UNIVERSITY OF RWANDA

COLLEGE OF EDUCATION

MODULE TITLE: ECONOMICS OF DEVELOPMENT

MODULE CODE: ECO3141

COMBINATION: EEE

YEAR:3

CHAPTER ONE: ECONOMICS OF DEVELOPMENT: CONCEPTS AND

APPROACHES
Introduction
The Economics of Development refers to the problems of the economic
development of underdeveloped countries. The study of economic
development has attracted the attention of economist’s right from Adam
Smith down to Marx and Keynes. For ‘in the advanced countries there has
been a tendency to take economic development for granted as something
that takes care of itself and to concentrate on the short-term oscillations of
the economy”. Therefore, Myrdal says that the underdeveloped countries
should not accept our inherited economic theory uncritically but remo uld it
to fit their own problems and interests.

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, but we may give a simple but comprehensive
definition of economic development which runs as,

"Economic development is a continuous process which has to be extended

over a long period of time so as to break the vicious circle of poverty and
lead a country to a stage of self-sustaining growth or to self-generating
economy".
Measurement of Economic Development
1. Traditional Economic Measure.
In economic terms, development is the capacity of a nation to generate and
sustain annual increase in its GNP.

GDP: is the market value of all final goods and services produced within a
country in a given period of time; Y=C+I+G+ XN.

GNP: is the market value of all final goods and services produced by
permanent residents of a country in a given period of time. GNP= GDP+ net
factor income from abroad.

2. Common Alternative Index

• Per capita GNP: is the per-head value of final goods and services
produced by permanent residents of a country in a given period of time. It is
converted to USD using the current exchange rate. Per capita GNP = GNP/
Population= Income per head

• PPP (Purchasing power parity) Measure: the number of units of a

country’s currency required to purchase the same of basket of goods and
services in the local market that a US $1 would buy in the USA.

3. Social Measurement
Human development indices
Economists have tried to measure social indicators of basic needs by taking
one, two or more indicators for constructing composite indices of human
development. We study below the Physical Quality of Life Index (PQLI)
of Morris and the Human Development Index (HDI) as developed by the
United Nations Development Programme (UNDP).

1. Physical quality of life index (PQLI)

Morris combined three component, indicators of infant mortality, life
expectancy at age one and basic literacy at age 15 to measure performance
in meeting the most basic needs of the people. The PQLI shows improvement

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in the quality of life when people enjoy the fruits of economic progress with
increase in life expectancy (LE), fall in infant mortality rate (IMR) and rise in
basic literacy rate (BLR).

The PQLI index is calculated by averaging the three indicators giving equal
weight to each and the index is also scaled from 0 to 100.

To find out the achievement level of the positive variable,

Actual value−Minimum value

Achivement level=
Max . value−min value

If the indicators of life expectancy and basic literacy rate are positive, the
best performance is shown as the maximum and the worst as the minimum

To find out the achievement level for a negative indicator,

Max . value− Actual value

Achivement level=
Max . value−min val ue

For life expectancy and infant mortality rate, there is no natural maximum
and minimum value. But there is need to select the right values.

Example

Dimension Maximum Minimum

Infant mortality rate 229 9

Life expectance at age 77 38

one

Basic literacy rate 100 0

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Construction of physical quality of life index (PQLI)
On the basis of the values of the component indicators given in Table 1, we
can construct the PQLI on the basis of the three indices in the following
manner:

Actual value−38
Life expectance index=
Max . value−min value

229−Actual value
Infant mortality rate index=
Max . value−min value

Actual value−0
Basicliteracy index=
Max . value−min value

We calculate the PQLI for India on the basis of 2001 Census data for these
variables: IMR = 67, LE = 65 years, and BL = 65%.

229−67
Inf ant mortality rate index= =0.74
229−9

65−38
Life expectance index= =0.69
77−39

65−0
Basicliteracy index= =0.65
100−0

IMRI + LEI + BLI 0.74+0.69+ 0.65

PQLI= =
3 3

2.08
= =0.69
3

Thus, the physical quality of life index (PQLI) for India in 2001 was 0.69

2. Human development index (HDI)

• Human development Index: is a composite statistic of life expectancy,
education and GDP indices used to rank countries into four tiers of human
development. It comprises of;

Longevity - Life expectance at birth

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Knowledge - Education

Standard of living- GDP

Life expectancy- The statistical average of the number of years that a

human is expected to live. According to National Institute of Statistics of
Rwanda projections for 2018, it was 67 years. Education Index - Mean
years of schooling and expected years of schooling.

Before the HDI is calculated, an index is created for each of these

dimensions: Life Expectancy Index, Education Index and GDP Index.

For the construction of the index, fixed minimum and maximum values have
been set for each of these indicators:

(i) Life expectancy at birth: 25 years and 85 years for calculating the
Life expectancy Index.
(ii) Adult literacy: 0% and 100% for calculating the education Index.
(iii) Combined gross enrolment ratio (0% and 100%)
(iv) Real GDP per capita (PPP$): $100 and $40,000 (PPP US$) for
calculating GDP Index.

