Lecture (1)

DR. Rania Anis

Lecturer of economics
Faculty of Economic Studies and Political Science – Alexandria University
1.1. The meaning of Economic Development
• Economic development is a process whereby an economy’s real national income as well as
per capita income increases over a long period of time.
• The process of economic development implies changes in resource supplies, in the rate of
capital formation, in demographic composition, in technology, skills and efficiency, in
institutional and organizational set-up.
• It also implies respective changes in the structure of demand for goods, in the level and
pattern of income distribution, in size and composition of population, in consumption
habits and living standards, and in the pattern of social relationships and ideas.
• In short, economic development is a process consisting of a long chain of inter-related
changes in fundamental factors of supply and in the structure of demand, leading to a rise
in the net national product of a country in the long run.
• The term ‘economic development’ is generally used in many other synonymous terms such
as economic growth, economic welfare, secular change, social justice and economic
progress.
• It is not easy to give a precise and clear definition of economic development. Broadly
speaking, economic development has been defined in different ways and as such it is
difficult to locate any single definition which may be regarded entirely satisfactory.
• Economic development, generally includes the development of agriculture, industry, trade,
transport, means of irrigation, power resources, etc. Thus, the sectoral improvement is a
part of the process of economic development.
1.2. Characteristics of Developed Economies
A developed economy is generally characterized by:
• increase in capital resources,
• improvement in efficiency of labor,
• better organization of production in all spheres,
• development of means of transport and communication,
• growth of banks and other financial institutions,
• urbanization and a rise in the level of living,
• improvement in the standards of education and expectation of life,
• greater leisure and more recreation facilities and the widening of the mental horizon of
the people, and so on.
In short, economic development must break the poverty barrier or the vicious circle and
bring into being a self generating economy so that economic growth becomes self-
sustained.
The main characteristics of developed countries are as follows:
1. Significance of Industrial Sector: Most of the developed countries in the world have given
much importance to the development of industrial sector. They have large capacities to
utilize all resources of production, to maximize national income and to provide employment
for the jobless people. These countries receive the major portion of their national income
from the non-agriculture sectors which include industry, trade, transport, and
communication.
2. High Rate of Capital Formation: Developed countries are generally very rich, as they
maintain a high level of savings and investment, with the result that they have huge amount
of capital stocks. Besides, well-developed capital market, high level of savings, broader
business prospects and capable entrepreneurship have led to a high growth of capital
formation in these economies.
3. Use of High Production Techniques and Skills: High production techniques and skills have
become an essential part of economic development process in the developed countries. The
new techniques have been used for the exploitation of the physical and human resources.
These countries have, therefore, been giving priority to the scientific research, so as to
improve and evolve the new and technique of production. Consequently, these countries
find themselves able to produce goods and services of a better equality comparatively at the
lesser cost.
4. Low Growth of Population: The developed countries have low growth of population
because they have low level of birth rate followed by low level of death rate.
Good health conditions, high degree of education and high level of living have led to
maintain low growth of population. The life expectancy in these countries is also very
high.
The high rate of capital formation on the one hand and low growth of population have
resulted in high level of per capita income and prosperity in these countries.
Consequently, the people in these countries enjoy a higher standard of living and work
together unitedly for more rapid economic and industrial development of the nations.
Besides, the entire society, its structure and values are found to be dedicated to the goal
of rapid economic and industrial development. Dignity of labor is maintained. The
economic motive and strong desire to lead a better social life always inspire people to
contribute to the process of development. The main objective of rapid economic
development, particularly in the developed economies is to achieve the level of stagnant
economic growth, so that they may maintain the existing economic status and exercise
control over business cycle.
1.3. Distinction Between Developed and Underdeveloped Economies

