Economics-Paper-VIII-Economics-of-Growth-and-Development-English-Version-munotes

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CONCEPTS OF AND DISTINCTION
BETWEEN GROWTH AND DEVELOPMET
Unit Structure:
1.0 Objectives
1.1 Introduction
1.2 Concept of Economic Growth
1.3 Concept of Economic Development
1.4 Distinction between Economic Growth and Development
1.5 Summary
1.6 Questi ons
1.0 OBJECTIVES

 To understand the concept of economic growth.
 To understand the concept of economic development.
 To study the distinction between economic growth and development.
1.1 INTRODUCTION
Economic Growth is a narrower concept than economic devel opment. It is
an increase in a country's real level of national output which can be caused
by an increase in the quality of resources (by education etc.), increase in
the quantity of resources & improvements in technology or in another way
an increase in t he value of goods and services produced by every sector of
the economy. Economic Growth can be measured by an increase in a
country's GDP (gross domestic product).
Economic development is a normative concept i.e. it applies in the context
of people's sense of morality (right and wrong, good and bad). The
definition of economic development given by Michael Todaro is an
increase in living standards, improvement in self - esteem needs and
freedom from oppression as well as a greater choice. The most accurate
method of measuring development is the Human Development Index
which takes into account the literacy rates & life expectancy which affects
productivity and could lead to Economic Growth. It also leads to the
creation of more opportunities in the sectors of e ducation, healthcare,
employment and the conservation of the environment. It implies an
increase in the per capita income of every citizen.
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2 1.2 CONCEPT OF ECONOMIC GROWTH
The modern conception of economic growth began with the critique of
Mercantilism, es pecially by the physiocrats and with the Scottish
Enlightenment thinkers such as David Hume and Adam Smith, and the
foundation of the discipline of modern political economy. It is an increase
in the value of goods and services produced by an economy. It is
conventionally measured as the percent rate of increase in real gross
domestic product, or GDP. Growth is usually calculated in real terms, i.e.
inflation -adjusted terms, in order to net out the effect of inflation on the
price of the goods and services p roduced. In economics, "economic
growth" or "economic growth theory" typically refers to growth of
potential output, i.e. production at "full employment," rather than growth
of aggregate demand.
Economic growth is the increase of per capita gross domestic product
(GDP) or other measure of aggregate income. It is often measured as the
rate of change in real GDP. Economic growth refers only to the quantity of
goods and services produced. Economic growth can be either positive or
negative. Negative growth can be referred to by saying that the economy
is shrinking. Negative growth is associated with economic recession and
economic depression.
In order to compare per capita income across multiple countries, the
statistics may be quoted in a single currency, based on either prevailing
exchange rates or purchasing power parity. To compensate for changes in
the value of money (inflation or deflation) the GDP or GNP is usually
given in "real" or inflation adjusted, terms rather than the actual money
figure compiled in a given year, which is called the nominal or current
figure.
Economists draw a distinction between short -term economic stabilization
and long -term economic growth. The topic of economicgrowth is
primarily concerned with the long run. The short -run variati on of
economic growth is termed the business cycle.
1.3 CONCEPT OF ECONOMIC DEVELOPMENT
The latter half of the 20th century, with its global economy of a few very
wealthy nations and many very poor nations, led to the study of how the
transition from subs istence and resource -based economies to production
and consumption based -economies occurred. This led to the field of
development economics, including the work of Nobel laureates Amartya
Sen and Joseph Stiglitz. However this model of economic development
does not meet the demands of subaltern populations and has been severely
criticized by later theorists.
Economic development is the increase in the standard of living in a
nation's population with sustained growth from a simple, low -income
economy to a mode rn, high -income economy. Also, if the local quality of
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Concepts of and
Distinction between
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3 scope includes the process and policies by which a nation improves the
economic, political, and social well - being of its people.
Gonçalo L Fonsesca at the New School for Social Research defines
economic development as "the analysis of the economic development of
nations.
Economic development' is a term that economists, politicians, and others
have used frequently in the 20th century. T he concept, however, has been
in existence in the West for centuries. Modernization, Westernization, and
especiallyIndustrialization are other terms people have used when
discussing economic development. Although no one is sure when the
concept originated, most people agree that development is closely bound
up with the evolution of capitalism and the demise of feudalism."
The study of economic development by social scientists encompasses
theories of the causes of industrial -economic modernization, plus
organizational and related aspects of enterprise development in modern
societies. It embraces sociological research on business organization and
enterprise development from a historical and comparative perspective;
specific processes of the evolution (growth, modernization) of markets and
management -employee relations; and culturally related cross -national
similarities and differences in patterns of industrial organization in
contemporary Western societies. On the subject of the nature and causes
of the conside rable variations that exist in levels of industrial -economic
growth and performance internationally, it seeks answers to such questions
as: "Why are levels of direct foreign investment and labour productivity
significantly higher in some countries than in others?"Mansell and Wehn
state that development has been understood since the Second World War
to involve economic growth, increases in per capita income, and
attainment of a standard of living equivalent to that of industrialized
countries.
Economy Develo pment can also be considered as a static theory that
documents the state of economy at a certain time. According to
Schumpeter (2003) the changes in this equilibrium state to document in
economic theory can only be caused by intervening factors coming from
the outside.
1.4 DISTINCTION BETWEEN ECONOMIC GROWTH
AND DEVELOPMENT
There are significant differences between economic growth and economic
development. The term "economic growth" refers to an increase (or
growth) in real national income or product expres sed usually as per capital
income. National income or product itself is commonly expressed in terms
of a measure of the aggregate output of the economy called gross national
product (GNP). Per capita income then is simply gross national product
divided by the population of the country. When the GNP of a nation rises,
whatever the means of achieving the outcome, economists refer to it as
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4 The term "economic development," on the other hand, implies much more
when used in relation to a country or an entire economy. It typically refers
to improvements in a variety ofindicators, such as literacy rates and life
expectancy, and it implies a reduction in poverty. Critics point out that
GDP is a narrow measure of economic welfare that does not take in to
account important non -economic aspects such as more leisure time, access
to health & education, the environment, freedom, or social justice.
Economic growth is a necessary but insufficient condition for economic
development.
Economic Growth does not tak e into account the size of the informal
economy. The informal economy is also known as the black economy
which is unrecorded economic activity. Development alleviates people
from low standards of living into proper employment with suitable shelter.
Economi c Growth does not take into account the depletion of natural
resources which might lead to pollution, congestion & disease.
Development however is concerned with sustainability which means
meeting the needs of the present without compromising future needs.
These environmental effects are becoming more of a problem for
Governments now that the pressure has increased on them due to Global
warming.
Different View related Growth and Development:
For a layman, the terms economic development and economic growth a re
synonyms. For a long time, the terms, economic development, economic
growth, economic progress, economic welfare, secular change and other
similar terms are being commonly used in day -to-day life as synonyms.
But some leading economists have drawn a lin e of demarcation between
them. Under the above heading we shall discuss the difference between
the above two concepts, i.e., economic development and economic growth
which is given below:
Mrs. Ursula Hicks, "Development should relate to underdeveloped
coun tries, where there is possibility of developing and using hitherto,
while the term growth is related to economically rich and advanced
countries where most of the resources are already known and developed."
This definition draws a vivid distinction between the economic
development and economic growth. The first term relates to the problems
of underdeveloped countries and their solution, whereas the second term is
related to the problems of developed countries of the world.
Prof. A. Maddison, "the rising of income levels is generally called
economic growth in rich countries and in poor countries it is called
economic development."
This definition also points out the same fact that economic development is
concerned with the rising of income level in underdevel oped countries like
India, whereas economic growth refers to the rising of income levels in
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Concepts of and
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5 Prof. J. A. Schumpeter, "Development is a discontinuous and spontaneous
change in the stationa ry state, which for ever alters and displaces the
equilibrium state previously existing; while growth is a gradual and steady
change in the long run, which comes about by a general increase in the
rate of savings and population ‖.
This explanation emphasise s that the economy is in the stationary state
before the process of development starts and in that stationary state,
equilibrium exists among the different development variables such as
investment and savings, income and expenditure, demand and supply etc.
The view of Schumpeter has been widely accepted and elaborated by the
majority of economists.
C. P. Kidleberger, "Economic growth means more output and economic
development implies both more output and changes in the technical and
institutional arrangemen ts, by which it is produced."
This explanation states that growth is synonymous with higher output.
Any increase in the quantity of development variables is termed as growth.
It has nothing to do with the means and methods of production.
Development, on th e other hand, implies not only higher output, but also
the changes which help in raising the level of output. Kindleberger has
further explained the difference by an analogy with human beings.
According to him, "Growth involves focussing on height or weigh t while
development draws attention to the change in functional capacity."
Prof. J. K. Mehta has summed up the above discussion in the words, "The
word Growth has quantitative significance while the Development has by
comparison qualitative significance."
Byrns and Stones , "Economic growth occurs when more goods can be
produced. Economic development entails improvements in the quality of
life, in the qualities of goods available or in the ways production is
organised."
Dr. Bright Singh , "Economic developm ent is a multi - dimensional
phenomenon, it involves not only increase in money incomes, but also
improvement in real habits, education, public health, greater leisure and in
fact all the social and economic circumstances that make Tor a fuller and
happier life. On thecontrary, in case of economic growth, there is increase
in national income alone. There is no structural change in the economy."
The distinction between economic development and economic growth
may further be explained by means of the table giv en below :



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6 Table No. 1.1
Difference between Economic Development and Economic Growth






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Concepts of and
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7

In spite of the above apparant difference, most of the economists are of the
opinion that there is no difference between economic development and
economic gr owth and hence they use both these terms as synonyms.
According to Arthur Levis, "Most often we shall refer only to growth but
occasionally for the sake of variety, to progress.
Economic growth is a necessary but not sufficient condition of economic
develo pment.
1.5 SUMMARY
While economists do not agree on exactly how to promote economic
development, there is general agreement that development requires
economic growth, a real increase in per capita income, and the social and
political institutions necessar y to support an expansion of the national
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8 enterprises. As the production of goods and services rise at a rate higher
than increases in population there is economic growth. Economic
developm ent, in addition to increased per capita income, also includes
fundamental changes in the structure of the economy. These changes are
characterized by a growing industrial sector combined with a declining
agriculture share of Gross Domestic Product (GDP) a s well as significant
changes in population growth, rural to urban migration, and employment
opportunities.
1.6 QUESTIONS
Q1. Write a note on economic growth.
Q2. Write a note on economic development.
Q3. Explain the distinction between economic growth and development.


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9 2
HUMAN DEVELOPMENT AND
MILLENNIUM DEVELOPMENT GOALS
(MDGs)
Unit Structure:
2.0 Objectives
2.1 Concept of Human Development
2.2 Human Development Index (HDI)
2.3 Gender Development Index (GDI)
2.4 Green GDP
2.5 Sen’s Capability Approach
2.6 Millennium Dev elopment Goals (MDGs)
2.7 Initiative by Indian Government towards MDGs
2.8 Summary
2.9 Questions
2.0 OBJECTIVES
 To study the concept of human development and human
development index.
 To study the concept of gender development index.
 To understand the conc ept of green GDP.
 To study Sen’s Capability Approach.
 To study about the millennium development goals.
2.2 CONCEPT OF HUMAN DEVELOPMENT
The UNDP Human Development Report 1997 describes human
development as “the process of widening people’s choices and the level of
well-being they achieve are at the core of the notion of human
development. Such theories are neither finite nor static. But regardless of
the level of development, the three essential choices for people are to lead
a long and healthy life, to ac quire knowledge and to have access to the
resources needed for a decent standard of living. Human development
does not end there, however. Other choices highly valued by many
people, range from political, economic and social freedom to
opportuniti es for being creative and productive and enjoying self respect
and guaranteed human rights”. The HDR 1997 further stated that,
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10 though an important one. But it is not the sum to tal of their lives. Income
is only a means with human development the end”.
What we understand from the description of human development found in
HDR 1997 is that human development is a continuous process. The
process becomes developmental only if it inc reases choices and improves
human well -being. Amongst other choices, the three most important
choices are that of long and healthy life which is determined by life
expectancy at birth, to acquire knowledge which is determined by
educat ion and a decent standard of living which is determined by GDP per
capita. These three choices are also the components of human
development index. While these three choices are basic to human
development, the choices go beyond these three to incl ude the ever
expanding social, political and economic freedoms that make human life
worth living. Thus guaranteed human rights become an important aspect
of human development.
According to Paul Streeton, human development is necessary due to the
following reasons:
1. Economic growth is only a means to the end of achieving human
development.
2. Investments in education, health and training will increase longevity
and productivity of the labor force and thereby improve human
development.
3. Female educ ation and development widens choices for women’s
development. Reduced infant mortality rate reduces fertility rate
and also reduces the size of the family. It further improves female
health and helps to reduce the rate of growth of population.
4. Encroachment upon the natural environment is the result of growing
size of impoverished populations. Problems of desertification,
deforestation, and soil erosion, erosion of natural beauty, unpleasant
habitats and surroundings will reduce with human development.
5. Poverty reduction will encourage people to satisfy higher order
needs like esteem needs and the need for self - actualization.Thus
human development can contribute to a better civil society, a credible
democracy and social stability a nd political stability.
2.3 HUMAN DEVELOPMENT INDEX (HDI)
The HDI – human development index – is a summary composite index
that measures a country's average achievements in three basic aspects of
human development: health, knowledge, and a decent standard of living.
Health is measured by life expectancy at birth; knowledge is measured by
a combination of the adult literacy rate and the combined primary,
secondary, and tertiary gross enrolment ratio; and standard of living by
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11 The Hu man Development Index (HDI) is a composite statistic used to
rank countries by level of "human development" and separate developed
(high development), developing (middle development), and under
developed (low development) countries. The statistic is compos ed from
data on life expectancy, education and per -capita GDP (as an indicator of
standard of living) collected at the national level using the formula given
in the Methodology section below.
The origins of the HDI are to be found in the United Nations Dev elopment
Programme's (UNDP) Human Development Reports (HDRs). These were
devised and launched by Pakistani Economist Mahbub ulHaq in 1990 and
had the explicit purpose: ‗‗to shift the focus of development economics
from national income accounting to people centered policies‘‘. To produce
the HDRs, Mahbub ulHaq brought together a group of well known
development economists including: Paul Streeten, Frances Stewart,
Gustav Ranis, Keith Griffin, Sudhir Anand and Meghnad Desai. But it was
Amartya Sen‘s work on ca pabilities and functionings that provided the
underlying conceptual framework. Haq was sure that a simple composite
measure of human development was needed in order to convince the
public, academics, and policy -makers that they can and should evaluate
deve lopment not only by economic advances but also improvements in
human well -being. Sen initially opposed this idea, but he went on to help
Haq develop the Human Development Index (HDI). Sen was worried that
it was difficult to capture the full complexity of human capabilities in a
single index but Haq persuaded him that only a single number would shift
the attention of policy -makers from concentration on economic to human
well-being.
The HDI has been used since 1990 by the United Nations Development
Programme for its annual Human Development Reports.
Human Development Index measures achievements on average on the
basis of three following criteria. Areas which are of significance to human
development:
 Life expectancy at birth which measures the longevity of lif e.
 Knowledge which is based on the following two factors.
 Adult literacy rate
 Gross enrolment ratio at primary, secondary and tertiary level.
 Per capitaGDP measures the standard of living of the people.
On the basis of above criteria an index is created f or each of the above
dimensions. This is done on the basis of maximum and minimum values
for each of the above three indicators.



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12 Table 2.1: Maximum and Minimum Values for Calculating HDI
Indicator Maximum Value Minimum
Value
Life expectancy at birth 85 25
Adult literacy rate 100 0
Gross enrolment ratio 100 0
GDP per capita (PPP US$) 40,000 100

The actual values for each country are compared with the maximum and
minimum value and for each country the values of all the indicators would
range between 0 and 1. The following formula is used:

Table 2.2: Human Development Indicators, 2003
Human Development Index Norway HDI Rank: India HDI Rank: Burundi HDI Rank: 1 127 171
Life expectancy at birth (years), 2001 78.7 63.3 40.4
Adult literacy rate (% ag e - 15 and above), 2001 - 58.0 49.2
Combined primary,
secondary and tertiary grcfcsenrolment ratio (%), 2000-01 98 56 31 GDP per capita (PPP US$), 29,620 2,840 690 2001
Life expectancy index, 2001 0.90 0.64 0.26
Education index, 2001 0.99 0.57 0.43
GDP index, 2001 0.95 0.56 0.32 Human Development Index 0.944 0.590 0.337 (HDI) value, 2001
GDP per capita (PPP US$) rank minus HDI rank 4 -12 0

Table 2 gives the Human Development index of selected countries as
given by the UN Human Development Report, 2003. According to this
report, India is ranked 127 among a total of 175 countries. India is
classified on the basis of HDI as a country of medium human
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13 2.3.1 Three dimensions in the HDI: The HDI combines three
dimensions:
• Life expec tancy at birth, as an index of population health and
longevity
• Knowledge and education, as measured by the adult literacy rate
(with two -thirds weighting) and the combined primary, secondary,
and tertiary gross enrolment ratio (with one -third weighting).
• Standard of living, as indicated by the natural logarithm of gross
domestic product per capita at purchasing power parity.
The formula defining the HDI is promulgated by the United Nations
Development Programme (UNDP) In general, to transform a raw vari able,
say x, into a unit -free index between 0 and 1 (which allows different
indices to be added together).

where min xand maxx are the lowest and highest valuesthe variable x can
attain, respectively.
The Human Development Index (HDI) then represents the uniformly
weighted sum with 1/3 contributed by each of the following factor indices:
2.3.2 Methods of HDI measures:
A) Life Expectancy Index:
Life expectancy is the expected (in the statistical sense) number of years
of life remaining at a given age. It is denoted by ex, which means the
average number of subsequent years of life for someone now aged x,
according to a particular mortality experience. (In technical literature, this
symbol means the average number of complete years of life remaining,
excludi ng fractions of a year. The corresponding statistic including
fractions of a year, the normal meaning of life expectancy, has a symbol
with a small circle over the e.) The life expectancy of a group of
individuals is heavily dependent on the criteria used to select the group.
Life expectancy is usually calculated separately for males and females.
Females live longer than males in countries with modern obstetric care.
In countries with high infant mortality rates, the life expectancy at birth is
highly sensi tive to the rate of death in the first few years of life. Because
of this sensitivity to infant mortality, simple life expectancy at age zero
can be subject to gross misinterpretation, leading one to believe that a
population with a low overall life expect ancy will necessarily have a small
proportion of older people. For example, in a hypothetical stationary
population in which half the population dies before the age of five, but
everybody else dies exactly at 70 years old, the life expectancy at age zero
will be about 35 years, while about 25% of the population will be between
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14 (e5) can be used to exclude the effect of infant mortality to provide a
simple measure of overall mortality rat es other than in early childhood —in
the hypothetical population above, life expectancy at age 5 would be 70
years. Aggregate population measures such as the proportion of the
population in various age classes should also be used alongside individual -
based measures like formal life expectancy when analyzing population
structure and dynamics.

B) Education Index:
The Education Index is measured by the adult literacy rate (with two -
thirds weighting) and the combined primary, secondary, and tertiary
gross enro lment ratio (with one -third weighting). The adult literacy rate
gives an indication of the ability to read and write, while the GER gives an
indication of the level of education from kindergarten to postgraduate
education.
Education is a major component of well-being and is used in the measure
of economic development and quality of life, which is a key factor
determining whether a country is a developed, developing, or
underdeveloped country.
c) Adult literacy index:
The Adult literacy index (ALI) is a stat istical measure used to determine
how many adults can read and write in a certain area or nation. Adult
literacy is one of the factors in measuring the Human Development Index
(HDI) of each nation, along with life expectancy, education, and standard
of liv ing.
The equation for calculating the Adult Literacy Index is:

The gross enrolment ratio (GER) or gross enrolment index (GEI) is a
statistical measure used in the education sector and by the UN in its
Education Index. The GER gives a rough indication of the level of
education from kindergarten to postgraduate education – known in the UK
and some other countries (mostly in the Commonwealth of Nations) as
primary, secondary, and/or tertiary –among stresidents in a given
jurisdiction.
In the UN, the GER is c alculated by expressing the number of students
enrolled in primary, secondary and tertiary levels of education, regardless
of age, as a percentage of the population of official school age for the
three levels.
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Human Development
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15 D) Gross domestic product:
The gross domesti c product (GDP) or gross domestic income (GDI) is a
measure of a country's overall economic output. It is the market value of
all final goods and services made within the borders of a country in a year.
It is often positively correlated with the standard o f living, alternative
measures to GDP for that purpose.
Gross domestic product comes under the heading of national accounts,
which is a subject in macroeconomics.
GDP can be determined in three ways, all of which should in principle
give the same result. T hey are the product (or output) approach, the
income approach, and the expenditure approach.

2.4 GENDER DEVELOPMENT INDEX (GDI)
The Gender -related Development Index (GDI) is an indication of the
standard of living in a country, developed by the United Na tions (UN). It
is one of the five indicators used by the United Nations Development
Programme in its annual Human Development Report. It aims to show the
inequalities between men and women in the following areas: long and
healthy life, knowledge, and a dec ent standard of living.
While HDI measures average achievement, the GDI adjusts the average
achievement to reflect the inequalities between men and women. The three
components used for the purpose are: (i) female life expectancy, (ii)
female adult literacy and gross enrolment ratio, and (iii) female per capita
income.
If gender inequality were not penalised, the value of GDI and HDI would
be the same, but if gender inequality exists, the value ofGDI would be
lower than that of HDL The greater the difference between HDI and GDI,
the greater is the gender inequality. Table no. 2.4 provides data both for
HDI and GDI for selected countries. It may be noted that near gender
equality exists in Norway, Canada, United States, United Kingdom, Japan,
Mexico, Russian F ederation, Malaysia, Venezuela, Philippines, Sri Lanka,
China, Vietnam and Indonesia. Countries which indicate higher gender
inequality are Saudi Arabia, Pakistan, Iran, India, Egypt and Nigeria.
However, there is a greater awareness in the world about gen der inequality
and efforts are being made to reduce gender inequality by promoting the
education of females and giving them a better status in the family. Some
countries have lagged behind due to cultural biases against the females.
However, in them also, women movements are promoting the cause of
bringing about gender equality.
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16 2.4.1 GDI in India:
In India, Life expectancy at birth of females in 2001 was 64 years, but for
males, it was 62.8 years. Comparing with medium human development
countries, Indian achievement, though good, is still much lower in relation
to Mexico, Venezuela, Russian Federation, Thailand, Philippines, Sri
Lanka, Iran, Vietnam, to name a few among them.
Although gap between life expectancy of females and males is very small,
but in o ther gender -related developmentindicators, this gap is very wide.
For instance, adult literacy of females was barely 46.4 per cent against
69.0 per cent of males in 2001. Similarly, combined Gross Enrolment ratio
of females was 49 per cent as against 63.0 per cent for males in 2001.
Likewise, Estimated Earned Income of females was $ 1,531 as compared
with that of males to be $ 4,070 in 2001. This implies that female income
was just 38 per cent of male income. Obviously, either females suffered
from gender d iscrimination in wage income or they did not have regular
employment and a big proportion was employed as casual labourersor a
large proportion of females worked part time. There may be many more
factors, but it cannot be denied that females suffered gende r bias both in
education and employment.
Calculating the GDI involves three steps:
Step 1: Unit-free indices between 0 and 1 are calculated for females and
males in each of the following areas:
1. Life expectancy,
2. Education (the adultliteracyrateandthecombine dprimarytotertiary
grossenrolmentratio),
3. Estimatedearnedincome(at purchasing power parityUS$).
FemaleLifeExpectancyIndex
=

MaleLifeExpectancyIndex
=

Female & MaleEducationIndices
=

Female &MaleIncomeIndices
=

Female lifeexpectancy 27.5 87.5 27.5
femalelifeexpectancy 22.5 82.5 22.5
2adultliteracyrateofgender 1grossenrollmentrateofgender 3 100 3 100 logearnedincomeofgender log100
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Step 2: For each area, the pair ofge nder indices, are combinedinto an
Equally Distributed Index that rewards gender equality andpenalizes
inequality. It is calculated as the harmonic mean of thetwoindices.
Equally Distributed index

=
Step 3: The GDI is the unweighted average of the three E qually
Distributed Indices: Equally distributed life expect ancy index, Equally
distributed education index, Equally distribute d income index.
The UN uses a different standard for male and female life expectancy,
basically assuming that it is natural that w omen shouldlive a bout 5 years
longer than men. If the life expectancy index wasset at an equal age of 85
years, the GDI calculated would increase, reflect ing the superior life
expectancy of women in almost all countries. Just replace 87.5 years and
82.5 ye ars with 85.0 yearsand repl ace 27.5 years and 22.5 years with25.0
years to equalizeit. Iceland, for example, would have a GDI of 0.992
instead of 0.962underthis method.
2.5 GREEN GDP
Green GDP is an important and current topic that is relevant to the UPSC
exam. It forms a part of th e current affairs, environment and ecology,
polity and also social issues . The following article gives you a brief about
the concept of green GDP.
The Green Gross Domestic Product, or Green GDP for short, is an
indicator of econo mic growth with environmental factors taken into
consideration along with the standard GDP of a country. Green GDP
factors biodiversity losses and costs attributed to climate change. Physical
indicators like “carbon dioxide per year or “waste per capita” m ay be
aggregated to indices like the “Sustainable Development Index”.
How is Green GDP Calculated?
Green GDP is calculated by subtracting net natural capital consumption
from the standard GDP. This includes resource depletion, environmental
degradation and protective environmental initiatives. These calculations
can alternatively be applied to the net domestic product (NDP), which
subtracts the depreciation of capital from GDP. In every case, it is required
to convert any resource extraction activity into a monetary value since
they are expressed in this manner through national accounts.