For any component of the HDI, individual indices can be computed by

applying the formula:

Actual value−Minimum Value

Dimension Index=
Max .Value−Min. Value

1. Life Expectancy Index. If the life expectancy at birth of a country is

78 years, then the life expectancy index for that country would be

78−25 53
Life expectancy index= = =0.884
85−25 60

2. Education Index. The education Index is the combination of adult

literacy index and gross enrolment index. If the adult literacy rate of
this country is 92, then its adult literacy index would be

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 92−0 92
Adult literacy index= = =0.920
100−0 100

If the combined gross enrolment in this country is 60, then its gross
enrolment index would be

60−0 60
Gross enrolment Index= = =0.600
100−0 100
Education Index=2/3( Adult literacy index ¿ +1/3(
Gross enrolment Index )
=2/3(0.920) +1/3(0.600) =0.813
3. GDP Index. The GDP per capita (PPPUS$) of this country is $8,840,
then the GDP index would be

log ⁡(88 , 40−⁡100) log ⁡(8,740)

GDP Index= = =0.856
log (40,000¿−100) ¿ log ⁡(39,900)

4. Human Development Index. The HDI is a simple average of the Life

Expectancy Index, Education Index and adjusted GDP per capita (PPP$)
Index. It is derived by dividing the sum of these three indices by 3

1 1 1
HDI = ( 0.884 ) + ( 0.813 ) + ( 0.856 )
3 3 3

=0.295+0.271+0.285=0.851

Characteristics of a Developed Economy

The main characteristics of developed countries are as follows:

1.Significance of Industrial Sector

Developed countries have a strong industrial base, with industries

contributing significantly to GDP and employment, driving innovation and
economic stability.

2. High Rate of Capital Formation

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High savings and investments in infrastructure, technology, and education
ensure sustained economic growth and productivity in developed nations.

3. Use of High Production Techniques and Skills

Developed countries leverage advanced technology, automation, and a

highly skilled workforce to achieve efficient and high-quality production.

4. Low Growth of Population

With better education, healthcare, and living standards, developed nations

experience stable or declining population growth, which supports economic
sustainability.

Distinction between Developed and Underdeveloped Economies

1. Per Capita Income: Underdeveloped economies have significantly
lower per capita income, generally less than $5000 annually, compared
to developed nations like the U.S.
2. Population Growth: Underdeveloped countries face high population
growth that hampers economic progress, whereas developed
economies often face stagnation due to declining population growth.
3. Mass Poverty: Mass poverty is both a cause and consequence of
underdevelopment, with shortages defining poor economies and
abundance creating issues for affluent societies.
4. Standard of Living: Underdeveloped economies are marked by low
productivity and poor living standards, while developed nations enjoy
high income and mass consumption beyond basic needs.
5. Capital: Capital deficiency causes poverty in poor countries, while in
affluent economies, excessive capital leads to stagnation.
6. Employment Issues: Underdeveloped economies face
underemployment and disguised unemployment, whereas developed
economies experience cyclical unemployment due to fluctuations.
7. Technology: Poor countries lack advanced technology, whereas
developed nations thrive with high technological advancements,

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 making it a basic objective for backward economies but less critical for
affluent ones.

Economic Development and Economic Growth

Normally in economic textbooks, growth and development are used
synonymously, and this usage is widely acceptable. However, in
particular, the two terms have been distinguished by different economists
as follows:

1. To some economists, economic development refers to the process of

expansion of backward economies, while economic growth relates to
that of advanced economies.
2. Schumpeter, however, uses the term "economic development" as a
spontaneous and discontinuous change in the stationary state which
disturbs the equilibrium state previously existing. And the term
"economic growth" is used to denote a steady and gradual change in
the long run which comes through a general increase in the rate of
saving and population in a dynamic economy.
3. Prof. Kindleberger has given the differences between growth and
development as; "Growth may well imply not only more output and
also more inputs and more efficiency, i.e., an increase in output per
unit of input. Development goes beyond these to imply changes in
the structure of outputs and in the allocation of inputs by sectors.
4. To some, economic development is the outcome of conscious and
deliberate efforts involved in planning. Economic growth, on the
other hand, signifies the progress of an economy under the stimulus of
certain favorable circumstances, e.g., the progress achieved by the
United Kingdom during the Industrial Revolution.
5. A. Madison says, "The raising of income levels is generally called
economic growth in rich countries and in poor ones it is called
economic development".

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Factors Affecting Economic Growth
A. Economic Factors
1. Technological Progress

Technological progress enhances productivity, reduces costs, and opens

new avenues for economic activities, driving sustained growth. It helps
economies transition to advanced industries and compete globally.

2. Natural Resources

Abundant and effectively utilized natural resources provide the raw

materials and energy required for economic development.
Mismanagement or scarcity of resources can constrain growth.

3. Capital Formation

Investment in physical assets like infrastructure, machinery, and tools

increases productive capacity. Higher capital formation directly boosts
economic output and living standards.

4. Population Growth

A balanced population growth supports economic growth by providing a

labor force and consumer base. However, excessive growth can strain
resources and infrastructure, limiting development.

5. Transformation of Traditional Agricultural Society

Modernizing agriculture and transitioning to industrial and service sectors

improve productivity. This shift fosters economic diversification,
urbanization, and higher living standards.

B. Non-Economic Factors
1. Political Factors

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Stable governance, sound policies, and effective institutions foster economic
growth by creating a conducive environment for investment and
development. Political instability or corruption, however, hampers progress.

2. Social and Psychological Factors

Cultural attitudes towards work, entrepreneurship, and innovation influence

economic activity. Societies valuing progress, hard work, and risk-taking tend
to experience faster growth.

3. Education

A well-educated workforce improves productivity, innovation, and

adaptability, driving economic development. Investment in education
enhances skills and knowledge essential for growth.

4. Religious Factors

Religious beliefs can influence work ethic, saving habits, and attitudes
toward change, either facilitating or impeding growth. Societies with tolerant
and progressive religious practices often experience faster economic
development.

Therefore, both of the economic and noneconomic factors do play an

important role in the process of economic growth.