We may now distinguish between the features of an underdeveloped economy from that
of developed one as follows:
1. Underdeveloped economies are distinguished from developed economies on the basis
of per capita income. In general, those countries which have real per capita incomes less
than a quarter of the per capita income of the United States, or roughly less than 5000
dollars per year, are categorized as under-developed countries.
2. An underdeveloped economy, compared with an advanced economy, is under-equipped
with capital in relation to its population and natural resources. The rate of growth of
employment and investment in such an economy lags behind the rate of growth of
population. The resources are not only employed but also underemployed. Technically, the
production possibility frontier of a poor country is far ahead of the actual production
curve, whereas the gap between the potentiality and actual utilization of resources is
narrow in a developed economy.
3. High rate of growth of population is an important characteristic of most of the
underdeveloped economies. Population growth in underdeveloped countries neutralizes
economic growth. In advanced economies, the case is different. One of the empirical tests of
secular stagnation in advanced economies is the declining rate of population growth. The
stagnation problem in a developed economy is a problem of population, natural resources
and technology failing to keep pace with capital accumulation.
4. The central problem of underdeveloped economies is the prevalence of mass poverty
which is the cause as well as the consequence of their low level of development. Shortage
and scarcity are the main economic problems in these economies.
5. In an underdeveloped economy, the fundamental problem is that of low productivity, low
income and a poor standard of living. A vast majority of people in an underdeveloped
country are ill clothed, undernourished and without adequate shelter. To use Rostow’s
terminology, economies of poor countries similar to those of a traditional society, where
modern science and technology are either not available or not regularly and systematically
applied.
6. Capital deficiency is the main cause of poverty of a poor country.
7. In an underdeveloped economy, the problem of unemployment is more important,
whereas a developed economy may have a cyclical unemployment problem. There is
chronic unemployment in an underdeveloped economy. An advanced economy may have
unemployment occasionally due to business fluctuations and a low marginal propensity to
consume. Whereas an underdeveloped economy is confronted with the problem of
disguised unemployment .
8. Poor countries are poor in technology; advanced countries are advanced in technology.
In fact, the level of technology attained in production is a reliable indication of the level of
economic development. Employment of advanced technology goes along with large capital
resources, high attainments in the fields of scientific research, greater availability of
entrepreneurial skill and a good supply of efficient skilled labor. Thus, development of
technology is the basic objective of the backward economy whereas development of
technology no longer remains the overriding objective of an affluent society.
1.4. Difference between Economic Growth and Economic Development
The differences between economic growth and economic development are:
1. Economic Growth is quantitative while economic development is qualitative.
2. Economic growth is comparatively a narrow concept and development is much more comprehensive.
3. Economic growth refers to increase in the total output of final goods and services in a country over a long
period of time. In contrast, economic development refers to progressive change in the socio-economic structure
of the country. It includes gender equality, change in composition of output, shift of labor force from agriculture
to other sectors.
4. Economic growth is easy to realize as only monetary aspect is involved. But, it is very difficult to attain the
goal of development as it involves many socio-economic-political aspects.
5. Economic growth can easily be estimated by real GDP or Real Per Capital income. But it is very difficult to
measure development as it has some aspects that can’t be quantified. Economic development however is
indicated by Human Development Index.
6. Economic growth can take place without Economic development; however, economic development can’t take
place without economic growth.
The difference between extensive and intensive growth can be summarized as below :
1. Extensive growth refers to growth in total output level of an economy. Intensive growth
refers to increase in per capita level of the output.
2. If output takes a jump due to unexpected one time force, it is called extensive growth. If
there is continuous expansion in output due to some positive change over time, it is called
intensive growth.
3. Extensive growth is temporary and short lived. However intensive growth is permanent and
has long lasting effects.
4. Extensive growth is relevant to study aggregative phenomenon such as economies of scale.
Intensive growth is relevant to study the increase in standard of living of the people of a
country.
1.5. Comparison of Economic Growth and Economic Development
Economic development Economic Growth
Concept Normative concept Narrowed concept than economic development
Scope Concerned with structural changes Growth is concerned with increases in the economy’s
in the economy output
Growth Development relates to growth of human Growth relates to a gradual increase in one of the
capital indexes, a decrease in inequality components of Gross Domestic Product: consumption,
figures, and structural changes that improve government spending, investment, net exports.
the general population’s quality of life