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18 2.6 SEN’S CAPABILITY APPROACH
The core concepts:
The capability approach involves concentration on freedoms to achieve in
general a nd the capabilities to function in parti cular (Sen 1995). The
major constituents of the capability approach are functionings and
capabilities.1 Functionings are the beings and doings of a person,
whereas a person‘s capability is the various combinations of functionings
that a person can achiev e. Capability is thus a set of vectors of
functionings, reflecting the person‘s freedom to lead one type of life or
another (Sen 1992). A person‘s functionings and her capability are
closely related but distinct.
A functioning is an achievement, whereas a capability is the ability to
achieve. Functionings are, in a sense, more directly related to living
conditions, since they are different aspects of living conditions.
Capabilities, in contrast, are notions of freedo m, in the positive sense:
what real oppo rtunities you have regarding the life you may lead (Sen
1987: 36).
The difference between functioning and capability can best be clarified
with an example.
Consider the following variation on Sen‘s classical illustration of two
persons who both don‘t eat enough to enable the functioning of being
well-nourished. The first person is a victim of a famine in Ethiopia, while
the second person decided to go on a hunger strike in front of the Chinese
embassy in Washington to protest against the occupation of Tibet.
Although both persons lack the functioning of b eing well - nourished, the
freedom they had to avoid being hungry is crucially distinct. To be able to
make this distinction, we need the concept of capability, i.e. the
functionings that a person could have achieved. While both hungry people
lack the achie ved functioning of being well -nourished and hunger -free, the
protester in Washington has the capability to achieve this functioning
which the Ethiopian person lacks.
Another crucial distinction in the capability approach is the distinction
between commodit ies (that is, goods and services) on the one hand and
functioning on the other hand.
Commodities are goods and services. They should not necessarily be
thought of as exchangeable for income or money – as this would restrict
the capability approach to anal yses and measurement in market -based
economies, which it does not intend. A commodity has certain
characteristics, which makes it of interest to people. For example, we are
not interested in a bike because it is an object made from certain materials
with a specific shape and colour, but because it can bring us to places
where we want to go, and in a faster way than if we were walking. These
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19 In our example, the bike enables the functioning of mobility, to be ab le to
move oneself freely and more rapidly than walking. However, the relation
between the good and the functionings to achieve certain beings and
doings is influenced by three conversion factors. Firstly, personal
characteristics (e.g. metabolism, physica l condition, sex, reading skills,
intelligence) influence how a person can convert the characteristics of the
commodity into a functioning. If a person is disabled, or in a bad physical
condition, or has never learned to cycle, than the bike will be of lim ited
help to enable the functioning of mobility. Secondly, social characteristics
(e.g. public policies, social norms, discriminating practises, gender roles,
societal hierarchies, power relations) and environmental characteristics
(e.g. climate, infrastru cture, institutions, public goods) play a role in the
conversion from characteristics of the good to the individual functioning.
If there are no paved roads, or if a society imposes a social or legal norm
that women are not allowed to cycle without being a ccompanied by a male
family member, then it becomes much more difficult or even impossible to
use the good to enable the functioning. Hence, knowing the goods a
person owns or can use is not enough to know which functionings she can
achieve; therefore we n eed to know much more about the person and the
circumstances in which she is living.
The capability approach does not consider the functionings that a person
has achieved as the ultimate normative measure. In principle, we are
concerned with people‘s real freedoms, that is, with their capability to
function, and not with her achieved functioning levels.
The functionings of a person are the set of things that she is and does in
life, whereas the capability of that person is the alternative combination of
functionings that this person can achieve and from which she can choose
one vector of functionings. Capability is thus closely related to the idea of
opportunity, but, as Sen warns, this should not be understood in the
limited traditional sense, but more as a positive notion of overall freedom.
The basic idea is thus that we are concerned with people‘s capabilities,
with their affective freedoms to be whom they want to be and do what
they want to do. Let us now look at three theoretical refinements.
Firstly, a focus on functionings and capabilities does not have to imply
that a capability analysis would not pay any attention to resources, or the
evaluation of social institutions, economic growth, technical advancement,
and so forth. Thus, while functionings and capabilities are of ultimate
concern, other dimensions can be important as well. Indeed, in their
evaluation if development in India, Drèze and Sen have stressed that
working within the capability approach does in no way exclude the
integration of an anal ysis of resources: ―It should be clear that we have
tended to judge development by the expansion of substantive human
freedoms – not just by economic growth (for example, of the gross
national product), or technical progress, or social modernization. This is
not to deny, in any way, that advances in the latter fields can be very
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20 in that light – in terms of their actual effectiv eness in enriching the lives
and liberties of people – rather than taking them to be valuable in
themselves. (Drèze and Sen 2002: 3)
The second remark is that there are cases and situations where it makes
much more sense to investigate people‘s achieved fu nctionings directly,
instead of evaluating their capabilities.
For example, if we are focussing on the capability of bodily integrity, we
will not be concerned with a boxer who deliberately puts his body at
danger of being beaten up.
He has the capability of not being attacked, but chooses to engages in
violent fights. But as far as domestic violence is concerned, we will use
the very plausible assumption that no one wants to be beaten up by
another person in the household, and therefore the achieved disfun ctioning
of bodily integrity due to domestic violence is a univocal sign that the
victim didn‘t have the capability of being safe from bodily harm in the
first place. Other examples where it makes more sense to focus on
achieved functionings levels directl y instead of capabilities are being well -
nourished in areas fraught by hunger and famines, and all situations of
extreme material and bodily deprivation in very poor societies or
communities.
Finally, it is important to note that in real life, two people with identical
capability sets are likely to end up with different types and levels of
achieved functionings, as they have made different choices from their
effective options. In philosophical terms, we could say that they have
different ideas of the good life, that is, different desires and wishes on
what kind of life they want to lead. As a liberal philosophical framework,
the capability approach respects people‘s different ideas of the good life,
and this is why capability, and not achieved functioning i s the appropriate
political goal. However, it is also clear that in real life, our ideas of the
good life are profoundly moulded by our family, tribal, religious,
community or cultural background. There are very few children from
Christian parents who end up being Muslim, for example. One could
question, therefore, to what extent this is a choice at all, and if we
characterise it as a choice, it would still remain a constrained choice. This
does not mean that these constraints always have to be negative or unjust;
on the contrary, some people might find them very enabling and
supporting. There is very little about these constraints that one could say
in general terms, as they are so closely interwoven with a person‘s own
history and thus with her personality , emotions, values, desires and
preferences. It is however important to question to what extent people
have genuinely access to all the capabilities in their capability set, and
whether or not they are punished by members of their family or
community for m aking certain life -style choices.
Principles of Capabilities:
Nussbaum (2000) frames these basic principles in terms of ten
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21 circumstance. This approach contrasts with a common view that see s
development purely in terms of GNP growth, and poverty purely as
income -deprivation. It has been highly influential in development policy
where it has shaped the evolution of the human development index HDI
has been much discussed in philosophy and is in creasingly influential in a
range of social sciences.
The ten capabilities Nussbaum argues should be supported by all
democracies are:
1. Life. Being able to live to the end of a human life of normal length;
not dying prematurely, or before one's life is s o reduced as to be not worth
living.
2. Bodily Health. Being able to have good health, including
reproductive health; to be adequately nourished; to have adequate shelter.
3. Bodily Integrity . Being able to move freely from place to place; to
be secure aga inst violent assault, including sexual assault and domestic
violence; having opportunities for sexual satisfaction and for choice in
matters of reproduction.
4. Senses, Imagination, and Thought. Being able to use the senses, to
imagine, think, and reason —and to do these things in a "truly human"
way, a way informed and cultivated by an adequate education, including,
but by no means limited to, literacy and basic mathematical and scientific
training. Being able to use imagination and thought in connection wi th
experiencing and producing works and events of one's own choice,
religious, literary, musical, and so forth. Being able to use one's mind in
ways protected by guarantees of freedom of expression with respect to
both political and artistic speech, and fr eedom of religious exercise. Being
able to have pleasurable experiences and to avoid non -beneficial pain.
5. Emotions. Being able to have attachments to things and people
outside ourselves; to love those who love and care for us, to grieve at their
absence ; in general, to love, to grieve, to experience longing, gratitude,
and justified anger. Not having one's emotional development blighted by
fear and anxiety. (Supporting this capability means supporting forms of
human association that can be shown to be cr ucial in their development.)
6. Practical Reason. Being able to form a conception of the good and
to engage in critical reflection about the planning of one's life. (This
entails protection for the liberty of conscience and religious observance.)
7. Affili ation.
1. Being able to live with and toward others, to recognize and show
concern for other humans, to engage in various forms of social interaction;
to be able to imagine the situation of another. (Protecting this capability
means protecting institutions that constitute and nourish such forms of
affiliation, and also protecting the freedom of assembly and political
speech.)
2. Having the social bases of self -respect and non - humiliation; being
able to be treated as a dignified being whose worth is equal t o that of
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22 sex, sexual orientation, ethnicity, caste, religion, national origin and
species.
8. Other Species . Being able to live with concern for and in relation to
animals, plants , and the world of nature.
9. Play. Being able to laugh, to play, to enjoy recreational activities.
10. Control over one's Environment.
1. Political. Being able to participate effectively in political choices
that govern one's life; having the right of pol itical participation,
protections of free speech and association.
2. Material . Being able to hold property (both land and movable
goods), and having property rights on an equal basis with others; having
the right to seek employment on an equal basis with o thers; having the
freedom from unwarranted search and seizure. In work, being able to work
as a human, exercising practical reason and entering into meaningful
relationships of mutual recognition with other workers.
The approach was first fully articulated in Sen (1985) and discussed in Sen
and Nussbaum (1993). Applications to development are discussed in Sen
(1999), Nussbaum (2000), and Clark (2002, 2005) and are now numerous
to the point where the capabilities approach is widely accepted as a
paradigm in development.
2.7 MILLENNIUM DEVELOPMENT GOALS (MDGS)
The Millennium Development Goals (MDGs) which include eight goals
were framed to address the world's major development challenges with
health and its related areas as the prime focus. In India, considera ble
progress has been made in the field of basic universal education, gender
equality in education, and global economic growth. However there is slow
progress in the improvement of health indicators related to mortality,
morbidity, and various environmenta l factors contributing to poor health
conditions. Even though the government has implemented a wide array of
programs, policies, and various schemes to combat these health
challenges, further intensification of efforts and redesigning of outreach
strategie s is needed to give momentum to the progress toward
achievement of the MDGs.
The MDGs adopted by the United Nations in the year 2000 project the
efforts of the international community to “spare no effort to free our
fellow men, women and children from the abject and dehumanizing
conditions of extreme poverty.” The MDGs are eight goals to be achieved
by 2015 that respond to the world's main development challenges.( 1)
These goals are further subdivided into 18 numerical targets which are
further measured by means of 40 quantifiable indicators. Health
constitutes the prime focus of the MDGs. While three out of eight goals
are directly related to health, the other goals are related t o factors which
have a significant influence on health. Hence the goals and targets are
inter-related in many ways. The eight MDG goals are to –
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23 (1) eradicate extreme poverty and hunger;
(2) achieve universal basic education;
(3) promote gender equalit y and empower women;
(4) reduce child mortality;
(5) improve maternal health;
(6) combat HIV/AIDS, malaria, and other diseases;
(7) ensure environmental sustainability;
(8) develop a global partnership for development.
2.8 INITIATIVE BY INDIAN GOVERNM ENT
TOWARDS MDGS
“Acute poverty prevails in eight Indian states, including Bihar, Uttar
Pradesh and West Bengal , together accounting for more poor people than
in the 26 poorest African nations combined, a new ‘multidimensional’
measure of global poverty ha s said. As per the new measure
Multidimensional Poverty Index (MPI – was developed and applied by the
Oxford Poverty and Human Development Initiative with UNDP support),
there are more ‘MPI poor’ people in eight Indian states (421 million in
Bihar, Chhatti sgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar
Pradesh, and West Bengal) than in the 26 poorest African countries
combined (410 million)”.
The states like Bihar, Chhattisgarh, Uttar Pradesh, Rajasthan, Orissa, and
Madhya Pradesh are among the most populous in the country, and have
very low GDP . Growing rate of population within these states will account
for an even larger share of India’s population in 2015. Therefore, India’s
attainment of MDGs will also largely depend on the performance of th ese
states.
The Millennium Development Goals under the Millennium Declaration
are not like other documents or plans which remain on paper only. These
set out measurable targets instead of the usual hazy statements or
agreements.
Goal 1: To achieve the goa l of eradicating extreme poverty and hunger,
India must reduce the proportion of people below poverty line from nearly
37.5% (in 1990) to about 18.75% by 2015.
Goal 2: To achieve universal primary education, India should increase the
primary school enrolm ent rate to 100 % with decreasing number of
students and completely wipe out the drop -outs by 2015 against 41.96% in
1991 -92.
Goal 3: To ensure gender parity in education, India will have to promote
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24 Goal 4: It aims at reducing ‘under five mortality rate (U5MR)’ from 125
deaths per thousand live births in 1988 -92 to 42 in 2015.
Goal -5: India should reduce maternal mortality (MMR) from 437 deaths
per 100,000 live b irths in 1991 to 109 by 2015.
Goal -6: Under this goal, though India has a low prevalence of HIV
among pregnant women as compared to other developing countries, yet
the prevalence rate has increased from 0.74 per thousand pregnant women
in 2002 to 0.86 in 2003. This increasing trend needs to be reversed to
achieve MDG 6.
Goal -7: The proportion of population without sustainable access to safe
drinking water and sanitation is to be halved by 2015 and India is on track
to achieve this target.
Goal -8: Develop global partnership for development. (It includes
financial support from developed countries. For example Official
Development Assistance – ODA, etc.)
The Government of India has adopted ambitious targets related to
Millennium Development Goals such as ed ucation – ‘Sarva Shiksha
Abhiyan ‘ (the national policy to universalize primary education and
making free and compulsory Education to the Children of 6 -14 years age
group), Health – the National Rural Health Mission along with Integrated
Child Development S ervices. To achieve the MDGs, India needs to
convert these commitments and resources into measurable results.
The Government of India claims that the country is on track to meet the
MDG targets by 2015. These claims include; number of people living
below the poverty line has reduced, child and maternal mortality rates are
reducing, increased public resources in several key sectors, Mahatma
Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has
increased rural employment, National Rural Health Miss ion have resulted
in massive inputs in the health sector, HIV rates are low and that deaths
due to tuberculosis and malaria show downward trends.
2.9 SUMMARY
1.India has been categorised by the Human Development Report 2001 as a
medium human development c ountry. A major impediment to progress in
human development is the very fast growth of population experienced in
India.
2.The Human Development Index (HDI) is a summary composite index
that measures a country‘s average achievements in three basic aspects o f
human development: health, knowledge and a decent standard of living.
Health is measured by life expectancy at birth; knowledge is measured by
a combination of the adult literacy rate and the combined primary,
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25 3. Following are the methods of HDI measures :
A) Life Expectancy Index: Life Expectancy is the expected (in statistical
Sense) number of years of life remaining at a given age. It is denoted by
ex, which means the average number of subsequent years of life for
someone now aged x, according to a particular mortality experience.
B) Education Index : The Education Index is measured by the adult
literacy rate (with two -third weighing) and the combined primary,
secondary and tertiary gross enrolment ratio (with one -third weighing).
C) Adult literacy Index: The Adult literacy index is a statistical measure
used to determine how many adults can read and write in a certain area or
nation.
D) Gross Domestic Product: The gross domestic product or gross
domestic income is a measure of a country‘s overall economic output. It is
the market value of all final goods and services made within the borders of
a country in a year. It is often positively correlated with the standard of
living, alternative measures to GDP for that purpose.
4.The Gender related Development Ind ex (GDI) is an indication of the
standard of living in a country, developed by the United Nations (UN). It
is one of the five indicators used by the United Nations Development
Programme in its annual Human Development Report. It aims to show the
inequaliti es between men and women in the following areas: long and
healthy life, knowledge and a decent standard of living.
5.The Sen‘s capability approach involves concentration on freedoms to
achieve in general and the capabilities to function in particular. The major
constituents of the capability approach are functionings and capabilities.
Functionings are the beings and doings of a person, whereas a person‘s
capability is the various combinations of functionings that a person can
achieve.
Capability is thus a s et of vectors of functionings, reflecting the person‘s
freedom to lead one type of life or another.
2.10 QUESTIONS
Q1. Write a note on –
a) Human Development Index.
b) Gender Development Index.
c) Greed GDP.
d) Millennium Development Goals.
Q2. Explain Sen’s capabilit y approach.

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26 3
THEORIES OF ECONOMIC
DEVELOPMENT - 1
Unit Structure:
3.0 Objectives
3.1 Introduction
3.2 Rostow’s Stages of Growth
3.3 Big Push Theory
3.4 Leibenstein’s Critical Minimum Effort Thesis
3.5 Summary
3.6 Questions
3.0 OBJECTIVES
 To study the Rostow’s Stag es of Growth.
 To explain big push theory.
 To Leibenstein’s Critical Minimum Effort Thesis.
3.1 INTRODUCTION
W. W. Rostow adopted a historical approach to the process of
development. He has given a descriptive economic study of the pattern of
growth and de velopment of countries. He identifies five stages of
development in the light of the experience of developed countries. Hence
empirical and historical examples are given to establish the stages of
growth theory.
Harrod and Domar models of growth also give us the dynamics of growth
based on a developed country. These models are extensions of Keynes
equilibrium analysis. J. M. Keynes explained the conditions for
equilibrium. Equilibrium will be achieved when planned investment
becomes equal to planned saving. Harrod and Domar furthered Keynes
theory to study the conditions required for steady and smooth growth of
the economy.
3.2 ROSTOW’S STAGES OF GROWTH
W. W. Rostow had adopted a historical method of studying and
interpreting the process of economic developm ent. According to him,
there are five stages of economic growth.
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27 1.The Traditional Society
2.The Pre -conditions for take off.
3.The take -off.
4.The drive to maturity.
5.The age of high mass consumption.
1. The Traditional Society : Traditional society is one whose structure is
developed within limited production function based on pre -Newtonian
science and technology. But such societies allowed for economic changes.
Such societies allowed for land to be bought, change in the scale of
production and increase in production. However there was no systematic
and regular use of modern science and technology.
The social structure was hierarchical family and clan connections were
important. The landed aristocracy exercised political power. More than
75% of the pop ulation was engaged in the agricultural sector. Agriculture
was the main source of livelihood for the people.
2. The pre -conditions for take -off : This stage in development is a
transitional period. During this period, pre -conditions for sustained growth
were created. The pre -conditions were encouraged by four forces. The
new learning or renaissance, the new monarchy, the new world and the
new religion or the reformation. These factors encouraged the reasoning
power. They brought about the fall of feudalism . Nation states emerged.
New inventions and discoveries led to the emergence of the bourgeoisie.
There was a change in social values, attitudes and expectations. Profit
motive, education etc. encouraged enterprise. This led to widening of
scope as investme nt increase trade expand and transport and
communications develop. According to Rostow, radical changes in three
non-industrial sectors are necessary.
1. The setting up of social overhead capital especially, transport.
2. It is necessary to bring about a technological revolution in agriculture
so that agricultural productivity increases to meet the needs of population.
3. Thirdly, expansion of imports needed for development and also
strengthen export with appropriate measures.
Industrial development was po ssible by the adoption of modern techniques
and reinvestment of profits. Ultimately, the rate of investment must
become more than the population growth rate. Moreover, due to the
international demonstration effect, people wanted the products of modern
industry which encouraged production of better quality goods.
3. The take -off : The take -off stage is a short stage of development during
which growth becomes self – sustaining.
a) The investment must increase from 5% to more than 10% of the
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28 b) The development of one or more substantial manufacturing sectors with
a high rate of growth.
c) Theexistence of a political, social and institutional
framework which makes faster growth possible.
The take -off will necessitate huge amounts of funds for in vestment. The
funds come from the profits of agricultural sector, reinvestment of profits
by landlords and inflows of foreign capital.
Rostow identifies leading growth sectors which enable the take - off
process.
i) Primary Growth Sectors : The innovation a nd exploiting of new
resources help to achieve a higher rate of growth examples – The cotton
textile of Britain and New England in the early stages of growth.
ii) Supplementary Growth Sectors : This sector grows as a result of the
development of the primar y growth sectors. Example – the development
of railways is a primary growth sector and the expansion of iron, coal and
steel industries is a growth activity in the supplementary sector.
iii) Derived Growth Sectors : The growth in these sectors take place a s a
result of the overall increase in income, population, industrial production
etc. For example, production of food and housing construction.
There are certain conditions to qualify any sector as the leading sector.
They are as follows –
1. There should b e an expanding market for the product so that it becomes
established.
2. The leading sector should generate secondary expansion.
3. The sector should have access to sufficient capital from the re -invested
profits.
According to Rostow the take -off can be tr iggered off by technological
innovations or political revolution.
4.The Drive to Maturity : This stage is defined by Rostow ―as the period
when a society has effectively applied the range of modern technology to
the bulk of its resources. It is a period of long sustained growth which
may extend upto four decades. During this period new production
techniques will be adopted instead of the old ones. There will be new
leading sectors. The rate of investment will go above 10% of the national
income. As a country becomes technologically mature, some changes
occur. In the fi rst place, workers become skilled and there will be
urbanization. Workers become organized and the real wages increase.
Secondly, there will be a use of polished efficient managers. Thirdly, the
society is used to the changes of industrialization and wan ts further
changes.
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29 The Age of High Mass -Consumption:
During this stage there is increased migration to urban areas and more use
of durable consumer goods. In the stage, the economy becomes concerned
with demand and problem of consumption and welfare. In the post
maturity stage, there is an effort to increase welfare in the following ways.
The countries try to increase their power and influence beyond their
borders. Secondly, the countries wilt want to pursue the goal of setting up
a welfare state which fo llows measures like progressive taxation and
increased social security and leisure. Thirdly, efforts will be undertaken to
produce cheaper automobiles, houses etc. This stage is marked by an
increase in population.
Criticisms of the Stages of Economic Grow th:
A number of criticisms have been leveled against the authencity of the
‖ decision of economic history into five ―Stages of growth . The question
was whether all the countries follow the same sequence in the stages of
growth. This is very unlikely.
1. Traditi onal society may not be essential : Empirical study and
experiences of countries like U.S.A. and Canada proves that traditional
society need not be a stage in the evolution towards development.
2. Pre -conditions need not be present : The pre -conditions nee d not be
necessary for a country‘s take off. Even after the take off many changes
can take place in an economy. For example, agricultural revolution and
accumulation of social overhead capital may take place even after the
take-off.
3. The stages may overl ap : The experience of a number of countries
show that development in agriculture continued even in the take off stage.
4. Criticism of the take -off : The take -off dates are doubtful and it need
not be uniform for countries. The theory ignores facts like t he degree of
backwardness of countries, time of entry into the process of economic
growth etc. Even assuming a 10% investment rate is arbitrary.
The theory gives a lot of importance to the leading sectors like textile,
railroads etc. But economic growth is not general by a few leading sectors.
Many economists pose the question of how to identify leading sectors.
5. The stage of Drive to maturity is vague : This stage is supposed to the
concerned with sustained growth which may be attained in the take -off
stage itself. There is not much difference between the take -off stage and
the stage of drive to maturity.
6.The countries reach the stage of High Mass consumption at different
points of time.