Obstacles to Economic Development

1. Vicious Circles of Poverty

Poverty perpetuates itself as low income leads to low savings and

investment, limiting economic growth. This cycle traps economies in a state
of underdevelopment.

2. Low Rate of Capital Formation

Insufficient savings and investment hinder the accumulation of capital

necessary for infrastructure, technology, and productivity improvements,
slowing growth.
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3. Socio-Cultural Constraints

Traditional beliefs, resistance to change, and gender inequality can limit

innovation, entrepreneurship, and the utilization of human potential,
obstructing progress.

4. Agricultural Constraint

Dependence on traditional farming methods and low agricultural productivity

strain resources, limit food supply, and reduce surplus for investment in
other sectors.

5. Human Resources Constraint

A lack of skilled and educated workers reduces productivity, innovation, and

the capacity to adopt advanced technologies, impeding economic growth.

CHAPTER TWO: ECONOMIC GROWTH AND INCOME

DISTRIBUTION; THE KUZNETS HYPOTHESIS.
This document summarizes the Kuznets hypothesis and its critics,
causes of increase and decrease of with development.

THE KUZNETS HYPOTHESIS

 The Kuznets hypothesis deals with the issue whether economic growth
increases or decreases inequality in income distribution.

 It states that, “in the early stages of economic growth relative income
inequality increases, stabilizes for a time and then declines in the later
stages”. This is known as Kuznets Inverted U-shaped Hypothesis of
income distribution.

 The degree of income inequality is measured by Gini Coefficient. It varies

from 0 (Perfect equality) to 1 (Perfect Inequality). The larger the Gini
Coefficient, the greater the inequality.

 The Gini Coefficient or the inequality in income distribution is also given by

Lorenz Curve. It is equal to the ratio of the area A/A+B.

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 The Kuznets inverted U-shaped Curve K traces the changes in
distribution of income (as measured by Gini Coefficient) in relation the
increase in per capita income. As shown in Fig.2. The income inequality falls
with an increase in the per capita income.

Gini Coefficient

In simple terms, the Gini coefficient is a way to measure how evenly or

unevenly income or wealth is distributed in a society. A lower Gini coefficient
indicates a more equal distribution, while a higher Gini coefficient suggests a
greater concentration of income or wealth in a small percentage of the
population.

The Lorenz Curve is a graph that shows the cumulative percentage of

income or wealth on the vertical axis and the cumulative percentage of the
population on the horizontal axis. The line of perfect equality is a straight
diagonal line that represents perfect income or wealth equality.

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The following diagram shows the graph of a typical inverted U-shaped
Kuznets curve.

1. The Starting Point

The starting point of the Kuznets curve shows low income inequality in a
country with low GDP per capita. This is because poor economies with a
dominant agricultural sector often have a more equal distribution of income
among individuals.

The Upward Slope

The upward sloping part of the Kuznets curve illustrates that as economies
experience economic growth and progress from agricultural economies to
industrialised ones, income inequality starts to increase.
This is because, with greater economic activity, new investment
opportunities increase for those who already have the capital to invest. This
means that those who already have wealth have the opportunity to increase

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it. There is also an influx of inexpensive rural labour to the cities
(Urbanisation), which keeps wages down for the working class because of an
increase in labour supply (higher urban population ). This widens the gap
between the rich and the poor, leading to an increase in income inequality.
So, the initial increase in income inequality can be attributed to factors such
as the concentration of wealth in the hands of a few individuals or groups,
the unequal distribution of resources, and urbanisation.

CAUSES OF INCREASE IN INEQUALITY WITH DEVELOPMENT

The factors which tend to increase relative income inequality in the early
stages of development are:

1. Dualism: LDC’s are characterized by the geographic, social, technological

and financial dualism. As a result of the process of transition from the
traditional agricultural society to modern industrial economy, the structural
changes take place. Consequently, the modern industrial sector grows faster
than the rural subsistence sector.

2. Migration: The migration of rural population to urban areas fails to

provide them gainful employment as rural people are mostly uneducated
and unskilled. As a result, they remain underemployed and have to perform
low paying jobs in the urban areas.

3. Urban Bias: There is urban bias in the allocation of financial resources for
development on the part of government. As a result, the rural economy
remains backward with underemployment and disguised unemployment and
low per capita income.

4. Inability of Government to Pass and Implement Legislations: Due

to political reasons, the government. finds it difficult to pass and implement
legislations relating to land reforms and other measures to reduce
concentration of income and wealth among the rich. Consequently, income
inequalities increase.

CAUSES OF REDUCTION IN INEQUALITY WITH DEVELOPMET

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Kuznets gave the following two reasons for the reduction in inequality

of income distribution in the later stages of development.

1. Fall in the per capita incomes of the highest income groups.

2. Rise in the per capita incomes of the lower income groups.

 As development proceeds, it sets in motion a chain of cumulative

expansion in the industrial sector, thereby leading to higher per capita
income. This in turn leads to an increase in the demand for farm products
and other products of the rural economy which raises the per capita income
of the people of these areas. This is what Hirschman calls “trickling down
effects” and Myrdal calls “spread effects”.

 The rural incomes also increase due to urban remittances / foreign

remittances. As development gains momentum, the growth rate of
population declines which increases per capita income. This leads to a
decrease in the inequalities of income distribution.

WHY THE PER CAPITA INCOME OF THE HIGHER-INCOME GROUP

TENDS TO DECLINE ?

1. Progressive Taxation Policies

Economic growth often prompts governments to introduce or strengthen

progressive taxation policies, where higher-income individuals pay a larger
percentage of their income in taxes. This cause Direct reduction in
disposable income and Transfer of wealth from high-income groups to fund
social programs (e.g., education, healthcare) that benefit lower-income
groups.

