BAEC 12 Block 01

ACKNOWLEDGEMENT
All the Units of this block is designed and developed by ePG Pathshala.
Bachelor of Arts (Honours) in
Economics
BEC-12
DEVELOPMENT ECONOMICS I
Block-1
Study of Economic Development
UNIT-1: Development and Underdevelopment, Measuring

Development and Development Gap
UNIT-2: Measurement and Indicators of Development
UNIT-3: Partial Theories of Growth and Development: Vicious

Circle of Poverty
UNIT-4: Human Development Index and Other Indices and

Quality Of Life
UNIT-1 DEVELOPMENT AND
UNDERDEVELOPMENT, MEASURING
DEVELOPMENT AND DEVELOPMENT GAP
Structure
1.0 Learning Outcomes

1.1 Introduction
1.2 Concepts of growth and development
1.3 Underdevelopment and the common characteristics of underdeveloped
countries
1.4 Factors which perpetuate under development
1.5 Understanding the measures of Economic Development
1.6 Understanding the Development Gap
1.7 Summary
1.8 Questions for Learners
1.9 Text Book and Reference Books
1.0 LEARNING OBJECTIVES
The study of economic growth and development is important to know not only the rate
of increase in output and capacity but also the mechanism by which this rate is realized,
sustained or impeded.
• Learn the concepts of economic growth and economic development

• Analyze that while economic growth is a single dimensional concept,
economic development is a multi-dimensional concept
• Identify that economic development has a social content as well and the quality
of life should be the focus of economic development
• Learn the concept of economic development and the features which
differentiate these underdeveloped economies from the developed economies
• Examine the factors responsible for perpetuation of the conditions of
underdevelopment in same economies
• Evaluate various measures through which the economic and social aspects of
development can be estimated and the gaps in various indices will measure the
differences in levels off development
1.1 INTRODUCTION
Since World War II more interest has been taken by the economists in the problems
of backward and less developed countries. Thus, the students of economics of
development must understand and distinguish between the concepts of economic
growth and economic development. Whereas development may not result from
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economic growth, economic growth always results from economic development.
Economic growth is therefore a concern of advanced countries; economic
development is a major issue for less developed nations.
As the ultimate objective of economic development is human development and an

improvement in the social well- being of the people, development strategy must aims
at improving the standard of life of the people.
Moreover, as the economies are classified into developed and underdeveloped, one
must understand the differentiating features of the two categories as well as the reasons
for the persistence of gap between the two. The unit also examines the factor which
helps in measurement of levels of growth and development across various nations.
1.2 CONCEPTS OF GROWTH AND DEVELOPMENT
The concept of economic development has taken a central place in economic literature
since World War II. Although economists like Karl Marx and even some of the
classical economists explained about this problem in 18th century yet economic
growth and development has now become a special area of study. The key element of
development is that people are the major participants in the process of change in an
economy as well as in the enjoyment of benefits flowing from these changes and this
process of change in the economy is referred to as economic development.
The traditional approach to the concept of development was strictly in economic terms
whereby an economy is transformed from a low level of economic activity to a higher
level. Development process, here, implied some forces working over a period of time
to change certain variables which result in the growth of national product. While
growth is only a quantitative change, the process itself involves many other changes
which can be classified into
a) Changes in factor supplies which comprises of

• The discovery of additional resources
• Capital accumulation
• Population growth
• New technology
• Skill formation &
• Institutional and organizational changes
b) Changes in the structure of demand due to the change in the level and
distribution of income as well as due to the changes in the structure of
production and employment.
This quantitative approach towards growth was based on the policy of inducing
industrialization at the expense of agriculture. The concepts of poverty elimination,
reduction in inequality, generation of employment were assumed to be the outcome of
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rapid growth in GNP and GNP per capita. Since a vast majority of world population
could not get the benefits of economic growth this narrow approach of development
had to be redefined. Therefore, while growth involves focusing on an increase in
height or weight (or GNP) development draws attention to changes in both functional
and learning capacities. In the early stages any economy that grows is likely to
develop. But, the study of Liberian economy ‘Growth without development’ which
shows an absence of both structural changes to induce complementary growth in other
sectors and of institutional changes to diffuse gains in all sectors has necessitated the
focus back on the problem of development.
The achievements in enhancing gross national product has been indeed remarkably
significant in certain countries (e.g Brazil, South Africa and Oman) but their success
in delivering public health, education and enhancing the life expectancy and reducing
mortality has been quite dismal, what Professor Sen has termed an example of
‘unaided opulence’ (Dreze and sen, 1990). While the countries like China and Sri
Lanka with relatively quite low-income levels have made significant progress in the
pubic provisioning of these services.
The concept of development, therefore, has been redefined to include direct attack on
the problems of poverty, unemployment and inequalities etc. Thus, economic
development is a wider concept which not only includes improvements in material
welfare but also includes changes to fulfill the objectives of eradication of mass
poverty along with its correlates of illiteracy, morbidity and early death. It also
includes changes in the structure of output, a change in occupational structure, and
changes in institutional and organizational set up along with the changes in allocation
of resources. Moreover, it also includes changes in attitudes of people which make
them more rational and more modern in outlook and behavior, as Kindleberger puts
“Whereas economic growth merely refers to a rise in output, economic development
implies a change in technological and institutional organization of production as well
as the distributive pattern of income.” Thus, while economic growth is a single
dimension concept economic development is a multi-dimensional concept which
includes both an increase in GDP per capita as a primary goal as well as a number of
sub-goals like poverty alleviation, reduction in inequalities, more employment
opportunities and improving the living standard of the masses.
1.3 UNDERDEVELOPMENT AND THE COMMON CHARACTERISTICS

OF UNDERDEVELOPED COUNTRIES
Since the end of World War II, more interest has been taken in the problems of
backward and less developed countries. Although, there is no single definition of
under development which is universally acceptable yet there are certain indicators on
which there is a consensus and those can be used to identify the under-developed
countries. The United Nation experts have defined “an Under-developed country as
the one which has a real per capita income that is lower in relation to the real per capita
income of USA, Canada, Australia and Western Europe”. Thus, under-development
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is a relative concept as it involves comparison of one set of countries with the other.
It refers to the state of an economy where levels of living of masses are too low due to
low per capita income resulting from low level of production. Although, it is a relative
concept yet it sustains absolute poverty wherein more than 30% of the people fail to
fulfill their basic needs of food, clothing and shelter. But, an under-developed country
should not be identified as a potentially poor country. These economies have the
capabilities for achieving higher growth rates and only need a big push through some
concerted domestic factors as well as some outside help. They also need same internal
re-organization to make them move in the desired direction. These are the countries
whose actual and potential resources have not been fully utilized due to lack of capital,
technological backwardness and unskilled manpower. These have good potential for
development if provided with sufficient capital with modern technology. Even,
Planning Commission of India has observed “An underdeveloped economy is one
which is characterized by the co-existence of unutilized or under-utilized manpower
on the one hand and of unutilized natural resources on the other. This state of affairs
may be due to stagnancy of techniques or to certain inhibiting socio-economic factors
which prevent the more dynamic forces in an economy from asserting themselves.”
World Bank, in the World Development Report has classified countries as low income,
middle income and high income countries. This classification is based on per capita
GNP. The data shows that low income countries comprise 12.5 % of the World
Population but account for only 0.7% of the total world GNI while high income
economies which have only 16.5% of world population account for 71% of world
GNI. The middle income countries which account for 71% of world population have
27.4% of world GNI. Thus, lower and middle income groups taken together which
are known as developing economies comprise about 83.5% of world population but
account for only 28.1% of the world GNI. Most of these countries are in Asia, Africa,
Latin America and some part of Europe. The most common characteristics of these
economies are
• Low per capita income

