ECONOMIC DEVELOPMENT •Birth of Economics as a Science Market– the institution through which buyers and sellers

interact and engage in exchange

CHAPTER 1: Principles Concepts and Comparative -Adam Smith –founder of economics; free trade, theory of
Economic Development Mixed System (Socialism) – mixture of command and
international trade and primitive theory of money
laissez- faire economies. Command and laissez-faire
-Thomas Robert Malthus-law of diminishing returns economies do not exist in the world because all real
Economic Systems systems are in some “mixed”.
-David Ricardo-economic model; comparative advantage
•What is Economics? Reasons why free markets are not perfect:
-John Stuart Mill-restated Ricardo’s theories
•Why we study economics? • do not always produce what people want at lowest cost
-Karl Marx-theory of surplus value; labor as source of so they are inefficiencies.
a. To learn a way of thinking profits
 rewards some groups may be unevenly distributed,
b. To understand society  The Marginal Revolution (1870s) and some groups may be left out.
c. To understand global affairs -William Stanley Jevons, Anton Menger, Leon Walras • periods of unemployment and inflation persist with
d. To be an informed voter. -replacement of the labor theory of value some regularity.

by the marginal utility theory of value.

Brief History of Economics  Neo-classical Economics (1930s) Definition of Economic Development: 1950s

 Primitive Economics (hunting & fishing stage) -John Maynard Keynes • In economic terms, development is the capacity of a
 Early Western Civilization’s Concept of Economics nation to generate and sustain an annual increase in its
-analysis of the determinants of effective expenditures, GNP of 5% or more.
 (Aristotle & Plato- against trade; Roman Catholic
investment and government expenditures
Church condemnedusury& against trade) • Traditional economic measures:
Economic Systems
–GDP: is the market value of all final goods and services
Command Economy (Communism)– an economy in which produced within a country in a given period of time
Brief History of Economics
a central authority or agency draws up a plan that Y=C+I+G+NX
 Birth of Mercantilism (15 Th – 18 Th century) establishes what will be produced and when, sets
 -Mercantilismis a theory of political economy that production goals, and makes rules for distribution. - GNP: is the market value of all final goods and services
holds that the wealth of a country consists of its produced by permanent residents of a country in a given
Example: Russian Federation (USSR), Poland and China period of time.
quantity of gold and silver and that the importation of
precious metals and the exportation of goods should Laissez-Faire Economy (Capitalism)– literally from the -GNP=GDP+ net factor income from abroad
be encouraged and controlled by the state. French “allow (them) to do”. An economy in which
 Physiocracy(Francois Quesnay) – against mercantilism, individual people and firms pursue their own self- interests • Common alternative index is the rate of growth of
free trade and laissez-faire and strongly advocated a without any central direction or regulation. income per capita or per capita GNP.
single direct tax to be levied on land.
–Per capita GNP:is the per-head value of final goods and •Non-economic factors (institutional, social, values) – development. It is an increase in a country's real level of
services produced by permanent residents of a country attitudes toward life and work – public and private national output which can be caused by an increase in the
in a given period of time. It is converted to USD using the structures – cultural traditions – systems of land tenure, quality of resources (by education etc.), increase in the
current exchange rate. property rights – integrity of government agencies quantity of resources & improvements in technology or in
another way an increase in the value of goods and services
–PPP Measure: the number of units of a country’s
produced by every sector of the economy.
currency required to purchase the same of basket of goods
Todaro and Smith said:
and services in the local market that a US $1 would buy in •Economic Growth can be measured by an increase in a
the USA.Under PPP, exchange rates should adjust to •“Development is a multi dimensional process involving country'sGDP(gross domestic product).
equalize the priceof a common basket of goods and changesinsocial structures,popular attitudes, and national
• Economic development is a normative concept i.e. it
services across countries. institutions, as well as the acceleration of economic
applies in the context of people's sense of morality (right
growth, thereduction of inequality, and the eradication of
and wrong, good and bad).
poverty.”
Definition of Economic Development:1970s • The most accurate method of measuring development is
the Human Development Index which considers the
• Decreasing of GNP in the 1970s and increasing emphasis
What is growth? literacy rates & life expectancy which affect productivity
on “redistribution from growth”
and could lead to Economic Growth.
•Economic growth is the increase of a nation’s real output
• Increasing emphasis on non-economic social indicators
(GDP). • It also leads to the creation of more opportunities in the
• Economic development consists of the reduction or sectors of education, healthcare, employment and the
• Results from: conservation of the environment.
elimination of poverty,inequality and unemployment
within the context of a growing economy. – Greater quantities of natural resources, human • It implies an increase in the per capita income of every
resources, and capital, citizen.
– Improvements in the quality of resources, and •Economic Growth does not take into account the size of
Definition of Economic Development:1990s
– Technological advances that boost productivity. the informal economy. The informal economy is also
• World Bank in its 1991 World Development Report known as the black economy which is unrecorded
(WDR) asserted that the “challenge of development is to What is Development economic activity.
improve the quality of life.”
•Economic development is the process by which a nation •Developmental alleviates people from low standards of
• The improved QOL involves higher incomes ,better enhances its standard of living over time. living into proper employment with suitable shelter.
education, higher standards of health and nutrition, less
poverty, a cleaner environment, more equality of • The economic standard of living is often defined as GDP •Economic Growth does not take into account the
opportunities, greater individual freedom, and a richer per capita. depletion of natural resources which might lead to
cultural life. pollution, congestion & disease.

