Measurement of Economic Development level Ishtiaq Ahmed F / 08 / 05 Submitted to: Sir Ajmal

Serial No
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Context
History of Economic Development

Page No.
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2.

Different Definitions of Economic Development

3.

Economic Development Vs Economic Growth

4.

Measurement of Economic Development By Traditional Approach

History of Economic Development:

It is commonly said that the concept of economic development goes back to the emergence of "Industrial Revolution" in Europe in 18th century. Because of such industrial revolution the use of machinery, new ideas and new technology increased in UK, France and Germany which initiated the process of industrialization in these countries. Afterwards, this process spread over the to Japan, Russia and US. But whole of the world could not be benefited by Industrial Revolution. The countries from Asia, Africa and Latin America failed to avail the fruits of industrial revolution. Accordingly, they remained poor and backward. In such state of affairs the world divided into two distinctive parts. On the one side there were those countries which experienced greater rise in their incomes, outputs and employments. On the other side there were the countries which faced falling levels of outputs, rising level of unemployment, the diseases, the poverty and ever increasing illiteracy. In this way, an international division came into being. The rich countries and the poor countries. In modern terminology, the world was divided into two opposite poles which are given the name of 'North' (the rich countries of the world) and the 'South' (the poor countries of the world). Till a long time the people of the poor countries remained ignorant of their poverty. They went on accepting their poverty, illiteracy, starvation and diseases as some thing natural. After the World War II when so many countries got rid of 'Imperialism' a desire emerged amongst these countries to remove their poverty, reduce unemployment and improve their standard of living. In other words after World War II there rose the desire for economic improvement in the backward nations of the world. It is the "International Media" which played an important role in this surge of change. The people of the poor countries became aware of with the life standards enjoyed by their rich counterparts. Moreover, the foreigners living in the 'Colonies' created the desire amongst the domestic residents to copy them in connection with their life-standard and consumption patterns, With this back ground the concept of economic development got the popularity. Accordingly, the poor countries of the world are struggling for the removal of poverty, illiteracy, starvation, unemployment, malnutrition, diseases, economic stagnation and environmental pollution. But the poor countries can not devote such a long time what it was devoted by the rich countries when they were poor countries. Moreover, the level of resources, technologies and the social and institutional structure of these poor countries does not allow them to attain economic development as soon as could be possible. But even in the presence of these obstacles and constraints the poor countries are highly overambitious to attain economic development, particularly when we see that the inequalities at international level an increasing day by day. As if we drew a line of demarcation between the rich and the poor nations by $500 per capita income, i.e., these countries having per capita income above $500 are the rich countries while the countries with per capita income lower than $500 and the poor countries. In such situation, it is found out that 20% of the world population which consists of the rich people is having control over 70% of world's income. Whereas, 80% of world's population which resides in the poor countries just occupies 30% of world's income. Not only the rich countries command greater control over world's income, but the 'Incomes Gap' between the rich and the poor countries goes on to increase. The countries like, Pakistan, India and the Bangladesh etc., have the per capita incomes in between $ 300 to $900 per annum, whereas, the countries like UK, France and US has the per capita incomes in between $15000 to $40000 per annum. Such heavy inequality in between income distribution at world level represents "Development Gap". Such development gap rises no only because of difference in growth rates of incomes, but the basic difference in between incomes is also responsible for it. It is explained as:

We suppose that there are countries like A and B. The country A is a rich country having the per capita income of $1000, while country B is a poor country having the per capita income of $100. If the per capita income of these countries increases at the rate of 2% (Which is not possible) the per capita incomer of country A will move to $1020 while that of B will move to $102. As a result, the basic gap which was of $900 has gone up $918. This shows that if the poor country wishes to remove this gap there should be a 20% increase in its per capita income. But the poor countries fail to divert their resources to capital formation. Moreover, in the backward countries, there is heavy population pressure, and population increases at an alarming rate. The per capita income growth rate is hardly 3% in UDCs. Accordingly, the poor countries remained backward

Different Definitions of Economic Development:

According to Prof. Winston: "Economic Development shows the excess of consumption and production of a country as compared with increase in population. This increase in population is due to better combination and increase in the productivity of the factors of production". According to Prof. Williamson: "Economic Development is a process whereby the people of a country utilize the available resources in such a way that the per capita income of the country increases". According to Prof. Higgins: "Economic Development is the increase in per capita and national income (NI) of a country". According to Prof. Arthur Lewis: "Economic Development represents the per capita increase in the production of a country". According to Prof. Meir and Baldwin: "Economic Development is a process whereby the real NI of a country increases over a long period of time. If the increase in the real NI is more than the population increase then the per capita real income of the country will also increase". It is expressed Mathematically as: If Y/P represents real national income (NI) and P represents population, then economic development will take place if d(Y/P) > 0. dt In case d(Y/P) = dP , it would represent economic stagnation. dt dt

While if d(Y/P) < dP or dP > d(Y/P) , it will represent backwardness. dt dt dt dt

If we analyze Meir and Baldwin's definition we find the following important features of economic development: (i) Process, (ii) Increase in Real NI and (iii) Long Period of Time. (i) Process: The process indicates the interaction of different technical and administrative forces which result in increase of production and changes on demand side as well as on supply side. The changes on supply side are as: (a) Discovery of new Resources, (b) Capital Accumulation, (c) Changes in Population, (d) Introduction of Better Techniques of Production, (e) Improvement in Skill, (e) Social and Institutional Changes. The changes on demand side are as: (a) Changes in Size and Nature of Tastes of the People, (b) Changes in the Level and Distribution of NI, (c) Changes in Tastes of the people, (d) Changes in Social and Institutional life. (ii) Increase in Real Gross National Product (GNP): Economic development will take place when the real GNP of a country increases. To get the real GNP of the country, the GNP must be corrected by some index number. Sometimes it happens that the GNP of a country increases due to inflation, such will not represent economic development. Therefore, to know development we will have to deduct the price rise from the increase in GNP. Moreover, we will have to deduct depreciation allowance from GNP to get NI. (iii) Long Period of Time: To assess economic development, a period of 25 years must be kept in view. That is, if real GNP rises till the period of 25 years it will be accorded as economic development.

Economic Development Vs Economic Growth:

Difference Between Economic Development and Economic Growth:
Simply by, "Economic Development" we mean the continuous increase in real income of a country over a long period of time. Moreover, it is also furnished with technical and industrial changes in the society. Like development, the economists also present the concept of "Economic Growth". The economic growth represents increase in the production of goods and services of a country. Moreover, it is attached with the increase in the efficiency of the factors of production. From such simple definitions we find that economic development is a qualitative term while economic growth is a quantitative term. As the increase in the quantity or volume of a thing denotes its growth. Therefore, if a country's output, national income, per capita income, consumption, savings and investment increase, such phenomenon represents growth. Therefore, if the level of national production increases due to better use of factors of production, better techniques of production or better organization, it represent economic growth. In the words of Kindleberger: "Economic Growth means more output and changes in the technical and institutional arrangements. Growth not only implies more output but also more efficiency and more inputs. While Economic

Development is a wider concept and it goes beyond the changes in the structure of output and allocation of inputs". In the early stage, any economy that grows is likely to develop and that which develops is likely to attain growth. But the countries who have already developed as US, UK, Germany, France and Australia etc., are desirous to keep on growing. While in the case of UDCs which have low incomes, growth and development go side by side. Thus we conclude that economic development means a sustained, secular improvement in material well-being which may be reflected in an increasing flow of goods and services. As the definition of development has been presented in material terms. Thus it includes social, cultural, political, moral and economic factors which contribute to material progress. Thus economic development is economic growth because it aims at growing of the production of material commodities and services. It is social because it implies institutional changes in the society. It is moral because the idea of equality and social justice is involved in it. It is cultural because development policies imply a profound revolution. Thus we say that Economic Development is wider than Economic Growth.

Measurement of Economic Development By Traditional Approach:

Methods to Measure Economic Development:
There are following methods to measure the economic development: (1) Increase in real GNP, (2) Increase in real per capita income, (3) Economic welfare criterion, (4) Social welfare criterion, (5) Human welfare criterion. However, in the earlier days only the first two methods were adopted to measure economic development.