• Wide spread poverty
• High rates of population growth
• Low levels of productivity
• Unemployment and under-employment
• Weak infrastructure
• More dependence on primary sector
• Low rates of capital formation
• Unequal income distribution
• Poor quality of human capital
• Dualistic economy
• Low social indicators
• Sociological factors
Thus, under-developed countries are low income countries whose resources have not
been fully utilized. These economies can achieve high rates of growth if their
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resources are fully utilized by mobilizing more capital and by utilizing the modern
technology judiciously.
1.4 FACTORS WHICH PERPETUATE UNDER DEVELOPMENT
The history of modern economic growth and development shows that it has not
affected all corners of the globe. While in some parts the economic performance in
the aggregate has led to a thorough transformation of a country’s economic and social
framework, there are countries which have been lost untouched and the conditions of
under-development perpetuate. We can, therefore, discuss those factors which have
been responsible for perpetuation of under-development between nations. These
factors include:
A. Agricultural conditions: - The influence of agriculture to achieve sustainable

living is generally underestimated. But in fact, agriculture is the cornerstone
of rural development and thereby poverty alleviation, particularly for
developing countries. The major challenges in this sector like fragmented
landownership, low public and private investment levels and low productivity
keep the role of this sector limited, particularly in rural socio-economic
development. Even, trade liberalization to create equal market access could
only benefit the developed nations. The lack of modern technology
comprehensive support measures and lack of resources in this sector has kept
the rate of growth low in both this sector as well as in the overall economy.
B. Urban Bias: - The govt. policies based in favor of metropolitan areas have
encouraged migration from rural areas and thereby, increasing facilities for the
urban population may promote growth in the short period but it won’t produce
long term sustainable and equitable development industrial investment, if
promoted at the cost of agriculture will further reduce land for agriculture and
thus will force migration to urban areas. This distorts urban labour market and
restricts comprehensive economic development. In the absence of rural
development, especially agricultural development resources particularly
unskilled labour shifts to the urban areas and stimulates social unrest and thus
perpetuates under-development.
C. Rapid population growth: - Rapid growth of population in most of the

African and Asian nations is due to factors like poverty, illiteracy,
unemployment and social norms. The bulk of the population growth is in those
countries which are under-developed. This ever increasing number is putting
pressure on land, houses, other services and infrastructure. As these economies
fail to provide sufficient food, housing, health care and education etc. this
promotes persistent underdevelopment which is further compounded by
poverty. Over population even leads to environment degradation. Thus, high
population hinders both social and economic development.
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D. Institutional framework: - Institutions are those rules and conventions which
govern human behavior and social interactions. These form the social structure
on which the edifice of economic development can be built. Since, these are
the constraints imposed by the society and are both formal and informal in
nature; development requires that these institutions are reformed. Although
formal institutions can be easily changed with the help of low but it takes a
long time to change the conventions and codes of behavior which depends on
the mindset of the society. Since, the changed formal rules work only in a
social set up which is willing to accept these changes, it is necessary that the
informal constraint must change. Thus, development is not simply related to
use of material resources but is also linked up with institutional framework.
Any economy caught up in the traditional and primitive institutional set up
cannot expect a high rate of development unless the institutions are
modernized.
E. Dualism: - By dualism we mean the co-existence of well-developed modern

sector with traditional backward sector in various parts of the economy. While
the modern sector uses scientific and sophisticated technology and is guided
by the profit motive the traditional sector uses outmoded techniques and
produces for self-consumption. The economy is thus divided into two major
segments-one which is well organized prosperous and progressive while in the
other poverty, backwardness and misery continues. This dualistic situation
also becomes a cause of stagnation and under-development in these
economies.
1.5 UNDERSTANDING THE MEASURES OF ECONOMIC

DEVELOPMENT
Since development is a multidimensional phenomenon no single measure of economic

development completely describes such an intricate and subtle process. However,
most economists follow the spirit of Lord Kelvin’s assertion that we are unlikely to
know much about a subject unless we can measure it in some way. The multiplicity
of development goals can be shown by a variety of development measures e.g. when
we are interested in material output we measure it in terms of GNP or GDP. Levels
of mass poverty are indicated by the income distribution, the utilization of resources
by sample surveys and the qualitative aspect of economic development is measured
through various social indicators.
The first and the most important measure of economic development is the Gross
Domestic Product which means the total value of goods and services, produced within
a country during a year or GNP which also includes the net income from abroad or
GNP per capita which is obtained by dividing the total value of GNP by population.
Here a distinction has to be made between the level which is a crude indicator of
average welfare and the rate of change which indicates the speed and direction of
change. A country grows if its total income increases, but since our interest in
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development is for human welfare income per capita is more important which takes
into account the size of the population and can provide some information about
efficiency. But, there are some theoretical and practical problems of using
GDP/GNP/or income per capita as a measure of development. The basic problems
faced are
• It remains hard to draw a line between consumption and costs or between final
product and intermediate product.
• The valuation of goods and services.
• The exclusion of govt. spending on administration and distribution in
particularly socialist economies.
• Informal economy and unpaid work such as home-makers services, and
subsistence farming and bartering.
• High informal sector as rural economy cannot give accurate information.
• It hides inequality in distribution even within a country.
• Negative externalities like pollution and environmental damage is not
included.
• The benefits of environmental services are not included.
Thus, GNP is only a measure of the economic value of what is produced and paid for.
It does not take into account the environmental and social costs as well as the
distribution aspect. There are a number of other problems faced whenever attempt is
made to reduce national product originating under different social conditions to
comparable aggregates. In order to measure and evaluate a country’s development
performance, one can use measures of the extent to which people in the country receive
the benefits of development process. One approach is to look at the indices like -
Absolute Poverty- Those living in a situation where they are unable to satisfy their
basic needs for survival, food, clothing, shelter, water and sanitation for which the
World Bank gives an income of $1.25 per day and that of
Relative Poverty- A level of poverty relative to the rest of the population which has
been taken as 50% of the average earnings and inequalities in income distribution
which has increased over the planning period in India. Inequality becomes a problem
when differences in income across sections of society are deemed to be excessive and
perpetuating.
An alternative approach to measure development is in terms of social indices which

may be single component indicators or composite indicators using multiple
components. These social indices give us some idea about people’s quality of life.
These are Demographic Statistics on mortality and fertility. The population growth
rate can indicate the stage of demographic transition the country is at, which can be
linked to development. The infant and maternal mortality rate, the fertility rate, the life
expectancy, the % of GNP spent on health, the doctors and hospital beds per 1000 of
population and the levels of urbanization in an economy can also be linked to
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development. Other social indices which can also measure the level of development
in an economy are:
• Percentage of GNP spent on education.

• Literacy rates including male and female literacy rates.
• Full time teachers per 1000 people
• No. of people having higher and professional education.
• Access to safe water.
• Percentage of GNP spent on housing and dwelling floor space per capita.
• Besides single component indices there can be multiple component indices
which combine a number of single components to give a combined score.
1.6 UNDERSTANDING THE DEVELOPMENT GAP
The Development Gap refers to the widening difference in levels of development

between the world’s richest and poorest countries. Although this development gap can
also occur within countries i.e. between regions, urban and rural areas but here we are
concerned with development differences between rich and poor countries. In order to
measure development gap we can evaluate all those indicators which are used to
measure development such as
• GDP/GNP/GNP Per Capita in which the gap between India and USA is around
40 times. While the average GNP per capita in India was $ 1180 that of USA
was $ 47240 at the official exchange rate.
• The employment structure and GDP contribution of agriculture also indicates

wide gaps between the two countries. While, in USA only 4% of the population
worked in agriculture and its share in GDP was only 1.3%, its ratios were 58
% and 17% in India.
• As far as the consumption of energy is concerned while per capita consumption

of electricity in USA was 7766 kg oil equivalent, in India it has been only 529
kg of oil equivalent.
• Nearly 51% of the bottom household own only 10% of the assets and 10% of
the rich own 49% of the assets in India which shows the extent of inequality.
• Around 1/3 of the population in India lives below poverty line.
• Not only in Economic indices even the social indicators show a wide gap
between developed and under-developed nations. While life expectancy in
USA was 79 years in India it was 64 years, the literacy ratios were 99 and 66
respectively. The infant mortality rate and the total fertility rates were 53 & 2.6
in India while there were as low as 4 and 1.2 in the country like Korea. While
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India ranked 134 in HDI index Canada occupies fourth place in this index. The
PQLI index and International suffering index which covers daily calorie
intake, access to clean water& communication, inflation rate and political
freedom and civil rights also indicate the similar types of gaps.
1.7 SUMMARY
• It is clear from the discussion above that while economic growth in terms of a
sustained increase in real national income is a uni-dimensional concept. But
economic development on the other hand, involves many structural and functional
changes. More recently the focus of development has been shifted to the quality
of life and enrichment of human life as the ultimate aim of all development is
improving the well-being of the people. The unit also examines some diverse
features of underdeveloped countries which differentiate these economies from
the developed economies.
• Since no single definition or characteristic of economic development can capture

the multidimensional nature of this concept, no single measure of development
can completely describe its intricate process. Therefore, the multiplicity of
development goals is seen by a variety of development measures. These may
range from material output to social indicators.
• Moreover, since many of the countries could not transform their economic and
social framework, a few factors have been discussed which are responsible for the
perpetuation of the problem of underdevelopment in these economies.
1.8 Questions for learners
1. Discuss the common characteristics of underdeveloped countries.