•Economic factors: capital – Labor – Natural resources – Economic Development vs. Economic Growth •Development however is concerned with sustainability
technology – established markets (labor, financial, goods) which means meeting the needs of the present without
•Economic Growth is a narrower concept than economic compromising future needs. These environmental effects
are becoming more of a problem for Governments now Millennium Development Goals (MDGs)
that the pressure has increased on them due to Global
-A set of eight goals adopted by the United Nations in
warming.
2000: to eradicate extreme poverty and hunger; achieve
•Economic growth is a necessary but not sufficient universal primary education; promote gender equality and
condition of economic development. empower women; reduce child mortality; improve
maternal health; combat HIV/AIDS* malaria* and other
diseases; ensure environmental sustainability; and develop
Three Core Values of Development a global partnership for development. The goals are
assigned specific targets to be achieved by 2015.
•Sustenance:The Ability to Meet Basic Needs
Sustainable Development Goals or Global Goals
- The basic goods and services, such as food, clothing, and COMPARATIVE DEVELOPMENT
shelter, that are necessary to sustain an average human -are a collection of 17 interlinked global goals designed to
being at the bare minimum level of living. be a "blueprint to achieve a better and more sustainable Classification of Countries
future for all". The SDGs were set up in 2015 by the •Developed countries- sovereign states with a developed
•Self-esteem:To Be a Person United Nations General Assembly and are intended to be economy and technologically advanced infrastructure
- The feeling of worthiness that a society enjoys when its achieved by the year 2030. compared to other nations.
social, political, and economic systems and institutions
promote human values such as respect, dignity, integrity, •Developing countries- known as an LMIC, or a low and
and self-determination. middle-income countries. It is less developed than
countries classified asdeveloped countriesbut these
•Freedom from Servitude: To Be Able to Choose nations are ranked higher thanleast developed countries.
- A situation in which a society has at its disposal a variety •Least developed countries (LDCs)- low-income countries
of alternatives from which to satisfy its wants and facing severe structural setbacks to sustainable
individuals enjoy real choices according to their development.
preferences.
Indicators of Classification of Nations:
The Three Objectives of Development
•Developed countries -Human Development Index,
1. To increase the availability and widen the distribution of political stability, gross domestic product (GDP),
basic life-sustaining goods. industrialization, and freedom.
2. To raise levels of living •Developing countries- standard of living, gross domestic
product, and per capita income. And less developed
3. To expand the range of economic and social choices
industrially and a lower Human Development Index than
other countries.