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30 3.3 BIG PUSH THEORY
Theory:
The theory states that proceeding ‗bit by bit‘ will not launch the economy
successfully on the development path; rather a minimum amount of
investment is a necessary condition for success. It necessitates the
obtaining of external economies that arise from the simultaneous
establishment of technically interdependent industries. Thus, the
indefensibilities and external economies flowing from a minimum
quantum of investmentare a prerequisite for launching economic
development of underdeveloped countries succe ssfully.
In underdeveloped countries, there is little scope in investing in modern
industries which need large investment. If the modern methods of
production and distribution are applied, the profit will be large. On the
other hand, to invest individually will not be beneficial if it is done
separately and privately. It will be beneficial only if they are organized
together. To quote Prof. Benjamin Higgins, ―Leaning on a stalled car
with gradually increasing weight will not get it started, for example, it
needs a big push. He further makes clear, ―Insistence on slow evolution
is defeatist and indeed dangerous because it precisely slows down the
evolution that cannot succeed in the face of all obstacles.
Indivisibilities:
Rodan says the need for big push in underdeveloped countries arises
from the following three kinds of indivisibilities and external economies
which are considered foremost in getting the path of economic
development:
a) Indivisibilities in the Production Function.
b) Indivisibility of Demand.
c) Indivisibility of the Supply of Savings.
Now let us examine these indivisibilities in the context of development of
underdevelopment countries.
a) Indivisibilities in Production Function:
According to Rosenstein Rodan, indivisibilities in Production functi on
refer to the indivisibilities of inputs, outputs and process of production etc.
they lead to increasing returns, i.e., the increase in output, income and
employment and lowering the capital output ratio. He showed that law of
increasing returns had play ed an important role in reducing the output
capital ration from 4:1 to 3:1. He considers social overhead capital such
as, power, transport, communications, housing, education etc., as the most
important examples of indivisibility and of external economies on the
supply side. These services of social overhead capital are indirectly
productive and have a long gestation period. They require heavy
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31 needs a capital investment of about 30 -40 per cent of its total investment
on the development of social overhead capital. The social overhead
capital is characterized by four indivisibilities. Firstly, it is irreversible
in time, therefore, must precede other directly productive
investments, secondly, it has minimum durability, this making it very
lumpy. Thirdly, it has a long gestation period. Fourthly, it has an
irreducible minimum industry mix of different kinds of public utilities.
Most of the underdeveloped countries have been suffering from the
shortage of social overhead capital, and it is one of the chief obstacles to
development in such economies. In this way, the rapid economic
development in underdeveloped economies would require a high initial
investment in social overhead capital.
b) Indivis ibility of Demand:
Rosenstein Rodan stressed the importance of indivisibility of demand in his
original article, and later it was given wide publicity by Prof. Ragnar
Nurkse in his book ―Problems of capital Formation in Underdeveloped
Countries. The impor tance of indivisibility of demand lies in
expanding the size of the market. The underdeveloped countries
are characterized by the small markets, which in turn limit the investment
opportunities and obstruct the process of development. Investment in any
single project will have a high degree of risk because of the uncertainty as to
whether their product will find a market. This indivisibility of demand
requires simultaneous investment in different industries. In other words, the
indivisibility of demand stre sses the complementarily of investment. Rodan
uses his example of shoe factory to explain his point. Assuming a
closed economy, let us suppose that a hundred disguised unemployed
workers (whose marginal productivity is equal to zero) are employed in
shoe f actory. Their wages would constitute additional income. If newly
employed workers spend all of their additional income for the purchase
of shoes they product, the shoe factory will find a market, thus it would
expand. In fact new workers do not spend their entire additional income on
shoes and the shoe factory will not find the market. The risk of not finding
a market would reduce the incentive to invest and the result would be the
colure of the factory. In this way the investment in a single project
cannot widen the extent of the market.
Now we shall change the example and suppose ten thousand workers
are employed in hundred industries (instead of hundred workers in one
industry) and they produce the bulk of consumer goods on which the
newly employed worker s will spend their wages. This would enlarge the
extent of demand and the size of the market. What is not true in case of
a single industry will become true in complementary system of one
hundred industries. In a complementary system of industries, the ris k of
not finding the new market reduces and incentive to investment
increases. Hence the indivisibility of demand necessarily implies a high
quantum of investment in complementary industries for enlarging the size
of market and increasing the incentives to invest without which the
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32 c) Indivisibility in the Supply of Savings:
The third indivisibility in the Rosenstein Rodan Theory is the indivisibility in
the supply of savings which means a high income elasticity of savings,
hence a high quantum of investment is needed for establishing
complementary industries and this will require huge savings. But in
underdeveloped countries, savings are low because income is low. To reduce
the gap between income and expenditure, the rate of saving should be
increase. To overcome this crisis, Rosenstein Rodan suggests to the
underdeveloped countries that with their enhancing incomes due to an
increase in investment, they should have their marginal rate of savings
much higher than the average rate of savings. If we want to initiate the
process of growth in underdeveloped countries, we must increase income
and saving considerably. The large increase in income requires large
investments in underdeveloped countries. According to Rosenstein Rodan,
―A high minimum quantum of investment requires a high volume of
savings, which is difficult to achieve in low income in underdeveloped
countries. The way out of the vicious circle is to have first increase in
income and to provide mechanism which assures t hat at the second stage,
the marginal rate of saving would be very much higher than average rate
of saving.
Giving much importance to these three indivisibilities and external
economies, the underdeveloped countries can successfully solve their
problems o f development only by a ―big push or a minimum
quantum of investment. Rosenstein observes: ―There may be finally a
phenomenon of indivisibility in the vigour and drive required for a
successful development policy. In other words, favorable environment
for development may be created in underdeveloped countries by a big push
or a minimum quantum of investment, and not by an isolated and small
way.
Importance of Social capital and Investment:
The big push theory is very clear on the importance of social over head capital
and assigns a crucial role to investment in power, transport;
communications and other basic industries, investments in all these
activities are lumpy along with long gestation period. Therefore the
responsibility for the development of social overhead capital has to be
borne by the state. Neither the private sector neither is willing nor is
capable of undertaking such type of projects involving a huge amount of
investment and then wait for profit for a long period of time due to their
gestatio n period and other constraints too. Rodan says in this
regards, ―The existing institutions of international and national
investment do not take advantage of external economies. There is no
incentive within their framework for many investments which ate
profitable in terms of social marginal net product but do not appear
profitable in terms of private marginal net product. The main driving
force of investment is the profit expectation of an individual
entrepreneur which is based on experience of the past. Experience of the
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33 of a region is to be changed. If the industrialization of international
depressed areas were to rely entirely on the normal incentive of private
entrepreneurs, the proves would not only be very much slower, the rate
of investment smal ler and (consequently) the national income lower,
but the whole economic structure of the region would be different.
Evaluation of theory:
Rosenstein Rodan Theory is an improvement over the traditional static
equilibrium theory. The big push theory clearly brings into focus the
need for a massive effort on the part of the underdeveloped countries to
industrialize them self provided they are really serious about economic
development. It warns that piecemeal efforts of development would be of no
avail. It is the high minimum quantum of investment that takes an
underdeveloped economy toward an optimum position.
Despite the above, big push theory has been criticized on several
grounds by number of leading economists like H. Myint, Jacab Viner and
H. S. Ellis etc . It has been argued that this theory creates more problems than
it solves. The main pillars of criticism are as follows:
1. More Emphasis on Indivisibilities:
The big theory lays too much stress on the problem of indivisibilities of
both the demand and suppl y sides. According to Celso Furtado, ―The
recognition and identification of these necessary reforms is of
fundamental practical importance both for countries which are anxious to
emerge from stagnation and for those who are desirous of intensifying
their d evelopment.:
2. Lack of Historical support:
The big push theory seems to suggest that whenever a large -scale
influence is exerted on the process of capital formation, stationary economy
probably begins to develop. As noted by Furtado this is not confirmed by
History. Furtado gives the example of Bolivia where large investments
were made in social and economic overheads. Yet the economy of this
country remained stationary and per capita income low. The progress
of the advanced countries does not lend support to the big push theses.
3. Institutional and Administrative Difficulties:
As a matter of fact, the big push theory cannot be adopted without active
state participation, guidance and control. However, in underdeveloped
countries the government administrative and institutional machinery is
very weak and inefficient. Further, underdeveloped countries lack
statistical knowledge, technical know -how, trained personnel and
problem coordination between different departments. Beside this, there is
gross re -tapism and cor ruption. This hampers the smooth working of Big
Push.
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34 4. Not consider for Mixed Economy:
The concept of Big -Push ignores the difficulties faced in a mixed
economy. The mixed economy, in underdeveloped countries, provides co -
existence for both private and pub lic sectors. If these are complementary
in nature then it faces no constraints. The problems become acute when
two sectors become competitive, e.g., when government sets up its own
factor in public sector. A situation of ‗Cold War‘ is a common feature
between these two sectors in underdeveloped countries. According to
Prof. H. Myint, ―the government departments tend to keep their
plans and intentions secret from the private businessmen because they fear
speculative activit ies which will disrupt their plans. On the other
hand, private enterprise is inhibited by uncertainties not only about the
general economic situation but also about the future changes in government
regulation.
5. Neglect the Promotion of Further Investment:
By concentrating on the acceleration of investment through planned
action, the big push theory has neglected the important tasks of
providing proper environment for further investment. Firstly, there is no
provision for inducing further investment in the economy. Secondly,
it has not provided a proper place to the private sector. By depending on
the public sector, t has simply bypassed the private sector which can play
important role both in savings and investments.
6. Ignore the Importance of Techniques:
Celso Furtado points out that the big push theory neglects the
importance of techniques in its over enthusiasm for capital formation. The
fact is that although capital formation has been the main vehicle of the
assimilation of new techniques it is, in itself, responsible for only a
relatively small fraction of the increase in the productivity of labour. Is the
historical context of today, development depends increasingly upon
technique and less on direct capital -formation in the production
processes.
7. Create Infl ationary Pressure:
The heavy investment on social overhead capital is not only highly
expensive, but also has a high capital output ratio and a very long gestation
period. It also generates inflationary pressure in the economy for the want of
consumer good s. Consequently, this large inflationary pressure, in turn,
would prolong, the process of constructing overhead capital, and it
would, thus, be very difficult for an underdeveloped country to achieve
the goal of rapid economic growth.
8. Difficulty in Coordin ation:
According to H. Myint, it is very difficult to coordinate various development
plans in big push theory. Evidently, sometimes the problem of
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35 developed countries. The governments of underdeveloped countries face
the difficulty not only in the initial drawing of the economic
development plans, but also in the execution of various development
projects according ot a planned time table. In executing the various
development projects‘, th ere are possibilities of revision of original
plans, delays and departures from the original time table. Thus, the problem
of coordination has been one of the weakest points of planning machinery.
9. Lack of External Economies:
According to the ―big push theory, the external economies can be
realized in underdeveloped countries only though investments in social
overhead capital. But it pointed out by viner, ―Underdeveloped economies
realize greater economies from world trade independently of home
investment. Later, Rodan has also realized this fact.
10. Lack of Resources:
The theory fails to recognize the fact that the amount of resources in an
underdeveloped country are limited. They lack requisite capital, skilled
labour, entrepreneurship ability and social and economic overheads. So
these countries cannot adopt big push theory. According to Prof. E. Gudin.
―The theory of big push is somewhat unreal because it presupposes not
only an ample supply of capital but also of other scarce factors in
underdeveloped countries. Since, otherwise, they would not be
underdeveloped. An attempt at a big push would probably amount to
stating more projects than the country‘s resources can cope with, with the
result of lengthening the period of investment unnecessarily and
uneconomically:
11. Ignorance of Agricultural Sector:
Rosenstein Rodan believes that an underdeveloped country can undertake
its development through a high level investment in all types of
industries -capital goods, consumer goods and social overhead capital. In
this way, the big push theory totally ignores agriculture which is the prime
source of living in underdev eloped countries because this sector
contributes a major part of national income and provided livelihood to a
large section of working population. The neglect of the agriculture sector
in such economies will retard rather than accelerate their economic
development.
12. Low Investment leads to Large Increase in Output:
In this analysis of economic development of underdeveloped countries,
Adler reveals. ―A relatively low level of investment ‗pays off‘ well in the
form of additional output. He has concluded this fact on the basis of
observation regarding the development process in India, Pakistan and
many other Asian and Latin American countries. It, thus , proves the
―big push theory unrealistic and unpracticable in underdeveloped
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36 Check Your Progress:
1. State the Theory of Big Push.
2. State the three kinds of indivisibilities in Big Push Theory.
3.4 LEIBENSTEIN’S CRITICAL MINIMUM EFFORT
THESIS
Prof. Leibenstein wrote his thesis not with reference to developed
economies nor with reference to backward and stagnant economics, but with
reference to the developing but less developed economies. These
economies are in ―subsistence equilibriumwhich is not c ompletely
stable but ―quasi -stable. In other words, there is some dynamism in
these less developed countries. Theessential feature of these economies is
that while many crucial variables (saving, population, skilled labour.
Investment, employment, GNF and intensity of application of various
policy measures) are changing the per capita real income remains almost
at the same real subsistence level, or changes just a little. This is quasi -
stable equilibrium; or quasi -stable disequilibrium. There are no endemi c
and endogenous forces that can bring development and therefore,
exogenous shocks of the critical minimum size are being administered so
that the per capita income rises. His thesis had countries like India in
mind.
There are always some factors that pull down development and some
factors that push up development. There are positive sun factors, negative
sum factors and zero sum factors of economic development. The
economy can surge forward only when the first set is greater than the last
two sets. The fir st set factors should be considerably greater. They should be
if a critical minimum size.
CRITICAL MIMIMUM EFFORTS:
a) Development requires that Economic Variables of Positive Sum
Set be greater than of the Negative Sum Set and Zero Sum Set:
Negative set a ctivities are population pressure, inflation, balance
of payment leakages and corruption. Demonstration effect leakages are also
negative sum activities.
Zero sum activities consist of opportunities for exploitation. Distribution
activities are zero sum ac tivities because they just transfer income from
the unfortunate ones to the fortunate ones. In these activities there are
individual gains but not the social gains. Zero sum activities involve mere
transfer of liquidity and their preponderance is the cause of poverty. In
many less developed countries there are more distributions than are
actual producers and the margin between what is taken out of the pockets
of the consumers and what toes in the pockets of the actual producers is
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37 Positive sum activities mean efforts towards actual production
efforts. The first task of development planning is to see that positive sum
activities are much more than the sum total of zero sum and negative
sum activities. Theses should persist.
Development will require that Positive Sum Incentives persist and
do not degenerate and disappear as also they do not stimulate Zero Sum
Activities:
One big problem of development is that many a times the positive sum
activities themselves degenerate into zero sum activi ties. E.g.
development brings inflation, or technological improvement brings
unemployment. Therefore, it should be seen that these degenerated zero
sum and negative sum effects become positive sum effects as soon as
possible.
c) Development will require Growt h and Development of the
Growth Agents:
Factors of production have to be made efficient ―growth agents. The
same population can become doubly effective, if its training, motivation
and efficiency go up.
d) Growth agent‘s Promote development and development itself
promotes the growth agents.
Entrepreneurs and technical organizers are very important growth agents.
Entrepreneurs discover investment opportunities, Marshall resources of
production, promote new ventures and most efficiently engage other agents
of production.
e) Positive Sum Activities to be of a Critical Minimum Size:
The initial thrust that should be given to the economy should be of a
critical minimum size i.e., not below a particular size. Only this way the
vicious circle of poverty can be bro ken. For example, if agriculture is to be
developed at a slow rate, the increase in output will all be consumed
and no re -investible surpluses will be generated by agriculture. The
critical minimum effort thesis can be shown with the help of a diagram.
In the following diagram of OE, subsistence level of income reducing
force (say, population growth) are as powerful as income raising factors.
Here the economy is in the grip of vicious circle. (Nelson called it ―low
level equilibrium trap). Any rise above OE (say to OM) will bring the
economy back to the same equilibrium level as the income depressing
forces line is higher or more powerful. However, if the stimulant is
sufficiently large so that income does rise above OK, the path of change is
one of endless expansion. This clearly vindicates the critical minimum effort
thesis. Stimulants should be higher than the depressants.

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38 Figure 3.1

It is to be conceded that there cannot be critical minimum effort
everyw here and in all lines.
Not everything can be done at once. A certain expenditure stretched
over ten years may be more effective than the same expenditure spent all
at once or all in one year.
This implies that the critical minimum efforts viewed as a
minim um of all possible efforts that would lead to sustained real income
growth involves an optimum time pattern of expenditure of efforts.
Critical minimum efforts are necessary not only to overcome production,
technical and psychological indivisibilities (Rod an thesis) to get out of
the vicious circle trap (Nelson thesis) but also to overcome the depressing
obstacles, about which mention had been made earlier.
Critical minimum effort is necessary to pierce the cultural and
institutional barriers to growth. Old values will take a long time to
change through evolutionary proves. There should be such a sudden (and
of certain critical minimum size) change that changes should breed more
changes above the low -level income equilibrium trap.
f) Critical Minimum Effort most relevant in the Stage of Demographic
Transition or Explosion:
Leibenstein agrees that a large population is a big drag on development but
one cannot wait for reduction in birth rate to bring down population to such
a level that it is no longer a drag . It is a necessary but not a precondition to
growth.
Leibenstein is of the view that if the development efforts are of critical
minimum size, the decline in birth rate itself can take place early and
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39 of such a nature that it remains a depressing factor. If there are efforts
to bring down birth rate in a set-up where people are economically
poor, the efforts will not show quick results. Fertility decline in such a set -
up lags behin d the mortality decline and there will be demographic
explosion.
g) Investment in Physical and Human Capital Formation on Critical
Minimum Effort Criterion:
Leibenstein wants investment both between physical capital and human
capital (investment for impr oving skill, knowledge, energy adaptability
and perceptiveness and capacity to ferret out new economic opportunities).
Investment should be made in such a manner that it brings adequate gains to
investors to enable them to reinvest. In other words, investm ent should
give the highest marginal per capita re -investment quotient.
Leibenstein argues that for a given tempo of change a certain
minimum per capita income level has to be achieved in order to
generate sustained per capita income growth in the economy. If the
initial per capita income is below this critical minimum limit, it can be
raised to the necessary minimum by a sufficiently large ‗injection‘ of
investment from outside the economy.
h) Higher Productivity, Key to Development, as Declining Internat ional
– Capital Output Ratio will reduce the size of the Denominator to
Growth:
If massive investment is made in developing the physical and human
capital formation, the capacity and willingness of the entrepreneurial
class, organizers and the working cla ss will increase. The demand for
workers is a derived demand if they produce more, the capacity and
willingness of the entrepreneurs to use more labour will increase Long
term interests of development require that capital intensive projects that
have high productivity profitability and reinvestment possibilities should
be chosen.
3.5 SUMMARY
The Big Push theory is an investment theory which stresses the conditions
of take -off. The argumentation is quite similar to the balanced growth
theory but emphasis is put on the need for a big push. The investments
should be of a relatively high minimum in order to reap the benefits of
external economies. Only investments in big complexes will result in
social benefits exceeding social costs. High priority is given to
infrastructural development and industry, and this emphasis will lead to
governmental development planning and influence.
The big push theory cannot be ignored. Really speaking, this theory is not
an exercise in futility; rather it stresses the bold attempt and tremendous
efforts, which the underdeveloped countries should put in so as to achieve
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40 sustained growth in the shortest possible time, but is difficult for it to do
so without big push str ategy of economic development.
In the conclusion we can say that the Leibenstein has given us new terms
like positive sum, negative sum and zero sum activities and they are very
relevant. He has very correctly analyzed that the bane of the development
problem in less developed countries is that there are more distributors than
actual producers. It has also been correctly brought home that growth
process itself creates certain problems and the economy should be purged
off these problems. The critical minimum effort thesis is novel and
important as well. Once Leibenstein concedes that the ‗critical minimum
injection‘ can be optimized into smaller doses, he has solved a big
problem. He is philosophical in the same manner in which smith and
Marshall were – happi ness is more important than just growth.
3.6 QUESTIONS
Q1. What are the Rostow’s Stages of Growth?
Q2. Explain Big Push Theory.
Q3. Explain the Leibenstein’s Critical Minimum Effort Thesis.


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41 4
THEORIES OF ECONOMIC
DEVELOPMENT - 2
Unit Structure:
4.0 Objectives
4.1 Introduction
4.3 Harrod -Domar Growth Model
4.4 Lewis Model of Unlimited Supply of Labour
4.5 RagnerNurkse’s Theory of Disguised Unemployment
4.6 Schumpeter’s Theory of Development
4.7 Summary
4.8 Questions
4.0 OBJECTIVES
 To study the Harrod -Domar Growth Model.
 To study the Lewis Model of Unlimited Supply of Labour.
 To study the RagnerNurkse’s Theory of Disguised Unemployment
 To study the Schumpeter’s Theory of Development
4.1 INTR ODUCTION
Harrod and Domar models of growth also give us the dynamics of growth
based on a developed country. These model s are extensions of Keynes
equilibrium analysis. J. M. Keynes explained the conditions for
equilibrium. Equilibrium will be achieved when planned investment
become sequal to planned saving. Harrod and Domar furthered Keynes
theory to study the conditions required for steady and smooth growth of
the economy.
4.3 HARROD -DOMAR GROWTH MODEL
The model is based on the experiences of advanced capitalist
economies and it analyses the requireme nts of steady growth in such
economies.
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42 REQUIREMENTS OF STEADY GROWTH
Harrod and Domar attempted to determine the rate of income growth
necessary for the steady working of the economy. Their models are differe nt
in details. However, their conclusions are s imilar. According to the two,
investment has a key role in the economic growth process because it
generates income and increases the productive capacity of the economy.
Rise in income may be known as the deman d effect and rise in productive
capacity may be known as the supply effect of investment. Expansion
inreal income and output depends upon net investment. Full employment
equilibrium will be maintained if growth in real income and output is equal
to the ris e in the productive capacity. If growth in real income and output is
less than the growth in the productive capacity, excess capacity will emerge
and entrepreneurs will reduce investment leading to reduced levels of
income and employment in the subsequent periods and the economy will
move away from the path of steady growth. The required rate of growth in
real income and output in order to maintain full employment is known as the
Warranted Rate of Growth or the full capacity growth rate.
ASSUMPTIONS
The Har rod-Domar model is based on the following assum ptions:
1. There is an initial full employment level of equilibrium.
2. There is absence of government interference.
3. The economy is a closed economy.
4. There are no adjustment lags between investment and
productive ca pacity.
5. The average propensity to save is equal to the marginal
propensity to save.
6. The ratio of capital stock to income is fixed.
7. The marginal propensity to save remains constant.
8. There is no depreciation of capital goods.
9. Saving and investment relate to the income of the same year.
10. The general price level is constant.
11. Interest rate is constant.
12. The proportion of labor and capital in the productive process is fixed.
13. Fixed and circulating capital are lumped together to be capital.
14. There is only one type of product.
(A) THE DOMAR MODEL
The rate at which investment should increase in order to make the increase
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43 obtained by linking aggregate supply and aggregate demand through
investment.
1. Increase in Productive Capacity or the Supply Side . Let the annual rate
of investment be ‘I’ and the annual productive capacity per dollar be
‘s’. Thus the productive capacity of ‘I’ dollar invested will be I·s
dollars per year. However, new investment will c ompete with the old for
attracting factors of production leading to a lower output from the old
plants. As a result, the rise in productive capacity of the economy will be
less than I·s which is indicated as Io where o represents the net social
average pro ductivity of investment (= ∆Y/I). Thus Io < Is. Io is the total
net potential increase in the output of the economy and is known as the
‘sigma effect’. According to Domar Io is the supply side of the
investment.
2. Required Increase in Aggregate Demand. Let t he annual increase in
income be denoted by ∆Y a nd increase in investment by ∆I and the
propensity to save by a (= ∆S/∆Y). Then the increase in income will be
equal to the multiplier (1/a) times the increase in investment i.e. ∆Y =
∆I×1/a.
3. Equilibrium. In order to maintain full employment equilibrium level of
income, aggregate demand should be equal to aggregate supply.
Equality between AD and AS is the fundamental equation of the
model which is stated as follows:
∆I × 1/a =Io which can be restated as ∆Y = Io.
Solving the above equation by dividing bo th sides by I and multiplying by
a we get:
∆I/I = ao.
This equation shows that to maintain full employment, the growth rate of net
autonomous investment ( ∆I/I) must be equal to ασ (mps times the
productivity o f capital). Ασ is the rate at wh ich investment must grow to
ensure the use of potential capacity in order to maintain a steady growth
rate of the economy at full employment.
Domar gives a numerical example to explain his point. Let o = 25% per
year, a = 12 per cent and Y = 150 Billion USD per year.
In order to maintain full employment, an amount equal to 150 × 12/100 =
18 billion USD should be invested. This will raise productive capacity by
the amount invested σ times i.e. by:

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44 The national income will t herefore rise by 4.5 Billion USD per year. But the
relative rise in income will equal the absolute increase divided by the income
itself, i.e.