Implication It implies changes in income, saving and It refers to an increase in the real output of goods and
investment along with progressive changes services in the country like increase the income in savings,
in socio-economic structure of country in investment etc.
(institutional and technological changes)
Measurement Qualitative. HDI (Human Quantitative Increase in real GDP. Shown in PPF.
Development Index), gender-related index
(GDI), Human poverty index (HPI), infant
mortality, literacy rate etc.
Effect Brings qualitative and quantitative Brings quantitative changes in the economy
changes in the economy
 1.6. Factors Affecting Economic Growth
The process of economic growth is a highly complex phenomenon and is
influenced by economic factor in addition to numerous and varied factors such
as:
• Political factors.
• Social factors.
• Cultural factors.
1.6.1. Economic Factors

1. Natural Resources:
The principal factor affecting the development of an economy is the natural
resources. Among the natural resources, we generally include the land area
and the quality of the soil, forest wealth, good river system, minerals and oil
resources, climate, etc.
For economic growth, the existence of natural resources in abundance is
essential. A country deficient in natural resources may not be in a position to
develop rapidly.
In fact natural resources are a necessary condition for economic growth but not
a sufficient one. In less developed countries, natural resources are unutilized or
even underutilized. This is one of the reasons of their backwardness.
2. Capital Formation
Among several economic factors, capital formation is another important
factor for development of an economy. Capital may be defined as the stock of
physical reproducible factors of production.
As we know, capital formation is cumulative and self-feeding and includes
three interrelated stages;
a) the existence of real savings and rise in them;
b) the existence of credit and financial institutions to mobilize savings and to
divert them in desired channels;
c) to use these savings for investment in capital goods.
3. Technological Progress
The technological changes are most essential in the process of economic
growth. Adam Smith pointed out the great importance of technological
progress in economic development. Ricardo visualized the development of
capitalist economies as a race between technological progress and growth of
population. The great importance of technological progress in capitalist
development was recognized by Karl Marx too.
There is no doubt that technological progress is a very important factor in
determining the rate of economic growth. In fact, even capital accumulation is
not possible without technical progress.
Through technological progress, a country may be adding to its means of
transportation and communications, its power resources and its factories.
4. Human Resources
A good quality of population is very important in determining the rate
of economic progress. Instead of a large population, a small but high
quality of human race in a country is better for development. Thus, for
economic growth, investment in human capital in the form of
educational and medical and such other social schemes is very much
desirable.
5. Population Growth
Labor supply comes from population growth. But the population
growth should be normal. An enormous rise in population retards
economic progress. Population growth is desirable only in a under-
populated country. It is, however, unwarranted in an overpopulated
country like India.
6. Social Overheads
Another important determinant of economic growth is the provision of social
overheads like schools, colleges, technical institutions, medical colleges,
hospitals and public health facilities. Such facilities make the working population
healthy, efficient and responsible. Such people can well take their country
economically forward.
7. Organisation
In the process of growth, organization is very important. It is organization that
emphasizes maximum use of inputs in production. Organization is
complementary to capital and labor and helps production to reach the
maximum level. In the modern economic system, the entrepreneur performs
the duty of an organizer and bears all risks and uncertainties. Hence,
entrepreneurship is an indispensable part in the process of economic growth.
8. Transformation of Traditional Agricultural Society
• The transformation of traditional agricultural society into a modern
industrial society, i.e., structural changes lead to enhancement of
employment opportunities, higher labor productivity and the stock of
capital, exploitation of the newly developed resources and improved
technology. Mostly, LDCs have a very large primary sector and very small
secondary and tertiary sectors.
• In such economies the structural changes involve the transfer of population
from the primary sector to the secondary and then to tertiary sectors.
 1.6.2 Non-Economic Factors
1. Political Factors: Political stability and strong administration are essential and helpful in modern economic
growth.
2. Social and Psychological Factors: Modern economic growth process has been largely influenced by social and
psychological factors. Social factors include social attitudes, social values and social institutions which change
with the expansion of education and transformation of culture from one society to the other.
3. Education: It is now fairly recognized that education is the main vehicle of development.
4. Urbanization: Another noneconomic factor promoting development is the process of urbanization. In poor
agrarian economies, the structural change must begin with the change in the size of population in rural and
urban sectors.
5. Religious Factors: Religion plays a great role in economic growth. It may give rise to a sense of self-
satisfaction.
1.7. Obstacles to Economic Development