2. What do you mean by economic Dualism
3. Distinguish between Absolute and Relative Poverty
4. Explain the concept of development Gap
• Todaro, Michael P and Stephen C Smith (2006): Economic Development, 8th

Edition, Pearson (Prescribed text Book).
• Debraj Ray (2009): Development Economics, Oxford University Press.
• Thirlwall, A P (2011): Economics of Development, 9th Edition, Palgrave

Macmillan
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UNIT-2 MEASUREMENT AND INDICATORS OF
DEVELOPMENT
Structure
2.0 Learning Objectives

2.1 Introduction
2.2 Sustainable Development and its measurement
2.3 Measures of Economic Development
2.4 Gross Happiness Index
2.5 Poverty
2.6 Causes of Poverty
2.7 Consequences of Poverty
2.8 Measures of Poverty
2.9 Causes of Inequality
2.10 Measures of Inequality
2.11 Summary
2.12 Questions for the learners
After studying this unit, you shall be able to -
• Know about the development and underdevelopment

• Evaluate the measures of economic development
• Learn about poverty and its measures
• Find out the various causes and measures of inequality
2.1 INTRODUCTION
Development and Underdevelopment Economic growth and economic development

seems to be synonymous but connotes different meaning in economic literature.
Economic Growth refers to a sustainable increase in the real per capita income of a
nation over a period of time. On the other hand economic development implies
economic growth plus a rise in standard of living of people. Economic development
is a broader concept than economic growth. There are some important major study
questions of economic development viz. What is the exact relationship between
phases of economic growth and income inequality? Does the process of economic
growth really provide trickledown effect and hence eliminating the poverty and
unemployment of a nation? Does the process of economic growth also imply a
balanced regional growth? Both economic and non-economic factors affect the
process of economic development. In the era of globalization both internal and
external factors influence the economic growth. It is the capital accumulation through
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higher saving and investment, technological advancement and research and
development, a large army of skilled human resource along with good governance
responsible for the growth of nation. This has also been propounded by the various
macroeconomic models like Harrod Domar, Solow-Swan and endogenous theory of
growth .Given the dual economy in the under developed nations and due to various
market failures and government failures these economies lag behind in the race of
development. Prices of scarce resources do not reflect true opportunity cost and
thereby not utilized in an efficient way. There operates a vicious circle of poverty both
on demand side and supply side which discourages savings and investment and hence
process of capital accumulation. There is also mass poverty, unemployment and
illiteracy among the under developed nations. According to the recent socio economic
statistics, situation is worst for Sub Saharan and some parts of Asia.
The underdeveloped economies have the following characteristics –
1. Colonial Exploitation by imperialist powers of Europe and West- Nearly all

the underdeveloped nations have same colonial heritage. These nations have been
the colonies of the powerful imperialist nations which exploited them through
various methods viz. free trade and drain of wealth etc. Due to the imperialists
policies, the economies of these nation have been destroyed i.e. there was hardly
any real growth in agriculture, industry and other economic activities of these
nation. This is also true in case of India where Dutch, Portuguese, British and
French etc. invaded India in order to serve their own economic interests. The
dependency school of thought propounded by Amin and Franklin, is based on this
notion only. It is the exploitation of underdeveloped economies by the developed
economies responsible for underdevelopment of the nations.
2. High Population- the underdeveloped economies are generally categorized as

highly populated economies. It is the high population of these nations which is
impeding their real growth rate. Given the limited resources, it is not possible to
satisfy the needs of ever growing population unless the rate of growth of resources
is faster than the growth rate of population.
3. Low level of Saving and Investment – Underdeveloped economies are

characterized by a low level of saving and income. There prevails a vicious circle
of poverty which acts both on demand and supply side. A low level of income
implies low demand which in turn implies low investment by the entrepreneurs
and low income at the end.
4. High level of Fiscal Deficits and Inflation- Underdeveloped economies are

supply constrained economies where there is always a scarcity of resources due
to supply side bottlenecks. These economies are inflationary economies due to
excess demand of the essential agricultural and industrial goods. The government
also plays a critical role in influencing the market outcomes. High fiscal and
revenue deficits of government financed through excessive borrowing from the
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market causes rise in the interest rate and cause crowding out effect. Hence the
private investment gets discouraged.
5. Lack of Infrastructure- Having the world class infrastructure is an essential

condition for an economy to move on the trajectory of growth. Infrastructure can
be bifurcated into economic infrastructure and social infrastructure. Economic
infrastructure consists of means of transportation, communication, water, gas, and
energy resources etc. whereas the social infrastructure is measured in terms of
health, education, sanitation, and housing etc. There is general lack of under
provisioning of both type of infrastructure in underdeveloped economies.
6. High Dependences on Agriculture – According to noble laureate Simon Kuznet,

a structural transformation takes place when the importance of agriculture in the
economy reduces and that of industry and service sector rises. The pace of
transition is very slow. Still more than fifty percent of total population is earning
their bread and butter through primary sector in the underdeveloped nations while
only three to four percent workforce is engaged in agriculture in the countries like
US and UK.
7. Underdevelopment of Industrial and Service Sector- These economies have

under developed state of industrial sector and service sector. Most of the industries
are consumer goods industries and there is lack of capital goods, basic and heavy
industries. These industries are run based on the old traditional techniques which
are quite slow and inefficient. Not only this but the people who are operating and
managing industrial sector not skilled and properly trained. Public sector
enterprises are highly suffered from inefficiency as they are handled by the class
of bureaucracy officers instead of market experts.
8. High Dependence on Trade- These economies are primarily agricultural

dependent. Manufacturing and service trade remains abysmally low. Export of
primary articles has both inelastic price and income demand and therefore
contribution of trade to foreign exchange is also very low. On the other hand
import of these nations include manufactured goods and services which have high
demand elasticities
9. High imbalance of payment account- Theses economies have high trade deficits
and overall balance of payment deficits. These economies are primarily
agricultural based economies and export mainly agricultural products while
mostly imported goods are manufactured products. The unit value of agricultural
produce is very low while price of unit value of manufacturing products is high
so this fact goes against the welfare of these economies and the result is overall
deficits. Likewise there is not much export of service trade in economies.
10. Underdeveloped Financial and Capital Markets- There is a dualism fund in

the financial and capital market of the under developed economies. Dualism
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implies the existence of two separate markets independent of each other in a
country. This is a lack of integration of financial markets. Participants have
information asymmetries in the market.
11. High level of corruption – The government administration of the

underdeveloped economies is not efficient as there are various loopholes in the
implementation of laws. Rules and regulations are not clearly defined and live
upon the discretion of the authorities. There is lack of transparency and
accountability. There is a lot of redtapism and nepotism in the public sector. There
is nexus between politicians, bureaucrats and business class to exploit and
misappropriate the public funds and impoverish the actual benefactors.
12. Highly Polluted Economies – All underdeveloped economies are highly polluted
in nature due their mismanagement of the natural resources and poor technologies.
Ecology of these nations is highly disturbed. Outdated and inferior technology
contaminate not only environment, biosphere but is also very costly and less
efficient. So it is imperative to switch to new and sophisticated technologies which
are not only environment friendly that is low carbon intensive but also reduces
the overall cost significantly.
2.2 SUSTAINABLE DEVELOPMENT AND ITS MEASUREMENT
A new concept of development is the Sustainable Development. It refers to

environmentally friendly economic development. It aims at satisfying the need of
present consumption without reducing the resources for the need of future generation.
It aims at achieving inter- generational equity. The idea of sustainable development
came United Nations World Commission on Environment and Development (WCED)
in its 1987 report “Our Common Future” defines sustainable development:
"Development that meets the needs of the present without compromising the ability of
future generations to meet their own needs."
Environment is a good which provides utility to people in many ways. Unlike the other
private goods environmental assets are public goods and hence have no markets. So it
becomes difficult to evaluate an economic asset. Green GDP or Environmentally
Adjusted GDP is the measure of sustainable development. It is the amount of national
income adjusted for the cost of pollution and depletion of natural resources. There are
two concepts related to sustainable development viz. weak sustainability and strong
sustainability. Weak sustainability implies that total value of physical, human and
natural capital should not deplete while strong sustainability implies that only natural
stock of capital should not deplete. Weak sustainability is a wider concept than strong
sustainability.
2.3 MEASURES OF ECONOMIC DEVELOPMENT
There are various popular measures of development which are discussed as follow –
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• Per Capita Income as a raw measure of development does not take into account
the following things
1. Does not look at the income inequality among the different people
2. Does not include the human development indicators like literacy, health ,
knowledge
3. Does not adjust the cost of polluting the environment
4. Does not include the various aspects of political, cultural, social freedom
as emphasized by Amartya Sen
5. Only official not the unofficial income is reported. It implies gross
underestimation of national income due to underground economic
activity.
• Physical Quantity of Life Index