2. Economic Diversification

Economic growth encourages diversification from traditional sectors like

agriculture to manufacturing and services.

High-income groups, often relying on traditional capital-intensive industries,

face declining profitability as new sectors emerge and attract investment.

Competition removes monopolistic control, reducing the share of income

controlled by the elite.

3. Diminishing Returns on Capital

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 In mature economies, the return on investments, such as land, property, or
other traditional forms of capital, declines.

Wealthy individuals, whose income largely depends on returns from capital,

experience slower income growth or even stagnation. This reduces their
income advantage relative to the broader population.

4. Increased Labor Participation

Economic growth generates more jobs and improves access to education

and skills development, empowering lower-income groups to earn higher
wages.

Increased bargaining power for workers leads to higher wages, reducing the
income share retained by business owners and capitalists.

5. Redistribution through Social Spending

Economic growth enables governments to invest in social services, such as

free or subsidized healthcare, education, and housing.

By doing this, a larger proportion of income of higher group is taxed to fund

these programs.

Reduced reliance of lower-income groups on private services diminishes the

profitability of industries dominated by high-income groups. Income
disparities shrink as lower-income groups gain access to quality public
services.

6. Policy-Induced Wealth Redistribution

Mechanism: Economic growth often aligns with policies targeting wealth

redistribution, such as land reforms, minimum wage laws, and social security
schemes.

This reduced ability to concentrate wealth in a few hands. Policies favoring

equitable distribution decrease the relative income of elites.

CRITICISM

 Kuznets inverted U-hypothesis has been empirically tested and

confirmed by some economists however it has been questioned on the

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 basis of data taken by Kuznets. Kuznets takes a very small sample of
developed and developing countries. Critics opine that his analysis is
based on 5% empirical data and 95% speculation.
 Todaro also finds fault with the methodology used by economists to
test the Kuznets hypothesis. The time-series data being not available
for most LDCs, economists use cross-sectional data. Using cross-
sectional data for a time-series phenomenon for drawing conclusion is
basically wrong. In a recent study, Anand and Kanbur (1993) have
shown that the choice of data as the measure of inequality may lead to
U-relationship between income inequality and development, inverted-U
relationship or no relationship at all.

The Significances of Kuznets curve

The Kuznets curve is an important tool that offers policymakers valuable

insights into the relationship between economic growth and income
inequality. By understanding this curve, governments can design policies to
achieve an important macroeconomic objective of low income inequality.
Such policies may include investments in education and skills to enhance
human capital, progressive taxation, social welfare programs, and labor
market regulation.
The Conclusion
The Kuznets curve suggests that with economic growth, income distribution
becomes more uneven, and then after a certain income level, income
becomes more evenly distributed. The Kuznets curve has offered valuable
insights into the dynamics of income inequality and economic development.
Despite its limitations, the Kuznets curve provides a framework for
policymakers to address income disparities.

CHAPTER 3: SUSTAINABLE DEVELOPMENT

MEANING

There are many definitions of sustainable development, but the most popular
definition is by the Brundtland report. It said that the sustainable
development is meeting the needs of present generation without
compromising the needs of future generation.

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Again, Sustainable development is a long-term perspective on how humanity
can improve the quality of life for all people, now and into the future.

Also, sustainable development simply means that development should keep

going. It emphasis the creation of sustainable development in quality of life
for all people through increases in real income e per capita, improvements in
quality of education , health and general quality of life and improvements in
quality of natural environment resources. So, sustainable development is
closely linked to economic development. It is situation in which the economic
development of country does not decrease over time.

As come out by Pearce and warford, sustainable development explains a

process in which natural resources base is not allowed to deteriorate/
decrease.

OBJECTIVES OF SUSTAINABLE DEVELOPMENT

 To promote environmentally sustainable patterns of

consumption: The first objective is to promote environmentally
sustainable patterns of consumption. This can be done by reducing the
amounts of natural resources used for industrial processes and
products. For example, recycling plastic bottles into new bottles or
turning wood chips into new paper products. This also includes using
less energy during production of goods and services, which would
reduce pollution. Energy-efficient transportation systems are another
way to promote environmentally sustainable patterns of consumption.
 To promote social equity: Social equity is a key objective of
sustainable development and refers to the process of changing
situations that allow some people to have more opportunities than
others. Social equity can be divided into four areas: 1) life expectancy,
2) access to education, 3) employment and living conditions, and 4)
levels of political rights.
 Improving economic efficiency: Economic efficiency is important to
sustainable development because it can help provide social equity. It
does this by providing social services, reducing unemployment, and
increasing the quality of life for all people. This objective also aims to
promote global economic integration that will increase opportunities
for trade between countries. Economic efficiency aims to reduce
poverty through education programs and better healthcare. Improving
economic efficiency is important because it can lead to better products

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 and services at lower cost. It also promotes innovation, which
generates jobs and increases wages.
 Preserving cultural diversity: Cultural diversity is one of the five
objectives of sustainable development. As culture changes, it can be
lost forever if not preserved. Preserving cultural diversity is an
especially big concern for indigenous cultures. According to the World
Heritage Encyclopedia, many factors contribute to indigenous cultures
being threatened by globalization and climate change. For example,
the erosion of language, traditions, and traditional knowledge are all
possible threats to Indigenous Peoples’ cultures today.
 Protecting the environment: As outlined by the United Nations
Development Programme, sustainable development is about protecting
the environment. It’s about conserving what we have so that future
generations can thrive.
SUSTAINABLE DEVELOPMENT GOALS (SDGS)

On September 25, 2015, many countries adopted the UN's 2030 Agenda for
Sustainable Development, which includes 17 goals and 169 targets. This plan
aims to ensure a sustainable future for both humanity and the planet. It
builds upon the previous Millennium Development Goals (2006-2015) set by
the UN.

