NATURAL HAZARDS are noticed as major obstacle to economic development
A. Political Obstacles:
❖ POLITICAL INSTABILITY: Lack of an orderly system of government such as:
✓ Rule of law and appropriate enforcement
✓ Democratic institutions
✓ Legal institutions
This will result lack of confidence to invest in the long run.
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❖ Poor governance: disparities in the level of development between countries are very related
to governance and that poor governance is an obstacle to development. This is because poor
governance leads to: poor decision in terms of public spending, Poor political/economic
ideology, Increased level of corruption, No accountability to the people.
❖ CORRUPTION: is the misuse of public power or position for private benefit.
It is a major barrier to economic development because it weakens institutions, slows growth,
and increases poverty. It is due to a failure of governing institutions who lack transparency
both in where their tax revenues are coming from and in how state resources are spent
▪ It reduces access to public services by diverting public resources for private gain
▪ Discourages direct foreign investment/local investment into an economy
▪ Leads to allocative inefficiency / i.e., diverting public resources for private gain,
▪ Contributes to wealth inequality and reduced progress in reducing poverty
▪ Causes a loss of trust - a breakdown of social capital
▪ Leads to poor human development outcomes because governments are not collecting in
enough tax revenues
▪ it undermines democracy
▪ Increases tax evasion
▪ It leads to distortion of government policies which will benefit few elites
B. Social Obstacles
❖ Human capital inadequacy: A nation’s human capital endowment the skills and
capacities of people that are put to productive use is more important determinant of its
long-term economic success than virtually any other resource. Weak human capital
constrains labor productivity and ability to harness new technologies. In many countries
there is a big gap between expected years of schooling and mean (actual) years of
schooling.
❖ RAPID POPULATION GROWTH: High dependency ratio
❖ LABOUR MIGRATION AND BRAIN DRAIN EFFECTS: Brain drain is the
emigration of highly skilled and educated professionals (doctors, engineers, teachers). It is
outward migration of skilled workers from developing countries. Disadvantages:
• Loss of human capital (expertise) from the economy
• Loss of enterprising younger workers who might have started up businesses at home
• Make the country less attractive to inward investment
• Make a country less innovative
❖ MALARIA AND HIV/AIDS
C. Economic Obstacles
❖ POOR INFRASTRUCTURE (road, power, air transport etc.)
❖ Infrastructure gaps limit economic growth & human development because:
• They increase supply costs for businesses – this causes higher prices – hitting real
incomes
• Reduce geographical mobility of labor / higher structural unemployment
• Damage export competitiveness and limit intra-regional trade
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• Make a country less attractive to inward foreign direct investment
• Make an economy vulnerable to effects of climate change/natural disasters
❖ Primary product dependency
• Primary product dependency is a situation where a country relies heavily on the
production and export of primary (raw) commodities as its main source of income and
foreign exchange earnings.
• Although large deposits of key resources such as oil would usually be considered a
blessing for the development prospects of a country, it often turns out to be a ‘resource
curse. Close to one third of the wealth of low-income countries comes from their
“natural capital” which includes forests, protected areas, agricultural lands, energy and
minerals.
❖ SAVINGS GAP AND FOREIGN EXCHANGE GAPS
• In many lower- and middle-income countries gross national saving is insufficient to
fund investment
• Financial systems are poorly developed so poor access to affordable credit / insurance
• Low national savings, it limits investment and make developing countries dependent
on external finance
• Many developing economies have low foreign exchange reserves to cover their
spending on imports, risking into a balance of payments /currency crisis.
❖ Debt dependency
❖ Unfair terms of Trade
D. Natural hazards - are extreme natural events such as droughts, floods, earthquakes,
hurricanes, and volcanic eruptions that can cause serious damage to people, property, and the
economy. In developing countries, natural hazards often act as major barriers to economic
development. But the degree of devastation depends on the economic, political and social
characteristics that determines the vulnerability levels of a system
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