1. Developed by Morris in 1979
2. It includes the life expectancy at age one, literacy rate at the age 15 and
infant mortality rate.
3. A dimensional index is created for each variable by diving the (Maximum
value – Actual value) / (Max. Value – Minimum Value)
4. It takes average of dimensional index of all three variables.
• Human Development Index

1. Developed by Indian economist Amartya Sen and Pakistani economist
Mahbubul-Haq and every year presented by the UNDP.
2. Variables taken life expectancy, knowledge and real per capita income by
PPP.
3. All variables are equally weighted.
4. No reason to give equal weights.
5. 2/3 weight is given to adult enrollment ratio while 1/3 weight to primary,
secondary and tertiary sector.
6. It includes enrollment but does not look at the dropout rates of children.
7. A dimensional index is created for each variable by diving the (Maximum
value – Actual value) / (Max. Value – Minimum Value)
8. The value of all dimension indices can vary from 0 to 1.
9. And then countries are ranked according their level of development.
2.4 GROSS HAPPINESS INDEX
The term "gross national happiness" was coined in 1972 by Bhutan's fourth Dragon
King, Jigme Singye Wangchuck. It includes sustainable development, cultural values,
natural environment, and good governance as the elements of development. And these
four elements are further divided nine sub divided elements. The nine subdivided are:
psychological wellbeing, health, knowledge and education, time use, cultural diversity
and resilience, good governance, community vitality, ecological diversity and
resilience, and living standards. The Gross National Happiness Index is a single
number index developed from 33 indicators categorized under nine domains. The
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GNH Index is constructed based upon a robust multidimensional methodology known
as the Alkire Foster method. (Quoted from a short guide to Gross Happiness Index)
2.5 POVERTY
Poverty: A person is said to poor if it is not able to afford his basic essential
necessities. Necessities implies without which he can’t survive. However there is no
consensus what is essential or not for a person. In general poverty is measured as the
reasonable amount of money income to keep the people out if the clutches of poverty,
however the emphasis in India is on the minimum standard. Poverty line is measured
in terms of minimum calorie intake taken by a person per day. It is 2400 calorie per
person per day in rural areas and 2100 calorie per person per day in urban areas as per
decided by the medical council of India. This approach was used in India to define the
poverty lines by planning commission in the past. However critics argue that poverty
is a multidimensional issue and should not be confined to the deprivation of food
requirements of only. The measurement based on the calorie needs should be called
starvation lines instead of poverty lines. Poverty on the other hands includes the
deprivation in many other essential facilities like health, education, clothing,
sanitation, access to cleaning drinking water, housing etc. A London based institute
has recently measured poverty with a new index called Multidimensional Poverty
Index (MDI) by taking data for various parameters like health, education etc. and India
was ranked abysmally low for MDI.
Here is important to distinguish between the absolute poverty and relative poverty.
Absolute poverty means a person falls below the poverty lines. But relative poverty
means relative position on the income distribution of the society. For example per
capital income of USA in a year is 25000 Rs and that of UK is 24000Rs and poverty
line cutoff is 5000 Rs then both USA and UK are prosperous economies but UK is
relatively poor than USA. The concept of relative poverty is more concerned with
measurement of income inequalities.
2.6 CAUSES OF POVERTY
1. Lack of any productive asset: There is a skewed distribution of assets e.g. land
in the society. A section of people in the society has high concentration of the
total wealth while they constitute a small percentage of population. On the other
hand majority of the population small and marginal farmers has very less
percentage of the total wealth.
2. Lack of quality education or any skill: Another reason for the poverty in the
developing country is the lack of formal schooling and lack of any special
knowledge for the employment purpose.
15
3. Larger size of household: It reduces the size of per capita cake. Larger size of
household actually both the cause and effect of the poverty. Larger children are
viewed as helping hands to the family.
4. Lack of opportunities of Employment generation: It is the primary cause of the

poverty in India. It is again related with creation of the job opportunities in both
public and private sector. It is true that it is the responsibility of a welfare state to
provide the employment opportunities but it cannot provide the employment to
all within the public sector. Given the already huge size of government
administration and privatization, it is not likely to create greater number of jobs.
5. Inflation: It implies a constant increase in the price level of the economy. It is

very detrimental to the growth process. However a mild inflation is accepted and
viewed as lubricant for the economy. Inflation snatches hard earned real value of
the money income. It increases the intensity of poverty by taking away the
purchasing power of the people.
2.7 CONSEQUENCES OF POVERTY
1. Larger size of population: As is described earlier that in order to tackle the curse
of poverty poor tend to have more and more children in order to have more money
income. Larger children are viewed as additional source of earning.
2. Hunger and Malnutrition: The state of abject poverty leads to the people to
starve and suffer from malnutrition. They do not have even the food for
maintaining their subsistence level. They can be easily caught by and are
vulnerable to serious diseases.
3. Adverse effect on the productivity of the person: Malnutrition and starvation

can lead to loss of productive capacity and loss of productive working hours. It is
the wastage of human resource which could be utilized.
4. Increase in inequality: The affluent society on the one hand and miserable state
of poverty on the other hand widens the gap between rich and poor. It makes rich
more rich and poor more poor.
2.8 MEASURES OF POVERTY
• Headcount Ratio- The ratio of people living below the poverty line to total
population is called headcount ratio. It is a very crude measure of poverty and
does the take into account the sensitivity of poverty among the poor people.
𝐻𝐶
Head count Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
16
For example if A and B are two person below poverty lines and A,s income rises but
remains below the poverty line while B position remains same, so now A is relatively
less poor than B. But HC does not take this into account.
• Poverty Gap Ratio: The poverty

gap index is a measure of the intensity
of poverty. It is defined as the average
poverty gap in the population as a
proportion of the poverty line.
Where z is the amount of income denoting poverty line, N is the total number of
population, yj is the income of jth person falling below the poverty line and q is the
total number of the poor person.
Poverty gap index ignores the effect of inequality between the poor. It does not capture
differences in the severity of poverty amongst the poor.
• Squared Poverty Ratio- The relative poverty among the poor was the limitation
of poverty gap ratio is solved by this index. In order to calculate this we take the
average of the square of the poverty gap ratio by placing higher weight on a
relatively higher poor person. The squared poverty gap index is one form of a
weighted sum of poverty gaps, with the weight proportionate to the poverty gap.
Where z is the amount of income denoting poverty line, N is the total number of
population, yj is the income of jth person falling below the poverty line and q is the
total number of the poor person.
• Foster-Greer-Thorbecke metric – It is a general class of measures of poverty.
For α=o it is equal to head count ratio. For α=1 it is equal to poverty gap ratio. For α=2
it is equal to squared poverty gap ratio.
17
• Sen P Index of Poverty:
Sen P index, sometimes referred to PSEN is related to poverty gap index (PGI). It is
calculated as follows:
PSEN= H*GZ + PGI*(1-GZ) where, H is the headcount ratio and GZ is the income Gini
coefficient of only the people below the poverty line.
2.9 CAUSES OF INEQUALITY
• Unequal distribution of assets: Highly unequal distribution of productive assets

in the hands of few causes inequality in the society.
• Improper Taxation: Principally taxation is viewed as the correcting factor for

reducing inequalities. But improper use of taxation policy has burden the common
man and made him poorer. There has not been active use of progressive taxation
in total taxation. Poor people are more vulnerable to indirect taxation as they are
not exempted from paying these taxes.
• Black Money: Huge amount of black money nearly 50% of the official reported
income is earned in the India and likewise might be figures for the underdeveloped
countries.
• Lack of Employment opportunities: People do not have employment