Thus in order to maintain full employment, income must grow at
a rate of 3 per cent per annum which is the eq uilibrium rate of growth. Any
divergence from the 3 per cent rate of growth will lead to cyclical
fluctuations. When ∆I/I > ασ, the economy would experience boom and
when ∆I/I < ασ, the economy would experience depression.

(B) THE HARROD MODEL
Prof. RF Harrod tries to show in his model how steady growth may
occur in the economy. Once the steady or the equilibrium growth rate is
disturbed, the disequilibrium will continue on account of the cumulative
forces lead ing the economy into secular deflation or inflation. The model
is based upon three distinct rates of growth. The actual growth rate ‘G’
which is determined by the saving ratio and the capital output ratio. ‘G’
shows the short run cyclical variation in the growth rate. The warranted
growth rate is represented by ‘Gw’ which is the full capacity growth rate.
The natural growth rate is represented by ‘Gn’ which is regar ded as the
welfare optimum by Harod. ‘Gn’ may also be called as full employment
rate of growt h.

The Actual Growth Rate (G)
In Harrod’s model, the first fundamental equation is:
GC=s (1)
Where G is the rate of growth of output in a given period of time i. e.
(∆Y/∆Y),
‘C’ is the net addition to capital and is defined as the ratio of investment to
the increase in income i.e. I/ ∆Yand ‘S’ is the average propensity to save i.e.
S/Y. Substituting these ratios in the above equation, we get:
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45
The Warranted Rate of Gr owth (Gw)
It is the rate at which producers will be happy with what they are doing. It
is the entrepreneurial equilibrium. Given the propensity to save, the rate
of growth of output will be equal to the growth rate in income or demand.
The equation for the warranted growth rate is:
GwCr=s ................................ ............................ (2)
Where Gw is the warranted rate of growth which is equal to ∆Y/∆Y, ‘Cr’ is
capital required to maintain the warranted rate of growth i.e. the required
capital output ratio which is equal to I/ ∆Y. ‘s’ = S/Y or the average
propensity to save. Thus if the economy is to grow at a steady rate of Gw,
income must grow at the rate of s/Cr per year i.e. Gw = s/Cr.
If income grows at the warranted rate, the capital stock of the economy will
be fully utilized and entrepreneurs will be willing to continue to invest the
amount of saving generated at full potential income. Gw is therefore a self -
sustaining rate of growth and at Gw growth rate, the economy will follow
the equilibrium path.
The Origin of Long -run Disequilibria
At full employment growth, the actual growth rate ‘G’ must equal ‘Gw’
resulting in a steady grwoth rate and ‘C’ must equal ‘Cr’ i.e. the actual
capital goods must be equal to the required capital goods for steady growth.
If ‘G’ and ‘Gw’ are unequal, the economy will be in disequilibrium. For
example, if G > Gw, then C < Cr and there will be shortages of goods a nd
equipment leading to secular or general inflation. The ruqired investment
will be greater than saving and hence aggregate supply will be less than
aggregate demand. There would thus be chronic or continuous inflation.
This is shown in figure 3.1(A). Not ice that the actual growth rate ‘G’
follows the warranted growth path ‘Gw’ from the full employment level of
income Y o up to point ‘E’ through period t 2. From t 2, ‘G’ deviates from
‘Gw’ and lies above it. In later periods, the gap between G and Gw widens.
Conversely, if G < Gw, then C > Cr resulting in a secular or general
depression because actual income grows at a rate less than the rate of
growth of the productive capacity of the economy. This is a situation in
which the actual capital goods are greater than the required capital goods.
This means that the required investment is less than saving and aggregate
demand is less than aggregate supply. The result is fall in output,
employment and income. There would thus be chronic depression. This is
shown in F ig. 3.1(B). Notice that from period t 2 onwards, G falls below Gw
and the gap widens in the subsequent periods. According to Harrod, once the
equilibrium is disturbed, it cannot be automatically restored. Hence public
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46 maintain long run stability. In this context, the concept of natural rate of
growth assumes importance.


Fig. 4.1(A). Secular Inflation Fig. 4.1(B). Secular Depression

The Natural Rate of Growth
The natural rate of growth is the rate of growth determined by the increase
in population and technological improvements at full employment. The
equation for the natural growth rate is:

Here Gn is the natural or full employment rate of growth.
Divergence of G, Gw and Gn
Full employment equilibrium will be attained when Gn = Gw = G. If
there is any divergence between thee rates of growth, there will be either
secular stagnation, inflation or depression. If G> Gw, investment increases
faster than savings and incomes rises fast er than Gw resulting in inflation.
If G < Gw, saving increases faster than investment and rise of income is
less than Gw resulting in depression. According to Harod, if Gw> gn, secular
stagnation will develop. In this situation, Gw is also greater than G
because the upper limit to the actual rate is set by the natural rate as shown
in Figure 3.2(A). When Gw> Gn, C> Cr and there will be excess of
capital goods due to shortage of labor which keeps the rate of increase
in output to a level less than Gw. Excess capacity results in reduced
investment, employment, output and incomes. The economy will be
found in chronic depression and savings will be considered bad. If Gw <
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47 in the economy . When Gw < Gn, C will be less than Cr (C < Cr), there is
shortage of capital goods and labor is abundant. Profits are high because
desired investment is greater than realized investment and businessmen will
tend to increase their capital stock. This will lead to secular inflation.
In such a situation, saving is good because it permits the warranted
growth rate to increase.
The policy implications of the model are that saving is good in any
inflationary gap economy and bad in a deflationary gap economy. Thu s, in
an advanced economy, ‘S’ has to be moved up and down as the situation
demands.
LIMITATIONS OF THE HARROD -DOMAR MODEL
1. The propensity to save (α or s) and the capital output ratio (σ) are
assumed to be constant. In reality, these do not remain constant in the long
run and hence the requirements of steady growth may change. Further,
steady growth rate may be obtained even with variable α and σ.
2. The assumption that labor and capital are used in fixed proportions is
not acceptable. Labor can be substituted for capital and the economy
can move towards a steady growth path.
3. The general price level is assumed to be constant. In reality, prices do
change and may stabilize unstable situations.
4. The assumption that interest rate is constant is unrealistic and irrelevant to
the model. A reduction in interest rates during periods of over -
production can make capital intensive processes more profitable by
increasing the demand for capital and thus reduce excess supply of
goods.
5. The Harrod - Domar models ignore the eff ect of government
programs on economic growth.
6. The model neglects the entrepreneurial behavior which actually
determines the warranted growth rate in the economy.
7. The model fails to distinguish between capital goods and
consumer goods.
8. According to Prof. R ose, the primary source of instability in Harrod’s
system lies in the effect of excess demand or excess supply on production
decisions and not in the effect of growing capital shortage or excess
capital on investment decisions.
Notwithstanding these limita tions, the model is based on a free market
economy with fiscal neutrality and is designed to indicate conditions of
progressive equilibrium for an advanced economy.
The model is important because it attempts to infuse dynamism and
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48 APPLICATION OF HARROD -DOMAR MDOEL TO
UNDER DEVELOPED COUNTRIES
The Harrod -Domar models are based on three principal concepts of
saving function, autonomous and induced investment and productivity of
capital. The m odel was basically developed to solve the problem of secular
stagnation in the advanced economies of the post -war period. The
application of these models has been extended to the development problems
of the under -developed countries.

Let us see as to how these models can be used for planning in UDCs. Let us
assume the capital output ratio to be 4:1 and Gw to be 3 per cent per
annum. By applying the Harrod Domar formula, the planners can find out
the saving ratio required to sustain the growt h rate of 3 per cent per annum.
By substituting the above values in Harrod’s model GwCr = s, we get:

Thus if the capital output ratio is assumed to be 4:1 in an economy, the
domestic savings must be 12% of the national income so that the
economy grows at the rate of 3% per annum. Given the saving ratio and the
capital output ratio, Harrod’s formula for calculating growth rate is Gw =
s/Cr and if S is 12% and the value of Cr is 4, then Gw = 12 /4 = 3 per cent.
UDCs are characterized by low savings, high le vel of investment and chronic
inflation. Hence, Harrod suggests the financing of large
investments through the expansion of bank credit and automatic investment of
inflationary profits in the capital markets. In the absence of organized
capital markets in the UDCs, bank credit is the only way to finance
investments and generate economic growth. Low savings in UDCs are
responsible for low rate of growth and mass unemployment and under -
employment. Thus the actual level of savings should be raised to the
requi red level of savings by a compulsory tax or a surplus budget so that S
= Sr. Further, Harrod also emphasizes the need for changes in the social and
institutional factors because social and institutional obstacles are viewed as
a cause of low growth rate.
LIMITATIONS OF THE HARROD -DOMAR MODEL IN UDCs
1. Different Conditions. The models were not intended to guide
industrialization programs of under developed countries.
2. Savings Ratio. The growth models require high savings as well as
low capital output ratio. In the UDCs, savings and investment decisions
are taken by a small percentage of people with the majority of people
leading a subsistence life.
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49 3. Capital Output Ratio. It is difficult to measure capital output ratio
when productivity is hindered by shortages and bottlenecks.
According to Prof. Hirschman, the predictive and operational value of a
model based on the capital output ratio and the savings ratio is less
useful in under developed countries.
4. Structural Unemployment. According to Prof. Kurihara, the model
fails to solve the problem of structural unemployment in UDCs i.e.
unemployment arising out of a faster growth of population than the
accumulation of capital.
5. Disguised Unemployment. The models begin with the assumption of
full employment level of inc ome which is not found in UDCs.
Disguised unemployment cannot be removed by these models.
6. Government Intervention. UDCs cannot develop without substantial
government intervention in the form of public investment, planning
and regulating the economy. Howeve r, the model is based on laissez -
faire policy.
7. Foreign Trade and Aid. The models are based on the assumption of a
closed economy. However, UDCs are open economies in which foreign
trade and aid has a major role.
8. Price Changes. Prices are assumed to be cons tant. However, the
development experience of UDCs indicates inflationary growth.
9. Institutional Changes. Institutional factors are assumed to be given.
However, economic development is not possible without institutional
changes in Under developed countries.

4.4 LEWIS MODEL OF UNLIMITED SUPPLY OF
LABOUR
4.0 Introduction:
The developing countries have agriculture as their main occupation.
Agriculture more or less is a subsistence activity implying that what ever
is produced by this sector is more or less used for consumption at the local
level only. Only a small part of it is marketed. This at least, is a feature of
underdeveloped economy that whatever is produced by the farmer is
consumed by him and his family. In his article 'Economic Development
with Unlimi ted Supplies of Labour", Lewis has tried to analyse how this
kind of subsistence economy transforms into the money or exchange
economy. His theory has been accepted as a general theory of
development in the third world labour surplus economies.
4.1 Lewis M odel in Closed Economy:
In the closed economy, in order to explain the growth process in labour
surplus economies, Lewis divides the economy into two sectors.

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50 a) Capitalist Sector:
It is that part of the economy which uses reproducible capital and pays
capitalist, for the use there of. The capital sector may be either private or
public and it may include not only manufacturing but also plantations and
mines where the labour is hired. The productivity of labour in this sector is
high because labour is emplo yed with capital.
b) Subsistence Sector:
It is that part of the economy which does not use reproducible capital. In
fact, this sector is characterised by self -employment of labour. Output and
productivity per head is very low because labour is not employe d with
capital. It is in this sector that the marginal productivity of labour, in some
cases, may be zero. This is due to disguised or hidden unemployment.
Relationship between these two sectors:
The subsistence sector and the capitalist sector are related to each other.
When the capitalist sector expands, the labour force required for
expansion comes from the subsistence sector. As Lewis deals with the
labour surplus economies, it is assumed that the subsistence sector has
surplus labour which is available unlimitedly for industrial expansion at
the existing wage rate.
According to Lewis:
"In this situation, new industries can be created, or old industries expanded
without limit at the existing wage, or to put it more exactly, shortage of
labour is no limi t to the creation of new sources of employment." The
labour supply for this expanding capitalist sector will come from the
following sources:
a) The labour which is disguisedly unemployed in subsistence sector.
b) Women who are housewives.
c) Labour supply from growth of population.
All these sources of labour, however, will supply unskilled labour. But
according to Lewis, getting skilled labour is just a temporary bottleneck.
Once this surplus labour is given training, the problem of unskilled labour
can b e solved. Another problem in this whole transition of labour from
subsistence to capitalist sector is whether the labour is really ready to
leave their families and come to take up wage employment. This would
depend upon the wages offered to them. Accordin g to Lewis, they are
generally offered 30% more wages than what their subsistence earnings.
This induces them to leave their traditional sector and join the modern
capitalist sector.

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51 Diagrammatic Representation:
The two -sector Lewis model of economic g rowth can be explained with
the help of a diagram.

Figure No. 4.1
On X -axis, the quantity of labour is represented and on Y -axis marginal
productivity of labour and wages are reprsented.
OS - Subsistence level of wages in the farming sector.
OW- Real wa ge rate in the Capitalist sector (which according to Lewis is
30% more than subsistence level).
WT- Unlimited or perfectly elastic supply curve of labour (It is assumed in
this model that the economy is a labour -surplus one).
W, Q, Marginal productivity cu rve of labour.
Capital will be employed till the point marginal productivity of labour
equals to wage rate. So at OW wage rate, OL, amount of labour will be
employed. Now,
OW, P, L, Total output
OW, P, L, Total wage -payment WW, P, Capitalists surplus/prof it
According to Lewis, a part of this surplus is reinvested so that the amount
of fixed capital in terms of machinery, equipments, plants and factories
increases. This shifts the marginal productivity curve upwards to W2 Q2
OW2P2L2 - Total output
OWP2L2 - Total wage payment
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52 Again, a part of this surplus is reinvested, fixed capital in the economy
increases more labour is employed and this further increases output of he
economy. This process, according to Lewis, continu es till the entire
surplus labour in the economy in absorbed.
Role of Savings:
In this entire process, savings play an important role. Unless the surplus is
reinvested, economic growth process can not be taken further. In the
words of Lewis,
"The central p roblem in theory of economic development is to understand
the process by which a community which was previously saving and
investing 4 to 5% of its national income or less, converts itself into an
economy where voluntary saving is running at about 12 to 15 % of national
income or more. This is the central problem because the central fact of
economic development is rapid capital accumulation (including
knowledge and skills with capital). We can not explain any "industrial
revolution" until we an explain why s avings increased relatively to
national income".
The savings, according to Lewis come mainly from the people who earn
profits or rent. The poor people who earn wages can not save. The middle -
class salary earners do not save much and hence savings that can be
converted into investment came through profits and rent. This explains the
existence of poverty in the developing countries. These countries have a
small capitalist sector and hence the quantity of rent and profits in these
countries is also less. The p rocess of capital accumulation or the process
of reinvestment of a part of profits of producers will stop at a point where
the real wages rise very high and a large part of capitalist's surplus is used
up in payment of wages.
Critical Evaluation of the Lew is Model:
The Lewis model of dual economy has been criticised on many grounds.
1) Supply of labour may not be unlimited -
The Lewis model assumes surplus labour and disguised unemployment in
the subsistence sector which is used for the expansion of capital ist sector.
But there are many African and Latin American countries which are thinly
populated. This model may not suit them.
2) The process of absorption of surplus labour suddenly ends -
As per Lewis, economy expands till the surplus labour is existing in the
subsistence sector. This according to the critics, seems to be sudden and
abrupt. Also surplus labour can be found not only in agricultural sector,
but also in the industrial towns and cities of many less Developed
countries. Surplus labour in the c ities, then has to be absorbed within the
industrial sector and this may adversely affect the process of transfer of
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53 3) Capital Intensive Technology is adopted -
The critics argue that the expansion of capitalist secto r may take place
with the help of capital intensive technology. The use of capital intensive
technology will shift the marginal productivity curve upward but that will
not reduce the unemployment.
4) Supply of skilled labour is limited -
The process of de velopment requires, a supply of skilled labour. But the
under developed countries may have unlimited supply of unskilled labour
and that of skilled labour may be limited.
5) Lack of entrepreneurs -
The Lewis model assumed the capitalist class to absorb th e surplus labour
that already exists in the country. This class keeps on reinvesting and
industrial activities keep on expanding. But the situation in the
underdeveloped countries may be totally different. They may not have
adequate entrepreneurs to take a n opportunity of expanding business
activities.
6) Aggregate demand is not considered -
The Lewis model assumes that 'whatever is produced is sold'. So if the
production goes up, the level of consumption will automatically increase.
But in the underdevelo ped countries, the subsistence sector is so big that
unless and until the productivity in that sector increases, there will be no
market for the commodities produced in the capitalist sector.
In this way, a Lewis Model of surplus labour in agriculture is c riticised
heavily on many grounds. These criticisms make it difficult to be
applicable to the underdeveloped countries but still in the model gives an
important insight into how the development and capital formation is
possible in the two -sector economies.
4.5 RAGNER NURKSE’S THEORY OF DISGUISED
UNEMPLOYMENT
The theory of disguised unemployment was introduced into the theory of
underdevelopment by Rosenstein Rodan in his famous article “Problems
of Industrialisation in Eastern and Southern Europ e”. Strictl y
speaking, the term was first coined by Joan Robinson in 1936, who
defined it as “the adoption of inferior jobs by the workers laid off from
their normal jobs due to lack of effective demand during depression.”
However, this term was used by her in the co ntext of developed countries
alone where disguised unemployment is only a cyclical phenomenon
since, with the revival of economic activity, workers return to more
productive occupations and the problem ceases to exist. This disguised
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54 However, much blood has been shed on the meaning and the implications
of disguised unemployment. There are two fronts in the battle —the
analytical and the empirical. However, we will concentrate on th e
analytical issues. Existence of disguised unemployment is largely a matter
of definition and assumptions about the institutional forces involved.
The term ‘disguised unemployment’ is used to designate a situation in
which the removal, from a working comb ination of factors, of some units
of labour, nothing else being unchanged, will have the aggregate product
of the working combination undiminished; and may even increase it.
To say that there is disguised unemployment is, therefore, equivalent to
saying, i n that working combination the MP L is zero and may even be a
‘negative quantity’. A considerable amount of rural surplus labour can,
therefore, be removed for productive use elsewhere, in the construction of
capital goods, say, roads, irrigation works and in the manufacturing sector.
Where MP of labour is zero in the agricultural sector, surplus labour can
be removed without reducing the total agricultural output. Even if the MP
of surplus labour is positive in the rural sector, it consumes more than it
produces in subsistence agriculture, i.e., its consumption (equal to his
average product) is much higher than his marginal contribution to the
production.
Thus, the removal of each unit of surplus labour will leave more food for
those remaining in the farm. T his surplus food can be used to feed the
labour, removed for some other productive work. Thus, disguised
unemployment provides with concealed savings.
However, Prof. A. K. Sen does not agree with this interpretation of surplus
labour. Using A. K. Sen’s def inition of the production approach,
“disguised unemployment” means that a withdrawal of a part of the
labour force from the traditional filed of production would leave the total
output unchanged.
Given this definition, some economists proceeded to define disguised
unemployment as a situation in which marginal product of labour over a
wide range is zero. In defining surplus labour or disguised unemployment,
one has to distinguish between labour and labourers (or flow of man hours
or stock of men).
This imp ortant point was raised by A. K. Sen. According to him, it is not
that too much labour is being spent in the process, but that too many
labourers are working in it. Thus disguised unemployment takes the form
of number of labourers.
Say, a production proces s needs 35 hours of labour for its completion and
the work is done by 7 workers initially. Then, if two workers are removed,
the remaining 5 workers work longer than 5 hours each. Thus, disguised
unemployment is that of 2 workers. It is, thus, the marginal productivity of
the labourer, so as to say that is nil over a wide range and the productivity
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55 This is represented in the following diagram:

Figure No. 4.2
In the above figure, the south represents the number of labourers, the east
represents the number of labour hours and the north represents their
product. In this figure MP L = 0 or it becomes nil with OL 0 labour hours.
Thus, there is no use to employ labour beyond this point. Number of
labourers engaged in agriculture initially is, say, OL 2.
This working population each puts in ‘tan a’ hours of work. But the
normal and sufficient working hours per worker i s ‘tan b’ (OL 0/OL 1). So
the job can be done by OL 1 labourers keeping normal hours. In this sense,
thus L 1L2working population is the existence of surplus labour. Thus,
while marginal productivity of labour is nil at point L 0 only, that of the
labourer is n il over the range L 1L2. This represents the volume of
disguised unemployment.
However, existence of surplus labour or disguised unemployment in
agriculture is questioned. Shakuntala Mehra has observed that disguised
unemployment is purely a seasonal phenom enon. There is a
complimentarily between peak and slack season employment. Schultz, in
his “Influenza epidemic test” has shown that disguised unemployment is
related to selected withdrawal.
The reorganisation requires extra fund. Thus, disguised unemployme nt is
not costless and self -financing as stated by Nurkse. In the words of
RagnerNurkse, the developing countries suffer from large -scale disguised
unemployment in the sense that “even with unchanged techniques of
agriculture, a large part of the populatio n engaged in agriculture could be
removed without reducing agricultural output”.
This means that, without changing technical methods of production, same
farm output can be obtained with a smaller labour force. The proviso that
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56 important because, with improved techniques, one could always take some
people off the land without reducing output.
4.6 SCHUMPETER’S THEORY OF DEVELOPMENT
Joseph A Schumpeter presented his theory of economic develo pment in
‘Theory of Economic Development’ published in German in 1911. The
theory was later refined and presented in his Business Cycles (1939) and
Capitalism, Socialism and Democracy (1942 ).
TheTheory:
Schumpeter assumes a perfectly competitive economy in a stationery
state. There are no profits, no interest rates, no savings, no investments
and no involuntary unemployment. The economy is in a circular flow
without change. According to Schumpeter, development is spontaneous
and discontinuous change in the channels of the circular flow which
changes the state of equilibrium. Changes are intrinsic and appear in the
spheres of industrial a nd commercial life. Development takes place
when new combinations are carried out in the form of innovations.
Innovations: An innovation may consist of:
1. Int roduction of a new product.
2. Int roduction of a new method of production.
3. Opening up of a new market.
4. Conquest of a new source of supply of raw mat erials or semi-
manufactured goods, and
5. Carrying out new organization of any industry like the creation of a
monopoly.
According to Schumpeter, the introduction of a new product and the
continual improvements in existing ones lead to development.
The innovator must be an entrepreneur who introduces something entirely
new. He directs the use of funds. The entrepreneur is motivated by:
1. The desire to found a private commercial kingdom.
2. The will to conquer and prove his superiority.
3. The joy of creating, getting things done or exercising one’s energ y and
ingenuity.
His nature and activities are determined by his socio -cultural environment.
The entrepreneur requires technical knowledge in order to produce new
products and the power of disposal over the factors of production in
the form of credit. According to Schumpeter, a pool of untapped
technical knowledge exists which he can make us of. Hence, credit is
essential for development to begin.
Role of Profi ts: An entrepreneur innovates to earn profits. Profits are a
surplus o ver costs. Under competitive conditions, the price of each product
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57 to dynamic changes resulting from an innovation. They continue to exist
till the innovation becomes gene ral.
Breaking the Circular Flow : The circular flow is broken with an
innovation in the form of a new product by an entrepreneur for the purpose
of earning profits. The innovators ar e financed by bank credit expansion
and they pay interest on the money bor rowed from the banks. Once the
new innovation becomes successful and profitable, other entrepreneurs
follow in swarm like clusters. Innovations in one area may induce other
innovat ions in related areas. The emergence of a motor car industry may
stimula te a wave of new investments in the construction of highways,
rubber tyres and petroleum produces. However, the spread of innovation is
never cent per cent.
The spread of innovatio n is shown in Fig.2.5 The percentage of firms
adopting innovation is shown on the vertical axis and time taken on the
horizontal axis. The curve OI shows that firms adopt an innovation slowly
to begin with and later the pace of adoption increases but it i s never cent
per cent.