 Goal 1. End poverty in all its forms everywhere

 Goal 2. End hunger, achieve food security and improved nutrition and
promote sustainable agriculture
 Goal 3. Ensure healthy lives and promote well-being for all at all ages
 Goal 4. Ensure inclusive and equitable quality education and promote
lifelong learning opportunities for all
 Goal 5. Achieve gender equality and empower all women and girls
 Goal 6. Ensure availability and sustainable management of water and
sanitation for all
 Goal 7. Ensure access to affordable, reliable, sustainable and modern
energy for all
 Goal 8. Promote sustained, inclusive and sustainable economic growth,
full and productive employment and decent work for all
 Goal 9. Build resilient infrastructure, promote inclusive and sustainable
industrialization and foster innovation
 Goal 10. Reduce inequality within and among countries
 Goal 11. Make cities and human settlements inclusive, safe, resilient
and sustainable
 Goal 12. Ensure sustainable consumption and production patterns

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  Goal 13. Take urgent action to combat climate change and its impacts*
 Goal 14. Conserve and sustainably use the oceans, seas and marine
resources for sustainable development
 Goal 15. Protect, restore and promote sustainable use of terrestrial
ecosystems, sustainably manage forests, combat desertification, and
halt and reverse land degradation and halt biodiversity loss
 Goal 16. Promote peaceful and inclusive societies for sustainable
development, provide access to justice for all and build effective,
accountable and inclusive institutions at all levels
 Goal 17. Strengthen the means of implementation and revitalize the
global partnership for sustainable development

ENVIRONMENTAL PROBLEMS

Environmental problems these are various issues that affective environment

negatively and impact natural environment, leading to harmful effects on
ecosystem, biodiversity, and human health. The following are some
environmental problems facing the less developed countries:

 Global Warming and Climate Change: Global warming is primarily

caused by the increase in greenhouse gas emissions due to human
activities, particularly the burning of fossil fuels for energy,
transportation, and industrial processes. As of 2023, global average
temperatures have risen approximately 1.46°C above pre-industrial
levels, marking it as the hottest year on record.
 Biodiversity Loss: Biodiversity refers to the variety of life forms on
Earth, including ecosystems, species diversity, and genetic diversity.
Human activities such as deforestation, pollution, overfishing, and
urbanization have led to significant biodiversity loss.
 Deforestation: Deforestation involves the large-scale removal of
forests for agriculture, logging, or urban development. This will cause
the following:
 Carbon Emissions: Trees absorb carbon dioxide; their removal
contributes significantly to greenhouse gas emissions.
 Loss of Habitat: Many species depend on forests for survival;
deforestation leads to habitat destruction.
 Soil Erosion: Without trees to anchor soil, erosion increases,
leading to land degradation.

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  Pollution: Pollution manifests in various forms of air, water, noise, and
land pollution. Air pollution comes from vehicle emissions and
industrial discharges; water pollution from agricultural runoff and
plastic waste, and soil contamination from hazardous waste disposal.
This affect ecosystem and human being.
 Overpopulation: Overpopulation exacerbates environmental
problems by increasing demand for resources such as water, food, and
energy. This leads to resource depletion and Increasing consumption.
Increasing populations, put much pressure on environment by
exploiting natural resources.
In summary, these environmental problems are deeply interconnected with
human activity driving many of them forward at an alarming rate. Addressing
these issues requires coordinated global efforts aimed at reducing emissions,
conserving biodiversity, promoting sustainable practices in industries like
fashion and agriculture, and improving governance around
resource management.

CAUSES OF ENVIRONMENTAL DEGRADATION

Environmental degradation is caused by many factors like population growth,

poverty, externalities/ market failure, urbanization etc. both are explained
bellow:

 Poverty: Poverty is a significant driver of environmental degradation.

Individuals and communities living in poverty often rely heavily on
natural resources for their survival, leading to over-exploitation. For
instance, in many rural areas, people may resort to deforestation for
firewood or charcoal production due to economic necessity. This
reliance on immediate resources can result in unsustainable practices
that degrade the environment, such as soil erosion and loss of
biodiversity.
 Population Growth: Rapid population growth is a major cause of
environmental degradation and rapid use of resources leads to
increased pressure on the use of country’s resources with the result
that there is air and water pollution, loss of biodiversity and soil
degradation. Rapid population growth depletes resources and
threatens sustainable development. Thus rapid population growth and
environmental degradation go hand in hand.
 Foreign Indebtedness: Foreign indebtedness is another cause of
environmental degradation in underdeveloped countries. In order to
repay their debt, they produce commercial crops for export that