opportunities to get a fair chance to come out of the poverty so they remain poor.
Lack of employment generation in the underdeveloped countries causes poverty
and inequality.
• Poor Implementation of Minimum wage laws: Wage laws are not properly
implemented in the underdeveloped nations. They appear good only on the paper
work and there are really no efforts to get these laws implemented.
• Prevalence of child labour and under payment of wages to women : Both

children and women are considered best for the employment as they can be paid
less amount of wage as compared to the adult male worker. Underpayment to this
section of working class deteriorates the economic condition and worsens the
degree of inequality.
• Rising Level of corruption: The wide spread dragon of corruption eats out the
public funds sanctioned for the developed and welfare schemes and therefore
these funds can’t reach the actual beneficiaries. Actually issue of inequality can’t
be removed unless there is a removal of poverty. Both are interconnected issues.
18
2.10 MEASURES OF INEQUALITY
• Range – It is the difference between the income of richest person and income of
poorest person in a group. It is only a crude measure of inequality. It does not take
into account the fact that transfer of income from a rich person but not the richest
to poor person but not the poorest reduces the inequality. If there is equal
distribution of income then range takes a zero value. It is not a unit free measure
of inequality.
Range = Max. Value – Min. Value
• Standard Deviation- It is the average of the sum of the square of its deviation of
a series from its mean value.
• Absolute Mean Deviation – It is a unit free measure of inequality and can be

used to compare the inequality of two different groups. Its calculation takes the
following steps. Calculate absolute difference between incomes of individuals and
mean of income and multiply it with corresponding frequency of the data. Sum it
up and divide the entire value by mean of the income.
M.D. (about mean) =
• Kuznet Ratios: These are the pieces of the Lorenz curves and are measured in
the ratio. For example it is expressed as the ratio of income of top 5% people to
top 5% of people. If top 5% of rich people earns 30% of the total income in the
society and bottom 5% people earn 2% of the total income the Kuznet ratio for
this given information is 15. If a Kuznet ratio is greater than unity then it shows
inequality. Higher the value of Kuznet ratio higher is the inequality.
• Lorenz Curve: It refers to the graphical representation of inequality. Individuals

are arranged according to ascending order of income. The vertical axis measures
the percentage of income in ascending order and horizontal axis measures the
percentage of population in ascending order. The line inclined at 45 shows the
equal level of distribution. Farther the Lorenz curve from the line of equality
greater is the inequality. In the figure drawn below OP represents the line of
equality and Lorenz curve B is much farther away from Lorenz curve A so it
naturally shows higher income inequality as compared to Lorenz curve B.
19
However the Lorenz curve is subject two limitations. First it does not give a numerical
value for measuring inequality and second in case two Lorenz curve cross each other
it is not possible to compare two different income distributions as shown in the
diagram below.
• Gini Coefficient: It is the popular measure of inequality which is widely used in

empirical research. It takes all the observation into account and takes the
interpersonal inequality. The value of Gini coefficient ranges from zero to unity.
20
An equal distribution takes zero value while complete inequality takes unity
value.
• Kuznet Curve Hypothesis: According to Kuznet curve hypothesis, there is an

inverse relationship between economic growth and inequality. In the initial phase
of economic development, income inequality rises with economic growth and
then later it follows negative relationship with economic growth. In the initial
stage of economic development, the concentration of income is in the hands of
only few people as they possess the ownership of modes of production and others
get only peanuts in the distribution of factor income. It is only when the
government intervenes in the economic system through development programs
for poor. Land distribution programs, employment generation, poverty
elimination schemes, labour laws, instruments of progressive taxation, monopoly
restriction, competition promotion act and efforts to check on black economy
generation cause reduction in income distribution in the society.
2.11 SUMMARY
In order to summarize there is mass poverty, unemployment and illiteracy among the
under developed nations. There are various measures of economic development such
as human development index, physical index and many more. Poverty is also a critical
issue that we discussed and measured through the indicators of Head count ratio,
Poverty Gap Ratio etc. This gives rises to inequality among the groups of people.
Inequality itself can be measured through Gini coefficient and Lorenz Curve.
1. Discuss various causes of equality.
2. Discuss the Measures of Economic inequality.
3. Define the following:
a) Kuznet curve
b) Gini coefficient
21
• Todaro, Michael P and Stephen C Smith (2006): Economic Development, 8th

Edition, Pearson (Prescribed text Book).

Macmillan
22
UNIT-3 PARTIAL THEORIES OF GROWTH AND
DEVELOPMENT: VICIOUS CIRCLE OF
POVERTY
Structure
3.0 Learning Outcomes

3.1 Introduction
3.2 Working of the Theory of Vicious Circle of Poverty
3.3 Critical Appraisal of the Theory
3.4 Meaning and evolution of Circular causation
3.5 Development Processes and Cumulative Causation
3.6 Summary
3.0 LEARNING OUTCOMES
After studying this module, you shall be able to –
• Know the concept of Vicious Circle of Poverty

• Understand the working of the Vicious Circle of Poverty in Under-developed
countries
• Critically appraise Nurkse’s Vicious Circle of Poverty
• Know the meaning of circular causation
• Learn the evolution of the theory of circular causation
• Development of theory
3.1 INTRODUCTION
The concept of vicious and virtuous circle of poverty as formulated by Ragnar Nurkse
describes the state in which the underdeveloped countries (UDCs) are entrapped in,
where poverty seems to be the cause and effect of poverty. It means that if you are
poor, you are bound to remain poor. This holds true for both individuals and societies.
Nurkse argued that it is due to the impoverish state of these economics that any
development effort to shift these economics to a higher growth path fails to fructify.
“Poverty, according to Nelson, is a circular constellation of forces tending to act and
react upon one another in such a way as to keep a country in a state of poverty”. It
implies that in the presence of such forces, achieving higher levels of economic growth
becomes no longer automatic or spontaneous. This is because poverty hinders the
inducement to invest, especially given the small size of the markets in the UDCs. Thus
it results in a shortage of capital accumulation in these economies. Due to this reason,
lack of capital accumulation is the central problem faced by the UDCs in their path of
23
development. Capital investment especially social overhead capital is ‘lumpy’ in
nature i.e. it cannot be acquired in small increments but must be obtained in large,
discrete units and has a long gestation period. This works as a deterrent for the private
investor to invest in capital formation in the small market economy. Another factor
contributing to the vicious circle of poverty is the inelasticity of demand faced by the
UDCs at the early stages of development.
3.2 WORKING OF THE THEORY OF THE VICIOUS CIRCLE OF