100 % I




0 Time
Figure No. 4.3 : The Spread of Innovation
Cyclical Process : Investment is constant and financed by bank credit. It
increases money incomes and prices and set the for ces of expansion in the
economy. When the purchasing power of people increases, the demand
for products of the old industries increases, supply falling short. Prices
rise, profits increase and old industries expand through bank credit. The
situation res ults in a fresh wave of credit inflation super imposed on the
innovation induced credit inflation. Over -optimism and speculation adds
momentum to expansion. When the new products from new inno vation
arrive in the market, they displace the old products an d a process of
liquidation, re -adjustment and absorption begins. The prices of old
products fall due to falling demand. The old firms are forced to reduce
their output and employment and some have to close down their
operations. As the innovators begin to repay bank credits out of their
profits, the supply of money falls and prices begin to fall. Profits decline
and uncertainties and risks increase. The motivation to innovate
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58 of long depression, the forces of recovery appear once again and the
equilibrium is restored. Entrepreneurs begin with a new wave of
innovations, others follow and once gain expansion begins. Sch umpeter
describes this process as one of ‘creative destruction ’ in which the old is
destroyed and replaced by the new. This process is shown in Fig.2.6
where time is measured on the horizontal axis and output on the vertical
axis. The curve YPT shows t he long run trade cycles. When there is a
new innovation, t he economy moves upwards from Y and reaches
output level P. When this innovation ends and new one begins, the output
levels fall from P to T. However, point T is higher P indicating a
new higher level of equilibrium .

Figure No. 4. 4 : Innovations and Trade Cycles
Schumpeter’s cyclical process of economic development is shown in Fig.
2.7 where the secondary wave of credit inflation is superimposed on the
primary wave of in novation. With over - optimism and speculation,
development takes place more rapidly in the expansion phase. When
recession starts, the cycle continues below the steady growth path to the
depression phase. A new innovation brings about recovery and
prosperity once again. Entrepreneurs are therefore the main drivers of the
economy. They bring about economic development in spontaneous and
discontinuous manner. Cyclical swings are the cost of economic
development under capitalism. Trade cycl es ar e a permanent feature
of a capitalist economy .

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59

Figure No. 4. 5: Trade Cycles and Economic Development
The Death of Capitalism : Schumpeter says that capitalism will survive as
long as entrepreneurs continue their entrepreneurial activity. Schumpeter
says that a capitalist society is a rationali st society. The forces of
decadence are set in due to the scientific temperament of the capitalist
society. These are: the decadence of the entrepreneurial function, the
disintegration of the capitalist family and the destruction of the
institutio nal framework of the capitalist society.

1. In the early stages of capitalism, the entrepreneurs were the driving
force behind development. Later on, innovation becomes routine.
Technological progress is captained by the new managers, i mpersonal
owners and private bureaucra ts. This reduces the industrial family to a
class of wage earners and thereby reduces the role of the entrepreneur
in a capitalist society.

2. The capitalist families are on the way to destruction because parents
adopt a rationalist attitude towa rds their children. The desire to establish a
private kingdom does not exist and hence the will to accumulate wealth
also dies its natural death.

3. The entrepreneur also destroys the institutional system of the capitalist
society. The tendency towards concentration weakens and destroys the
institutions of private property and freedom of contract. In the case of
big firms, the proprietors and the shareholders are made defunct by the
professional manag ers.

The intellectual class become hostile towards capitalism and begins with
mass campaigns against capitalism. They bring about anti -capitalist
political reforms and capitalism begins to crumble only to be replaced
by Socialism.
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60 Critical Appra isal: Schumpeter’s theory of economic development is
criticized on the following grounds:

1. The Surviva l and Progress of Capitalism. According to Schumpeter the
entrepreneur is the ideal behind the success of capitalism. However, in
later days , innovation becomes routine in the modern joi nt stock companies
and innovators become defunct. Capitalism comes to an end to be
replaced by Socialism. However, the economic history of the 20th century
and beyond is the story of the succes s of capitalism. It is in fact, socialism
as an economic system that came to an end in the 1990s.

2. Economic Development is not Essentially Cyclical. Trade cycles are
not essential for economic development. Trade cycles are a consequence
of mac ro-economic mismanagement and many a times deliberately
induced. Innovation is not a discontinuous process and trade cycles are not
caused by innovations alone.

3. Overemphasis on Bank Credit. Bank credit constitutes only one segment
of the financ ial market. In fact long term capital, both o wnership and debt
capital comes from the capital market. The capital market has a more
important role to play in the process of economic development than the
money market which offers bank credit. .

4.7 SUMMARY
According to Schumpeter, development is spontaneous and discontinuous
change in the channels of the circular flow which changes the state of
equilibrium. Changes are intrinsic and appear in the spheres of industrial and
commercial life. Development takes place when new combinations are
carried out in the form of innovations.
4.8 QUESTIONS
Q1. Explain the Harrod -Domar Growth Model.
Q2. Explain the Lewis Model of Unlimited Supply of Labour.
Q3. Explain the Ragner Nurkse’s Theory of Disguised Unemployment.
Q4. Explain th e Schumpeter’s Theory of Development.

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61 5
STRUCTURAL ISSUES IN
DEVELOPMENT PROCESS – 1
Unit Structure:
5.0 Objectives
5.1 Concept of Human Capital
5.2 Role of Education, Health and Nutrition in Human Capital
5.3 Meaning of Poverty
5.4 Measurement of Poverty
5.5 Measures to Eradicate Poverty
5.6 Meaning of Inequality
5.7 Measurement of Inequality
5.8 Measure to Eradicate Inequality
5.9 Summary
5.10 Questions
5.0 OBJECTIVES
 To know the concept of human capital.
 To understand the role of education, health and nutrition in human
capital.
 To study the meaning and measurement of poverty.
 To know the measures to eradicate the poverty.
 To study the meaning and measurement of inequality.
 To know the measures to eradicate the inequality.
5.1 CONCEPT OF HUMAN CAPITAL
The concept of human capital has re latively more importance in the
labour -surplus countries. These countries are naturally endowed with more
of the labour due to the high birth rate under the given climatic conditions.
Surplus labour in these countries is the human resource available in mor e
abundance than the tangible capital resource. This human resource can be
transformed into the human capital with effective inputs of education,
health and moral values. Transformation of raw human resource into
highly productive human resource with these inputs is the process of
human capital formation. Problem of scarcity of tangible capital in the
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62 capital formation with both private and public investment in education and
health s ectors of their national economies. Tangible financial capital is an
effective instrument of promoting economic growth of the nation.
Tangible human capital, on the other hand, it is an instrument of
promoting comprehensive development of the nation becaus e human
capital is directly related to human development, and when there is human
development, the qualitative and quantitative progress of the nation is
inevitable. This importance of the human capital is explicit in the changed
approach of United Nations (UN) towards comparative evaluation of the
economic development of different nations in the world economy. United
Nations publishes the Human Development Report (HDR) on the human
development in different nations with the objective of evaluating rate of
human capital formation in these nations.

The human capital is the backbone of human development and economic
development in every nation. Mahroum suggested, at the macro -level, the
human capital management is about three key capacities: the capacity to
develop talent, the capacity to deploy talent, and the capacity to draw
talent from elsewhere. Collectively, these three capacities form backbone
of any country's human capital competitiveness. The recent U.S. research
shows that geographic regions that inve st in human capital and economic
advancement of immigrants who are already living in their jurisdictions
help boost their short - and long -term economic growth. There is also the
strong evidence that organizations that possess and cultivate their human
capital outperform other organizations lacking human capital.

5.2 ROLE OF EDUCATION, HEALTH AND NUTRITION
IN HUMAN CAPITAL
INTRODUCTION:
Many studies, especially in the Western countries, have shown that the
growth of national income in their countries was m uch more than the
growth in their physical inputs like physical capital and labour units. The
National income in those countries has increased over and above the rate
of capital formation. This has led to distinguish capital into two concepts:
a) Physical cap ital:
Physical capital is the growth of machinery, equipment, plants, labour
units and other material things.
b) Human capital:
Human capital is acquiring skill, education, abilities and other kinds of
training which add to the productive capacity and eff iciency of labour
units. Many economists have understood the importance of human skills
in improving the productivity of labour - The actual growth rate of the
economy, therefore, does notjust depend upon the physical capital
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63 ROLE OF EDUCATION:
Most of the empirical work on the relationship between education and
economic development of a country is done in the developed countries.
According to T. W. Schultz's study, there was a substantial part of growth
in the USA which could not be explained by the growth of physical
capital. Education had rapidly expanded during that period and as per
Schultz, the rate of return on education was much higher than the rate of
return on the physical capital. His study clearl y indicates the importance of
education in the process of economic development. All the obstacles to
greater productivity of labour like poor health, illiteracy, non -acceptance
of the new technology, fear of change, lack of incentive to change job -can
be o vercome by the education. In other words, education can make a
labourer more efficient and productive which in general will lead to faster
economic development of a country.
1. According to Frederick Harbinsen:
'Human resources...constitute the ultimate ba sis for wealth of nations.
Capital and natural resources are passive factors of production; human
beings are active agents who accumulate capital, exploit natural resources,
build social, economic and political organisations, and carry forward
national dev elopment. Clearly, country which is unable to develop skills
and knowledge of its people and to utilize them effectively in the national
economy will be unable to develop anything else."
The process of education helps a country in many ways. Following poin ts
will explain the importance and role of education in economic
development of a country:
2. Education and Economic Growth
From the experience of the Western countries, the developing countries
startedspending a huge amount of public expenditure on provid ing
educational opportunities toall. This did help them in the following ways.
i)It created a skilled labour force.
ii) It provided a large number of employment opportunities in the form of
teachers, school administrative staff, text -book printers, uniform
manufacturers and so on.
iii) It generated a class of leaders in all the fields who were educated and
were leading in various fields like public administration, professions,
private business, etc.
iv)It created a class of people who believed in the modern technology,
attitudes and had better skills.
3. Education, Inequality and Poverty:
The relation -ship between education and inequality or poverty is difficult
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64 and the level of lifeti me earnings of a person. It means more educated
person tends to earn more in his lifetime as compared to his less educated
counterpart. This is basically true about higher education. As more
education tends to increase the productivity of the nation, quali ty of labour
also improves and the growth rate of economy also increases, most of the
underdeveloped and developing countries went for rapid expansion of
education. The impact of this expansion on poverty and inequality was
ignored. Recently, it has been f ound out that educational system of most of
the developing countries lead to increase rather than decrease in the
income inequalities.
This is mainly because there is no doubt that education improves the
lifetime capacity to earn, but generally the low and middle income groups
are denied access to the higher education. As a result, it is just the higher
income group that benefits out of educational expansion.
4. Education and Migration and Fertility:
Education generally has a positive impact on both migrat ion and fertility.
More educated person has more propensity or chance to migrate from
rural to urban areas and get a better job in the modern sector in the urban
areas. Similarly, there is an inverse correlation between level of education
of women and the size of family. Generally, the educated women tend to
have smaller families.
5. Education and Rural Development:
Education indirectly helps rural development in many ways.
a) If the farmers are educated, it becomes easier to adopt new
technology.
b) Education h elps in improving the quality of life by improvement in
health, nutrition, child care, etc.
c) It helps in reducing the impact of ignorance and superstitions. It can
also help them to be economically more sound by adopting allied
activitiesand alternative emp loyment opportunities during the slack
agricultural season.
In the developing countries, however, education has more urban -bias and
hence it does not give proper attention to the needs of the rural
environment. Major rural groups of out -of-school children, women,
subsistence farmers are out of the purview of formal educational system.
Conclusion
There is no doubt about the contribution of education towards the
development of human capital formation. Many efforts are made to
measure the contribution of educa tion to development. Indirectly also
education helps to improve the tendency to make the people more lawful,
more research oriented, more skillful and to increase the potential of a
country to have political stability.
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65 ROLE OF HEALTH AND NUTRITION:
The e fficiency of workers directly increases with the improvement in
health and nutrition. According to World Development Report." Improved
health contributes to economic growth in four ways: It reduces production
losses caused by worker's illness, it permits t he use of natural resources
that had been totally or nearly inaccessible because of diseases, it
increases the enrolment of children in the schools and makes them better
able to learn, and it frees for alternative uses, resources that would
otherwise be sp ent on treating illness. The economic gains are relatively
greater for the poor people, who are typically most handicapped by ill
health and who stand gain the most from the development of underutilised
natural resources".
Better health conditions of worke rs help them to earn more because they
can be more productive and can get better paying jobs. Healthier person
also is more eger to learn new things. Improvement in health facilities can
also reduce the poverty rate in the country. Many studies have shown a
positive correlation between health and nutrition and economic
development of a country.
Conclusion
The concept of human capital formation, thus, has gained a lot of
importance in the economics of development. The growth of social
infrastructure includin g education, health and nutrition has helped the
countries to experience better growth rates. For the developing countries, a
lot more to be done. A proper educational planning, control of population
and spread of health facilities are some of the issues w hich the developing
countries should take care of. An accumulation of just the physical capital
is not going to be sufficient but the investment in human capital is going to
help these countries to break a vicious circle of poverty in their
economies.
5.3 MEAN ING OF POVERTY
For formulating poverty reduction programmes it is necessary to
define poverty and measure poverty. The extent of absolute poverty is
the number of people who are unable to command sufficient resources
to satisfy basic needs. They are counte d as the total number living below a
specified minimum level of real income or an international poverty line.
Absolute poverty is measured in terms of the basic needs a person has to
meet in order to survive adequately in modern society. However, the
expre ssions like ―adequately and ―modern society are vague.

Another approach to explain the concept of absolute poverty is to estimate
the minimum intake of calories required for survival so the search for
measuring poverty led to the concept of poverty line. The poverty line
indicates the income level below which poverty exists. For this data
is needed with respect to the income or consumption. The common
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66
1. Surveys with regard to income, consumption standards,
nutritional contents.
2. Surveys are also conducted to gather information with
regard to employment, housing conditions.
3. Census data also enables the estimation of poverty

Human Poverty Index :
The Human Poverty Index was introduced by the Uni ted Nations
Development Programme (UNDP) in the Human Development
Report 1997. HPI is a composite index to measure poverty which is based
on three indicators.
i) Life Expectancy
ii) Basic Education
iii) Access to public and private resources.

Life expectancy is an important indicator of human
development. Life expectancy in developing countries is 40 whereas in
the developed countries it is 60. Life expectancy is a reflection of the
overall living conditions, health and sanitary measures, food and
nutrition.

Literacy is another indicator of the level of development. The level of
illiteracy is high in developing countries inspite of globalization and
changes in technology literacy is important to keep pace with changes
happening in the country and at the global level. It is also essential to take
advantage of economic opportunities.

The third indicator of HPI is the standard of living. Though this criteria
cannot be easily defined, it is a combination of three variables. Standard of
living is based on three variab les i.e. the percentage of people with access
to health services, to safe water and the percentage of malnourished children
under five. The HPI is published for each country. Though HPI is an
overall index showing the level of development, individual indic ators are
also prepared separately, so that policy makers can study the specific
problems are formulate policies for human development. For example,
health and sanitation may be a problem area for a particular country.
Policies can be tailor made to remedy the situation.

Alternative Poverty Measures :
Head Count Ratio : Absolute Poverty may be measured by the number of
―headcount , H of those, whose incomes fall below the absolute poverty
line . When the head count is taken as a fraction of the total popul ation,
N, it is called the headcount Index, .

The poverty line is set a level that remains constant in real terms so that
we can chart our progress on one absolute level once time. The level is set
at a standard below which we would consider a person to l ive in
absolute human misery such that one‘s health is in dange r. It is difficult
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67 technology changes over time. It is more practical to establish a reasonable
minimum standard which is applicab le over a few decades so as to
understand the progress made. The international poverty level is
defined at a level of 1 dollar per day. This may not be practically useful
in the Indian extent when anti -poverty programmes have to be
designed. Another more p ractical method of determining a local absolute
poverty line is to define the combination of food or basket of food on the
basis of nutritional requirements surveys and data collected from the
households will make clear the nature and type of goods purchas ed by
people and how they are not meeting the standard set by the basket of
food which is supposed to by nutritionally balanced and ideal. Food alone
is not sufficient to determine the poverty line. Hence the expenditures of
the households on basic needs s uch as clothing, shelter and medical care
have to be included to determine the local absolute poverty line.
Calculating by this method has shown that the poverty line may come to
more than 1 dollar per day.

Poverty Gap : Depending on the poverty line and simply
counting the number of people below the accepted poverty line can be
misleading since it has a number of limitations. If the poverty line is set at
US 360 dollars per person, there may be people earning 355 dollars or
300 dollars or any other categor y. To put everyone into a homogeneous
group is misleading since all will be given the same weights when
calculating the proportion of the population that lies below the poverty
line. The seriousness of the poverty problem may be different for different
income level. The concept of ‗Poverty Gap ‘which measures the total
amount of income necessary to raise everyone who is below the poverty
line upto that line.

Poverty gap is illustrated in the diagrams below


Figure No. 5.1
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68


Figure No. 5.2


Measuring t he Poverty Gap

The poverty gap is the shaded area between the poverty line PV and the
annual income profile of the population. In both countries A and B, 50%
of the populations are falling below the poverty line. But the poverty gap
is more for country ‗A‘ then ‗B‘. Hence the poverty situation is more
serious for a country like ‗A‘ and more efforts will be needed to remove
poverty. The extent to which the incomes of the poor lie below the poverty
line can be calculated. The ―total income shortfall or tota l poverty gap
of the poor is defined as



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69 5.5 MEASURES TO ERADICATE POVERTY
Poverty eradication is one of the major objectives of planned economic
development. Economic growth has always been recognized as an
important among various factors contributi ng to poverty alleviation. It is
now recognized that it is not the rate of growth but the composition of
growth which determines the pace of the "trickle down" effect of growth.
India's anti -poverty programmes are mainly run by the Central
Government. The re are three main types of poverty alleviation
programmes :(1) rural works, (2) self -employment and (3) food subsidy.
All three have been subject to reforms in the recent years. Plan allocations
have been enhanced in areas of health, education, sanitation and other
facilities in order to promote capacity building and wellbeing of the poor.
Anti-poverty programmes have been strengthened and restructured
through special programmes for the weaker sections of the -society.
The major poverty alleviation programme s currently operating in the
country are discussed below : .
1) Mahatma Gandhi National Rural Employment Guarantee Scheme
(MGNREGA) February2006:
This flagship programme of the government aims at enhancing livelihood
security of households in rural areas by providing at least 100 days of
guaranteed wage employment in a financial year to every household
whose adult members volunteer to do unskilled manual work. For the year
2011 - 12, Rs. 40,000 crore has been allotted for this programme. This has
led to su bstantial increase in the purchasing power and has strengthened
the livelihood resource base of the rural poor in India.
During the year 2011 -12, 3.80 crore households have been provided
employment under the scheme till January 2012. At national level, th e
average wage paid under the MGNREGA has increased from Rs. 65 in
2006 -07 to Rs. 120in2011 -12.
2) Swarnajayanti Gram Swarozgar Yojana (SGSY):
April , 1999. It is a major ongoing scheme to help the poor rural families to
cross the poverty line by assisting them to take up incomegenerating
economic activities through a mix of bank credit and government subsidy.
The scheme involves selection of key activities, planning of activity
clusters, organization of the poor into self -help groups (SHGs) and
building of their capacities through training and skill development,
creation of infrastructure and technological and marketing support. SGSY
was introduced by amalgamating former self employment programmes
into a single self employment programme. Since inception of the scheme
in April 1999 up to December, 2011, 42.05 lakh self -help groups (SHGs)
have been formed and 168.46 lakh swarojgaries have been assisted with
bank credit and subsidy. The total, investment under the SGSY is Rs.
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70 NRLM : The SGSY ha s now been restructured as the National Rural
Livelihood Mission (NRLM). The NRLM aims at reducing poverty by
enabling poor households to access gainful self -employment and skilled
wage employment opportunities.
3) Sampoorna Grameen Rozgar Yojana (SGRY):
Sept.2001 The objective of SGRY is to provide additional wage
employment along with food security, creation of durable community,
social and economic assets and infrastructure development in the rural
areas. The schemes of Jawahar Gram Samridhi Yojana (JGSY ) and
Employment Assurance Scheme (EAS) have been fully integrated with
SGRY. SGRY programme in many districts has been included in National
Rural Employment Guarantee Scheme (NREGS) during 2006 -07 and
2007 -08. Since April 2008, SGRY programme is part of N ational Rural
Employment Guarantee Scheme (NREGS).
4) Pradhan Mantri Gramodaya Yojana (PMGY):
It was launched in 2000 -01 in all states and the Union Territories (UTs) in
order to achieve the objective of sustainable human development at the
village level. The PMGY gives additional central assistance to states and
UTs for selected basic minimum services in order to focus on certain
priority areas. Initially, it focused on five critical areas, i.e., primary
health, primary education, rural shelter, rural dri nking water and nutrition.
Rural electrification has been added as an additional component from
2001 -02.
5) Pradhan Mantri Gram Sadak Yojana (PMGSY) : Dec.2000
It is a 100 percent centrally sponsored scheme. It is a programme to
provide road connectivity through good all weather roads to all the eligible
unconnected rural inhabitants. 1,42,750 kms. of road works had been
completed till December 2007 and an expenditure of Rs. 27,382 crore has
been incurred.
6) Antyodaya Anna Yojana : Dec. 2000
It provides foodgrains at a highly subsidized rate of Rs. 2 per kg for wheat
and Rs. 3 per kg for rice to the poor families under the Targeted Public
Distribution System. Initially 25 kgs of foodgrains was made available to
each family per month. This quantity has be en increased to 35 kgs with
effect from April 2002.
7) Swarna Jayanti Shahari Rozgar Yojana (SJSRY) :1997 Revised in
April 2009
It aims at providing gainful employment to urban unemployed or
underemployed poor by encouraging the setting up of self -employ ment
ventures or provision of wage employment. It replaced various
programmes operated earlier for urban povertyalleviation. It is being
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71 allocation for the SJSRY scheme for 2011 - 12 is Rs. 813 crore. A total of
3,63,794 beneficiaries have been assisted in the year 2011 -12.
8) Indira Awaas Yojana (lAY) : 1999 -2000.
It aims at providing dwelling units, free of cost, to the poor families of the
Scheduled Castes (SCs), Scheduled Tribes (STs), freed bonded labourers
and also the non -SC/ST persons below the poverty line in the rural areas.
Upto December 2006, about 153 1akh houses had been constructed or
upgraded with an expenditure of Rs. 29,246 crore .
9) Annapurna Yojana : 2000.
It aims at pr oviding food security to meet the requirements of those senior
citizens who, though eligible for pensions under the National Old Age
Pension Scheme, are not getting the same. Foodgrains are provided at a
subsidized rate. It is a 100 percent centrally spons ored scheme.
10) Valmiki Ambedkar Awas Yojana (VAMBAY) : Dec. 2001
It seeks to improve the conditions of the urban slum dwellers living below
the poverty line who do not possess adequate shelter. The primary
objective of this scheme is to facilitate cons truction and upgradation of
dwelling units for the slum dwellers. A component of the scheme is to
provide a healthy environment through community toilets.
11) National Food For Works Programme (NFFWP) :Nov.2004
This programme is open to all rural poor wh o are in need of wage
employment and desire to do manual unskilled work. It is implemented as
a 100 per cent centrally sponsored scheme and the food grains are
provided to the states free of cost.
12) Rural Employment Generation Programme (REGP) :
It was launched in 1995 with the objective of creating self employment
opportunities in the rural areas and small towns. Since the inception upto
March 2004, 1.86 lakh projects have been financed and 22.75 lakh job
opportunities have been created.
13) Prime Mini ster's Rozgar Yojana (PMRY) :
It was started in 1993 with the objective of creating self employment
opportunities to the educated unemployed youth by assisting them to set
up any economically viable activity.
14) Public Distribution System and its impact on Poverty:
The Public Distribution System (PDS), seeks to enhance food security
particularly for the economically weaker sections of the society. The PDS
is the instrument for ensuring availability of certain essential commodities
at easily affordable p rices especially for the poor. A well targeted and
properly functioning public distribution system (PDS) is an important
constituent of the strategy for poverty alleviation. PDS with a network of munotes.in

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72 about 4.74 lakh. Fair Price Shops (BPS) is perhaps the large st Distribution
network of its type in the world .
In order to make PDS more responsive to the needs of the poor, the
Targeted Public Distribution System (TPDS) was introduced in June 1997.
This system attempts to target families below the poverty line (BP L) at
heavily subsidized rates.
5.6 MEANING OF INEQUALITY
Economic in equality is a situation characterized by fundamental disparity
that permits a few individual certain materialchoices and denying the
choices to a few others.In the context ofdevelopment, it is n ecessary to
examine whether the gap between the haves and the haves not has
widened since the beginning of planning.Most of the findings arrived at
the conclusion that the gapbetween haves and haves not has evidenced and
there has been aconcentration of weal th and economic power in a few
hands which adversely affected the comm on people. Even Karl Mark
firmly believed thatine quality will bring the doom of capitalism.
Incomparison to developed countries the developing countries are
characterized by lowper capital in come and moreun equa l distribution of
income, wealth and power.
The inequality is due to the following factors.
1) Inequalitiesarise due to differences in education, qualification, skills,
abilities and experience.
2) Differences in opportunities or access to education and jobs.
3) Difference son the basis of race, ethnicity and gendermay lead
toine qualities.
4) Ownership and in heritance of wealth are also sources ofine quality.
5.7 MEASUREMENT OF INEQUALITY
Economists usually distinguish between two principal measures of
income distribution for analytical and quantitative purpose s. They are the
personal or size distribution of income and the functional or distributive
factor share distribution of income.