21
 displace subsistence crops which are subsequently grown on marginal
lands. They also export minerals by exploiting them recklessly, thereby
depleting them at a great cost to future generations.
 Deforestation: Deforestation involves the permanent removal of
trees for agricultural expansion, urban development, or logging. This
practice severely impacts ecosystems by reducing biodiversity and
disrupting the water cycle. Trees play a crucial role in maintaining
ecological balance; their removal leads to increased carbon emissions,
soil erosion, and altered weather patterns.
 Agricultural Development: Agricultural development in
underdeveloped countries has been a major factor in environmental
degradation. Intensive farming and excessive use of fertilizers and
pesticides have led to over exploitation of land and water resources.
These have led to land degradation in the form of soil erosion, water
logging and salination.
 Industrialization: To industrialize rapidly, underdeveloped countries
are causing environmental degradation. The establishment of such
industries as fertilizers, iron and steel, chemicals, refineries, etc. has
led to land, air and water pollution. The use of fossil fuel, minerals and
timber as sources of industrial energy is depleting these natural
resources and degrading natural eco-systems.
 Transport Development: Underdeveloped countries are developing
transport facilities for the expansion of trade and commerce. But they
are also bringing about environmental degradation in the form of air
pollution, noise pollution and sea pollution. The development of ports
and harbors have led to oil spills from ships and adversely affected
fisheries, coral reefs, mangroves and landscape.
 Urbanization: Rapid and unplanned urbanization has led to
degradation of urban environment. Slums and shanty towns pollute air
and water and generation of solid and hazardous wastes have
contributed to environmental degradation on a vast scale.
 Economic Factors/ Market failures: can contribute significantly to
environmental degradation when there is insufficient economic
incentive to protect natural resources or invest in sustainable
practices. Unsustainable economic development models often prioritize
short-term gains over long-term environmental health.
In summary, the causes of environmental degradation are multifaceted and
interconnected, involving social issues like poverty and urbanization;
ecological concerns such as deforestation; climatic changes; soil and water

22
quality deterioration; and economic factors that fail to account for
environmental sustainability.

POLICIES FOR SUSTAINABLE DEVELOPMENT

 Reducing Poverty: Poverty often leads to unsustainable practices as

people struggle to meet their basic needs. By reducing poverty
through job creation, healthcare, education, and improved
infrastructure, we can alleviate pressure on the environment. For
instance, providing affordable housing and sanitation facilities can
reduce the reliance on harmful practices like open defecation.
 Removing Subsidies: Subsidies can distort markets and encourage
the overuse of resources. By removing subsidies on fossil fuels,
fertilizers, and water, governments can incentivize more sustainable
practices. For example, removing subsidies on fossil fuels can
encourage the adoption of renewable energy sources.
 Clarifying and Extending Property Rights: Clear property rights
can incentivize sustainable management of resources. When people
own land or resources, they have a vested interest in their long-term
health. For example, assigning property rights to forests can
encourage reforestation and conservation.
 Market-Based Approaches: Market-based instruments, such as
taxes and fees, can internalize environmental costs, making polluters
pay for the damage they cause. For instance, a carbon tax can
encourage businesses to reduce their carbon emissions.

 Regulatory Policies: Governments can set environmental standards

and regulations to protect the environment. These regulations can limit
pollution, conserve resources, and promote sustainable practices. For
example, regulations on air and water quality can help reduce pollution
levels.
 Economic Incentives: Economic incentives, such as subsidies for
renewable energy or tax breaks for green technologies, can encourage
sustainable practices. For instance, subsidies for solar panels can make
them more affordable and encourage their adoption.
 Trade Policy: Trade policies can influence environmental outcomes.
By promoting fair trade, sustainable production, and the adoption of
clean technologies, governments can encourage sustainable
development. For example, imposing tariffs on products from countries
with weak environmental regulations can incentivize those countries to
improve their environmental performance.

23
  Public Participation: Public awareness and participation are crucial
for sustainable development. By educating the public about
environmental issues and involving them in decision-making
processes, governments can foster a culture of environmental
stewardship. For example, community-based conservation initiatives
can help protect local ecosystems.
 International Cooperation: International cooperation is essential to
address global environmental challenges like climate change and
biodiversity loss. By working together, countries can develop and
implement effective policies to protect the planet. For instance, the
Paris Agreement is an international agreement to
combat climate change
MEASURING SUSTAINABLE DEVELOPMENT

Measuring sustainable development is a difficult task which involves the

valuation of environmental damage and comparing it with the costs of
preventing it. There are also the problems of measuring the capital stock
needed for sustainable development, of natural resource accounting, and the
use of an appropriate discount rate for maintaining an optional balance
between the use and preservation of natural resources. We discuss a few
methods and their implications on sustainable development.

 Measuring Natural Capital Stock: This involves valuing natural

resources and ensuring their sustainability. However, it's challenging to
balance natural and man-made capital due to the difficulty in quantifying
environmental damage.
 Natural Resource or Green Accounting: This method adjusts
traditional economic measures to account for environmental costs, aiming
for sustainable income levels. However, accurately valuing non-market
environmental assets remains a significant challenge.
 Measuring Environmental Values: This involves estimating the
benefits of environmental protection and comparing them to costs.
Various methods, such as market prices, replacement costs, and surveys,
can be used, but each has limitations.
a) Market Prices: This method uses market prices to estimate the
economic losses caused by environmental damage, such as health
problems and reduced productivity. However, it can be difficult to
accurately quantify these losses.
b) Costs of Replacement: This approach estimates environmental
damage by calculating the cost of replacing damaged resources or

24
 installing pollution control measures. However, it may not fully capture
the true extent of the damage.
c) Surrogate Markets: This method analyzes the impact of
environmental damage on other markets, such as property values and
wages. It assumes that people will adjust their behavior to avoid
environmental risks, but this may not always be the case.
d) Surveys: This approach uses surveys to gather information on
people's preferences for environmental quality. However, surveys can
be subjective and may not accurately reflect people's true values.
 Social Discount Rate: This rate balances present and future
environmental impacts. The choice of a suitable discount rate is crucial
but challenging, as there's no consensus on the ideal rate.
CHAPTER 4: CHARACTERISTICS OF UNDERDEVELOPED COUNTRIES

MEANNING OF UNDERDEVELOPED VS UNDEVELOPED COUNTRIES

Underdeveloped countries: a country characterized by chronic poverty

and less economic development than other nations. These countries have

very low per capita income and many residents’ lives in in very poor

conditions, including lacking access to education and health care. Also are

the one, which has no potentialities of development.