Millennium Development Goals (MDGs) & Sustainable •Least developed countries (LDCs) -LDCs have low levels
Development Goals (SDGs) of human assets and are highly vulnerable to economic
and environmental shocks. (compensation of employees and property income) from Defining Developing Nations
abroad.
Basic Indicators of Development: Real Income, Health, • A nation where the average incomeis much lower than in
and Education industrial nations, where the economy relies on a few
export crops, and where farming is conducted by primitive
•Gross National Income (GNI)
methods.
•Gross Domestic Product (GDP)
• Rapid population growth which threatens the supply of
•PPP method instead of exchange rates as conversion food.
factors
• also called underdeveloped nations.
• Purchasing power parities (PPPs) are the rates of
• Most of them are in Africa, Asia, and Latin America.
currency conversion that try to equalize the purchasing
power of different currencies, by eliminating the Common Characteristics of Developing Nations
differences in price levels between countries.
• Low levels of living

• Low levels of productivity

• High rates of population growth and dependency

burdens.

• Substantial dependence on agricultural production and

primary exports

• Prevalence of imperfect markets

• Dependence and vulnerability

How Developing Countries Today Differ from Developed

Gross National Income (GNI) per capita based on Countries in Their Earlier Stages
purchasing-power-parity (PPP) in current prices
• Physical and human resource endowments
•PPP GNI- gross national income (GNI) converted to
international dollars using purchasing power parity rates. • Per Capita incomes and levels of GDP in relation to the
An international dollar has the same purchasing power rest of the world
over GNI as a U.S. dollar has in the United States.
• Climate
•GNI- the sum of value added by all resident producers
• Population size, distributions and growth
plus any product taxes (less subsidies) not included in the
valuation of output plus net receipts of primary income • Historical role of international migration

• International trade benefits

• Basic R&D capabilities

• Stability and flexibility of political-social institutions What makes a nation third world?

• Effectiveness of domestic economic institutions • Despite ever evolving definitions, the concept of the
third world serves to identify countries that suffer from
high infant mortality, low economic development ,high
FIRST WORLD COUNTRIES levels of poverty, low utilization of natural resources,

• the term "First World"refers to so called developed, And heavy dependence on industrialized nations.
capitalist, industrial countries, roughly, a bloc of countries
• These are the developing and technologically less
aligned with the United States after World Warn II, with
advanced nations of Asia, Africa, Oceania, and Latin
more or less common political and economic
interests :North America, Western Europe, Japan and America.
Australia.
• Third world nations tend to have economies dependent
SECOND WORLD COUNTRIES on the developed countries and are generally
characterized as poor with unstable governments and
• "Second World" refers to the former communist-
having high rates of population growth, illiteracy, and
socialist, industrial states, (formerly the Eastern bloc, the
disease.
territory and sphere of influence of the Union of Soviet
Socialists Republic) today: Russia, Eastern Europe (e.g., • Most third world nations also have a very large foreign
Poland) and some of the Turk States(e.g., Kazakhstan) as debt.
well as China.

THIRD WORLD COUNTRIES

•"Third World" are all the other countries, today often

used to roughly describe the developing countries of
Africa, Asia and Latin America. The term Third World
includes as well capitalist (e.g.,Venezuela) and communist
(e.g.,North Korea) countries, as very rich (e.g.,Saudi
Arabia) and very poor (e.g.,Mali) countries.
  All advanced economies have passed the stage of Harrod-Domar Model Obstacles and Constraints
take-off into self sustaining growth
 Problem with the argument that GDP growth is
 Developing countries are still in the traditional proportional to the share of investment
CHAPTER 3:
society or the pre-conditions stage. Why? expenditure in GDP
CLASSICAL THEORIES OF ECONOMIC DEVELOPMENT
 Lack of adequate investment. The financing gap  Low rate of savings in developing countries gives
Classical economic development theories aim to explain exists! rise to savings gap and capital constraint
how economies transition from underdevelopment to
Criticisms of the Rostow’s Model  Savings and investment is a necessary condition
sustained growth.
for accelerated economic growth but not a
o Overly simplistic – Assumes all countries follow
Linear-Stages of Growth Model (1950s-1960s) sufficient condition
the same path.
Structural-Change Models
o Ignores institutional and social factors –
Development is not just about investment but also
governance, education, and health.

o Fails to address inequality – Economic growth

does not always lead to fair income distribution.