POVERTY
Nurkse looked at the problem of vicious circle of poverty from both sides: the supply
side and the demand side wherein he gave more emphasize to the supply side problem.
The supply side argument explains that the capacity to save of UDCs is severely
limited by their low level of income earned. Hence, the mobilisation of savings into
investment generates low levels of investment in an economy. Due to shortage of
investment in the economy, productivity levels are also adversely affected which in
turn results in an overall low level of income produced.
Figure
The demand side argument on the other hand explains the low level of income
resulting in a lack of demand by the consumers and producers leading to a limited size
of the market. The small size of the market works restraints the incentive to invest in
that market. Hence the lack of effective investment results in low levels of income.
According to Nurkse, in addition to these two vicious circles of poverty, the UDCs
also face one other circle of poverty that operates in terms of Market Imperfections.
These economies work in a manner that resources are not optimally utilised. There are
no economies of scale. The scale of production is low and cost of production is high.
There is lack of competitiveness and thus the UDCs are losers in international market.
24
So in such a scenario the question is how the UDCs will break the vicious circle of
poverty and move to higher path of growth. Nurkse borrowed the idea from ‘Allyn
Young’ to provide the solution for the same. He quoted the famous example of the
Shoe Factory which highlights that if a firm is only producing one product i.e. shoes
then it is bound to fail. This is because the workers (then consumers) engaged in the
factory will not spend their income entirely on the purchase of shoes. This is so
because human wants are diverse. So the demand for shoes will be less than the supply
of shoes and hence a glut of shoes will be created which will result in the price to fall.
Thus the firm will suffer losses. He said it might be acceptable in the Short run but not
in the Long run.
So the way out is to set up a number of factories producing different goods that are
market-wise and technologically interdependent so that workers working in one firm
are the buyers of another firm and vice-versa i.e. there should be a synchronized
application of capital in a number of factories simultaneously so as to cater to the
complementarities of demand. If such kind of investment is made then the size of the
market will expand, there’ll be no deficiency of demand and all benefits will be
realized in terms of cheap goods both domestically and internationally. He said this
will result in a FRONTAL ATTACK on poverty. According to him a single factory
fails and many factories succeed to come out of the vicious circle of poverty through
their forward and backward linkages. Backward linkages can be defined as "the
growth of an industry leads to the growth of the industries that supply inputs to it".
Forward linkages exist when the growth of an industry leads to the growth of other
industries that uses its output as input.
Before Nurkse, Adam Smith propagated the idea of division of labour and expansion
of the size of the market to accelerate the process of economic development. Nurkse
seems to have been influenced by his ideas also.
3.3 CRITICAL APPRAISAL OF THE THEORY
• The approach promotes practices like Division of Labour that ensure economies
in terms of time, money and effort.
• It promotes development of various ancillary industries through working of
vertical linkages.
• It accelerates the pace of economic development by developing a large number of
sectors simultaneously.
• The approach suggests that the UDCs can move on the path of economic progress
by massive investment simultaneously in all sectors appears totally impractical
because the central problem faced by the UDCs is the dearth of capital and other
resources.
25
• There could be problems of coordination. If large number of interdependent
industries will be established then underperformance of few might disrupt the
whole chain.
Hence this theory is good on paper only but in practice lack of technical knowledge
and skills will restrain growth.
“The thesis of a general vicious circle of poverty thus conflicts with the most
elementary empirical evidence” (Bauer, 1965).
Circular Causation The classical economists are of the view that the expansion of
international trade can be taken as an important source of economic development as it
has equalizing effect i.e. it has developed both export and import countries irrespective
of type of goods traded. But some of the recent economists have argued that
international trade cannot encourage growth especially in underdeveloped countries.
It may only help to the developed country. The theory of circular causation is one of
the explanations to this.
3.4 MEANING AND EVOLUTION OF CIRCULAR CAUSATION
3.4.1 Meaning of Circular causation
Circular causation can be defined as a common complex situation with several

interconnected causes and effects, where an action is controlled or affected by its own
outcome or results. Circular causation is a theory developed by Swedish economist
Gunnar Myrdal in the year 1956. It is a multi-causal approach where the core variables
and their linkages are delineated. The idea behind it is that a change in one form of an
institution will lead to successive changes in other institutions. These changes are
circular in that they continue in a cycle, many times in a negative way, in which there
is no end, and cumulative in that they persist in each round. The change doesn’t occur
all at once but in small changes because that would lead to chaos.
3.4.2 The Theory
According to Gunnar Myrdal “Economic development results in a circular causation

process leading to rapid development of developed countries while the weaker
countries i.e. underdeveloped countries in Asia and Africa continent tend to remain
behind and poor”. He further argues that “economic theory has disregarded these so
called noneconomic factors and kept them outside the analysis. As they are among the
main vehicles for the circular causation in the cumulative processes of economic
change, this represents one of the principal shortcomings of economic theory”
(Myrdal, 1957).
26
Evolution of Theory
Gunnar Myrdal developed the concept from Knut Wicksell and developed it alongside
with Nicholas Kaldor when they worked together at the United Nations Economic
Commission for Europe. Myrdal concentrated on the social provisioning aspect of
development, while Kaldor concentrated on demand-supply relationships to the
manufacturing sector. About Economic Theory and Underdeveloped Regions Myrdal
wrote that ‘the argument moves on a general and methodological plane in the sense
that the theory is discussed as a complex of broad structures of thought’. His aim was
to submit ‘broad generalizations, as a ‘theory’ is permitted to be, grasp the social facts
as they organize themselves into a pattern when viewed under a bird’s-eye perspective
into this general vision, the specific characteristic. Myrdal developed further the
circular cumulative causation concept and stated that it makes different assumptions
from that of stable equilibrium on what can be considered the most important forces
guiding the evolution of social processes. These forces characterize the dynamics of
these processes in two diverse ways.
It is generally recognized that Myrdal’s work on development and underdevelopment

made three important contributions. He proposed accumulative causation approach in
opposition to the dominant one, which he called the stable equilibrium approach. He
pointed out that analyses of development processes, which only focus on economic
factors, are irrelevant and misleading because historical, institutional, social and
cultural factors also matter. He disputed the existence of a body of economic thought
that is ‘objective’ in the sense that it is value-free.
3.5 DEVELOPMENT PROCESSES AND CUMULATIVE CAUSATION
Myrdal’s cumulative causation theory is the theory of development. His theory

includes institutional and political factors to determine the development process
besides demand and supply factors of an economy. Concerning institutional factors he
insisted both economic and non-economic factors should be included in the analysis
of causes of development as both have substantial importance. Again, Myrdal’s
cumulative causation theory allows the possibility and necessity of the social reform
by introducing policies. Myrdal’s methodology on policies is so unique that it might
as well be called “the political implications in the evolutionary economics”. Myrdal’s
cumulative causation theory can be a kind of indicator of the direction for the further
development of cumulative causation theory.
3.6 SUMMARY
• The concept of Vicious Circle of Poverty is defined as the state of UDCs at the
subsistence level of output. The UDCs are poor because they are poor. They seem
to be entrapped in the vicious circle of poverty where poverty is the cause and
effect of poverty. And any developmental effort to pull the economy out of this
27
trap requires synchronized application of capital to cater to complementarities of
demand.
• It propagates that piece-meal effort is bound to fail in the UDCs and hence there
is a need for simultaneous investment in a number of projects/sectors.
• Circular cumulative causation is a multi-casual approach, where core variables

are interlinked to each other.
• The theory states that a change in one form of institution will lead to successive
changes in other institutions.
• These changes are circular in the way that they continue in a cycle many times in
a negative way and there is no end it functions in a vicious circle.
• This model combines both national and international forces which tend to keep
backward countries in the morass of cumulative process where poverty become
its own cause.
1. Explain the concept of vicious circle of poverty
2. Explain Myrdal’s cumulative causation theory as a theory of development
• Todaro, Michael P and Stephen C Smith (2006): Economic Development,

8th Edition, Pearson (Prescribed text Book).

Macmillan
28
UNIT-4 HUMAN DEVELOPMENT INDEX AND
OTHER INDICES AND QUALITY OF LIFE
Structure
4.0 Learning Objectives

4.1 Introduction
4.2 Meaning of HDI and measurement by old method
4.3 Advantages and disadvantages of HDI
4.4 Meaning and measurement of HDI by new method
4.5 Importance of HDI
4.6 Meaning and measurement of PQLI
4.7 Summary
4.9 Text Books and Reference Books
• Learn the meaning of HDI and measurement by old method

• Identify the advantages and disadvantages of HDI
• Understand the meaning and measurement of HDI by new method
• Analyse Importance of HDI
• Know Meaning and measurement of PQLI
4.1 INTRODUCTION
Human Development is cited as a method of expanding people’s choices by way of

expanding their capabilities. Income is one of the many choices faced by the
individuals, though not the only choice. Therefore, an increase in income is not the
same as an increase in human capabilities. Human Capability as defined by Prof.
Amartya Sen (in explaining the concept of Economic Development) is the freedom
that a individual has in terms of choice of functioning. These are dependent on the
personal features of an individual as each individual is unique from the others and
his/her command over the bundles of commodities that he/she entitles given his/her
entire income. As capabilities expand, there is development of self-esteem, to
exterminate the feeling of supremacy and dependence, which is allied with inferior
economic status. Also, there will be freedom from want, ignorance and squalor, so that
people are more able to determine their own destiny. Hence, development of
capabilities implies freedom of all kinds of choices. Thus, we say that human
development is a broader concept than simply inferring to an increase in income.
29
4.2 MEANING OF HDI AND MEASUREMENT BY OLD METHOD
The construction of Human Development Index (HDI) is a notable attempt undertaken

by the Pakistani economist Mahbub-ul-Haq to measure and rank countries’ socio-
economic development overtime. The United Nations Development Programme
(UNDP) in its annual series of Human Development Reports published it in 1990. The
explicit purpose of the HDI is "to shift the focus of development economics from
national income accounting to people-centered policies" in terms of enhancing their
entitlements and capabilities as defined by Amartya Sen. It was made sure that a
simple complex measure of human development was required in order to persuade the
public, academics, and politicians that they can and should gauge development not
only by economic upliftment but also by progresses in human comfort. The HDI was
formed to highlight that people and their abilities should be the last measures for
weighing the development of a country, not economic growth alone. The HDI is also
used to question national policy choices, asking how two countries with the same level
of GNI per capita can end up with dissimilar human development results. These
disparities can kindle discussion about government policy primacies.
It can also be said that the purpose of HDI was to shift the focus from Economic
Growth to Economic Development as the latter is a multi-dimensional process that can
forever alter the stationary state so that the economies can move to a higher trajectory
of well being.
Old Methodology of HDI (till 2009):
HDI is a composite index. The key magnitudes of the HDI are in terms of three social
pointers:
• An index of population health and longevity to HDI measured in terms of Life

