Lesson 29 Institution in economic development

29.1 Introduction

29.2 Education and economic development

29.3 Health and Economic Development

29.4 Market and Economic Development

29.5 State and Economic development

29.5.1 Creation of Social and Economic Overheads

29.5.2 Agriculture development

29.5.3 Industrial development

29.5.4 Reduction of Inequalities

29.5.5 Optimum allocation of Resources and Creation of Full Employment

29.6 Summary

29.7 check your progress

29.8 Key Concepts

29.9 Self Assessment Question

29.10 Answers to check your progress

20.11 Suggested Readings

Objectives:

After studying this lesson, you will be able to understand

Relationship between Education and Economic Development

Importance of Health and Economic Development

Significance of Markets and Economic Development

29.1 Introduction:

One of the important measures of economic development is to bring about changes in the

social-cultural attitudes of the people in the LDCs. Such societies possess religious and

cultural traditions which are not conductive to economic development.

The institutional framework does not encourage rational individualistic behaviour, and

the spirit of competition and enterprise. If economic development is to proceed, social

attitudes, values and institutions entrenched in the joint family, caste, kinship and in

religious beliefs must undergo change. These require social revolution. Social revolution

does not imply the rapid over throw of the existing institutions.

The process of change has to be evolutionary. Otherwise, violent social changes will lead

to discontentment, frustration, unrest and violence. These factors will, in turn, inhibit

economic growth.

Francis Hues points out that “it took Europe ten centuries or more to produce an

individualistic orientation of life which bore economic growth two hundred years ago,

and there does not seem to be any way in which a similar orientation could be generated

in a matter of years or even decades.” Any society attempting to institute it quickly will

result “either in apathy or revolt.” Thus “much depends upon the way in which the

process of growth and change it set in motion, the speed of the process and the extent to

which it permeates all sectors of the economy. Generally, a slow but steady development

is likely to create fewer political, social and economic tensions; and it is likely that an

attempt to force the pace too strenuously may also be economically wasteful because the

social and personal changes may not take place which are necessary to enable the

individual or then society to form the development necessary to enable individuals or the

society to profit and sustain it.”

Economic change is not brought about by institutional changes alone. Economic change

may take place due to increased capital formation or as a result of technological change

which may in turn cause institutional changes. Non economic factors like changes in

religious ideas or political framework may also bring about changes in institutions. Thus

there may be causal relationship between economic development and institutional

changes. If a change starts in social institutions people will seize new opportunities which

will it turn further change the institutions. Such new opportunities bring changes and

these changes are gradual and perceptible. They are initiated by innovators, the new men,

who endeavour to break with the past and mould the old institutional framework into a

new setting.

Above all it is the government which plays a crucial role in influencing the institutional

framework.

29.2 Education and economic development:

Economic development is not possible without education. As Myrdal says,” to start on a

national development program while leaving the population largely illiterate seems to

met to be futile”. For economic development, it is the quality of labour that is more

important.

Many quantitative studies of the source of economic growth in the West have amply

demonstrated that it was not the growth of physical capital but that of human capital

which was the principal source of economic progress in the developed countries. Even in

developing economies it was felt an immediate need to build up human capital

infrastructure. Rapid expansion of education therefore appeared essential in the light of

substantial scarcities of manpower in 1950’s and 1960’s. Infact, expansion of educational

opportunities has contributed to economic development in four ways:

it has created a more productive labour force by endowing it with increased

knowledge and skill

it has provided widespread employment and income-earning opportunities to

teachers, school workers, text book and paper printers, school uniform

manufactures, builders etc.,

It has created a class of educated leaders to fill vacancies left by departing

expatriates or otherwise vacant positions in government services, public

corporations, private business and the professionals.

It has provided the kind of training and education that would promote literacy,

numeric and basic skills while encouraging modern attitudes on the part of diverse

segments of production.

Thus, it cannot be denied that educated and skilled manpower is a necessary condition for

sustained economic development. However, the role of education in the process of

economic growth should not be confined to the latter’s overall rate in a single dimension.

Rather, we should also consider the structure and pattern of growth and its distributional

implications in terms of reduction in inequality and poverty.

29.3 Health and Economic development:

To increase the efficiency and productivity of labor, the health of the people must be

progressively improved. Public health measures include the improvement of

environmental sanitation both in rural and urban areas, removal of stagnant and polluted

water, slum clearance, better housing, clean water supply, better sewage facilities, control

of communicable diseases, provision for medical and health services, especially in

maternal and child welfare, and health education and family planning, and above all, for

the training of health and medical personnel. All this necessitates planned efforts on the

part of the public authorities.

