Chapter 1 Principles and Concepts of Development PDF

College of Business Administration CHAPTER 1 PRINCIPLES AND CONCEPTS OF DEVELOPMENT A.​ Topic Highlights: 1. Economic Development 2. Measures of Economic Development 3. Classification of Rich and Poor Countries 4. Basic Needs Attainment 5. Growth...

College of Business Administration CHAPTER 1 PRINCIPLES AND CONCEPTS OF DEVELOPMENT A.​ Topic Highlights: 1. Economic Development 2. Measures of Economic Development 3. Classification of Rich and Poor Countries 4. Basic Needs Attainment 5. Growth and Basic Needs 6. Basic Needs as a Human Right 7. Cost and Benefit of Economic Development B.​ Abbreviations: ASEAN Association of Southeast Asian Nations DCs Developed (high-income) Countries E.U. European Union FAO Food and Agriculture Organization of the United Nations G7 Group of Seven, meeting of the seven major DCs: the United States, Canada, Japan, the United Kingdom, Germany, France, and Italy (EU representative also attends) G8 Group of Eight, meeting of G7 plus Russia GATT General Agreements on Tariffs and Trade, the predecessor to the WTO GDP Gross domestic product GNI Gross national income (same as GNP) GNP Gross national product HDI Human Development Index, UNDP’s measure of development ILO International Labour Organization IMF International Monetary Fund LDCs Less-developed (developing) countries LICs Low-income countries LLDCs Least-developed countries MDGs Millennium Development Goals (U.N., 2000) MNCs Multinational (transnational) corporations NGOs Nongovernmental (nonprofit) organizations NICs Newly industrializing countries NNP Net national product OECD Organization for Economic Cooperation and Development, comprising high-income countries (including Republic of Korea) plus Czech Republic, Hungary, Mexico, Poland, Slovak Republic, and Turkey PQLI Physical Quality of Life Index PRI Partido Revolucionario Institucional (Institutional Revolutionary Party), Mexico U.N. United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program xvii xviii Abbreviations and Measures UNICEF United Nations Children’s Fund URL Uniform Resource Locator, the address of documents and other resources on the World Wide Web WTO World Trade Organization, established in 1995, to administer rules of conduct in international trade C.​ THE MEANING AND MEASUREMENT OF ECONOMIC DEVELOPMENT Economic Development Economic Development is programs, policies, or activities that seek to improve the economic well-being and quality of life of a community. Economic development is a process of targeted activities and programs that work to improve the economic well-being and quality of life of a community by building local wealth, diversifying the economy, creating and retaining jobs, and building the local tax base. Though economic development priorities vary, economic development strategies often aim for common, positive results, such as: ​ Creating more jobs and more job variety ​ Keeping businesses and getting new ones ​ A better quality of life ​ More people and businesses paying taxes ​ More productive use of property ​ Promoting your community’s assets ​ Making and selling more local products ​ Getting more skilled workers living in your community D.​ MEASURES OF ECONOMIC DEVELOPMENT Generally, economic development is a process of change over a long period of time. Though there are several criteria or principles to measure the economic development, yet none provides a satisfactory and universally acceptable index of economic development. Hence, it is a complex problem to answer about the measuring of economic development. R.G. Lipsey maintains that there are many possible measures of a country’s degree of development, income per head, the percentage of resources unexploited, capital per head, saving per head and amount of social capital. But more commonly used criteria of economic development are increase in national income, per capita real income, comparative concept, standard of living and economic welfare of the community etc. Let us make a detailed study of these measurements for BETTER understanding: 1. National Income as an Index of Development: There is a group of certain economists which maintains the growth of national income should be considered most suitable index of economic development. They are Simon Kuznets, Meier and Baldwin, Hicks D. Samuelson, Pigon and Kuznets who favored this method as a basis for measuring economic development. For this purpose, net national product (NNP) is preferred to gross national product (GNP) as it gives a better idea about the progress of a nation. According to Prof. Meier and Baldwin, “If an increase in per capita income is taken as the measure of economic development, we would be in the awkward position of having to say that a country had not developed if its real national income, had risen but population had also risen at the same rate.” Similarly, Prof. Me de maintains that, “Total income is a more appropriate concept to measure welfare than income per capita.” Therefore, in measurable economic development, the most appropriate measure will be to include final goods and services produced but we must allow for the wastage of machinery and other capital goods during the process of production. 