Harrod-Domar Model
Proposed by Rostow, identifying five stages of economic
growth:

Lewis Theory of Development

Lewis Theory of Development: Criticism

Rostow’s Stages of Growth
  Four of the key assumptions do not fit the realities  Increased urbanization  The IDR models argue that developing countries are
of contemporary developing countries up in a dependence and dominance relationship
 Decline in family size
with rich countries
 Reality is that:
 Demographic transition  Emphasizes external factors that trap developing
 Capitalist profits are invested in labor nations in poverty.
Structural Changes and Patterns of Development :  Three key perspectives:
saving technology
Chenery’s Model  Neoclassical Dependence Model: Economic
 Existence of capital flight dependence results from biased foreign influence.
• Differences in development among the countries
 Little surplus labor in rural areas are ascribed to:  False-Paradigm Model: Poor policies arise from
misguided international advice.
 Growing prevalence of urban surplus labor Domestic constraints  Dualistic-Development Thesis: Rich and poor
 Tendency for industrial sector wages to International constraints economies coexist, reinforcing inequality.
rise in the face of open unemployment Real World Example of Neoclassical Dependence Model:
• To summarize, structural-change analysts believe
Structural Changes and Patterns of Development : that the “correct mix” of economic policies will
Chenery’s Model generate beneficial patterns of self-sustaining
growth
 Patterns of development theorists view increased
savings and investment as necessary but not Structural Changes and Patterns of Development :
sufficient for economic development Chenery’s Model

 In addition to capital accumulation, transformation • Criticisms:

of production, composition of demand, and
• Not universally applicable – Some countries (e.g.,
changes in socio-economic factors are all Real World Example of False-Paradigm Model
resource-rich nations) do not follow this pattern.
important
• Ignores external shocks – Assumes smooth
 Chenery and colleagues examined patterns of
transitions, which may not be the case in unstable
development for developing countries at different
economies.
per capita income levels
The International Dependence Revolution (IDR) (1970s)
 The empirical studies identified several
characteristic features of economic development:  The IDR models reject the exclusive emphasis on
GNP growth rate as the principal index of
 Shift from agriculture to industrial
development
production
 Instead they place emphasis on international power
 Steady accumulation of physical and balances and on fundamental reforms world-wide.
human capital  IDR models view developing countries as beset by
institutional, political, and economic rigidities in
 Change in consumer demands
both domestic and international setup
 • Actual experience of developing countries that • Ignores income inequality – Market forces alone
have pursued policy of autarky/closed economy may not lead to equitable growth
has been negative
Application: Do Economies Converge?
Neoclassical Counterrevolution (1980s-1990s)
• Unconditional convergence occurs when poor
• Advocates free markets, privatization, and minimal countries will eventually catch up with the rich
Criticisms of International Dependence Revolution (IDR) government intervention. countries (LR) resulting in similar living standards
models
• Key components: • Conditional convergence occurs when countries
• A. Neocolonial Dependence Model with similar characteristics will converge (savings
• Free-market approach: Markets drive efficient
rate, investment rate, population growth)
• Overemphasizes external factors – Internal resource allocation.
governance and policies also play a crucial role. • No convergence occurs when poor countries do
• Public-choice theory: Government intervention
not catch up over time and living standards may
• Ignores success stories – Some countries (e.g., often worsens economic issues.
diverge
South Korea, Taiwan) escaped dependency
through smart policies. • Market-friendly approach: Some government
Summary and some Real World Examples
policies can aid market efficiency.
• B. False-Paradigm Model
• New Institutionalism: Development depends on
• Doesn’t offer solutions – Identifies the problem strong institutions.
but doesn’t suggest alternatives.
Solow’s Neoclassical Growth Model
• Blames foreign influence – Domestic leaders and
policies also shape development outcomes. • Introduces technology as a key driver of long-term
growth.
Criticisms of International Dependence Revolution (IDR)
models • Predicts convergence, where poorer countries can
catch up if they invest in capital and education.
• C. Dualistic-Development Thesis
• Unlike Harrod-Domar, it allows labor-capital
Too deterministic – Suggests that inequality is substitution and diminishing returns.
inevitable.
Criticisms of the Solow Model
Underestimates economic mobility – Some countries
have successfully reduced inequality through reforms. • Does not explain technology growth – Treats it as
an external factor, rather than part of economic
Weaknesses of IDR Models policy.
• Do not offer any policy prescription for how poor • Assumes perfect markets – In reality, markets fail
countries can initiate and sustain economic due to monopolies, corruption, and poor
development institutions.
 • Fourth planning sometimes means any setting of • The planning is necessity of removing widespread
production targets by the government. Whether unemployment.
for private or public enterprise.
• For developing the agricultural sector along with
• Fifth, here targets are set for the economy as industrial sector arises from that agriculture and
whole maintaining to allocate all the country's industry are independent.
labour, foreign exchange raw materials and other
• The expansion of domestic and foreign trade
resources between the various branch's of the
requires not only the development of the
economy.
agricultural and industrial sectors along with social
• Finally the word planning is sometimes used to and economic overheads but also existence of
describe the means which the government uses to financial institutions.
CHAPTER 4: try to enforce upon private enterprise the targets
• The planning for development is indispensable for
Introduction To Development Planning which have been previously determined.
removing the poverty of nations.
MEANING OF ECONOMIC PLANNING Professor Robbins defines economic planning as
Two methods are open to underdeveloped countries.
collective control or supersession of private
• Planning is a technique it means to an end being activities of production and exchange’’. – One is planned development by
the realization of certain pre-determined and well importing capital from abroad which calls
Needs for planning in underdeveloped countries
defined aims and objectives laid down by a central “supported industrialization’’ and
planning authority • Principal objectives of planning in underdeveloped
– other is by force saving which
countries is to increase the rate of economic
• Professor Lewis has referred to six different characterizes as “self-sufficient
development.
senses in which the term planning is used in industrialization’’
economic literature. • D.R.Gadgil, “Planning for economic development
Plan formulation and fundamentals for successful planning
implies external direction or regulation of
• First there is an enormous literature in which it economic activity by the planning authority which The formulation and success of a plan requires the
refers only to the geographical zoning of factors, is in most cases, identified with the government of following
residential buildings, cinemas and the like. the state.”
Sometimes this is called town and country • Planning commission: The first prerequisite for
planning and sometimes just planning. • It means increasing the rate of capital formation ’’plan is the setting up of planning commission
by raising the levels saving and investment. But which should be organized in a proper way.