(1) Increase in Real GNP as a Criterion of Economic Development:

In the light of Profs. Meir and Baldwin's definition, it is said that if real GNP increases over a long period of time, this situation will be considered as economic development. Following arguments are given in favor of this criterion: (i) The increase in real per capita income is based upon increase in real GNP. Therefore, how long the real GNP does not increase, the per capita income cannot increase. (ii) So may countries who want to increase their military power they have the desire to increase their population. They never think of per capita income rise. Therefore, if in such countries the per capita income remains the same, it does not mean that economic development has not taken place. Moreover, if in some countries due to drought, migration and genocide etc., the per capita income rises, it does not mean, economic development. (iii) If the per capita method is adopted the population problems will be ignored. But as far as UDCs are concerned, the need is to face the population problems rather keeping them aside. Moreover, if in UDCs we adopt per capita method, then there will be hardly any development because in UDCs per capita income rises very slowly and nominally.

(iv) The criterion of increase in real national income is also important for Developed Countries (DCs). It is because that these countries have already attained high per capita income levels. But they want to increase national income so that full employment could be maintained without inflation and deflation.

(2) Increase in Real Per Capita Income as a Method of Economic Development:

Some economists are of the view that if per capita income or real GNP per capita increases over a long period of time, it will be accorded as economic development. As Prof. Meir says, "Economic Development is a process whereby the real per capita income of a country increases over a long period of time". But this would occur only when the growth of real national income is more than the growth of population. According to this method, if the per capita income of a country increases each resident of the country will be able to attain more goods and services than before at average. Consequently, the average poverty will come down and the life standard of the people of the country will improve.

Formula for Per Capita Real GDP and its Growth:

If we divide GDP or Y by population ( POP), we get per capita GDP as: Y/Pop While if we divide GDP or Y by a price index (P), we get real GDP as: Y/P Thus, the real per capita GDP (y) is as: y=Y (Pop) . (Y) The growth rate of a product (ab) is equal to the sum of the growth rates of a and b. It is as: gab = ga + gb While in case of a ratio c/d, the growth rate is equal to the difference of the growth rates of c and d is as: gc/d = gc - gd Then following these principles, the growth rate of real per capita GDP (y) will be as: gy = gY - (gPop + gP) = gY - gPop - gP This shows that the growth rate of per capita real GDP is equal to the rate of growth of nominal GDP minus the sum of growth rates of population and prices. This equation holds for so-called instantaneous or point rates of growth. As long as the rates of population growth and inflation are not very high, then the above equation holds. We suppose that in case of Pakistan, the nominal GDP grew last year at 6%, population grew at 2.0%, and the rate of inflation was 3.0% , then the above equation tells that the per capita real GDP grew at 6 - 2 - 3 = 1%.

Merits of Real GNP-ism and Per Capita-ism:

(i) Primarily the criterion of GNP per capita is adopted to measure economic development. It is so because that the information regarding national income, price level and population are mostly available in each country. (ii) On the basis of statistics of GNP and population the per capita GNP can easily be calculated. (iii) On the basis of GNP and the real GNP the international comparisons between countries can easily be made, i.e., the country with higher GNP or GNP per capita would be a developed country as compared with the country having low GNP or low per capita income. (iv) The measure of GNP per capita reflects the social and economic structure of societies.

Demerits of Real GNP and Per Capita Method:

(i) Standard of Living: We told above that the per capita method of economic development reflects the living standard of the people. But perhaps it is not so, as Brunei Dar-Ul-Salaam and Kuwait have the highest per capita incomes but the average living standard of a US citizen is far above than that of Brunei and Kuwait. Moreover, the per capita is obtained by dividing the total national income by the total population, but the national output and national population statistics may be misleading, over-estimated or under-estimated. In such situation the per capita income which has been estimated will not be correct. Again the per capita income is an average income which includes both the big incomes of industrialists and the minor incomes of unskilled daily wage earners. Accordingly the average or per capita income does not truly represent the standard of living of the people. Therefore, the level of distribution of income must be kept in view while giving some verdict about the level of development. Furthermore, it may also happen that GNP of a country increases but a minor segment of the society gets the fruits of it and the standard of having of majority of masses remains obstructed. Such phenomenon may be given the name of economic growth, not economic development. And in such situation the economic welfare of the masses will not improve; the economic growth and economic welfare will diverge. (ii) Increase in Population: According to GNP per capita method, economic development will take place if real GNP exceeds population growth. But it has also been observed in case of poor countries that they are furnished with higher growth rate of population. If in such countries like Pakistan along with increase in GNP the population also increases there will be a nominal increase in per capita income. According to per capita criterion this would be hardly any development. But it is not true. Such countries do witness certain rise in their GNP along with changes in productivity and efficiency. However, this situation will represent economic growth not development which is furnished with the structural and institutional changes along with growth in output. Thug according to per capita method population is an obstacle in the attainment of economic development. (iii) International Comparison: According to GNP per capita method, development is characterized by the level of per capita incomes of different countries. The countries having greater incomes per capita will be developed countries and vice versa. But the comparison of per capita incomes of different countries at international level is furnished with the; following problems: (a) As told earlier the statistics regarding per capita income is not reliable in case of developing countries. They are just guesses and approximates. While in case of developed countries, most of the statistics is accurate. Accordingly, in such situation, the comparison is difficult. In case of developed countries, there is the use of money and there is little barter trade. The figure regarding outputs and incomes are mostly true. While in case of poor countries there is a barter trade, reduced use of money, there is a trend to conceal the incomes and outputs on the part of earners

and producers. In such situation, the statistics are not accurate in case of developing countries. In such state of affairs, how the comparison regarding per capita incomes of the poor and rich countries can be made. (b) The national income statistics obtained with and without the inclusion of self-services will yield different results. As in certain countries such services are included while in certain other countries they are not included. Thus in such state of affairs, the international comparisons will be doubtful. (iv) Dual Economy: The economy where a few developed cities go side by side along with the majority of the backward villages; unemployment along with capital intensive technology; and mass poverty along with a few rich families is given the name of dual economy. Accordingly, if in any country, per capita income rises along with the existence of a dual economy, it will be the economic growth not the economic development because the rise in per capita income could not bring changes in the socio-economic life of the society. (v) Social Opportunity Costs: As rise in per capita income is accorded as economic development, but during such rise in GNP or GNP per capita, a common man has to suffer; there may be the distortions in the family life; there may be the tensions and tortures; there may be the mass environmental pollution and traffic noises etc. This shows that the rise in per capita income is furnished with a deterioration in the quality of life. In other words, the society will have to bear the greater opportunity costs of rise in GNP per capita. Thus in such phenomenon the economic growth will be taking place instead of economic development. (vi) Nature of Output Produced: The criterion of rise in per capita income does not consider the nature of output produced which has led to enhance the GNP per capita. As if in a country the GNP rises due to the greater production of military hardware; more production of alcohol; and a greater production of palacious houses it will not represent economic development. Because the plenty and abundance has not benefited a common man. The rich segment of the society has gone more rich while the poor section of the society has further gone poor. (vii) Practical Failure: The period of 1960s was accorded as a period of "Development Decade" whereby it was conceived that for the sake of development, GNP must be increased by 6% annually. Accordingly, a ruthless craze developed amongst the countries to attain a 6% rise in GNP. But during such craze the problems of poverty, unemployment and income distribution were ignored. Then the economists and policy makers emphasized upon "Dethronement of GNP", Despite the rise in GNP by 6% per annum the unemployment, diseases, environmental pollution could not be removed. The income distribution could not be made fairer; the infant mortality rates could not be decreased; the water supply and water sanitation facilities could not be enhanced; the illiteracy could not be decreased; and social injustice could not be removed in majority of the developing countries despite rise in GNP and GNP per capita. Dr. Mahbub-Ul-Haq who once said, "First make the cake and then divide it" brought the change in his thinking when he wrote an article "Employment and Income Distribution in 1970s". He said, The economic development should launch a big war against worst type of poverty. The developmental goals should be expressed in the removal of poverty, diseases, malnutrition, unemployment and illiteracy etc. We were taught to take care of GNP and it will take care of poverty, But now it should be reversed. We should have an eye on poverty because it will take care of GNP. In other words, we should be worried of components of GNP, rather growth rate of GNP. Accordingly, in 70s a change in emphasis occurred amongst economists and policy makers, "The Redistribution from Growth" where it was considered that along with increase in GNP per capita, the economic welfare should also be entertained. As the economists like Gunner Myrdal and Lebinstein etc., are of the view that, to measure economic development the criterion of economic welfare be employed.

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