MODULE II

Perceptions about Development and

Underdevelopment
Vicious Circle of Poverty
• According to the principle of vicious circle in UDCs’ level of income
remains low which leads to low level of saving and investment. Low
investment leads to low productivity which again leads to low income.
• According to Prof. Nurkse. “It implies circular constellation of forces
tending to act and react one another in such a way as to keep a poor
country in a state of poverty. He cited an example of a poor man.
• According to Prof. Nurkse, “The main reason of vicious circle of
poverty is the lack of capital formation.”
• Kindleberger opined that vicious circle of poverty takes place due to
the small size of the market.
• However, the reasons of vicious circle of poverty can be
classified into three groups:
• (a) Supply side of vicious circle.
• (b) Demand side of vicious circle.
• (c) Vicious Circle of Market Imperfections
A. Supply Side of Vicious Circle:

• Supply side of vicious circle indicates that in underdeveloped countries,

productivity is so low that it is not enough for capital formation.
• According to Samuelson, “The backward nations cannot get their heads
above water because their production is so low that they can spare nothing
for capital formation by which their standard of living could be raised.”
• The lack of capital is a result of the small capacity to save and so the circle
is complete.
• Low Income → Low Saving → Low Investment → Low
• Production → Low Income
B. Demand Side of Vicious Circle:

• According to Prof. Nurkse, “On the demand side, the inducement of invest
may low because of the small purchasing power of the people, which is
due to the small real income, which is again due to low productivity.
• The level of productivity however, is the result of the small amount of
capital used in production which in turn may be caused or at least partly
caused by small inducement to invest.
• Low Income → Low Demand--- Low Investment → Low
Productivity → Low IncomeThus, according to Nurkse,
“In underdeveloped countries, on demand side, low purchasing power of the
people results in low productivity.”
Measures to Break Vicious circle of poverty
• Adequate investment of both private and pulic
• Emphasis on product oriented policies
• Control population growth
• Criticism of VCP
• [Link] saving
• 2 Small MARKET
Rostow’s stages of growth
• According to Rostow, the transition from underdevelopment to
development can be described in terms of a series of steps or stages
through which all countries must proceed.
• Rostow has conceived five universal stages; viz:
• (i) The traditional society,:-
• (ii) The pre-conditions for take-off:- —a stage in which
communities build up their propensities in such a way as
would be conducive to the take-off
• (iii) The period of take off: in which the productive capacity
of the community registers a distinct upward rise,
• (iv) The stage of drive to maturity: the period of self sustained growth
in which the economy keeps on moving,
• (v) The stage of high mass consumption
(i) The Traditional Society:
• A traditional society is one of the simplest and primitive forms of social
organisation.
• It is one whose structure is developed within limited production function, based
on Pre-Newtonian science and technology
• The characteristics are:
• (a) Per Capita:
• Within a limited range of available technology there is a low ceiling per capita
output.
• (b) Employment in Agriculture:
• A high proportion of workforce (75% or more) are devoted in the production of
agricultural goods. High proportion of resources are also devoted in the
agricultural section
• (c) Social Mobility: A hierarchical, hereditary, status-oriented social
structure held down the mobility of society at that time.
• (d) Political Power:
• The centre of gravity of political power was localistic, region-bound
and primarily based on land ownership.
(ii) Pre-Conditions for Take-Off(Traditional
Stage)
• It is that stage of economic growth .
• People try to break free from the rigidities of the traditional society
and a scientific attitude
* it is the transitional stage
• The main requirement in this stage is that level of investment should
be raised to at least 10 % of national income
• This stage demands sweeping changes in certain sectors of the
economy
The features of the Stage
(a) Economic Progress:
• Economic progress became an accepted social value. At this time the
change of human mind took place and they were able to think about their
respective countries.
(b) New Enterprises:
• New types of enterprising people emerged on the society. Their objective
was to establish a firm or industry and produce output for a long time.
(c) Investment: As the new enterprising persons emerged in the society, the
gross investment raised from 5% to 10%, so that the rate of growth of
output outstrips the rate of population growth.
• (d) Infrastructure: As different industries were established in different
parts of the country, automatically transportation, more mobilised
communication, roads, railways, ports were required. So, infrastructure was built
all over the country
• (e) Credit Institutions: to mobilise savings for investment
• (f) Mobilisation of Work Force:
• (g) Decline of Birth rate
(iii) The Take-Off Stage:
• It is a period of dramatic expansion, during which growth becomes
self-sustaining
• The rate of investment must be >10 % of NI
• “Manhattan Project (1940s)” that signalled the arrival of USA on the
world political scenario, that are living example of take-off stage as
mentioned by Rostow
• This stage witnesses the rapid economic growth and faster
industrialization
The characteristics of the stage
• (a) The Rate of Investment:-
investment should be more than 10%
• (b) Development of One Leading Sector:-
Nowadays the development of a country is measured by per capita
consumption of iron and steel.
(c) Existence of Different Frameworks in the Society:
There was the existence of political, social and institutional
framework which exploited impulses to expansion in the modern
sector and the potential external economies
(iv) The Drive to Maturity
• Here, society has effectively applied modern technology to the bulk of
its resources
• The important feature of the stage is “ growth becomes the habit and
routine matter of every sector of the society”
• . Industries like heavy engineering, iron and steel, chemicals, machine
tools, agricultural implements, automobiles etc. take the driver’s seat
The economic characters of the stage