2. Per Capita Real Income: Some economists believe that economic growth is meaningless if it does not improve the standard of living of the common masses. Thus, they say that the meaning of economic development is to increase aggregate output. Such a view holds that economic development is defined as a process by which the real per capita income increases over a long period of time. Harvey Leibenstein, Rostow, Baran, Buchanan, and many others favor the use of per capita output as an index of economic development. The UNO experts in their report on ‘Measures of Economic Development of Under-developed Countries’ have also accepted this measurement of development. Charles P. Kindleberger also suggested the same method with proper precautions in computing the national income data. 3. Economic Welfare as an Index of Economic Development: Keeping in view the drawbacks of real national income and real per capita measures of economic development, some economists like Coline Clark, Kindleberger, D. Bright Singh, Hersick etc. suggested economic welfare as the measure of economic development. The term economic welfare can be understood in two ways: (a) When there is equal distribution of national income among all the sections of the society. It raises economic welfare. (b) When the purchasing power of money goes up, even then there is an increase in the level of economic welfare. The purchasing power of money can go up when with the increase in national income there is also an increase in the prices of goods. That means economic welfare can increase if price stability is ensured. ​ Thus economic welfare can boost with equal distribution of income and price stability. The higher the level of economic welfare, the higher will be the extent of economic development and vice-versa. 4. Comparative Concept: Economic development is a comparative concept and it can easily be understood and measured. In a simple way, from a comparative concept, we can ascertain how much economic development has been attained in a country. The comparison can be made by two methods over a time period: (а) Comparison within the country. (b) Comparison with other countries. 5. Measurement through Occupational Pattern: The distribution of the working population in different occupations is also regarded as a criterion for the measurement of economic development. Some economists regard the changes in the occupational structure as a source for measuring the nature of economic development. According to Colin Clark, there is deep relation between occupational structure and economic development. He has divided the occupational structure into three sectors. (1) Primary Sector: It includes agriculture, fisheries, forestry, mining etc. (2) Secondary Sector: It consists of manufacturing, trade, construction, etc. (3) Tertiary Sector: It includes services, banking, transport, etc. In under-developed countries, the majority of the working population is engaged in the primary sector. On the contrary, in developed countries, the majority of the working population works in the tertiary sector. A shift in the occupational distribution of the population from the primary sector to secondary and territory sectors shows the movement towards economic development when a country makes economic progress, its working population begins to shift from the primary sector to secondary and tertiary sectors. Thus, with economic development, the percentage of the population engaged in the primary sector declines, while the percentage of the population working in secondary and tertiary sectors increases. 6. Standard of Living Criterion:  Another method to measure economic development is the standard of living. According to this view, the standard of living and not a rise in per capita income or national income should be considered an indicator of economic development. The very objective of development is to provide a better life to its people through improvement or upliftment of the standard of living. In other words, it refers to an increase in the average consumption level of the individual. But, this criterion is not practicably true. Let us suppose, national income and per capita, both increase but the government mops up this income with way of a heavy dose of taxation or compulsory deposit scheme or any other method, in such a situation, there is no possibility to raise to average consumption level i.e., the standard of living. Moreover, in poor countries, the propensity to consume is already high and stern efforts are made to reduce superfluous consumption in order to encourage savings and capital formation. Again the standard of living is also subjective and cannot be determined with objective criteria. HUMAN DEVELOPMENT INDICES Economists have tried to measure social indicators of basic needs by taking one, two or more indicators for constructing composite indices of human development. We study below the Physical Quality of Life Index (PQLI) of Morris and the Human Development Index (HDI) as developed by the United Nations Development Program (UNDP). 