Public health measures assume great importance in LDC’s mainly for two reasons:

they help in the development process by augmenting labor productivity and

efficiency

By reducing the mortality rate they tend to increase the rate of population growth,

thus making it imperative for the state to adopt family planning and speedy

development programmes. But all development efforts will be futile if the growth

in numbers is not checked. Since, the death rate is already on the decline in

LDC’s the remedy is to bring down the birth rate from 40 per thousand prevailing

in such countries to 20 per thousand.

No doubt there is greater need for accelerating development, but to increase per

capita income and improve the standard of living, the rate of population increase

must be checked and family planning programs be given top priority. Dr. Stephen

Enke has calculated that the value of a new-born baby’s life-time net consumption

in an LDC is approximately 125 dollars after discounting his lifetime future

production. 125 dollars is a negative value and an economic burden on

overpopulated LDC’s.

29.4 Market and Economic Development:

An important economic requirement of development is well-functioning market

system. This requires special institutional, legal and cultural preconditions. Nathan

Keyfitz and Robert Dorfman have listed the following 14 institutional and cultural

requirements of the operation of effective markets.

Trust in banks, insurance companies, suppliers.

Law and order (enforcement of contracts)

Security of persons and of property

Balancing competition with cooperation

Division of responsibility and diffusion of power

Community altruism

Social mobility, legitimation of ambition, and toleration of competitiveness

Materialistic values as a stimulus to greater production

Deferring gratification to generate private saving

Rationality unconstrained by tradition

Honesty in government

Efficient forms of competition as opposed to monopolistic control

Freedom of formation

Flows of information without restrictions

Given the existence of these institutional and cultural preconditions, a well functioning

market system requires at least the flowing eleven market-facilitating legal and economic

policies.

Property rights clearly established and demarcated, procedures for establishing

property rights and transferring them

Commercial law and courts to enforce it, especially contract and bankruptcy laws

Freedom to establish huiness in all sectors except those with significant

externalities, without excessive licensing requirements analogous freedom to

enter trades and professions to attain government offices

A stable currency and a reliable and efficient system for making transfers

Public supervision or operation of natural monopolies as occurs in industries

where technological efficiency requires that a firm be large enough to supply 10%

to 15% of the national markets

Provision of adequate information in every market about the characteristics of the

products offered and the state of supply and demand, to both buyers and sellers

Autonomous tastes-protections of consumers preferences from influence by

producers and purveyors

Public management of externalities and provision of public goods

Instruments for executing, stabilizing monetary and fiscal policies

Safety nets-provisions for maintaining adequate consumption for individuals

affected by certain economic misfortunes, especially involuntary unemployment

industrial injuries and work disabilities

Encouragements to innovations, in particular, issuance and enforcement of patents

and copyrights.

So the market reforms involve much than eliminating price distortion, privatizing public

enterprises and declaring markets free. All these essential requirements are present in an

economy for a speedy development. The slow pace of development in many African and

Asian countries is attributable to the absence of some or many of the institutional

preconditions and market practices.

29.5 State and Economic Development:

The contribution of State in economic development may be discussed under the following

heads:

29.5.1 Creation of Social and Economic Overheads:

The overheads such as means of communications and transportations, ports, generation of

energy, irrigation, etc are important for rapid development of an economy. The private

enterprise is not interested to invest therefore, the provision of these economic overheads

have to be undertaken by the State.

Development of infrastructure is a sine qua non of economic development. All economic

activities require infrastructural facilities. Thus the State must take upon itself the

responsibility for the construction of economic overheads in the under developed

economies so as to achieve over all economic development.

29.5.2 Agricultural development:

The State must play an active role in the re-organization and revitalization of agriculture.

Consolidation of holdings, organization of agriculture on co-operative lines, provision of

irrigation and credit facilities, adoption of new high yielding varieties of seeds, increased

use of fertilizers, pesticides and insecticides, agricultural research and training,

remunerative prices for agriculture products, reform of tenancy laws, establishment of

subsidiary and agro-based industries etc., must form part of an agrarian policy of the

government.

29.5.3 Industrial development:

Another function of the state is to develop the economy industrially. It is the duty of the

state to formulate and implement a judicious industrial policy so that necessary

encouragement should be given to the development of cottage, small and large-scale

industries. A policy of decentralization of industries should be followed so that industries

should be spread over all areas in accordance with their factor endowments. Even the

adoption of a policy in establishing focal points of industries in and around small towns

can go a long way in developing local resources and providing larger employment

opportunities.

The state can also help in the growth of private industries by importing raw materials,

capital equipment, machinery and technical know-how. The state can also help private

enterprises in establishing and provide facilities like cheap finance, tax rebate, etc…It is

the state which can help the development of backward areas by giving various facilities

and concessions.