1. The personal or size distribution of income : This measure is most
commonly used by economists. It simply deals with individual persons
or households and the total incomes they receive. The distribution
across income size classes is commonly called the ―size distribution
of income . Income inequality among the households is commonly
measured by the distribution of income according to the size of income
per household. The higher the share of the low income classes in
income, the more equal the distribution of income.

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73 2. Methods of Measurement :
a) A very popular method to analyze personal income is to arrange all
individuals by ascendi ng personal incomes. For this the population has to be
divided into distinct groups i.e. deciles (tenths) or quintiles (fifths). Then
it is determined as to what proportion of the total national income is
received by each income group.

The second method t o analyze personal income statistics is to construct a
Lorenz curve. The numbers of income recipients are plotted on the
horizontal axis in cumulative percentage. The vertical axis shows the
share of total income received by each percentage of population. Both
are cumulative up to 100% meaning that both the axes are equally
long. Every point on the Lorenz curve represents a statement. For example,
the bottom ‗X‘ share of households has ‗y‘ share of the total income.
Suppose there are 100 households, they are arranged in ascending
incomes. The Lorenz curve is constructed by plotting the cumulative share
of households on the horizontal axis and the cumulative sh are of
household income on the vertical axis. The figure is enclosed in a square.
A diagonal line is drawn from the origin or the lower left corner of the
diagram to the upper right corner of the diagram. On the diagonal line, at
every point, the percentag e of income received is exactly equal to the
percentage of income recipients. The diagonal line represents ―perfect
equality of distribution of income. For example, if we take the mid point
of the diagonal, i.e. halfway, 50% of the income is distributed t o exactly
50% of the population.



Figure No. 5.3

The Lorenz curve shows the actual quantitative relationship between the
percentage of income recipients and the percentage of the total income they
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74 data plotted in terms of decile groups. It is clear from the Lorenz curve
that 50% of the population is receiving a little less than 20% of the
income. In the same way, 80% of the population is receiving less than
50% of the total income. This is clear from point H on the Lorenz curve.

The population of the Lorenz curve will make clear the degree of
equality or inequality. If the Lorenz curve coincides with the diagonal
line there is perfect equality and all the people in the households g et the
same income. As the Lorenz curve moves away from the diagonal line,
inequality also increases


Figure No. 5.4

c) Gini concentration ratio or calculation of the Gini co -efficient is
another measure of the relative degree of income inequality. This is
obtained by calculating the ratio of the area between the diagonal and the
Lorenz curve divided by the total area of the half square in which the
curve lies.


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75

This ratio is known as the Gini Co -efficient, named after the
Italian sta tistician who first formulated it in 1912. Gini co -efficients are
aggregate inequality measures and can vary anywhere from zero (perfect
equality) to one (perfect inequality). Gini co -efficient is commonly used to
study the income and wealth distribution.

2. The Functional Distribution or Factor share of
Distribution of income : The functional distribution of income attempts
to explain the share of total national income that each of the factors of
production (land, labour, capital) receives. This method l ooks at the
income received by the factors as a whole in the form of rent, interest
and profit. This method is not concerned with specific individual
incomes. Functional distribution of income has emerged as a very
important branch of study. It explains th e income of a factor of production
by the contribution that this factor makes to production. Supply and
demand curves are assumed to determine the unit price of each
productive factor. When this unit prices are multiplied by quantities
employed, we get the total payments to each factor Example – the supply
and demand for labour determine the wage rate. When this wage is
multiplied by the total level of employment, we get the total wage
payments called the wage bill. Thus functional distribution of income is a
very relevant and important part of distribution studies.

Economic Growth and Income Inequality

Income inequality is a critical factor in determining the level of
progress and well being of the citizens of a country. Inspite of the
growth and develop ment achieved by developing countries, the vast
majority of population remains poor. Thus inequalities have increased
inspite of economic progress.

There are aspects of inequality. Vertical inequality is the traditional
measure of inequality which is disc ussed in the development policy.
Horizontal inequality is concerned with how the different groups in
society are treated, based on race, religion, language, class, gender etc.
Both the measures help to evaluate the well being of the people.

It has been ex perienced that as an economy grows from a traditional to a
modern economy, growth is accompanied by widening disparities in the
personal income distribution. The disparities may occur due to various
factors like industrious nature of people and skills. Eve n opportunities
may not be available for all which may lead to inequalities. Lack of
appropriate taxation system, and differences in individual ability may result
in inequalities. Later with more developmental efforts, the inequalities will
reduce.
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76 Horizo ntal inequality shows how economic differences, social
limitations and political power together create inequalities among
different groups in a society. The groups may belong to different race,
religion, gender, class or language. Horizontal inequalities c an lead to
conflicts within a society which adversely affect the development process.

Inequality affects an economy adversely in various ways. As far as
economic growth is concerned, increased inequality creates dissatisfaction,
ill feeling and frustratio n among the poor which may even lead to a civil
war. Extreme inequality leads to economic inefficiency. Inequality
may lead to inefficient allocation of resources. For example, high
inequality leads to an over emphasis on higher education at the expense
of good quality universal primary education. High inequality leads to
actions like excessive lobbying, large political donations, bribery and
cronyism.

5.8 MEASURE TO ERADICATE INEQUALITY
It is necessary for the government to formulate and implement certai n
policy measures to mitigate inequality in income distribution. The
measures may be in the form of :
1)Fiscal Measures: Fiscal policy through its budgetary instruments can
attempt to redistribute income. The important instruments are:
(a) Progressive Di rect Taxes: Income tax, wealth tax, capital gains tax,
gift tax and estate duty, when levied in a progressive manner, help
withdraw more money from the rich. The poor will be exempted from
these taxes by exempting minimum income or wealth from tax. The
success of all these tax instruments depends on its effective
implementation. Loopholes in tax laws enable the taxpayers to legally
avoid tax payments. If tax evasion cannot be checked effectively, income
inequalities may aggravate.
b) Subsidies: Cost of agr icultural inputs like fertilizers, water supply,
electricity, pumps and other equipment can be subsidized so that small and
marginal farmers may produce more. Measures should be taken to
safeguard the misuse of subsidies. Education and medical services can be
provided to those below poverty line at a highly subsided rate or almost
free.
c) Indirect Taxes: Taxes on commodities and services may turn out
regressive if they are levied indiscriminately. They may help reduce
inequality if such taxes are selectiv e. Consumer durables, specially the
luxurious ones like air conditioners, cars etc. and services in five star
hotels, when taxed heavily help to mop up excess income of the top ric h.
2) Monetary Measures: One of the reasons why the bottom section of the
income group has remained so poor is their inability to acquire money
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77 capital at a very low rate of interest. Treating them und er the priority
sector will help those secure loans at the right time with minimum and
simple procedure.
3) Public Distribution System: The real income of the bottom income
group could increase if they are supplied with essential consumer items
through ra tion and fair price shops. Such public distribution should be
confined only to the lowest income group.
4) Social Security Measures: The low income group comprise
agricultural and industrial labourers, old people without any regular source
of income and t he unemployed. Social security measures go a long way in
providing either minimum or some additional income to supplement their
meagre income. The social security may comprise:
(i) Old Age Pension : Old people with no source of income can be
provided a reg ular monthly income by the government to enable them to
subsist.
(ii) Unemployment Benefits : With the increasing number of unemployed
vis-a-vis limited employment opportunities the government is expected to
support the jobless.
(iii) Social Security Insu rance: Under this scheme, workers and their
dependants are covered. The scheme can also be accepted by households
voluntarily for a price, even by those who belong to higher income group.
Medical, disablement and maternity benefits are provided under these
schemes.
5) Employment Schemes: Employment in rural and urban areas are
provided through various schemes like National Food for Works
Programme, (SGSY), (SGRY), (PMGY), and many other schemes. In
order to wipe out absolute poverty and extreme inequality i t is necessary
that the government provide permanent employment to at least one
member of an absolutely poor family.
6) Institutional Changes: Land reforms are the example of institutional
changes whereby land is distributed among the landless and ownersh ip is
given to the tiller. Such institutional reforms bring a change in the
distribution of income earning assets in favour of the poor.
7) Self Employment: Unemployed specially the educated can be trained
and assisted to set up tiny, cottage and small ind ustries, service oriented
jobs like electricians, machine repairers etc. Promoting self employment
schemes besides providing employment reduces inequality too.
8) Rural Development: Rural India has a larger share of unemployment
and poverty. The situation leads to t he migration of people to the urban
area aggravating the urban problems. Promoting rural development
through providing infrastructure and rural industrialization would help
preventing migration, providing employment and reduction in economic
inequality. Al l these measures cannot bring a lasting solution to the
inequality of income distribution. In our country these measures must be
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78 growth in order to have the desired result. Otherwise w e may end up
distributing poverty instead of promoting equality.
5.9 SUMMARY
Economic inequality is a situation in which a few people areallowed
access to resources and opportunities whereas the sameare denied to
others.In spite of developmental efforts in itiated bydeveloping countries,
the gap between the rich and the poor haswidened.The developing
countries are plauged by the problem oflow per capita income and unequal
distribution of income, wealthand power. The inequalities arise due to
difference in ed ucation qualification, skills, abilities, experience,
inheritance of wealth etc.
There are two ways of studying income distribution, personaland
functional.There are various methods of measuring inequalityin personal
income distributions.One is to divide p opulation intodistinct groups and
study how much income is received by eachgroup.Another method is to
construct a Lorenz curve which show s the actual quantitative relationship
between the percentage of income recipients and the percentage of the
total inco me receive dduring a given year.The diagonal shows perfect
equality.The position of the Lorenz curve represents the degree of
inequality.Another method of measuring inequality is to estimate the Gini
coefficient. Another method of studying income distributi on is functional
distribution.
The economic growth of a country may lead to inequalities initially. But
as the economy achieves development, inequalities become less. Prof.
Kuznets had studied empirically the experience of different countries. The
inverted ‗u‘shaped Kuznets curve explain the inequalit ies experienced at
different stages of development.The unit also discusses the causes of
inequalitiesand how inequalities can affect economic development
adversely.Inequalities can lead to imbalance in distribut ion of resources
and can retard economic and social devel opment. It can adversely affect
production and lead to inefficiency. It can also affect socialstability. Thus ,
it is necessary to take appropriate steps to reduce inequalities in income
and wealth di stribution.
5.10 QUESTIONS
Q1. Write a note on -
a) Concept of Human Capital
b) Role of Education, Health and Nutrition in Human Capital
c) Meaning and Measurement of Poverty
d) Measures to Eradicate Poverty
e) Meaning and Measurement of Inequality
f) Measures to Eradicate Inequality
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79 6
STRUCTURAL ISSUES IN
DEVELOPMENT PROCESS – 2
Unit Structure:
6.0 Objectives
6.1 Inclusive Growth
6.2 SHG and Microfinance
6.3 Migration
6.4 Urbanization
6.5 Formal and Informal Sector
6.6 Summary
6.7 Questions
6.0 OBJECTIVES
 To understand the meaning o f Inclusive Growth
 To know the concepts of Self -Help Groups (SHGs) and Microfinance
 To study of the concepts of migration and urbanization in detail.
 To study the formal and informal sector and urban Informal Sector
6.1 INCLUSIVE GROWTH
6.1.1 Introduction :
 Inclusive growth means economic growth that creates employment
opportunities and helps in reducing poverty.
 It means having access to essential services in health and education by
the poor. It includes providing equality of opportunity, empowering
people through education and skill development.
 It also encompasses a growth process that is environment friendly
growth, aims for good governance and helps in creation of a gender
sensitive society.
 As per OECD (Organisation for Economic Co -operation and
Develo pment), inclusive growth is economic growth that is distributed
fairly across society and creates opportunities for all.
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80 6.1.2 Elements of Inclusive Growth:
1. Skill Development
 Harnessing the demographic dividend will depend upon the
employability of the working age population, their health, education,
vocational training and skills. Skill development plays a key role here.
 India is facing a dual challenge in skill development:First, there is a
paucity of highly trained workforce . Second, there is non -employment
of conventionally trained youths
 According to the Economic Survey 2017, over 30% of youth in India
are NEET (Not in education, employment or training).
 Similarly, UNICEF 2019 reports stats that at least 47% of Indian youth
are not on track to have the education and skills necessary for
employment in 2030.
2. Financial Inclusion
 Financial Inclusion is the process of ensuring access to financial
services to vulnerable groups at affordable costs.
 Financial inclusion is necessary for inclusive growth as it leads to the
culture of saving, which initiates a virtuous cycle of economic
development.
3. Technological Advancement
 The world is moving towards an era of Industrial Revolution
4.0. These technological advancements have capabilities to both
decrease or increase the inequality depending on the way these are
being used.
 Several initiatives have been taken by the government, eg. Digital
India Mi ssion, so that a digitally literate population can leverage
technology for endless possibilities.
 Technology can help to combat other challenges too, eg:
Agriculture - Modern technology can help in making an agro -value
chain from farmer to consumer more eff icient and competitive.
Manufacturing - Technology can resolve the problems of finance,
procuring raw materials, land, and linkages with the user market. GST was
made possible only with the help of sound technology.
Education - Innovative digital technologie s can create new forms of
adaptive and peer learning, increasing access to trainers and mentors,
providing useful data in real -time.
Health - Technologies could transform the delivery of public health
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81 Governance - Technology can cut down delays, corruption, and
inefficiency in the delivery of a public service
4. Economic Growth
 India is among the fastest -growing major economies in the world.
However, currently Indian economy is facing slowdown due to both
cyclic and structural challenges.
 However, the target of becoming a $ 5 trillion economy by 2024 -25 can
allow India to reduce inequality, increase social expenditure and
provide employment to all.
5. Social Development
 It means the empowerment of all marg inalised sections of the
population like SC/ST/OBC/Minorities, women and transgenders.
 Empowerment can be done by improving institutions of the social
structure i.e. hospitals especially primary care in the rural areas,
schools, universities, etc.
 Investme nt in social structures will not only boost growth (by fiscal
stimulus) but will also create a healthy and capable generation to handle
future work.
6.1.3 Challenges in Achieving Inclusive Growth:
1. Poverty
 As per the Multidimensional Poverty Index (MPI) 2018, India lifted
271 million people between 2005 -06 and 2015 -16, with the poorest
regions, groups, and children, reducing poverty fastest. India
demonstrates the clearest pro -poor pattern at the sub -national level.
 Still, despite the massive gains, 373 m illion Indians continue to
experience acute deprivations. Additionally, 8.8% of the population
lives in severe multidimensional poverty and 19.3% of the population
are vulnerable to multidimensional poverty.
2. Unemployment
 As per the Periodic Labour Force Survey (PLFS) of NSSO, the
unemployment rate among the urban workforce was 7.8%, while the
unemployment rate for the rural workforce w as 5.3% totaling the total
unemployment rate at 6.1%.
 The quality and quantity of employment in India are low due to
illiteracy and due to over -dependence on agriculture.
 The quality of employment is a problem as more than 80% of people
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82  Low job growth is due to the following factors:Low investment , Low
capital utilization in industry and Low agriculture growth .
3. Agriculture Backwardness
 Around 44% of people in India have agriculture -related employme nt
but its contribution to the Indian GDP is only 16.5% which lead to
widespread poverty
 Issues in agriculture are as follows:
o Declining per capita land availability
o A slow reduction in the share of employment
o Low labour productivity
o Decline in agriculture yield due to climate change, land degradation
and unavailability of water
o Disparities in growth across regions and crops
3. Issues with Social Development
 Social development is one of the key concerns for inclusive growth.
But it is facing some problems s uch as:
o Significant regional, social and gender disparities
o Low level and slow growth in public expenditure particularly in health
and education
o The poor quality delivery system
o Social indicators are much lower for OBC, SC, ST, and Muslims
o Malnutrition amo ng the children - India ranks 102nd in Global
Hunger Index
4. Regional Disparities
 Regional disparities are a major concern for India. Factors l ike the
caste system, gap between rich and poor etc. contribute to the regional
disparities which create a system where some specific groups hold
more privileges over others.
 Some of the regional disparities problems are as follow:
o In terms of literacy rat e, Kerala is the most literate state with 93.1%
literacy, on the other hand, literacy rate of Bihar is only 63.82%
o In terms of per capita income, Goa's per capita income is Rs 4,67,998
in 2018 while per capita income of Bihar is just one -tenth of that ie R s
43,822
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83 6.1.4 Measuring Inclusive Growth:
1. Inclusive Development Index (IDI)
 In the Inclusive Development Index (IDI) compiled by the World
Economic Forum (WEF), India ranked 62nd out of 74 emerging
countries and was among the least inclusive countries in Group of 20
(G-20) countries.
 The IDI is based on the idea that most people base their country’s
growth not on GDP but by their own standard of living.
 It gives a measure of inequality based on three parameters:
o Growth and development
o Inclusion
o Inter -generational equity and sustainability.
 India also did not make it to the top 10 most inclusive emerging and
developing economies, where its neighbours Nepal, China and Sri
Lanka made a mark.
 India performed its best in terms of “intergenerational equity an d
sustainability”, ranking 44th, for which credit can be attributed to its
demographic dividend.
2. Social Progress Index (SPI)
 It is an aggregate index of social and environmental indicators which
includes the following:
o Basic human need
o Foundation of wel l being
o Opportunity
 Limitation of other indices:
o GDP: It does not include non -market activities.
Excludes factors like environment, equality, etc
o Gini Coefficient:
Only income inequalities are included and other inequalities like social
inequality, equalit y of opportunities, etc are ignored.
o Gross Happiness Index:
Ignores gender neutrality, education, etc
o HDI:
The unequal distribution of wealth is ignored.
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84 o SPI measures the outcomes of the government measures rather
than money spent. It also takes account of efficiency by which money
spent by the government has been used.
o It is more comprehensive.
3. Global Slavery Index
 It is released by the Walk Free Foundation of Australia.
 Modern Slavery means a situation where one person has taken away
another person's freedom, to control their body so that they can be
exploited.
 Factors responsible for modern slavery:
o Absence of rights
o Lack of physical safety
o Access to necessities such as health care, education, food, etc
o Pattern of migration
 Government actions to reduce modern slavery:
o India has worked in the right direction by criminalizing trafficking,
slavery, forced labor, child prostitution, and child marriage.
6.1.5 Measures Taken India to Achieve Inclusive Growth :
 Several schemes are being impleme nted by the government for
inclusive growth which includes the following:
o Mahatma Gandhi National Rural Employment Guarantee Act Scheme
(MGNREGA)
o Prime Minister’s Employment Generation Programme (PMEGP)
o Mudra Bank scheme
o Pt. DeenDayal Upadhyaya Grameen Kau shalya Yojana (DDU -GKY)
o Deendayal Antyodaya Yojana - National Urban Livelihoods Mission
(DAY -NULM)
o SarvaSiksha Abhiyan (SSA)
o National Rural Health Mission (NRHM)
o Bharat Nirman
o Swachh Bharat Mission
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85  Government is working with NGOs and International groupings in
policy making eg:
o DISHA Project is being implemented in partnership with UNDP for
creating employment and entrepreneurship opportunities for women in
India.
 NITI Aayog's Strategy for New India @75 has the following objectives
for the inclusive growth:
o To have a rapid growth, which reaches 9 -10% by 2022 -23, which is
inclusive, clean, sustained and formalized.
o To Leverage technology for inclusive, sustainable and participatory
development by 2022 -23.
o To have an inclusive development in the cities to ensure that urban poor
and slum dwellers including recent migrants can avail city services.
o To make schools more inclusive by addressing the barriers related to
the physical environment (e.g. accessible toilets), admission procedures
as well as curriculum design.
o To make higher education more inclusive for the most vulnerable
groups.
o To provide quality ambulatory services for an inclusive package of
diagnostic, curative, rehabilitative and palliative care, close to the
people.
o To prepare an inclusive policy framework with citizens at the center
6.2 SELF -HELP GROUPS (SHGs) AND MICROFINANCE
Microfinance refers to the provision of small scale financial services to
economically active people. The provision of financial s ervices like credit
facilities to operate small enterprises or micro enterprises. These units
may be engaged in a variety of activities. They may be people who work
for wages or commissions. They may be people who make an income
from renting out their land , vehicles, draft animals or machinery and tools.
These households have multiple sources of income.

More than 500 million of the world‘s poor population are economically
active. These poor population earn their livelihood by being self
employed or they wor k in micro enterprises. They produce a variety of
goods in small workshops, trading and retail activities, making pots,
furniture or sell fruits and vegetables. It is difficult for these people to
secure capital and they have hardly any access to financial services. Since
the institutional soruces are not ready to finance these poor people, they
depend on family, friends etc. Microfinance is the solution to the needs
of the people for finance. Though the movement was originally started for
providing micro c redit, it started covering a variety of financial
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86 and Rural Development) finances more than 500 banks. These banks
lend money to Self Help Groups. The bank ability of the rural poor was
discovered. With new lending methods, the rural poor repaid loans on
time. There has been a tremendous growth in the number of successful
micro finance institutions which are reaching out to a number of poor
people and that are becoming commercially viable.

Features of Microfinance Services:

1. Micro finance loans can be used for a number of purposes : It
enables the poor to accumulate assets and enable the poor to be
economically independent. It helps the poor to invest in income
generation activities. They can improv e their standard of living
through better education health and housing. The people have
flexibility in loan use. It is understood that the clients themselves
know about how best to manage their funds.

2. Microfinance gives importance to financial services an d not
subsidies : The low income entrepreneurs are more interested in
getting working capital and run their business. They require capital and
continued access to financial services rather than subsidies. The small
entrepreneurs borrow small amounts and are able to comfortably
pay off the loans while making a profit for themselves. The people
find it better to borrow from micro finance institutions rather than from
money lenders or the government.