1.​ PHYSICAL QUALITY OF LIFE INDEX (PQLI) The Physical Quality of Life Index was the most serious challenge to GNP per capita as the index of development. It was invented by M.D. Morris in 1979. He constructed a composite Physical Quality of Life Index (PQLI) relating to developing countries for a comparative study. He combined three component indicators of infant mortality, life expectancy at age one and basic literacy at age 15 to measure performance in meeting the most basic needs of the people. This index represents a wide range of indicators such as health, education, drinking water, nutrition and sanitation. The PQLI shows improvement in the quality of life when people enjoy the fruits of economic progress with increase in life expectancy (LE), fall in infant mortality rate (IMR) and rise in basic literacy rate (BLR). Each indicator of the three components is placed on a scale of zero to 100 where zero represents an absolutely defined worst performance and 100 represents an absolutely defined best performance. The PQLI index is calculated by averaging the three indicators giving equal weight to each and the index is also scaled from 0 to 100. If the indicators of life expectancy and basic literacy rate are positive, the best performance is shown as the maximum and the worst as the minimum. Infant mortality rate being a negative indicator, for this the best indicator is shown as the minimum and the worst as the maximum. To find out the achievement level of the positive variable, its minimum value is deducted from its actual value and the balance is divided by the difference (range) between maximum value and minimum value 🥅🥅 i.e. For life expectancy and infant mortality rate, there is no natural maximum and minimum value. But there is need to select the right values. According to Morris, each of the three indicators measures 6 results and not inputs such as income. Each is sensitive to distribution effects. It means that an improvement in these indicators signifies an increase in the proportion of people benefiting from them. But none of the indicators depends on any particular level of development. Each indicator lends itself to international comparison. Taking Gabon’s infant mortality rate of 229 per thousand live births as the worst rate in 1950, Morris sets it at 0. At the upper end, the best achievement is set at 9 per thousand for the year 2000. Again, taking Vietnam’s life expectancy at age one as 38 years in 1950, Morris sets it at 0 of the life expectancy index. The upper limit is set at 77 years for men and women combined for the year 2000. Lastly, the basic literacy rate at 15 years is taken as the literacy index. The PQLI tries to measure “quality of life” directly rather than indirectly. But it has its limitations. 1. Morris admits that PQLI is a limited measure of basic needs. ​ It supplements but does not supplant the GNP. It fails to dislodge GNP from its lofty perch. ​ It does not explain the changing structure of economic and social organization. It, therefore, does not measure economic development. ​ Similarly, it does not measure total welfare. ​ Morris has been criticized for using equal weights for the three variables of his PQLI which undermine the value of the index in a comparative analysis of different countries. IMRI = Max. IMR – Actual IMR Range​ ​ LEI = Actual LE – Minimum LE Range BLI = Actual LI – Minimum LI Range PQLI = (IMRI+LEI+BLI) /N Thus, the Physical Quality of Life Index for India in 2001 was 0.69. 2.​ HUMAN DEVELOPMENT INDEX (HDI) Lord Meghnad Desai and Nobel Laureate Amartya Sen invented the Human Development Index and UNDP incorporated it into its first Human Development Report in 1990. Since then, the UNDP has been presenting the measurement of human development* in its annual report. The HDI is a composite index of three social indicators: life expectancy, adult literacy and years of schooling. It also considers real GDP per capita. Thus, the HDI is a composite index of achievements in three fundamental dimensions: living a long and healthy life, being educated and having decent standard of living. The HDI value of a country is calculated by taking three indicators: ​ Longevity, as measured by life expectancy at birth. ​ Educational attainment, as measured by a combination of adult literacy (two-thirds weight) and combined primary, secondary and tertiary enrolment ratio (one-third weight). ​ Decent standard of living, as measured by real GDP per capita based on purchasing power parity in terms of dollar (PPP$). Before the HDI is calculated, an