(a) Shift in the Occupational Distribution: a shift from entrepreneurship to

manager and Agriculture to industry
(b) Shift in the Consumption Pattern: Due to high income their preferences
were shifted to luxury goods
(c) Shift in the Consumption of Leading Sector:.
The Swedish take-off was initiated by timber exports, wood pulp and
pasteboard products followed by the emergence of railways, hydropower,
steel, and animal husbandry and dairy products.
The Russian take-off started with grain exports, followed by railways, iron
and steel, coal and engineering
(v) The Age of High Mass Consumption:
• From maturity the economy moves with growth to high mass
consumption, the stage at which durable consumer goods like radios,
TV sets, automobiles, refrigerators, etc.,
• life in the suburbs, college education for one-third to one half the
population came within reach
II Big Push Theory
• The theory of ‘big push’ first put forward by P.N. Rosenstein-Rodan
• It is the big push or some critical minimum effort to elevate
underdeveloped countries from the poverty gap
• He estimated that investment ratio has to be raised to 18 % of national
income to enforce a big push
• Crux of the theory:- there is minimum level of resources that must be
devoted to a development program if it is to have any chance of success
• According to this theory, minimum quantum of investment is necessary
condition for success
• Investment by entrepreneurs in one sector in a country depends on
investments in other sectors.
• This theory is based up on the idea of economic externalities
• Big push approach requires that a sufficient number of sectors must
industrialize in order to generate enough national income to make
industrialization profitable
• The theory is based on a set of assumptions of certain indivisibilities
which give rise to increasing returns and external economies
Assumptions of indivisibilities
• [Link] in production function: indivisibilities of inputs give rise to
increasing returns ,ie economies of scale, economies of scale are unpaid
benefits enjoyed by the third parties from the economic activity
• Smooth operation of indivisibilities and external economies depends upon
the investment in social overhead capital (SoC)
• Investment in SoC stimulates various industries to make use of their excess
capacity to expand the production
• SoC consist of all basic industries
• Investment in SoC requires large amount of capital which is called
“lumpiness capital”, this generates the forces of external economies, then
lead to higher growth path
(ii) Indivisibility of Demand (complementarity
of demand)

