ECONOMIC DEVELOPMENT

By: Ajay Kumar

What is Economy?

• Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods.

• Economics explains how people interact within markets to get what they want or accomplish certain goals.

• Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways.

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What is Economic Development?• Economic development generally refers to the sustained,

concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area.

• Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and other initiatives.

• Economic development differs from economic growth. • Whereas economic development is a policy intervention endeavor

with aims of economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP.

• Consequently, as economist Amartya Sen points out: “economic growth is one aspect of the process of economic development.”

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Traditional View of economic development

• It is concerned primarily with the efficient, least- cost allocation of scarce productive resources and with the optimal growth of these resources over time so as to produce an ever expanding range of goods and services.

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New economic view of development.• "Economic development is generally defined:

– To include improvements in material welfare, especially for persons with the lowest incomes,

– The eradication of mass poverty with its correlates of illiteracy, Diseases and early death,

– Changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agricultural growth towards industrial activities,

– The organization of the economy in such a way that productive employment is general among the working age population rather than the situation of a privileged minority and the correspondingly greater participation of broadly based groups in making decisions about the directions,

– Economic and otherwise, in which they should move to improve their welfare

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Growth versus Development

• Economic growth may be one aspect of economic development but is not the same

• Economic growth:– A measure of the value of output of goods and services

within a time period

• Economic Development:– A measure of the welfare of humans in a society

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Economic Growth

• Using measures of economic growth can give distorted pictures of the level of income in a country – the income distribution is not taken into account.

• A small proportion of the population can own a large amount of the wealth in a country. The level of human welfare for the majority could therefore be very limited.

But this could be just around the corner!

This might be a common picture……

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Myths About Economic Growth

• It is indicator of wealth, which reflect the quantity of resources available to a society .

• Does not tells about people’s quality of life: access to education and health care, employment opportunities, availability of clean air and safe drinking water, the threat of crime, and so on.

• Economic growth, by increasing a nation’s total wealth, also enhances its potential for reducing Poverty and solving other social problems.

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Cont.

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Indicators of Economic Development

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Growth

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Economic Growth• Using measures of economic performance in terms of the

value of income, expenditure and output• GDP – Gross Domestic Product – The value of output produced within a country during

a time period• GNP – Gross National Product– The value of output produced within a country plus net

property income from abroad• GDP/GNP per head/per capita – Takes account of the size of the population

• Real GDP/GNP – Accounts for differences in price levels in different

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Economic Growth

• High economic growth fuelled through capital spending can hide a number of underlying economic problems – how is the income and wealth distributed? Who is doing the spending and will it ‘trickle down’ to the poor?

Shopping Mall in Saudi Arabia Dubai Skyline

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National Income – Problems with using GDP/GNP

• Reliability of data?– How accurate is the data that is collected?

• Distribution of income?– How is the income distributed – does a small

proportion of the population earn a high percentage of the income or is income more evenly spread?

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National Income – Problems with using GDP/GNP

• Quality of life?– Can changes in economic growth measure changes in

the quality of life?– Does additional earnings power bring with it additional

stress, increases in working hours, increased health and family problems?

• Impact of exchange rate?– Difference in exchange rates can distort the

comparisons – need to express in one currency, but which one and at what value?

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National Income – Problems with using GDP/GNP

• Black/informal economy?• Some economic activity not

recorded – subsistence farming and barter activity, for example

• Some economic activity is carried out illegally – building work ‘cash in hand’, drug dealing, etc.

• Work of the non-paid may not be considered but may contribute to welfare – charity work, housework, etc.

It might not be pleasant, but what he finds among the refuse could be all he has.Title: Sierra Leone Liberia. Copyright: Photolibrary Group

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Development

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Development

• Development incorporates the notion of a measure/measures of human welfare

• As such it is a normative concept – open to interpretation and subjectivity

• What should it include?

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Development

• Levels of poverty– Absolute poverty– Relative poverty

• Inequality• Progress – what

constitutes progress?Our definitions of progress may be highly subjective. What has progress brought to native tribes people across the globe?Title: Navajos refuse casino riches. Copyright: Stock.Xchng

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Development

• Other considerations of human welfare:• Political freedoms?• Sustenance?• Self esteem?• Proportion of activity in different sectors of the

economy:– Primary– Secondary– TertiarySUSTAINABLE DEVELOMENT

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Development

• Development is sustainable if it “meets the needs of the present without compromising the ability of future generations to meet their own needs.”

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Development

• Iraqis have supposedly been given their freedom following the American led ‘Operation freedom’ but has it improved welfare?

Copyright: Photolibrary Group

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Human Development Index

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Human Development Index (HDI)

• HDI – A socio-economic measure• Focus on three dimensions of human welfare:• Longevity – Life expectancy• Knowledge – Access to education, literacy rates• Standard of living – GDP per capita: Purchasing

Power Parity (PPP)

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OTHER MEASURES

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