3. The micro finance revolution has helped in women
empower ment : Since women constitute the most vulnerable section
of the society, MFIs have a special role to play in the upliftment and
empowerment of women. Women face a number of disadvantages and
problem since they have fewer economic opportunities and they he ar the
burden of domestic work, child bearing, education, health and nutrition
of children. MFIs have found to the very helpful especially for women.
Experience has proved that women are sincere and regular in
repayment.
Microfinance supports institutions and not projects : There is a stress on
the creation of institutions rather than projects for meeting the financial
needs of the poor on a sustained basis. It has been proved that successful
microfinance institutions reach large numbers of clients and beco me
financially self – sufficient. The objective of setting up micro finance
institutions is to reach out to the very poor people and provide them
with quality financial services. The success of microfinance is due to the
following features.
(i) It is possible to know the needs of the clients and design
appropriate products. For example, the institutions are able to
meet specific requirements of the people like short term loans,
high liquidity, saving services etc.
(ii) Reducing risk and increasing value to the clien ts : There is no
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87 motivated to repay. For example the idea of poor group lending is
adopted. In this several people guarantee one another‘s loan and
incentives are given to people who repay on time.
(iii) Low administration cost : Since the operations are efficient and
simple, the administrative expenses are low.

5. The microfinance movement has brought out the fact that
institutions can serve the poor and still be sustainable.

6. There are a varie ty of financial services tailored to meet the specific
requirements of poor population. For example, micro credit is a part
of microfinance. Experiments with micro credit in Bangladesh have
shown that it is possible to help extremely impoverished people to
engage in self employment projects that allow them to generate an
income and enable them to create wealth thus getting rid of
poverty. The success of the micro credit policy is urging the
mainstream finance industry to consider micro credit as a source
of future growth. This brings out the various possibilities for the
growth of micro finance which can revolutionize the society by
empowering the poorer sections of the society.

6.3 MIGRATION
Migration means the long time relocation of an individual, household or
group to a new location outside the community of origin. Urbanization leads
to migration. Rural urban migration was once though normal and natural in
the economic development literature. Internal migration was considered as a
natural process in which su rplus labour was gradually withdrawn from the
rural sector to provide needed manpower for urban industrial growth. Today
besides internal migration, international migration is a lso on the increase.
Causes of Migration:
There are various factors which lead to migration.
1) The conditions in the place of origin may not be sufficiently rewarding
for the people. The migrants feel that they are not getting economic
security and well being due to limited job opportunities. They feel that
they will be better off wi th their skills and better education. Thes e factors
constitute the push factors.

2) The migrants may be attracted by the potential opportunities in the new
place. Better wages, better living conditions, infrastructure may induce
people to migrate. The movemen t usually is a more developed place with
better amenities and life styles. These are the pull factors.

3) Government policies have an important role to play in migration.
Government policies may encourage large produces or farmers for
efficiency and economies of large scale production. The small farm ers of
producers may be discouraged. They may be forced to migrate in such a
situation.
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88 4) Policies for increasing competition and efficiency calls for minimum
government intervention. As a result, concessions and ben efits like farm
subsidies and cheap credit policies meant to help the farmer will not be
given to the farmers. This implies more burden on the farmers since they
do not get any financial support. This situation may force the farmer to
sell the land and mig rate to cities. Policies to reduce the urb an cost of
living and distribution and sale of food at fair prices under the
government scheme adversely affected the rural farmers. The prices of
food grains are not sufficient even to cover the cost. Farming feel them is
no more attractive. Hence they te nd to look for better opportunities in
cities. Internationally, migration policies affect migration.

5) Industrialization was the major factors which stimulated migration in the
19th and 20th centuries opportunities f or work in factories and industries
led to large scale migration. At present there is so much surplus migratory
labour in cities which are available cheap. This lowers the cost of
production, which is attractive for foreign investment companies.

6) Though wag e differentials are the prime cause for mi gration. There are
many social and circumstantial factors like marriage, migration of family
members, disasters, famine which may induce migration.
Effects of Migration:
The experience of LDCs have shown clearly th at rural – urban migration is
harmful in many ways. The job creation in urban areas is not sufficient to
absorb the migrants and the migrants are a burden on the infrastructure in
urban areas.

1) Migration results in rural urban structural imbalances both on the
supply side and the demand side. The educated skilled workers migrate
from the rural areas in search of better opportunities. This will lead to a
drain of human capital from the rural areas which may affect rural
development adversely.

2) Migration to the urban areas increases pressure on job creation for the
surplus labour force. This is so because urban job creation may mean
use of more capital and other scarce complementary resources which
may be difficult especially for LDCs.

3) The industries may be forc ed to adopt capital intensive technology due
to rising wage rates and other be nefits which have to be given to the
labour force. Moreover these countries may not be able to select the
appropriate labour intensive production technologies. If the job
creatio n lags behind it will result in a situation of increasing urban
surplus labour . Too much migration reflects the underdevelopment of
the economy. Migration upsets the pattern of sectoral and geographic
economic activity, income distribution and even populat ion growth.

4) The policies of the government may have a direct and immediate
impact on migration. For example, policies related to land tenure
arrangement commodity pricing, taxation export promotion import
substitution, exchange rate policies etc. affect mi gration.
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89 5) All the above effects imply that it is necessary to formulate
develop ment policies taking into account the internal and
international migration and the issues of population
distribution .
6.4 URBANIZATION
An urban area is a geographical area, const ituting a city or town.
Urbanization means the growth of cities. According to the United Nations
definition, settlements of over 20,000 are urban and those with more than
1,00,000 are cities.
Urbanization is a process in which an increasing proportion of an entire
population lives in cities and t he suburbs. It is related to the process of
industrialization. Urbanization was at its peak in the late 19th and early 20th
century. This was the period of industrial revolution. During this period,
better opportun ities come up in the cities due to the set ting up of factories and
industries. When human productivity increased due to industrialization,
surpluses were generated in both agriculture and industry. Increasing number
of population started living in cities. The factories and industries were set up
in cities due to a number of advantages. The benefits of science, research and
technology directly benefit the people who reside in cities.
Urbanization which is the result of industrialization and modernization
involves a shift of population from the rura l to the urban areas. Urbanization
is the increase over time in the population of cities in relation to the regions‘
rural population. It is the proportion of the total population or area in urban
localities over t ime. Urbanization can also be defined as t he increased spatial
scale and the density of settlement as well as business and other activities in
the area. People are attracted to more to the urban areas since there are
opportunities for business expansion. T his involves a shift of people from
agricu lture to other activities like trade, manufacture etc. Urbanization leads
to a number of changes like change in attitude, beliefs, values and behaviour
patterns. The various facilities provided by the urban areas l ike better
education, health care system, employment chances, civic facilities ard social
welfare attract people to urban areas .
Urbanization and India :
The urban areas in India have a major role towards the growth of the
country‘s economy. Urbanization is an integral part of the process of
economic growth. Only 1/3rd of Indians live in cities. But these urban areas
generate more than 2/3rd of the country‘s GDP and account for 90% of
government revenue. There has been an uncontrolled growth of India‘s towns
and cities as more have migrated to these areas in search of economic
opportunity. In cities like Mumbai slums constitute 1/4 th of urban housing
and 50% of the population reside in slums.
Generally, the more developed the country measured by per capita i ncome,
the greater the share of population living in urban areas. The highest income
countries like Denmark are also the most urbanized while the very poorest
countries such as Rwanda are the least urbanized. A very important question
as far as LDCs like I ndia are concerned is that how they will cope,
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90 Causes of Urbanization:
The large cities and towns are the result of various socio - economic and
political factors. The urbanization has led to changes in the lan d use pattern
and there has been change, in the organization as well as governance. Various
factors have contributed t o urbanization process.

1. The increase in population has been a major reason for urbanization.
There has been an increase in population due to high birth rate and low
death rates. Another reason for the population increase is the large scale
migration of rur al population to urban areas in search of livelihood and
better wages. Rural economy has failed to give gainful employment to the
rural po pulation and there is over crowding and uncertainty in agriculture.
People migrate to urban areas in search of better opportunities in
education, job and general standard of living.

2. Urbanization and migration are prompted by competition, diversity and
oppo rtunities which are absent in the villages.

3. With agriculture the only occupation, the farmers may find it difficult to
grow beyond a certain limit. Agriculture has become very unpredictable
and risky since it depends on environmental factors, climatic cond itions,
floods, pest attacks etc. The farmers have limited choice and crop failures
have become common. Somehow the government schemes have not been
able to improve the conditions in farming. Cities offer various
opportunities to earn a living.

4. The industr ies and businesses are located in the urban centres. Industrial
and service sectors offer opportunities for growth. People can always find
work and earn money through various activities which the rural areas
lack.

5. With regard to education, transport, housi ng and other basic services
urban areas are far ahead and are able to cater to the needs of the people.
The presenc e of better health facilities and hospitals are attractive to
people since the elders and sick people in the family can be looked after.
Even in the field of entertainment urban areas offer a variety.

6. One of the causes for the urbanization and migration i s also
industrialization and commercialization of farming operations which
resulted in unemployment. Thus unemployment caused due to
mechaniza tion has also contributed to migration. Moreover urban life is
projected as glamorous and superior by mass media w hich is also
encouraging increased migration.

7. Urban sprawl or increasing urbanization has led to the prolific growth of
suburbs. Government ha s been investing in the development of suburbs
by creating better infrastructure facilities. The advantages are c heap
housing, nearest to cities, less population, low taxes etc .
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91 Effects of Urbanization:
There are positive and negative effects of urbanizati on. The positive effects
are the following.

1. Urbanization helps in enhancing productivity. Productive activity in urban
centres allows for a larger scale of operation, leading to specialization and
economies. The size of operation allows sharing and risk po oling. There
will be mutua lly beneficial activities and cost efficiency which will make
the firms more efficient.

2. Urbanization leads to a total change in the character of local areas. The
nature of occupation, services and the way the various activities ar e
conducted undergo a tho rough change. For example, one major change
will be the shift from the agriculture and service oriented sectors to large
scale industries and business which becomes specialized and there will be
more professionalism in their dealin g. The business houses or industries
become independent, risk taking and resourceful, fit to face competition
and risk.

3. There will be specialization of goods and services in larger cities and they
will provide the goods to the smaller cities like wholesal ers. In this
manner busin ess grows and there will be expansion of capital and
financial services. The wages paid also will be higher in larger cities.

4. Due to the facilities available in urban areas the urban productivity will be
much higher as compared t o rural productivity. Thi s will further induce
migration from rural to urban areas.

5. Another effect of urbanization is that it encourages the growth of
commercial activities and promotes efficient utilization of resources. This
will encourage the optimum pr oduction and distributio n of goods.

6. City life helps in improving the quality of life : It helps individuals to grow
socially, culturally, widen their horizons and learn new technology and
applications. It enable a person to keep upto date and active in var ious
fields and enables people to excel in their activities.

7. Urbanization will necessitate better housing, sanitation and transport
facilities. There will be increased health awareness and people
consciously try to improve their living styles. The families start opting for
lesser children and better education for them. Hence urban life has a
strong socio cultural impact on the people. Since the cost of bringing up
children is more they start limiting the family size.

8. Urbanization helps in social and cultura l integration since t he cities
function as the melting pots of cultures. The diverse culture merge and
people learn from each other. They also learn to live with each other in
harmony.

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92 9. Urbanization leads to agglomeration economies. These economies arise
and are enjoyed by the business houses, workers and consumers when
they are localized in a particular area. The benefits result from the
economies of scale and network effects. The benefi ts arise due to factors
like the growth of infrastructure like schools, hospitals and other services.
Benefits also arise in productive activities due to cost benefits, increased
demand, competition, specialization and division of labour etc.

Urbanization also leads to many problems and it is necessary to arrest the
negative effects of urbanization in view of the welfare of the society as a
whole. The negative effects are the following.

1. Urbanization leads to overcrowding in cities. In countries like India
urbanization has led to the growth of slums. The infrastructure faci lities
like water, electricity housing etc. have not expanded sufficiently to
accommodate the large number of migrant population. There is too much
pressure on the infrastructure facilitie s. This leads to adverse living
conditions. Housing and sanitation b ecome problems. Over crowding and
congestion make life miserable. The governments are not in a position to
cope with this situation.

2. Urbanization may co -exist with unemployment also. Anti social
activities become common. This leads to activities like al coholism drug
abuse etc.

3. Pollution of air and water are the other serious harmful effects of
urbanization. Polluting vehicles and unthoughtful expansion of
construction and other activities adversely affect the environment. More
and more lands will have be cleared for construction purposes. Eg.
Destruction of mangroves in Mumbai. This results in loss of bio diversity.
There will be serious environmental losses due to pollution in various
forms like water pollution, air pollution and noise pollution. Over use of
transport leads to an pollution and noise pollution. Safe drinking water is a
problem in urban areas. Pollution due to the industrial wastes and drainage
get mixed with the drinking wat er.

4. Increased demand for housing results in hike in rents and overpricing of
residential areas. This makes decent housing unaffordable for most of the
people. This leads to the growth of slums. Moreover uncontrolled
expansion of cities have been a strain on public utility services like
energy, education, health care sanitation, transportation etc. The pressure
on infrastructure leads to traffic congestion, lack of sanitation, poverty,
lack of recreational activities, global warming, loss of forest cover an d
resulting over heating. It also leads to destruction of agri cultural land and
wildlife. Urban sprawl or development of suburbs increases traffic and
destroys open space. There will be a scattering of resources. The growth of
urban sprawls leads to neglec t of infrastructure, waste of resources and
heavier traffic wi th its ill effects. The economies of agglomeration turn
into diseconomies as a result of too much competition. However, with the
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Structural Issu es in
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93 another trend is also developing which is the idea o f working from home.
This trend, if continuous can solve many of the problems and ill effects of
urbanization.
6.5 FORMAL AND INFORMAL SECTOR
Formal sector in India :
In this sector all jobs with specific working hours and regular wages and
the worker’s job is assured . It is a licensed organization and is liable to
pay taxes.Banks and other corporations comes under formal sectors . Rag
pickers, moneylenders, broke rs are considered as a part of an informal
economy.It is also described as the grey economy.
Informal sector in India :
Majority of the population is into the informal sectors.Informal sectors are
deemed low with low production value.In India agriculture, dairy,
horticulture and related occupation employ 52 percent of the workers.It
lacks security both legally and economically . About 25 percent of the
informal sectors constitute urban employment in India
6.6 SUMMARY
Economic growth and urbanization are inter related factors. Urbanization is a
process in which an increasing proportion of an entire p opulation lives in
cities and the suburbs. It is related to the process of industrialization.
Urbanization and mo dernization results in a shift of the population from the
rural to the urban areas. Opportunities of employment and better living
standards att ract people to urban areas. It involves a shift of people from
agriculture to other activities. The urbanization was caused by a number of
factors like the increase in population, declining opportunities in the
agricultural sector, better opportunities, tr ansport, education, housing and
other basic services.
Urbanization led to a number of positive and negative effec ts. The positive
effects are increase productivity, increased commercialization
professionalism, growth of capital and financial services, effi cient utilization
of resources, better housing and sanitation and transport facilities and social
and cultural in tegration. Moreover, urbanization leads to agglomeration
economies. The negative effects are over crowding, anti social activities,
pollution, increase in rents, strain on public utility services etc.
The theory of migration implies that the labourers com pare their expected
incomes for a given time horizon in the urban sector with the prevailing
average rural incomes. Migration takes place only if the expected returns are
attractive. In deciding to migrate, the individuals must balance the
probabilities an d risks of being unemployed or under employed for a
considerable period of time against the positive urban -rural real income
differential. Rura l- urban migration acts as an equilibrating force that equates
rural and urban expected incomes. The model explai n the co -existence of
rural to urban migration and high unemployment in the urban sector. The
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94 The module also explains the causes for migration. Migration is encouraged
by prospects of better e conomic security, job opportunities, industrialization
and wage differentials. Migration leads to a number of problems like lack of
sufficient job opportunities, burden on infrastructure, rural -urban structural
unbalances, increasing wage rates. Therefore, it is necessary to formulate
policies with regard to migration, both internal and international .
6.7 QUESTIONS
Q1. What are the causes and imp act of migration?
Q2. What are the causes and imp act of urbanization?
Q3. Write a note on following topics in detail.
a) Inclusive Growth
b) SHG and Microfinance
c) Formal and Informal Sector
d) Urban Informal Sector