• This refers to the complementarity of demand arising from the

diversity of human wants.
• The very fact that there is an indivisibility of complementarity of
demand requires simultaneous setting up of interrelated industries in
countries to initiate and accelerate the process of development
• See example in TB
(iii) Indivisibility in the Supply of Savings:
• A high minimum quantum of investment requires a high volume of
savings, which is difficult to achieve to in low income
underdeveloped countries
• The way out of the vicious circle of poverty is to have an increase in
income and an increase in marginal rate of savings
• Criticism of the theory:[Link] neglects the shortfalls of LDCs
• [Link] does not consider the agriculture dominant sector in LDC
• [Link] export primary commodities, which cannot activate external
economies
Balanced growth strategy
• Ragnar Nurkse is main the exponent of the theory
• They emphasized the scale of investment necessary to overcome the
indivisibilities on both the supply side and demand side of the
development process
• This strategy means the harmonious and simultaneous development
of different sectors
• It requires the pattern of investment necessary to keep the different
sectors of the economy in balance
• BGS require big investment in SoC
Balance among Different sectors
• It points out the need of achieving a balance between agriculture and
industry, capital goods and consumer goods industries, SoC and directly
productive activities (DPA)
[Link] B/W Agriculture & Industry:- the interdependence b/w agriculture
and industry is very crucial for the balanced development of an economy
2. Balance B/W human capital and physical capital:- human capital means
skilled and trained human resource, investment in HC improves its quality
through education ,
*The trained manpower improves efficiency and productivity of firms
* So, the increase in national income may raise investment in physical
capital
Conditions of balanced growth
• 1. State intervention: - it requires public investment
• [Link] of employment plans
• [Link] among different industries
• 4. public cooperation
• Advantages of the theory:-
• [Link] of all sectors of the economy
• [Link] solve the market imperfections due to the investment in all
sectors simultaneously
• [Link] widens the market
Unbalanced growth strategy( UBG)
• Hirschman was the foremost exponent of the doctrine of unbalanced
growth strategy
• UBG recognize the importance of large scale investment program for the
development of an economy
• They argue that in the absence sufficient resources, the investment will be
low
• Hirschmann viewed that creating deliberate imbalance in the economy is
the best way to accelerate economic development
• To Rostow,UBG strategy means the rate of productive investment should be
raised from 5 % to 10% of the NI and the focus must be devoted to the
development of leading sectors of the economy
Theory of Unbalanced growth
• To Hirschman, LDCs are not capable of developing all sectors
simultaneously because of the resource constraint
• He argued that the appropriate strategy for LDCs is that investment should
be made in strategic industries and leading sectors
• Development is the result of series of investments in leading sectors
• A Convergent& Divergent series of Investment:-
• Convergent series of investments are made by private entrepreneurs for
profit motive, which are appropriate more economies than they create
• Divergent series of investments are made by public agencies for social
welfare, which are appropriate less economies than they create
• Convergent series of investments are made in directly productive
activities(DPA)
• Divergent series of investment are made in social overhead capital
(SoC)
• II). Unbalancing the economy with SoC:-it is the investment in basic
services such as education, health, transport, communication,
power etc, which is essential for the promotion of social welfare
• When investment made in SoC, nit would encourage private
investment in DPA, which allows new industries to come and
expand
III).Unbalancing the economy with DPA
•Another method to create tension in the economy is to invest in DPA
(directly productive activities)
• If investment is first made in DPA, the shortage of Soc ( social
overhead capital) raises the cost of production and price level
• An increase in the price level creates an unfavourable climate for new
private invest ment in DPA
• It may hinder the process of development
Paths to development
• The sequence of investment to be pursued for the rapid expansion of
under developed economy is explained with the help of diagram
•
•In the diagram investment in soc is measured on horizontal axis and DP
investment measured on vertical axis
AB,CD and EF are the isoquant curves showing various combination of Soc and DPA
investment level
•The 45 degree line showing equality intersects the isoquants at G,J and M
•This line represents that investment in soc and DPA are equal proportions.
•These point indicates the optimum combination of Soc and DPA investment level
•If we choose the sequence of expansion with SoC,the development path will be
GHJKM
•When investment in SoC increase from G to H ,It will encourage private
investment in DPA from G to I till the balances is restored at j which lies on higher
isoquant CD
•The investment in DPA increase from J to L and the equilibrium is
restored M on the higher isoquant indicating much higher output level
•This development path is called development via excess capacity of
Soc
* If we choose the development path in DPA the path of development
will be GIJLM.
Linkage Effects
• There are two types of linkage effects 1) Forward 2) Backward linkage
effects
• Forward linkage refers to that investment that encourages the
investment in subsequent stages of production
• Eg- iron and steel industry will boost the investment in automobile
industries which supplies raw materials to the iron and steel industry
• Backward linkage refers to that investment which encourages
investment in the earlier stages of production
• Eg- investment in iron & steel industry may boost investment in coal
industry which supplies raw materials to the iron and steel industry
Balanced V/S Unbalanced Growth
Low level Equilibrium Trap
• The theory of Low-Level Equilibrium Trap has been developed by R.R.
Nelson for underdeveloped countries.
• It states that when per capita income increases above the minimum
specific level, population tends to increase ,but when the growth rate
reaches an upper physical limit as the per capita income increases,
the growth starts declining.
• See the figure
Policy implications of low level Equilibrium trap
• The output growth curve must be shifted upwards through better
allocation of resources or technical progress
• Population growth rate must be controlled as far as possible. It is
essential to raise productive investment
• Government should make greater effort to increase investment in
LDCs
Critical Minimum Effort theory
• Harvey Leibenstein is of the view that UDCs are characterized by vicious
circle of poverty (VCP) which keeps them around a low-income per capita
equilibrium state.
• The way out of this impasse is a certain 'Critical minimum effort' which
would raise the per capita to a level at which sustained development could
be maintained
• Leibenstein says that every economy is subject to 'Shocks and Stimulants'.
A shock has the impact of reducing the per capita income initially; while a
stimulant tends to increase it.
• Shocks are income depressing forces which reduces output, income,
employment etc, stimulants are income generating forces which helps to
raise the level of output, income etc
• Certain countries are poor and backward because of the reason that
the magnitude of stimulant is small while that of shocks is large.
• On the other hand, if income raising forces are more than income
depressing forces the economy will be having critical minimum effort
which will take the economy on the path of development.
• The most significant forces that offer an escape from Malthusianism
are technical progress and irreversible additions to the capital stock in
the form of social and human capital, so there will be a shift of the
income growth curve
• See diagram
 Diagram