Expectancy at birth, which is cited as the number of years a newborn infant is
expected to live if ongoing patterns of age-specific mortality rates at the time
of birth stay the same during the infant’s life.
• Knowledge and education, as gauged by the adult literacy rate (with two-thirds
weighting) and the gross enrollment ratio (with one-third weighting). Adult
literacy rate is percentage of the population age 15 and above who can, with
understanding, read and writes a short, simple statement on their everyday life.
Gross enrolment ratio is the combined total of all primary, secondary and
tertiary enrolment.
• Standard of living, as shown by the natural logarithm of gross domestic product

(GDP) per capita at purchasing power parity (PPP): PPP GDP is gross
domestic product transformed into international dollars using purchasing
power parity rates. Per capita GDP is a gauge of the total output of all final
goods and services produced in a country in one financial year that takes the
30
GDP and divides it by the number of people in the country. The per capita GDP
is particularly useful when comparing one country to another because it shows
the relative performance of the countries. An upsurge in per capita GDP
gestures growth in the economy and inclines to interpret as a surge in
productivity.
For any component of the HDI, individual indices can be computed by applying the
formula:
Dimension index: Actual value - Minimum Value

Maximum value – Minimum value
And fixed minimum and maximum values have been set for each of the individual
indices. These are as follows:
• For life expectancy at birth, minimum as 25years and maximum as 85years.

• For educational attainment, minimum as 0% and maximum as 100%.
• For real GDP per capita (PPP$), minimum as $100 and maximum as $40000
(PPP US$).
𝐴𝑐𝑡𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒−25
Therefore, Life Expectancy Index is given by:
85−25
𝐴𝑐𝑡𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒−0 𝐴𝑐𝑡𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒−0

Education Index = 2/3 + 1/3
100−0 100−0
log(𝐴𝑐𝑡𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)−log(100)
GDP Index =
log(40000)−log (100)
HDI is then calculated by taking an average of these three individual indices. The
numeric value of the HDI can vary between 0 to1. On the basis of the HDI value, one
can rank and compare the countries on the basis of its performance in terms of these
social indicators and not just a mere comparison between the incomes of the countries.
Higher HDI implies higher human well being which further implies that quality of life
is betteroff in this country vis-a-vis the other countries.
4.3 ADVANTAGES AND DISADVANTAGES OF HDI
Advantages of HDI:
HDI is a composite index that tries to capture the building blocks for sustained
Economic Development of any economy i.e. it takes into account the performance of
the economy in terms of health and education which are the important components of
Human Capital. And as any economy progresses the role of human capital becomes
increasingly vital.
31
It also divulges that a country with a low level of income can do significantly better in
terms of other parameters of development and vice-versa. Two countries having the
same amount of national income can be poles apart in terms of HDI value. So
inferences can be made about the potential of the long run performance of the two.
Disadvantages of HDI:
The problem of HDI is that it permits a joint substitutability within all three
dimensions which are used and those alike countries which are very close in a ranking
they can have pointedly diverse development in particular dimensions in a close look.
HDI is an average of the individual indices. Therefore, the problem with any average
i.e. it being affected by extreme values is there with HDI also. So, high value of HDI
might just be because of high value of any two individual indices. Hence it has a bias
for the rich countries.
In HDI, equal weights are given to all indices, which make it subjective and difficult
to interpret in concrete terms. Gross enrolment ratio is an appropriate measure of
education index, as it doesn’t take into account the percentage of dropout rate at each
stage.
The role of quality, especially when HDI is covering the impact of social indicators,
becomes important to access the well being of the population. However, it appears to
be missing in the calculation of HDI.
4.4 MEANING AND MEASUREMENT OF HDI BY NEW METHOD
New Method of Calculating HDI:
It was published on 4 November 2010 (and updated on 10 June 2011). The basic three
dimensions of the new HDI remains the same i.e. index on health, education and
income of a country. The measure of long and healthy life remains the same as Life
expectancy at birth whereas the index on a decent standard of living and education
has changed.
Education index: It is taken as the average of Mean years of schooling (MYS) (in
years) and Expected Years of Schooling (EYS) (in years). MYS is the average
amount of years of education received by people ages 25 and older, reformed from
education attainment levels using official periods of each level. EYS is the number of
years a child of school entrance age can expect to spend in a given level of education.
A decent standard of living: GNI per capita - Gross national income (GNI) (PPP
US$) is the sum of value added by all resident producers plus any product taxes (less
subsidies) not involved in the evaluation of output plus net receipts of primary income
(compensation of employees and property income) from abroad. The difference
between Gross Domestic Income (GDI) and GNI is the net factor income received
32
from abroad. In the globalized world, there are cases where GNI may be a better
indicator of country’s economic performance than GDP. Case of a nation such as
Ireland, for example, where large-scale repatriation of profits from foreign companies
located there far exceeds income flows from overseas. So much so that Ireland’s GNI
was 20% below its GDP in 2011, which means that although Ireland attracts
substantial foreign investment that contributes to its economic growth, a big chunk of
the profits arising from such foreign investment does not remain in the nation., Hence
GNI is a superior indicator of Ireland’s performance than GDI since the latter
overstates the strength of the Irish economy.
In the Human Development Report of 2010, the UNDP started using a new technique
of calculating the HDI. The following three indices are used:
LE−20
1. Life Expectancy Index (LEI) =
85−20
LEI is 1 when Life expectancy at birth is 85 and 0 when Life expectancy at birth is 20.
MYSI+EYSI
2. Education Index (EI) =
2
MYSI
Mean Years of Schooling Index (MYSI) =
15
Fifteen is the estimated extreme of this indicator for 2025.
EYS
Expected Years of Schooling Index (EYSI) =
18
Eighteen is equivalent to attaining a master’s degree in most countries.
In (𝐺𝑁𝐼𝑝𝑐)−In (100)
3. Income Index (II) =
In (75,000)−In (100)
II is 1 when GNI per capita is $75,000 and 0 when GNI per capita is $100.
Finally, the HDI is the geometric mean (GM) of the previous three normalized indices:
3
HDI = √LEI . EI . II
Geometric mean allows estimating the average growth rate for processes with variable
in time growth rate whereas Arithmetic mean characterizes the average value in data
set and is affected by extreme values. Hence for financial analysis, GM is a more
reliable measure of central tendency.
33
4.5 IMPORTANCE OF HDI
Importance of HDI on developing economies:
Economists like Adam Smith, J.S.Mill emphasized the idea that freedom to lead a
valuable life is intrinsically important to human beings and hence, the motivation of
development economics is seen as uncompromisingly on the growth of income. In
other words, the entitlements that a person possesses are tremendously important at
the first place. “Entitlements as defined by Amartya Sen are the commodity bundles
that a person can command in the society using the totality of rights and obligations
that he or she faces”. Rights represent the benefits that are derived out of the different
set of goods and obligation is a sort of cost i.e. in terms of the price tag attached to
these set of goods. Entitlements generate the capacity to do certain things. They lie at
the center of what we can do and what we can’t do. Therefore, in this context, the
Development Economics has shifted its focus to take a more inclusive view of
economic development, which emphasizes not only on material possessions but also
on the kind of use that one can make out of these entitlements. Hence we can say that
the growth of income is not an end in itself, real freedom depends on one’s capability
to make the most effective use of alternative combinations of entitlements. These
human capabilities are dependent on a number of factors other than income. Of these,
two most important factors affecting human capabilities are the education and health.
Good and proper education develops personality of the people, offers physical and
mental standard and transforms people’s living status. It endorses the feeling of
physical, mental and social well being by providing better life. It helps us to earn
recognition and respect in the family and society. It provides freedom from dogmatic
values and negative thoughts. It helps in developing additional skills that are required
in this ever-changing technological world. Likewise better health is vital to human
happiness and well-being. Health may be pronounced as a potentiality—the capability
of a person or a social group to adapt himself or itself repeatedly, in the face of
changing circumstances of life not only, in order to function good in the present but
also to prepare for the future. According to World Health Organization, health makes
a significant influence to economic improvement, as healthy populations live longer,
are more productive, and save more. Due to all these reasons, health care as a right of
every individual has been recognized in many countries. Thus both these factors are
regarded as a prerequisite for optimum socio-economic development of human beings.
Both these parameters are adequately signified in the HDI. Thus, HDI is a better
indicator to access the economic well being and quality of life for a community.
4.6 MEANING AND MEASUREMENT OF PQLI
Physical Quality of Life Index (PQLI): Speedy economic growth raised average living
standards in numerous countries round the globe in the 1960s and the early 1970s, but
inequality also came out as a problem.
34
Prosperity evaded large sections of the population, especially in developing countries,
which stimulated a search for meaningful measure of development in terms of
fulfillment of basic human needs. As some researchers showed up progress in the
segments of the population that lacked essential human needs, such as clean water,
basic medical care, suitable housing, and adequate calories. This led to the formulation
of PQLI in the mid1970s by Morris D Morris. It is a composite index that attempts to
access the standard of living or the quality of life of the people in a country. It relies
on three correlated social indicators to access the well being or development of the
citizens of a country. The three indicators of PQLI are infant mortality rate (IMR)
(it is the number of deaths of infants under one year old per 1,000 live births), life
expectancy at the age of one it is number of years a one year old child is expected to
live) and basic literacy rate (the total percentage of the population of an area at a
particular time aged fifteen years or above who can read and write with
understanding).Morris found that most of the indicators were inputs to development
process rather than result of the development process. Each indicator is sensitive to
the distribution effect. And none of them depends on any particular level of
development.
How to Normalize Indicators
In order to facilitate comparison between countries, Prof. Morris placed each of the
three cases on the scale of zero to 100 to represent the best and worst levels in
performance of each indicator. Basic literacy can have a natural zero for minimum and
100 for maximum. However, there exist no natural minimum or maximum values for
other indicators. Thus for life expectancy and infant mortality, actual minimum and
maximum are taken into calculation.
In the case of positive pointers of life expectancy and basic literacy, the best is shown
by the maximum and worst by the minimum. While in case of negative gauge of infant
mortality, the best is signified by the lowest and the poorest by the maximum.
For changing the actual levels of a positive variable into normalized indicators, first
the minimum values are subtracted from the actual values and then the gap is divided
by the range. For positive indicators, the formula is:
Achievement Level= Actual Value - Minimum Value / Maximum Value - Minimum