• Secondly planning means only deciding what increasing the rate of capital nation in
money the government will spend in the future, if • Statistical data: A prerequisite for sound planning
underdeveloped economies is be set with a
it has the money to spend. is a through survey of the existing a potential
number of difficulties. People are poverty-ridden
resources of a country together with its
• Thirdly a planned economy is one in which each • The rationale planning arises in such countries to deficiencies.
production unit uses the resources of men, improve and strengthen the market mechanism.
materials and equipment allocated to it by central • Objective: the plan may lay down the following
order. objectives like
  To increase national income and per • A theory of consumption: According to professor • It is an attempt to work out the implication of the
capita income, Galbraith an important requirement of modern development efforts in terms of factor allocation
development planning is that it has a theory of and product yields so to maximize incomes and
 To expand employment opportunities,
consumption. Underdeveloped countries should employment.
 To reduce inequalities of income and not follow the consumption patterns of the more
INDICATIVE PLANNING
wealth developed countries.
• It prevails in France. Planning in socialist countries
 To raise agricultural production. • Public cooperation: Above all it is considered to be
is comprehensive in which the planning authority
one of the important levels for the success of the
 To industrialize the economy. decides about the amount to be invested sector in
plan in a democratic country.
fixation of prices of products and factors and the
• Fixation of target and priorities: To fix targets and PLANNING BY DIRECTION types and quantities of products to be produced.
priorities for achieving the objectives laid down in
the plan. • Planning by direction is an integral part of a • The system of planning is free from all such
socialist society like that of the soviet union. troubles because it is in the principle of
• Mobilization of resources: A plan fixes the public There is one central authority which plans, directs decentralization in the operation and execution of
sector outlay for which resources are required to and orders the execution of the plan in accordance the national plans. It is known as indicative or soft
be mobilized. with pre-determined targets and priorities. planning.
• Balancing in the plan: A plan should ensure proper PLANNING BY INDUCEMENT ROLLING PLANNING
balance in the resource mobilization.
• It is democratic planning. It means planning by • Professor Myrdal was the first economist to
• Incorrupt and efficient administration: A strong, operating the market. There is no compulsion but advocate a rolling plan for developing countries.
efficient and incorrupt administration is required encouragement. There is freedom of enterprise.
for successful planning. But this is what an • It was introduced in Indian planning by the Janata
Freedom of consumption and freedom of
underdeveloped country lacks the most. Government on April 1, 1978.
production.
• Proper development policy: The state should lay • In rolling plan every year the new plans are made
• It is able to achieve the same results as are likely
down, proper development policy for the success and acted upon
to be achieved in planning by direction by with less
of a development plan and to avoid any pitfalls expense of individual liberty. • There is a plan for the current year which includes
that may arise in the development process.
the annual budget and the foreign exchange
FINANCIAL PLANNING
• Economy in administration: Every efforts should budget.
be made to effect economies in administration, • Financial planning refers to the techniques of
• There is a plan for a number of years, say three,
particularly in the expansion of ministries and planning in which resources are allocated in terms
four or five. It is changed every year in keeping
state departments. of money while physical planning pertains to the
with the requirements of the economy. It contains
allocation of resources in terms of man,
• An education base: For a clean and efficient targets and techniques to be followed during the
machinery.
administration a firm educational base essential plan period.
PHYSICAL PLANNING
FIXED PLANNING
 • In contrast to the rolling plan, there is a fixed plan • A model expresses relationship among economic
for four, five, six years. A fixed plan lays down variables which explain and predict past and
definite aim and objectives which are required to future event under a set of simplifying
be achieved during the plan period. assumptions

• For this purpose. Physical targets are fixed along • It consists of a series of equations each of which
with the total outlay. Physical targets and represents the association among certain
financial outlays are rarely changed except under variables.
emergencies.
• Planning models are three types: Aggregate,
PLANNING UNDER CAPITALISM Multisector and Decentralization.

• It is not based on any central plan. The production • Aggregative models trace the optimal path of
is also carried out by private enterprise. development overtime of such economy-wide
aggregates as income, saving, consumption,
• It is not planned by the government. Market
investment, etc...
prices are determined by market forces and are
not by the government. • Multisector models are designed which connect
macroeconomic aggregates with the sectors
• So under capitalism planning the institutions of
consisting the operational content of the plan.
private ownership, private enterprise and price
mechanism continue to operate • Decentralized models have sector or project level
variables which are used to prepare models for
• There is no comprehensive planning under
individual sectors or projects.
capitalism.

PLANNING UNDER SOCIALISM

• It is based on central plan.

• There is a central planning authority or board

which formulates a plan for the entire economy.

• There is complete centralization of economic

power in the central planning authority.

• It fixes the plan objectives, priorities and targets

PLANNING MODELS

• Planning models have been increasingly used in

LDCs for the drawing up of plans for economic
development.