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95 7
PLANNING, TECHNOLOGY AND
ECONOMIC DEVELOPMENT - 1
Unit Structure:
7.0 Objectives
7.1 Meaning and Feature of Infrastructure
7.2 Importance and Role of Infrastructure in Economic Development
7.3 Role of Technology in Economic Development
7.4 Labour Inte nsive versus Capital Intensive Technology
7.5 Summary
7.6 Questions
7.0 OBJECTIVES
 To study the concepts and role of infrastructure in economic
development.
 To know the role of technology in economic development.
 To understand the labour intensive versus capital intensive technology
concepts.
7.1 MEANING AND FEATURES OF INFRASTRUCTURE
Infrastructure is an important factor contributing to the rapid economic
growth of any country. The term Social Overhead capital is also used to
describe infrastructure. So cial Overhead Capital is different from the
directly productive capital. Directly Productive capital includes the
material things like plant, machinery, equipment, technology, etc. On the
other hand, Social Overhead Capital includes all those basic service s that
help in carrying out economic activities in the country. These services
indirectly help economic development but their presence is must.
Albert O. Hirschman, in his 'Strategy of Economic Development' defines
infrastructure or Social Overhead Capital as follows:
"SOC (Infrastructure) is usually defined as comprising those basic services
without which primary, secondary and tertiary activities can not function.
In its wider sense, it includes all those public services from law and order
to education an d public health to transport and communications, power
and water supply, as well as agricultural overhead capital like irrigation
and drainage system."
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96 In other words, the term infrastructure can be defined in narrow as well as
wider sense. In narrow sens e, investment in infrastructure should be
technically indivisible. That is, there should be a lumpiness in the
investment. The capital -output ratio in this type of investment also is
generally high. If we really define infrastructure in this narrow sense, it
will only include the following activities :
a) Power and electricity generation
b) Petroleum production
c) Transport and communication, etc.
d) Irrigation
In the wider sense, infrastructure includes all those services which
generally are provided by g overnment and they are at a regulated price.
This definition allows us to include following services in the concept of
infrastructure alongwith those which are mentioned above :
e) Education
f)Health
g) Law and order, etc.
Features of Infrastructure
What k ind of investment should be called as the investment in
infrastructure? We may be able to answer this question after understanding
the following features of infrastructure.
1) Infrastructure generally falls in the category of public good
Private goods are those for which a consumer has to pay himself. The
amount of consumption on private goods depend upon the purchasing
power of the consumer. Public goods, on the other hand, are supplied by
the state and they are for mass consumption. These may be available free
of cost (Eg: - roadways, public parks, municipal hospitals) or at a very
reasonable cost fixed by the state (electricity, water etc.). Investment in
infrastructure, thus, falls in the category of public goods. The government
makes the provision of inf rastructure so that the masses would be able to
avail these services at reasonable cost.
2) Investment in infrastructure is high cost
Generally, investments in infrastructure are beyond the capacity of
individual private investor as a huge amount of money is required to be
invested in providing for these services. Another reason why the private
investors may be reluctant to invest in infrastructure is that these
investments have a very long gestation period (Gestation period is a time
between actual investm ent and returns from the period investment). Under
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97 provide these services to the people. This is also necessary from the point
of view of social welfare.
3) Infrastructure provides external economies or advantages.
A development of Konkan railway has led to the commercial growth of
many small villages in konkan through which the railway passes.
Infrastructure development gives additional benefits to all the people
staying in that are a. These are called external economies or advantages. Of
course, these advantages may not be equally distributed to everyone but
such investments certainly help in commercialising these areas.
4) Innovations are possible with infrastructure development.
It is argued by many scholars that an improvement in infrastructure
provides a stimulus to the innovations and.discoveries. Investment in
education or provision of good health facilities make people think, bring
out new ideas and apply these ideas for the pr actical purposes.
5) Social Overhead Capital or infrastructure leads to directly
productive capital.
Investment in roadways, railways, power -generation projects, irrigation
etc leads to a condusive environment for the investment in industry,
agriculture, t rade and other commercial activities. These areas are
preferred by the private investors where infrastructure is available in
adequate quantities. So it is clear that development of infrastructure is a
precondition for the development of other productive a ctivities in the
economy.
7.2 IPORTANCE AND ROLE OF INFRASTRUCTURE IN
ECONOMIC DEVELOPMENT
As discussed earlier, an investment in infrastructure is a pre -requirement
for rapid growth of other productive sectors in the economy. Backward
nature of agricultu re for example, can be improved only by providing
irrigational water throughout the year, using electricity and power for
running tractors and other mechanical equipments, having market linkages
and by preserving grains to market them at a right time. All this requires
an investment in the services like irrigation, power plants, transport and
communication, etc. Industrial sector and manufacturing also can be
modernised only through adequate materials and marketing finished
products, etc. Proper, adequate a nd quick and regular power supply,
proper transport and communication linkages for buying raw
transportation is required for the development of trade and commerce in
the country. Location of industries is highly affected by the availability of
all these se rvices. If country wants to have balanced regional growth,
provision of infrastructure itself can be a single influential factor in doing
so. Thus, all agriculture, industry and trade and services are dependent on
the development of infrastructure for thei r growth and modernisation.
Hence infrastructure plays a vital role in developing on economy at rapid
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98 Over the years, two alternative strategies have been followed by the
governments to have infrastructure development in the country. One is to
provi de such facilities and services in accordance with demand and two, to
make arrangements for such services well in advance, even before the
demand for them arises. In the following brief analysis, we will try to
understand these two alternative strategies a nd their pros and cons.
a) Providing infrastructure as per the demand.
With rapid industrialisation, agricultural development and implementation
of economic planning, demand for power, transport of communication,
housing, water, etc. increases rapidly. The country faces acute shortages of
these services and hence a huge investment is made in infrastructure. This
is demand -based expansion of infrastructure. Five year plans accord
highest priority to infrastructure and through allocation of funds
governments try to improve the infrastructure facilities in the economy.
An advantage of such a demand -based expansion is expansion is demand
related & so there is no wastage. The problem with this strategy may be a
lack of co -ordination among different types of infra structure facilities.
That is, if a country is going to plan its infrastructure investment based on
each project separately, then there is a possibility of lack of integration
particularly for providing transport facilities. The road ways, railways and
water transport should actually be developed in co -ordination. But a
project -wise outlook and not an integrated outlook to infrastructure
development may defeat the objective of developing an integrated
transport system for the country.
b) Providing infrastru cture much before the demand
In the late 19th and early 20th centuries, European countries followed the
other kind of strategy of infrastructure development in the underdeveloped
countries. With a view to develop trade with the UDCS, these European
countri es first developed ports, constructed railways routes and built
roads, particularly around the big cities. This helped them in having quick
and easy market linkages. This strategy implies making the provision of
infrastructure first and then the demand for them will automatically
follow. According to R. Nurkse, the direct productive investment
automatically follows the investment in social Overhead capital.
Investment in infrastructure is pioneering or basic investment and other
investments (say in agricult ure, industry, trade) would follow the
investment in infrastructure. So according to this group of experts first
infrastructure should be provided all over the country and then the
balanced regional development will take place. The problem with this
strate gy crops up when an underdeveloped country has a limited
resources. Whether these limited resources should be first invested in
providing 101 excessive infrastructure or whether these resources should
be invested in the directly productive activities? Inf rastructure first and
then more productive investment in agriculture, industry and trade may
lead to slow growth with better income distribution. Demand based
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99 distribution of wealth and incom e. Each country has to make its own
choice according to its priorities.
Let's Recall
 Infrastructure is important factor in the economic development of any
country.
 Investment in infrastructure is special type of investment which
requires huge financial res ources, has a long gestation period and does
not assure immediate returns.
There is a constant debate among the thinkers whether a country should
invest in infrastructure first or in other directly productive sectors first.
7.3 ROLE OF TECHNOLOGY IN ECONOM IC
DEVELOPMENT
At the outset it is important to understand the factors that led to technical
progress in the western world. The technical progress was either
competition led or demand led.
Once industrial revolution began, a whole lot of inventions and
discoveries followed in the industrial production and other fields. Each
producer wanted to give something new and superior to his consumer and
in this competition, many innovations took place.
Similarly, industrial revolution in the western countries brough t many new
commodities in the market. The consumers were highly enthusiastic about
these new commodities and hence the demand for goods in the market
increased very rapidly. This encouraged the producers to further supply
new commodities and this led to th e innovations and inventions. Thus,
there was a continuous upgradation of technology either out of
competition or out of increased demand. This had a very positive impact
on the economic growth of the western countries.
Technical progress influences econom ic development of a country in
many wages.
1) Greater output is possible - Industrial revolution and the new
discoveries thereafter increased the total output of Western countries very
rapidly.
2) Shorter working Hours - The workers have to work with machin es and
- equipment which reduces their physical efforts and the workers do not
have to work for long hours.
3) Job opportunities - Technical progress led to the availability of many
skilled jobs in the field of engineering, design, maintenance and other
innovative fields.
4) Efficient use of raw materials - Increase in productivity due to the use
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100 resources in a better way. Eg. mines could be extracted more efficiently,
from same plot of la nd more output was possible.
5) Scientific Attitude - Introduction and use of modern technology help in
changing the traditional attitude of the people. Generally, it is seen that a
person using modern technology is a person with scientific attitude and is
less superstitious.
6) Example of Japan - in realising the role of technical progress in
economic development, it is important to cite an example of Japan. Japan
was a traditional agricultural country about a century ago. But the
Japanese undertook delibe rate efforts to study modern industrial methods
used abroad, modern management techniques that helped the western
countries to increase productivity and efficiency. They imported modern
equipments, studied them and adopted the foreign techniques to suit th e
local Japanese conditions. This greatly helped Japan to come up as a
highly developed and technological superior nation. Technical progress, is
the sole important factor for such a rapid economic growth in Japan.
7) Negative Effect of Technical Progress Technology also affects
negatively - According to some experts technological progress may lead
to displacement of workers. This results in massive unemployment.
The technical progress, however, is inevitable. In the long -run, it is going
to be beneficial t o the economy of a country by providing better jobs. The
short run problems of labour -displacement can be resolved once the
demand conditions in the economy are improved. Hence, technical
progress is an important factor that can lead to rapid economic grow th.
7.4 LABOUR INTENSIVE VERSUS CAPITAL
INTENSIVE TECHNOLOGY
A comparison between capital intensive and labour intensive technology
has led to a huge discussion on the topic. It has been proven by many
studies that if the policy objective of a country is m aximisation of
economic growth, then capital intensive technology should be adopted.
More surplus is created through the use of capital intensive techniques and
hence more investible fund can be generate and thus country can progress
further. According to A. K. Sen technology that uses more labour adds
output lesser in quantity than it adds consumption. That means when more
labourers get employment at a given wage rate, the consumption level in
the economy goes up. This leaves less surplus for future invest ment and
whatever is produced is mainly consumed. This maximises the
statisfaction in the short period but slows down the growth in the long run.
On the other hand, if capital intensive techniques are used, production
increases at a faster rate than consu mption, a surplus capital for
reinvestment is made available in large quantity and this further leads to
rapid growth of economy as a whole.
The labour intensive techniques of production are advocated on the ground
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101 cost of labour is low. The economists like kindleberger point out that in
spite of more availability of labour as factor of production, the cost of
labour is not low. Collective bargaining by the trade unions and high level
of inflation in the domestic country put upward pressure on wages. On the
one hand, import of foreign modern technology is subsidised and on the
other hand wages are much higher than productivity at least in the
organised sector. This compels many capital ists to apply capital intensive
techniques of production. Management problems, industrial disputes,
difficulty of quality maintenance among the labour make it difficult for the
capitalist to use more labour even in the developing countries.
Some also argue that efficiency of labour can be improved only when
labour is employed along with the capital. But in the developing countries
where scarcity of foreign exchange is a persistent problem, use of labour
intensive technology puts limit on the imports. Huge a mount of foreign
exchange is spent on the import of capital equipment. So if the foreign
exchange problem is to be tackled, then labour intensive technology can
be a better solution.
In brief.
Why should a county to use capital intensive technology?
i) To have faster economic growth.
ii) To improve the level of efficiency of labour.
iii) To modernise production process.
iv) To have more surplus for future investment.
v). The capitalists can have smooth production without labour disputes
and management pro blems.
Why should a country use labour intensive technology?
i) Labour may be available in plenty.
ii) If labour supply is more, the wage rate is generally low.
iii) Labour intensive techniques require less foreign exchange.
iv) To maximise satisfaction i n the short run. v). Those techniques have a
short gestation period and the volume of output is enjoyed by th firm
much earlier as compared to mechanised production.
Why should a country not use capital intensive technology ?
(i) Labour abundant country wi ll have a distorted pattern of utilisation of
factors of production.
ii) Unemployment of labour resources will be a major problem.
iii) It requires huge foreign exchange particularly for the developing
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102 Why should a country not use labour intensive techniques ?
1) It will maximise satisfaction in the short run but will adversely affect
the growth rate in the long run.
2) If the trade unions are successful in keeping wage rates high, the labour
abundant coun tries will have labour available at high cost which will
lead to high cost structure in industry.
3) Using labour intensive technology may slow down the process of
modernisation of industrial production.
4) Low priced labour may not necessarily be efficien t labour. This factor
reduces the productivity of labours .
7.5 SUMMARY
Since there are a number of alternative combinations of labour and capital
available for producing a particular commodity, choice of technique
implies the combination chosen by a partic ular firm, industry or a country
in general to produce a particular commodity. The country will have to
choose from two major types of techniques of production.
1) Capital Intensive Techniques - which use more units of capital and less
units of labour to p roduce a given commodity.
2) Labour Intensive Techniques - which use more units of labour and less
units of capital to produce a given commodity.
Both these types of techniques have their positive and negative sides. Let
us now try to understand the argume nts for and against each of these types
of techniques.
7.6 QUESTIONS
Q1. Explain the role of infrastructure in economic development.
Q2. What is the role of technology in economic development ?
Q3. Write a note on the labour intensive versus capital intensive
technology .
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103 8
PLANNING, TECHNOLOGY AND
ECONOMIC DEVELOPMENT - 2
Unit Structure:
8.0 Objectives
8.1 Schumacher’s Concepts of Intermediate and Appropriate Technology
8.2 Green Technology
8.3 Meaning of Economic Planning
8.4 Types of Economics Planning
8.5 History of Ec onomic Planning in India
8.6 Role of Planning in Economic Development
8.7 Summary
8.8 Questions
8.0 OBJECTIVES
 To know the concepts of intermediate and appropriate technology.
 To understand the concept of green technology.
 To study meaning and types of economic planning.
 To study the history and role of planning in economic development.
8.1 SCHUMACHER’S CONCEPTS OF INTERMEDIATE
AND APPROPRIATE TECHNOLOGY
The term Intermediate Technology first came into general use following
the writings of E. F. Schumac her, and particularly after the setting up by
him of the Intermediate Technology Development Group in 1965.
'Intermediate Technology' is now part of the literature of development.
Intermediate Technology as conceived by Schumacher was in the context
of an economist, that is, he saw I.T. as the stage between the subsistence
£1 per work -place economy and the developed, several thousand pound
per work -place economy. 'Intermediate' unfortunately has connotations of
the inferior or the second rate and also impli es that it is a stage to
something more desirable. For these reasons 'appropriate' may be a more
suitable choice and in fact the I.T.D.G. journal has the title 'Appropriate
Technology' "Technology' too could be criticised as implying 'engineering
machinery ' whereas in fact the Appropriate Technologist is engaged with
total development which includes social and cul tural factors, and in
practice may be concerned with manage ment, accountancy and marketing
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104 is one attempt to meet some of these objections. 'Low -Cost Technology'
also appears in the literature. In the developed countries the increas ing
concern over the undesirable results of high technology such as pollution
and the drain on resources has led to the setting up of 'alternative' societies
who adopt 'soft' technologies. The aims of such groups usually include an
attempt to minimise resource use and ecological damage. In this book we
are concerned primarily with the small -scale a pplications in developing
countries, in this field. 'Appropriate Technology' is now generally used,
and understood, and is substantially equivalent to the older 'Intermediate
Technology'. Appropriate Technology, or A.T., will be used as the
preferred term in the remainder of this book.
Claims of Appropriate Technology
Appropriate Technology is concerned with all aspects of com munity
development leading to a total or integrated develop ment and hence to an
improved quality of life for the individual members . Since most of the
world's poor live in the rural areas, it is very much concerned with
agriculture and agriculture -based activities. However, A.T. is not
exclusively for the rural areas but is also applicable to the problems of the
urban poor. Appropriat e Technology aims include
(1) The provision of employment.
(2) The production of goods for local markets.
(3) The substitution of local goods for those previously imported and
which are competitive in quality and cost.
(4) The use of local resources of la bour, materials and finance.
(5) The provision of community services including health, water,
sanitation, housing, roads and educa tion.
It is important that such developments should be compatible with the
wishes, culture, and tradition of a particular com munity and not have a
socially disruptive effect.
8.2 GREEN TECHNOLOGY
The green technology refers to a type of technology that is considered
environmentally friendly based on its production process or its supply
chain . Green tech is an abbreviation of "green technology" which can also
refer to clean energy production, the use of alternative fuels, and
technologies that are less harmful to the environment than fossil fuels.
Although the mark et for green technology is relatively young, it has
garnered a significant amount of investor interest due to the increasing
awareness about the impacts of climate change and the depletion of
natural resources.
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Planning, Technology
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105 Key points:
 Green tech or green technology is an umbrella term that describes the
use of technology and science to reduce human impacts on the natural
environment.
 Green technology encompasses a wide area of scientific research,
including energy, atmospheric science, agriculture, material science ,
and hydrology.
 Many green technologies aim to reduce emissions of carbon dioxide
and other greenhouse gases in order to prevent climate change.
 Solar power is one of the most successful green technologies and is
now cheaper to deploy than fossil fuels in the many countries.
 Investors can support the green technology by buying stocks, mutual
funds, or bonds that support environmentally friendly technology.
8.3 MEANING OF ECONOMIC PLANNING
Economic planning refers to the planning of subsequent economic
actions through the development of certain policy measures. These
actions are to be followed in the future in consonance with
predetermined economic objectives.
As a banking aspirant, the knowledge of this topic is important for
both Mains and Interview round. It is pertinent to know the
concept of economic planning and its background to make
yourself proficient in your work as a banker. Let us now delve
deeper and understand what is economic planning, what are the
different types of economic planning and a bri ef introduction to
how economic planning in India is carried out!
What is Economic Planning?
Economists have come up with a number of definitions since the time
planning entered the domain of economics. However, a lot of them have
agreed that the most sign ificant was formulated by H D
Dickinson.According to him, economic planning is - “the making of
major economic decisions - what and how much is to be producedand
to whom it is to be allocated by the conscious decision a determinate
authority, on the basis of a comprehensive survey of the economic
system as a whole”.

After it was introduced by the erstwhile Soviet Union, many countries
started adopting the method of economic planning at different levels to
achieve faster growth.

Let us now discuss the type s of economic planning that emerged.


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Economics of Growth and
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106 8.4 TYPES OF ECONOMICS PLANNING
1. Planning by Direction and Planning by Inducement
An integral part of the socialist society, planning by direction entails the
absolute absence of a laissez -faire system. This type of ec onomic planning
has one central authority that plans, directs, and executes according to pre -
determined economic priorities.

Planning by Inducement, on the other hand, is more of democratic
planning. It entails planning by manipulating the market. Althoug h there is
no compulsion, a certain degree of persuasion is practised in planning by
inducement. In this type of planning, the enterprises have the freedom of
production & consumption. However, these freedoms are controlled &
regulated by the state through policies and measures.

2. Financial Planning & Physical Planning:
In financial planning, resource allocation is done in terms of
money; and it is essential to remove the maladjustments between
supply and demand. Hence, it is instrumental in ensuring a
balan ce between supply & demand, and in controlling inflation to
bring about economic stability in the country.
In physical planning, resource allocation is done in terms of men,
machinery, and materials. An overall assessment of the available
resources is done to ensure that bottleneck situations are
eliminated during the execution of the plan. It is viewed as a long -
term planning process.
3. Indicative Planning & Imperative Planning:
Indicative planning is based on the principle of decentralization
for the operat ion & execution of plans. In this type of planning,
the private sector is neither completely controlled nor directed to
meet the targets of the plan. But it is expected to fulfill those
targets. Towards that end, the government facilitates the private
sector but does not direct them in any way.
In imperative planning, on the other hand, all economic activities
are controlled by the state. There is complete control of the
government over the factors of production. Even the private sector
needs to strictly ab ide by government policies and decisions,
which are rigid.
4. Rolling Plans & Fixed Plans
In a rolling plan, every year three plans are drawn up and acted
upon. One of them is an annual plan, which entails the planning
for one year;the second is a 5 -year plan ;while the third is a 15 -
year plan in which broader goals and objectives are listed, which
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Planning, Technology
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107 In contrast to the rolling plan, a fixed plan refers to planning for a
certain period of time — say 4, 5, or 10 ye ars ahead. It lays down
definite goals and objectives that are to be met in the due course
of time. Except under an emergency situation, the annual
objectives are met (those listed in the fixed plan).
5. Centralized & Decentralized Planning
Under the centrali zed planning system, planning is made a
restrictive prerogative of the central planning authority. This
authority is solely responsible for the formulation of the plan, and
fixing its objectives, targets, and priorities. There is no economic
freedom; and t he entire economic planning is under bureaucratic
control.
In contrast, decentralized planning refers to execution of the plan
from the grassroots. In this type of planning, the central planning
authority formulates the plan in consultation with the differ ent
administrative units for the central and state schemes. The state
planning authority formulates the plan for district and village
levels.
6. Economic Planning in India
Economic planning in India is undertaken by the Planning
Commission, which was replaced by NITI Aayog on January 1,
2015. NITI (National Institution for Transforming India) Aayog
was established with the objective of achieving sustainable
development goals through cooperative federalism.
The first attempt to initiate economic planning in Ind ia was made
by in 1934 by Sir M Visvesvaraya — who was a civil engineer
and ex -dewan of the state of Mysore — in his book “The Planned
Economy of India”. From then to the establishment of NITI Aayog
and the replacement of the 5 -Year Plan with a 15 -year vis ion
document, the history of economic planning in India is rather
interesting.
8.5 HISTORY OF ECONOMIC PLANNING IN
INDIA:
Since independence till 2017, the Indian economy was premised
on the concept of planning that was carried out by the five -year
plans. These plans were developed, executed, and monitored by
the Planning Commission from 1951 to 2015; and then by NITI
Aayog from 2015 to 2017. In 2017, the five -year planning system
was replaced by the NITI Aayog’s 15 -year vision document.
However, to have an insight into the economic planning in India,
it is pertinent to know the history of economic planning and the
objectives of each of the five -year plans. Let us take a brief look
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Economics of Growth and
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108 Five -Year
Plans Year Objective Achievements
First Five -
Year Plan 1951 -
56 Agricultural
development &
balanced economic
development.
It was based on the
Harrod -Domar Model. During this time,
18% of national
income & 11% of
per capita income
were increased. Targeted Growth
Rate: 2.1% Actual Growth
Rate: 3.6%
Second
Five -Year
Plan 1956 -
61 Industrial
development,
transport&
communicationdevelo
pment.
It was based on the P C Mahalanobis
model. Establishment of
Durgapur, Bhilai,
and Rourkela steel
plants.
The price level was
up by 30%. Targeted Growth
Rate: 4.5% Actual Gr owth
Rate: 4.1%
Third
Five - Year
Plan 1961 -
66 Both agricultural &
industrial
development and
establishment of a
self-reliance & self -
reliant economy. The third five -year
plan was also called
Gadgil Yojana. The first elections
(Panchayati Raj)
under the Ra jasthan
Panchayat Samitis
and Zilla Parishads
Act, 1959 were held
in September 1959.
Targeted Growth
Rate: 5.6% Actual Growth
Rate: 2.8% 1962: Indo -China
War
1965: Indo -Pak War 1966: Severe
drought
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Planning, Technology
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109
Plan
Holiday 1966 -
69 Three annual plans:
1966 -67; 1967 -68 and
1968 -69 were
developed.
Equal priority was
given to agricultural
& related activities The Green
Revolution
commenced in 1966
with an objective to
increase food grain
production by usi ng
HYV (High
Yielding
Variety)seeds.
The Father of
Green Revolution
in India: M S
Swaminathan
Fourth
Five -Year
Plan 1969 -
74 Growth with stability,
and progress towards
achieving a self -
reliant economy The plan failed due
to the 1971 Indo -
Pak War, the arri val
of refugees from
Bangladesh, and
poor monsoon. Targeted Growth
Rate: 5.7% Achieved Growth
Rate:3.3%
Fifth Five -
Year Plan 1974 -
78 Launched by D D
Dhar, the objectives
were:
Reduction of poverty
(Garibi Hatao),
attainment of self -
reliance, and better
distribution of income Minimum Needs
Programme (MNP)
was started to
provide certain
basic needs to
improve the living
conditions of the
poor.
Targeted Growth
Rate:4.4%
Achieved Growth
Rate:4.8%
The plan was
terminated in 1978
when the Janata
Party came into
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Economics of Growth and
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110
Rolling
Plan 1978 -
80 Every year the plan
would be assessed
according to the
performance of the
previous plan; and a
new plan laid out
accordingly.
Sixth Five -
Year Plan 1980 -
85 Increase of nation al
income, removal of
poverty, decrease in
unemployment,
population control
through family
planning,
modernization of
technology NABARD was
established in 1982
during this five -year
plan.
Targeted Growth
Rate: 5.2% Achieved Growth
Rate: 5.4%
Seventh
Five - Year
Plan 1985 -
90 Rapid growth in food
grain production,
increase in employment
opportunities, increase
in production of all
sectors There was an
increase in per capita
income by 3.6% per
annum.
The Jawahar Rozgar
Yojana commenced. Targeted Growth
Rate: 5 % Achieved Growth
Rate: 6.01%
Annual
Plans 1990 -
92 Due to political
instability, the two
annual plans were
rolled out The New Economic
Reforms, including
the LPG
(Liberalisation,
Privatisation,
Globalisation)
reforms were
undertaken in 1991.
Eighth
Five -Year
Plan 1992 -
97 Development of human
resources, rapid
economic growth, high
growth of agriculture &
allied sectors, growth
in export and import,
improvement in current
account deficit The Prime Minister’s
Rozgar Yojana was
launched in 1993. Targeted Grow th
Rate: 5.6% Annual Growth Rate:
6.78%
Ninth Five -
Year Plan 1997 -
2002 Theme: Growth with
Social Justice & Equity Objective: Agriculture
& rural development The recession of the
global economy was
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Planning, Technology
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111 with productive
employment generation,
improvement in quality
of life, self -reliance,
and generati on of
employment Targeted Growth
Rate: 6.5% Annual Growth Rate:
5.4%
Tenth Five -
Year Plan 2002 -
07 Eradicate poverty &
unemployment
(inclusive growth) Double the per capita
income in the next 10
years The Kasturba Gandhi
Balika Vidyalaya was
established to
promote education
for girls. The Jawahar Lal
Nehru National
Urban Renewal
Mission was initiated
to foster urban
development.
Targeted Growth
Rate: 8.1% Annual Growth Rate:
7.76%
Eleventh
Five - Year
Plan 2007 -
12 Poverty eradication,
Development of health,
education,
infrastructure &
environment of the
country.
To increase the literacy
rate to 85% The services sector
attained an annual
average growth rate
of 9.7% vis -à-vis the
targeted growth rate
of 9.9%. Targeted Growth
Rate: 8.6% Annual Growth Rate:
7.9%
Twelfth
Five -Year
Plan 2012 -
17 Theme: Faster,
sustainable & more
inclusive growth Objective: Sustainable
development &
inclusive growth The main focus areas
were health, ed ucation,
skill development,
universal healthcare,
and optimum utilization
of available resources. Schemes like Atal
Pension Yojana,
UJALA, DDU
Grameen Kaushalya
Yojana, Digital India
Programme were
launched.
Targeted Growth
Rate: 8% Annual Growth Rate:
-


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Economics of Growth and
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112 8.6 ROLE OF PLANNING IN ECONOMIC
DEVELOPMENT
1. Accelerating Economic Growth:
There were two main features of India’s economic policy that emphasized
the role of planning and intervention by the State in the development
process of the Indian economy in the first three decades of planning. First,
to accelerate economic growth economists and planners recognized that
raising the rate of saving and investment was essential to accelerate the
rate of economic growth.
It was thought that the private sector on its own would not be able to
achieve a higher rate of saving and investment required to break the
vicious circle of poverty. Therefore, the state had to intervene to raise
resources and increase the rate of saving and investment. This made the
planning and the expansion of the public sector essential to accelerate
economic growth.
Emphasis on Industrialisation, Second, the strategy of development,
adopted since the adoption of Second Five Year Plan which was based on
Mahalanobis growth model, laid stre ss on the industrialisation with an
emphasis on the development of basic heavy industries and capital goods
industries.
This model implied allocating a higher proportion of investible resources
to capital goods industries than to consumer goods industries . Private
sector which is driven by profit motive could not be expected to allocate
sufficient resources to the growth of capital goods industries.
Therefore, the role of planning and the public sector was considered
essential for rapid growth of basic he avy industries. Mahalanobis growth
model was wrong in neglecting the role of agriculture and importance of
wage goods for accelerating growth of output and employment. In fact,
shortage of food, a cheap wage good, rather than machines could act as a
constr aint on the growth process. This became evident by the time of the
Third Plan which laid a relatively greater stress on growth of agriculture to
achieve self -reliance.
But rapid growth of agriculture itself requires a good deal of state
intervention and pl anning. The land reforms in agriculture, supply of
adequate credit to farmers, development of infrastructure such as
irrigation, power, roads were necessary where planning and State could
play an important role.
2. To Compensate for Market Failures: 112
The dominant view in development economics in the fifties and sixties
also laid stress on the planning by the State to compensate for ‘market
failures’. It was argued that while market mechanism was efficient in
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113 This was because of myopic nature of private sector which guided the
working of markets. It was therefore asserted that the State and planning
could play an important role in alloca ting resources for investment to
bring about rapid economic growth.
Besides, failures of market mechanism and free working of private sector
to allocate adequate amount of resources for investment in infrastructure
such as power, transport, communication created substantial external
economies and also where significant economies of scale existed.
Therefore, in the development of infrastructure, the State and planning had
an important role to play.
3. Regulatory Role of the State :
There is another importa nt aspect of the role of State and planning in the
development of the Indian economy which dominated economic thinking
in the pre -reform period. Though the private sector was given an important
role to play in the framework of mixed economy, to achieve opt imal
allocation of resources among different industries according to plan
priorities, economic activities in the private sector were required to be
regulated by the State. Further, to achieve other objectives of planning
such as restraining the concentrati on of economic power in a few big
business houses, the private sector was subjected to industrial licensing
controls.
To quote C. Rangarajan, the former Governor of the Reserve Bank of
India, “while the private sector was given space to operate in keeping with
the concept of a mixed economy, in the field of industry particularly the
decisions of the private sector were circumscribed by the licensing
mechanism. Hence, while foreign trade was subject to control because of
the strategy of import substitution, industrial production and investment
were subject to control because of the need to direct resources according
to plan priorities”.
4. Tackling the Problems of Poverty and Unemployment:
The other problem which makes role of planning and state interventio n
important is the need to tackle the problems of poverty and
unemployment. Since the beginning of the seventies the Indian planners
realised, especially in the Fifth, Sixth and Seventh Five Year Plans, that
even if growth rate of GDP was raised to 5 to 6 per cent per annum, it was
not possible to make a significant dent on the problems of mass poverty
and unemployment prevailing in the Indian economy.
Some argued that benefits of economic growth did not trickle down to the
poor. Others were of the view th at even if the poor get benefits from
growth by way of more employment opportunities generated by it, mere
economic growth was not enough to eradicate poverty and unemployment.
Therefore, role of planning and State was necessary to start and implement
special poverty and unemployment schemes such as Food for Work
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114 8.6 SUMMARY
NITI Aayog | An Institution for Current Economic Planning in
India:
NITI (National Instit ution for Transforming India) Aayog is a
policy think -tank of the Government of India that replaced the
Planning Commission on January 1, 2015. It aims at involving the
states in the policy -making process to foster economic growth &
development. It strives to indulge in a ‘bottom -up’ approach to
envisage ‘maximum governance, minimum government’, echoing
the spirit of cooperative federalism. The Prime Minister of India
is the ex officio Chairman of NITI Aayog.
8.7 QUESTIONS
Q1. Write a note on –
i) Intermed iate and Appropriate Technology
ii) Green Technology
iii) History of Economic Planning
iv) Types of Economics Planning
v) Role of Planning in Economic Development


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