Value
For negative indicator of infant mortality, actual value has to be subtracted from the
maximum value and the gap if any has to be dividing by the range. The formula is
Achievement Level = Maximum Value - Actual Value / Maximum Value - Minimum

Value
PQLI is then calculated by taken as the average of the three variables.
35
Advantages of PQLI:
• The PQLI way is better because it does not have those errors, which exist, in
per capita GNP measure. The PQLI gauge retains in view the welfare
considerations, and it assigns the influence of economic growth with human
betterment.
• The PQLI can also be used like other indices to make comparisons between
countries.
• PQLI is useful in identifying the areas where social policy is lacking and hence
immediate action is required. So this index is particularly more useful for the
developing economies.
Disadvantages of PQLI:
• The indexing process is not convincing mathematically. It leads to weird

comparisons between countries that are very different but have
"compensating" values for literacy and life expectancy.
• There is a high degree of negative correlation between the two indicators i.e.
infant mortality rate and life expectancy. The index is thus criticized on
theoretical grounds.
• There is a problem of assigning weights to the various items, which may

depend upon the social, economic and political set-up of the country. Many of
the social indicators are subjective in character and differ from country to
country. Equal weight assigned to each indicator undermines the value of the
index in a comparative analysis of various countries.
• The education index is inappropriate, as it does not take in account the changes
in human capital, which is an essential tool in measuring the overall
development of human beings.
4.7 SUMMARY
Development is a multi-dimensional concept that requires changes in the entire

socioeconomic-cultural factors of an economy. It is a much broader concept than
growth. Growth relies mainly on achieving higher levels of income in an economy.
However, the distributional aspect of growth is limited and there could be high levels
of inequality in the economy. Hence, with the shift of emphasis of development
economics from mere increases in income to more human-centered policies, the
importance of measures like Human Development Index and Physical Quality of Life
Index becomes more pertinent. They emphasize the role of two important pillars of
development i.e. education and health. They also facilitate comparison of different
36
countries in terms of their performance. Both the measures emphasize on the
distributional aspect of growth.
1. Discuss HDI as a measure of Human development
2. Discuss PQLI as a measure of Human development.
• Todaro, Michael P and Stephen C Smith (2006): Economic Development,

8th Edition, Pearson (Prescribed text Book).

Macmillan
37

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ACKNOWLEDGEMENT

Study of Economic Development

UNIT-1: Development and Underdevelopment, Measuring

UNIT-3: Partial Theories of Growth and Development: Vicious

UNIT-4: Human Development Index and Other Indices and

1.0 Learning Outcomes

1.0 LEARNING OBJECTIVES

• Learn the concepts of economic growth and economic development

As the ultimate objective of economic development is human development and an

1.2 CONCEPTS OF GROWTH AND DEVELOPMENT

a) Changes in factor supplies which comprises of

1.3 UNDERDEVELOPMENT AND THE COMMON CHARACTERISTICS

• Low per capita income

1.4 FACTORS WHICH PERPETUATE UNDER DEVELOPMENT

A. Agricultural conditions: - The influence of agriculture to achieve sustainable

C. Rapid population growth: - Rapid growth of population in most of the

E. Dualism: - By dualism we mean the co-existence of well-developed modern

1.5 UNDERSTANDING THE MEASURES OF ECONOMIC

Since development is a multidimensional phenomenon no single measure of economic

An alternative approach to measure development is in terms of social indices which

• Percentage of GNP spent on education.

1.6 UNDERSTANDING THE DEVELOPMENT GAP

The Development Gap refers to the widening difference in levels of development

• The employment structure and GDP contribution of agriculture also indicates

• As far as the consumption of energy is concerned while per capita consumption

• Around 1/3 of the population in India lives below poverty line.

• Since no single definition or characteristic of economic development can capture

1.8 Questions for learners

1. Discuss the common characteristics of underdeveloped countries.

1.9 Text Book and Reference Books

• Todaro, Michael P and Stephen C Smith (2006): Economic Development, 8th

• Debraj Ray (2009): Development Economics, Oxford University Press.

• Thirlwall, A P (2011): Economics of Development, 9th Edition, Palgrave

2.0 Learning Objectives

2.0 LEARNING OBJECTIVES

After studying this unit, you shall be able to -

• Know about the development and underdevelopment

Development and Underdevelopment Economic growth and economic development

The underdeveloped economies have the following characteristics –

1. Colonial Exploitation by imperialist powers of Europe and West- Nearly all

2. High Population- the underdeveloped economies are generally categorized as

3. Low level of Saving and Investment – Underdeveloped economies are

4. High level of Fiscal Deficits and Inflation- Underdeveloped economies are

5. Lack of Infrastructure- Having the world class infrastructure is an essential

6. High Dependences on Agriculture – According to noble laureate Simon Kuznet,

7. Underdevelopment of Industrial and Service Sector- These economies have

8. High Dependence on Trade- These economies are primarily agricultural

10. Underdeveloped Financial and Capital Markets- There is a dualism fund in

11. High level of corruption – The government administration of the

2.2 SUSTAINABLE DEVELOPMENT AND ITS MEASUREMENT

A new concept of development is the Sustainable Development. It refers to

2.3 MEASURES OF ECONOMIC DEVELOPMENT

• Physical Quantity of Life Index

• Human Development Index

2.4 GROSS HAPPINESS INDEX

2.6 CAUSES OF POVERTY

4. Lack of opportunities of Employment generation: It is the primary cause of the

5. Inflation: It implies a constant increase in the price level of the economy. It is

2.7 CONSEQUENCES OF POVERTY