index is created for each of these dimensions: Life Expectancy Index, Education Index and GDP Index. To calculate these indices, minimum and maximum values or goal posts are chosen for each indicator. The HDI is then calculated as a simple average of the three dimension indices. The HDI value for each country indicates the distance it has travelled towards the maximum possible value of 1 and how far it has to go to attain certain defined goals : an average life span of 85 years, access to education for al. The HDI ranks countries in relation to each other. A country’s HDI rank is within the world distribution i.e., it is based on its HDI value in relation to each developed and developing country for which the particular country has travelled from the minimum HDI value of 0 towards the maximum HDI value of Countries with an HDI value below 0.5 are considered to have a low level of human development, those between 0.5 to 0.8 a medium level, and those above 0.8 a high level. In the HDI, countries are also ranked by their GDP per capita. Of the 177 countries for which the HDI was calculated, ​ 55 out of 177 - in the high development category (0.80 or more); ​ 86 out of 177 - in medium category (0.5 to 0.79); and ​ 36 out of 177 in the low category (less than 0.50). Which is the Best Measure of Economic Development? After studying all the above methods of measurement of economic development we are likely to be confused and the question might arise as to which of the above measures of economic development is the best. The answer depends on the objective of measuring economic development. However, after considering different point of view it may be concluded that GNP or per capita is the best method of measuring economic development. In the words of Prof. R.G. Lipsey, “Whatsoever changes there may be in future in the measurement of economic development they cannot fully replace gross national product (GNP).” Economists and U.N. Organisations use GNP per capita as the measurement of economic development. E.​ THE CLASSIFICATION OF RICH AND POOR COUNTRIES The World Bank groups economies into one of four categories: low income, lower-middle income, upper-middle income, high income. The categories are used to show how different groups of countries are doing against measures such as reducing poverty, growth, increasing income per head of population, and so on. Gross national income (GNI) per capita is the main indicator of how well off a country is and where it sits in the four categories. The 2020 GNI per capita thresholds are: Low income: less than $1,036 Lower-middle income: between $1,036 and $4,045 Upper-middle income: between $4,046 and $12,535 High income: greater than $12,535  The Bank also takes into account geography, lending eligibility and the fragility of an economy. There are, the World Bank says, two reasons for an economy to be moved between classifications. One is in-country change, such as increased or decreased economic growth, marked shifts in domestic inflation, or exchange rates. The data can also be influenced by changes in population, which will change the GNI ratios. The second likely cause of a country moving between categories is adjustments to the thresholds. What is Gross National Income (GNI)? Gross National Income (GNI) is the total amount of money earned by a nation's people and businesses. It is used to measure and track a nation's wealth from year to year. The number includes the nation's gross domestic product (GDP) plus the income it receives from overseas sources. The more widely known term GDP is an estimate of the total value of all goods and services produced within a nation for a set period, usually a year. GNI is an alternative to gross domestic product (GDP) as a means of measuring and tracking a nation's wealth and is considered a more accurate indicator for some nations. What Is Gross National Product (GNP)? Gross national product (GNP) is an estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investments, minus income earned within the domestic economy by foreign residents. Net exports represent the difference between what a country exports minus any imports of goods and services. What Is Gross Domestic Product (GDP)? Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. GDP vs. GNP GDP and GNP are two of the most commonly used measures of a country's economy. Both represent the total market value of all goods and services produced over a certain period. However, they are calculated in slightly different ways. Gross domestic product (GDP) is the value of the finished domestic goods and services produced within a nation's borders. On the other hand, gross national product (GNP) is the value of all finished goods and services owned by a country's citizens, whether or not those goods are produced in that country. VI. BASIC-NEEDS” ATTAINMENT Many economists are frustrated at the limited impact economic growth has had in reducing third-world poverty. These economists think that programs to raise productivity in developing countries are not adequate unless they focus directly on meeting the basic needs of the poorest 40–50 percent of the population – the basic-needs approach. This direct attack is needed, it is argued, because of the continuing serious misdistribution of incomes; because consumers, lacking knowledge about health and nutrition, often make inefficient or unwise choices in this area; because public services must meet many basic needs, such as sanitation and water supplies; and because it is difficult to find investments and policies that uniformly increase the incomes of the poor. Measures The basic-needs approach shifts attention from maximizing output to minimizing poverty. The stress is not only on how much is being produced but also on what is being produced, in what ways, for whom, and with what impact. Basic needs include adequate nutrition, primary education, health, sanitation, water supply, and housing. What are possible indicators of these basic needs? Two economic consultants with the World Bank identify the following as a preliminary set of indicators (Hicks and Streeten 1979:567–580):20 Food: Calorie supply per head, or calorie supply as a percentage of requirements; protein Education: Literacy rates, primary enrollment (as a percentage of the population aged 5–14) Health: Life expectancy at birth Sanitation: Infant mortality (per thousand births), percentage of the population with access to sanitation facilities Water supply: Infant mortality (per thousand births), percentage of the population with access to potable water Housing: None (as existing measures, such as people per room, do not satisfactorily indicate the quality of housing) Each of these indicators (such as calorie supply) should be supplemented by data on distribution by income class. Infant mortality is a good indication of the availability of sanitation and clean water facilities, as infants are susceptible to waterborne diseases. Furthermore, data of infant mortality are generally more readily available than data on access to water. GROWTH AND “BASIC NEEDS” High basic-needs attainment is positively related to the rate of growth of per capita GNP, as increased life expectancy and literacy, together with reduced infant mortality, are associated with greater worker health and productivity. Furthermore, rapid output growth usually reduces poverty (Hicks 1979:985–994). Thus, GNP per head remains an important figure. But we also must look at some indicators of the composition and beneficiaries of GNP. Basic-needs data supplement GNP data but do not replace them. And, as the earlier South African example indicates, we must go beyond national averages to get basic-needs measures by income class, ethnic group, region, and other subgroups (see Chapter 6 for a discussion of inequality). IS THE SATISFACTION OF BASIC NEEDS A HUMAN RIGHT? The U.S. Founders, shaped by the scientific and intellectual activity of the Enlightenment, wrote in the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal; that they are endowed by their Creator with certain unalienable rights.” The U.N. Universal Declaration of Human Rights goes beyond such civil and political rights as a fair trial, universal adult vote, and freedom from torture to include the rights of employment, minimum wages, collective bargaining, social security, health and medical care, free primary education, and other socioeconomic rights. In fact, for many in the third world, the fulfilment of economic needs precedes a concern with political liberties. In Africa, there is a saying, “Human rights begin with breakfast”; and a beggar in one of Bertolt Brecht’s operas sings, “First we must eat, then comes morality.” Some LDCs may have to reallocate resources from consumer goods for the well-off to basic necessities for the whole population. However, even with substantial redistribution, resources are too scarce to attain these social and economic rights for the masses in most low-income countries. Consider the right of free primary education. Most low-income countries have less than one-tenth the PPP$ GNP per capita of the United States, 1.5 times the population share aged 5–15 (see Chapter 8), and greater shortages of qualified teachers, all of which means a much greater share of GNP has to be devoted to education to attain the same primary enrollment rates as in the United States. Far less income would be left over for achieving other objectives, such as adequate nutrition, housing, and sanitation. Furthermore, primary school graduates in Africa and Asia migrate to the towns, adding to the unemployed and the disaffected. A carefully selective and phased educational program, including adult literacy programs, often can be more economical, and do more for basic needs, than an immediate attempt at universal primary education. Setting up Western labor standards and minimum wages in labor-abundant