Undeveloped countries: are those countries which one has no hope of

development in terms of infrastructure, technology, economy, education,

and other key indicators of development.

Criteria of underdeveloped countries

1. The ratio of population to land area: this ratio refers to number of

people living in given land area, often expressed as people per square

kilometer or population density. High population can have important

impact for country’s economy.

25
2. The ratio of industrial output to total output: This ratio compares

the contribution of the industrial sector, which include manufacturing,

mining, construction and utilities to the overall economic output of the

country.

3. The low ratio of capital to per head of population:

underdeveloped countries as those, which compared with the

advanced countries are inadequate with capital in relation to their

population and natural resources.

4. Poverty as the main cause of underdevelopment:

underdeveloped countries have unexploited natural resources, scarcity

of capital goods and equipment, outdated techniques of production

and defects in socio-economic organization hence results mass

poverty.

5. The low per capita real income of underdeveloped countries as

compared with the advanced countries. Underdeveloped countries

have lower per capita real income compared to advanced countries

indicating lack of economic development and prosperity. The data on

per capita nation income is often inaccurate, misleading and unreliable

due to the following reasons: there is agricultural non-monetized

sector, lack of occupation specialization, illiteracy of opening accounts,

reliance on commercial based on goods and services, and difficulties

arise in the definition of income.

26
Characteristics of underdeveloped countries
1. General poverty: Poverty is reflected in low GNP per capita however,

it is not relative poverty but absolute poverty that is more important in

assessing such economies. Absolute poverty measured not only by low

income but also by malnutrition, poor health, clothing, shelter, and lack

of education. Thus, absolute poverty is reflected in low living standards

of the people.

2. Agriculture the main occupation: underdeveloped countries their

heavy concentration in agriculture is a symptom of poverty and as the

main occupation is mostly unproductive which it is carried out in old

fashion with outdated methods of production.

3. A dualistic economy: underdeveloped countries have a dualistic

economy. One is the market economy the other hand subsistence

economy.

4. Underdeveloped natural resources: natural assets that have not

been fully exploited or utilized for economic benefits, can occur for

different reasons including technological limitation, lack of investment,

poor infrastructure and political instability.

5. Demographic features: Underdeveloped countries differ greatly in

demographic position and trends. Diversity exists in the size, density,

age-structure and the rate of growth of population.

6. Economic backwardness: is the situation where country or region

has low level of economic development compared to more advanced

economies, in underdeveloped countries particular indicators of

27
 economic backwardness are low labour efficiency, factor immobility,

and limited specialization in occupation and in trade, economic

ignorance, values and social structure that minimizes the incentives for

economic changes.

7. Lack of enterprise and initiatives: it is a situation where individuals

or businesses show limited willingness or ability to take risks, innovate,

or engage in entrepreneurial activities. Due to lack of resources,

education and opportunities. This can affect economic growth and

development, innovation.

8. Technological backwardness: is a situation where country cannot

adapt developing or implementing advanced technology,

Underdeveloped countries are also in the backward state of

technology. Their technological backwardness is reflected, in high

average cost of production despite low money wages, in high labor-

output and capital-output ratios as a rule, and on the average, given

constant factor prices thus reflecting a generally low productivity of

labor and capital, in the predominance of unskilled and untrained

workers, and in the large quantity of capital equipment required to

produce, a national output.

9. Foreign trade orientation: Underdeveloped economies are

generally foreign trade-oriented. This orientation reflected in exports of

primary, products and imports of consumer goods and machinery. This

too much dependence on exports of primary products leads to serious

28
 impacts on their economies. Firstly, the economy concentrates mainly

on the production of primary exports to the comparative neglect of

other sectors of the economy. Secondly, the economy becomes

particularly subject to fluctuations in the international prices of the

export commodities. A depression abroad brings down their demand

and prices. As a result, the entire economy is adversely affected.

Lastly, too much dependence on a few export commodities to the utter

neglect of other consumption goods has made these economies highly

dependent on imports

10. Income inequality: this is common characteristics of

underdeveloped countries with disparities in wealth distribution having

significant social, economy, and political implication. Through unequal

access to resources, limited social mobility, inadequate public services,

political instability, and economic inefficiency.

11. Corruption: this is often cited as significance characteristics of

underdeveloped countries, and it can have profound effects on values

aspects of a society including economic development, social cohesion

and political stability.

12. High rate of Unemployment: these countries are usually have

limited industries, so there are not enough jobs outside of agriculture,

which is often seasonal. Rapid population growth means more people

are looking for work than there are jobs available. Many workers lack

29
 the education and skills needed for existing education and skills

needed for existing jobs, leading to mismatch.