• Criticism:- [Link] relationship b/w population growth and percapita

income does not hold true
• 2. this theory ignored the role of the Government in controlling
population growth
Dual economy Models
• Dualism is the co-existence of traditional and modern sectors
• It refers to economic and social divisions in an economy like
differences in the level of technology between sectors ,regions and
differences in social customs and attitudes between the regions
• There will be gaps in technology b/w the rural and industrial sectors
of the economy
• In rural or non-monetized sector of the economy, production process
are characterized by labour intensive technology, while in industrial or
advanced sector, there are capital intensive technology.
• This theory is modified by Arthur Lewis
Lewis model & picture of the Dual economy
• This model is introduced by W Arthur Lewis.

• Agriculture plays a synergitic role in the development of the non

agriculture sector like handicrafts, Mining, Construction etc.

• The supply of labour and the surplus of fund that allows non agricultural
labour force to survive are the two fundamental resource flow from
agriculture to industry.

• In return, industry supplies inputs like Tractors, Pumbset, tools, chemicals

etc to agriculture.
• Agriculture is often a major source of demand for the products of industry
which include both durable and final consumption goods as well .

• The export of agricultural product serve as the vital foreign exchange,

which permits the import of inputs to industrial production .

• The two important resource flow from agriculture is :

• 1. Flow of labour from agricultural to industry.
• 2. Flow of agricultural surplus to nuture workers in industry
The Picture Of Dual Economy
• Lewis introduced the Theory Of Development on the basis of an idea
that the economic development proceeds by the transfer of surplus
labour from tradional sector to modern sector.
• The starting point of Lewis model is the idea of Dual economy.
• The traditional sector or agricultural sector produces traditional
outputs by using labour intensive technology.

• The modern sector or industrial sector produces manufactured

commodities by using capital intensive technology.
• Agriculture sector with traditional forms of economic organization
was based on family labour as opposed to wage labour in the
industrial sector.

• Hence, the overall output is distributed not in the form of wages and
profits, but in the form of shares that accrue to each family member.
Harris-Todaro Migration model
• It is explain the paradoxical relationship b/w accelerated rural-urban
migration in the context of rising urban unemployment and in its
equilibrium form
• This model assumes that there are differences in the conditions
prevailing in both the rural and urban sectors
• The rural sector is mainly informal and its wage rate is low, flexible
and the workers are not organized
• The urban industrial sector is more or less formal and organized and
pays higher wages to labours
• There is a significant wage gap prevails b/w the two sectors
• The main idea of this model is that the formal urban sector pays a
high wage to workers and this high wage that creates unemployment
in the economy
• Main reasons of high wages in Urban sector:-[Link] in formal
sector may be unionized and subject to collect bargaining power
• [Link] implements minimum wage laws, pension schemes etc
[Link] is to get the workers of high quality and remove inferior workers
• See the diagram TB also
• Concept of poverty
• Absolute and relative poverty
• Poverty line
• Estimation of poverty ( calorie based estimation, percapita
expenditure based estimation)
• see last semester Indian economy note for the reference
Measures of poverty
• 1. Head count ratio ( Head count Index):- it is the ratio b/w number
of people who are below poverty line and total population
• Head count ratio=H/N
• H- No of people below [Link]
• N-total population
• [Link] Gap index:- it shows the difference b/w poverty line and
actual income of poor individuals
• It is the average gap in each persons income from [Link]
• It is the amount of income necessary to raise everyone who is
[Link]
2. Squared poverty gap( P2): it is the average square of poverty gap ratio
• It is also known as poverty severity index p2
• This measure helps to account the inequality among the poor and severity
of poverty for each area
• [Link] Index:-poverty can viewed from the two angles of absolute poverty
and relative poverty
• While absolute poverty gives a view on the overall magnitude of poverty,
relative poverty reflects on relative inequality
• Sen incorporated the effects of the number of poor, the depth of their
poverty and the distribution of the poverty within the group and proposed
an index which is called Sen index
• Sen Index (Ps)= P0Gp+P1(1-Gp)
• P0- headcount index
• P1- poverty gap index
• Gp- Gini coefficient of inequality
• The value of Gp ranges from 0 to 1,
• 0 indicates perfect equality and 1 for perfect inequality
4. Human poverty index (HPI):-it is developed by UN and was
published in HDR 1997
*This index reflects the deprivation in an economy
*HPI covers three elements of human life- longevity, Knowledge and a
decent standard of living
HPI considers three variables also while calculating HPI-
a). Probability at birth of not surviving to a age of 40
b)Adult literacy rate
c)Unweighted average of the population without sustainable access to
an improved water source and children underweight for age
Inequality