LDCs is not always sensible. With a labor force growth of 2–3 percent per year, imitating labor standards from rich countries in LDCs may create a relatively privileged, regularly employed labor force and aggravate social inequality, unemployment, and poverty. Economic rights must consider the scarcity of available resources and the necessity of choice (Streeten 1980:107–111) COST AND BENEFITS OF ECONOMIC DEVELOPMENT Economic development and growth have their costs and benefits. Economic growth widens the range of human choice, but this may not necessarily increase happiness. Both Gandhi and Schumacher stress that happiness is dependent on the relationship between wants and resources. You may become more satisfied, not only by having more wants met, but perhaps also by renouncing certain material goods. Wealth may make you less happy if it increases wants more than resources. Furthermore, acquisitive and achievement-oriented societies may be more likely to give rise to individual frustration and mental anguish. Moreover, rootlessness and alienation may accompany the mobility and fluidity frequently associated with rapidly growing economies. Benefits What distinguishes people from animals is people’s greater control over their environment and greater freedom of choice, not that they are happier. Control over one’s environment is arguably as important a goal as happiness, and in order to achieve it, economic growth is greatly to be desired. Growth decreases famine, starvation, infant mortality, and death; gives us greater leisure; can enhance art, music, and philosophy; and gives us the resources to be humanitarian. Economic growth may be especially beneficial to societies in which political aspirations exceed resources, because it may forestall what might otherwise prove to be unbearable social tension. Without growth, the desires of one group can be met only at the expense of others. Finally, economic growth can assist newly independent countries in mobilizing resources to increase national power. Costs Growth has its price. One cost may be the acquisitiveness, materialism, and dissatisfaction with one’s present state associated with a society’s economic struggles. Second, the mobility, impersonality, and emphasis on self-reliance associated with economic growth may destabilize the extended family system, indeed the prevailing social structure. Third, economic growth, with its dependence on rationalism and the scientific method for innovation and technical change, is frequently a threat to religious and social authority. Fourth, economic growth usually requires greater job specialization, which may be accompanied by greater impersonality, more drab and monotonous tasks, more discipline, and a loss of craftsmanship. Fifth, as critics such as Herbert Marcuse (1966) charge, in an advanced industrial society, all institutions and individuals, including artists, tend to be shaped to the needs of economic growth. Additionally, the larger organizational units concomitant with economic growth are more likely to lead to bureaucratization, impersonality, communication problems, and the use of force to keep people in line. Economic growth and the growth of large-scale organizations are associated with an increased demand for manufactured products and services and the growth of towns, which may be accompanied by rootlessness, environmental blight, and unhealthy living conditions. Even though the change in values and social structure may eventually lead to a new, dynamic equilibrium considered superior to the old static equilibrium, the transition may produce some very painful problems. Moreover, the political transformation necessary for rapid economic growth may lead to greater centralization, coercion, social disruption, and even authoritarianism. Thus, even if a population is seriously committed to economic growth, its attainment is not likely to be pursued at all costs. All societies have to consider other goals that conflict with the maximization of economic growth. For example, because it wants its own citizens in high-level positions, a developing country may promote local control of manufacturing that reduces growth in the short run. The question is, what will be the trade-off between the goal of rapid economic growth and such noneconomic goals as achieving an orderly and stable society, preserving traditional values and culture, and promoting political autonomy?  REFERENCES Seth, S. (2022, June 12). GDP vs GNP: What's the Difference? Investopedia. Retrieved September 10, 2022, from https://www.investopedia.com/ask/answers/030415/what-functional-difference-bet ween-gdp-and-gnp.asp THE INVESTOPEDIA TEAM. (2022, July 05). GROSS NATIONAL PRODUCT (GNP). Investopedia. Retrieved September 10, 2022, from https://www.investopedia.com/terms/g/gnp.asp THE INVESTOPEDIA TEAM. (2021, August 31). GROSS NATIONAL INCOME (GNI). Investopedia. 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