29.5.4 Reduction of inequalities:

As the pace of economic development proceeds, there takes place wide disparities in the

distribution of income and wealth. Thus to secure equitable distribution of wealth, this

can be done through public finance operations. The government should impose steeply

progressive taxes on income and wealth and on luxury goods and benefit the poor

through wise public expenditure. The reform of inheritance laws, regulation of

competition and control of monopolies will ensure equal opportunities for all and pave

way for economic development.

29.5.5 Optimum allocation of Resources and Creation of Full

Employment:

The government must see that the economic resources of the country are used for socially

desirable projects and it must discourage the flow of investible resources into

unproductive and speculative channel and for that appropriate fiscal and monetary

policies must be followed vigorously. The government should not allow wastefull

exploitation of natural resources and they should be properly conserved. Besides, the

economic policies of the government must aim at the proper balance in the rate of

development of different sectors and in the rate of development of different industries in

each sector.

The ultimate objective of economic development is to create conditions of full

employment of labor and other resources in the economy. The state must provide justice,

economic, social and political; internal law and order and influence against external

aggression. Without these no progress is possible. Besides the state must make substantial

structural changes to attain the objective of national development based on equity and

growth.

29.6 Summary:

At the outset, to increase the efficiency and productivity of labor, the health of the people

must be progressively improved. Public health measures include the improvement of

environmental sanitation both in rural and urban areas, removal of stagnant and polluted

water, slum clearance, better housing, clean water supply, better sewage facilities, control

of communicable diseases, provision for medical and health services.

Economic development is not possible without education. As Myrdal says,” to start on a

national development program while leaving the population largely illiterate seems to

met to be futile”. For economic development, it is the quality of labour that is more

important.

Further, the state has to play a vital role in the economic development of underdeveloped

countries. Without active state intervention and participation, the poor countries cannot

develop themselves, emphasizing the role of state the economic development, Rostow

observes, “the central government, in a period of pre-conditions to take-off must be

capable of organizing the nation, so that untited commercial markets develop. It must

create and maintain a tax and fiscal system which diverts resources into modern use. In

particular the state has an inescapable responsibility for ensuring that the stock of social

capital required for takeoff is built; and, it is also likely that only rigorous central

leadership can bring about these traditional changes in productivity, in agriculture and

industry whose quick achievement may also constitute a pre-condition for takeoff”. The

present economic development of Japan is largely due to the initiative and active

entrepreneurial role played by the government after 1870. It is now everywhere

recognized that the primary responsibility of the government is to plan, initiate, regulate

and sustain economic development of underdeveloped courtiers. We may sum up the role

of the state as initiator of development, as accelerator of growth, as custodian of

economic justice, and as promoter of the welfare of the people.

29.7 Check your Progress

State whether following statement is True or False

1. Economic change is brought about by only institutional changes

2 There is a causal relation between economic development and institutional changes

3. According to Myrdal ’Quality of Labor is more important for Economic development

4. Education creates more un-productive labor

5. State duty is to see that there is optimum allocation of resources

29.8 Key Concepts

Economic development : One of the important measures of economic development is to

bring about changes in the social-cultural attitudes of the people in the LDCs.

Social and overhead capital : The overheads such as means of communications and

transportations, ports, generation of energy, irrigation, etc are important for rapid

development of an economy.

Social infrastructure : Social infrastructure such as education, health and nutrition etc

also important along with economic infrastructure.

Economic infrastructure; overall economic development depends on economic as well

as social infrastructure. Energy development, transportation, building construction etc are

fall under economic infrastructure.

Fiscal policy : It refers to a policy related to fiscal instruments such as taxation, public

borrowing and public debt. By adopting one of the instruments, government can achieve

its planning objectives.

Monetary policy: Economic policy consisting of monetary and fiscal policy. Monetary

policy is related with the controlling of money supply and to achieve monetary policy

objectives.

29.9 Self-Assessment Questions

Long Answer Questions

1. Examine critically the role of Institutions on Economic development.

2. Discuss the Significance of Education in Economic development

3 Explain, How do you assess the role of State in Economic development

Short Answer Questions

4 Write Note on Markets and development

5. What is meant by social and economic overheads

6. Explain the contribution of health to economic development

7 Enlist the different Institutions and their importance in development

29.10 Answers to check your progress

1. False 2. True 3. True 4. False 5. True

29.11 Suggested Readings

1. Todaro,M.P., Economic Development in the Third World,1978

2. Meier,G.M.(ed), Leading Issues in Economic Development,1984

3. Jhingin M.L. The Economics of Development and Planning,2002

4. Taneja,Myer Economics of Development and Planning,2007

5. Michael P. Todaro and Stephens C. Smith Economic Development, Pearson’s education, 2005