CHAPTER FIVE: CHENERY’S PATTERNS OF STRUCTURAL CHANGE

I. Definition
In economics, structural change is a shift in how systems operate with in the
country. Especially in developing county this lead to the process called
transition
Transition; according to Hollis chanerry defined transition as a set of
structural changes that have almost always accompanied the growth of per
capita income in recent decades.
The developing country it’s likely to struggle for their development through
pacing in difference process especially structure change as results of
transition as it explained in the above paragraph. Different economist has
interested in demonstrating how developing country are striving for their
long process of development especially, << Hollis chenery>>
Chenery defines the development pattern “as a systematic variation in
any significant aspect of the economic or social structure associated with a
rising level of income.” But he is primarily interested in those structural
changes that are needed to achieve sustained increase in per capita income.
He divided this development principal in ten basic developmental
process
According to chenery development process has three principals:
accumulation process: refers to the process of using resources to increase
the productive capacity of an economy.
Resource Allocation Processes: is the processes produce systematic
changes in the sectoral composition of domestic demand, international
trade, and production as the income level increases.
Demographic and Distributional Processes: is the process that is
influenced by number of socio-economic processes like mortality, fertility and
urbanization that are themselves correlated with the income level
Chenery takes three principal developments which are further divided into
ten basic development processes that describe different dimensions of the
overall structural transformation of a less developed country to a developed
one. They are as follows:

30
 Accumulation Processes
The accumulation processes comprise:
1. Investment consisting of (a) gross domestic savings as % of GDP, (b)
gross domestic investment as % of GDP, and (c) capital inflow (net
imports of goods and services) as % of GDP.
2.
Total Capital Inflows
Capital Inflow as % of GDP= ×100
GDP

Gross Domestic Savings(GDS )

Gross Domestic Savings as % of GDP= ×100
Gross Domestic Product (GDP)

Gross Domestic investiment (GDI )

Gross Domestic Investiment as % of GDP= × 100
GDP
3. Government revenues consisting of (a) government revenue as % of GDP,
and (b) tax revenue as % of GDP.

Total Government Revenue

Government Revenue as % of GDP= ×100
GDP

Total tax Revenue

Tax Revenue as % of GDP= ×100
GDP

4. Education consisting of (a) education expenditure by government as % of

GDP, and (b) enrollment ratio.

Total Government Education Expenditure

Education Expenditure as % of GDP= ×100
GDP
Enrollment Ratio:
Total Enrollment ∈a Level of Education
Enrollment Ratio(GER)= × 100
Total Population of Relevant Age Group

 Education Expenditure as % of GDP reflects how much the government

invests in education relative to the total economy. Higher expenditure can
indicate a strong commitment to education development.

 Enrollment Ratio shows how accessible education is for the population. A

high enrollment ratio typically indicates good access, though it may be
influenced by factors like the quality of education and the capacity of schools
to accommodate all students.

31
 Resource allocation processes
Resource allocation processes comprise:
1. Structure of domestic demand consisting of: (a) Gross domestic
investment as % of GDP; (b) private consumption as % of GDP; (c)
government consumption as % of GDP, and (d) food consumption as % of
Gross Domestic Investment
GDP. Gross Domestic Investment as % of GDP=
Gross Domestic Product ¿ ¿

Private Consumption
Private Consumption as % of GDP= ×100
GDP

Government Consumption
Government Consumption as % of GDP= ×100
GDP

Food Consumption
Food Consumption as % of GDP= ×100
GDP

2. Structure of Production consisting of: (a) Primary output as % of GDP;

(b) industry output as % of GDP; (c) utilities output as % of GDP; and (d)
services output as % of GDP.

Primary Sector Output

Primary Output as % of GDP= ×100
GDP

Industry Sector Output

Industry Output as % of GDP= ×100
GDP

Utilities Sector Output

Utilities Output as % of GDP= ×100
GDP

Services Sector Output

Services Output as % of GDP= × 100
GDP
3. Structure of Trade consisting of: (a) Exports as % of GDP; (b) primary
exports as % of GDP; (c) manufacturing exports as % of GDP; (d) services
exports as % of GDP; and (e) imports as % of GDP.
Total Exports
Exports as % of GDP= 100
GDP

32
 Primary Exports
Primary Exports as % of GDP= ×100
GDP

Manufacturing Exports
Manufacturing Exports as % of GDP= ×100
GDP
Services Exports
Services Exports as % of GDP= × 100
GDP
Imports
Imports as % of GDP= × 100
GDP
Demographic and Distribution
process
Demographic and distributional processes include:
1. Labour allocation comprising (a) share of primary labour; (b) share of
industry labour; and (c) share of service labour
Labour ∈ Primary Sector
. Share of Primary Labour ( % ) = ×100
TOLAL LABOUR FORCE

Labour ∈ Industry Sector

Share of Industry Labour ( % )= × 100
Total Labour Force

Labour∈ Service Sector

Share of Service Labour ( % )= × 100
Total Labour Force

2. Urbanization as urban percent of total population.

Urban Population
Urbanization (%)= ×100
Total Population
3. Demographic transition in (a) birth rate, and (b) death rate.
Number of Births
Birth Rate= ×1000
Total Population
Number of Deaths
Death Rate= × 1000
Total Population
4. Income distribution as (a) share of highest 20%, and (b) share of lowest
40% and share of middle 40%
Total Value of the Highest 20 %
Share of Highest 20 %= ×100
Total Valueof the Population

Total Value of the Lowest 40 %

Share of Lowest 40 %= ×100
Total Valueof the Population

33
 Total Value of the Middle 40 %
Share of Middle 40 %= × 100
Total Value of the Population

As conclusion the structure change has the most three main principals and

ten basic developmental process that describe different dimensions of the

overall structural transformation of a less developed country to a developed

one, for less developed country has to go through overall principal,

developmental process and those different dimension to move from under

developed structure of (developing country) economy to developed structure

of economy (developed country

CHAP: 6 MEANING AND CHARACTERISTICS OF CHARACTERISTICS OF

MODERN ECONOMIC GROWTH.

Meaning of modern economic growth

Modern economic growth refers to the development of the developed

countries of Western Europe, the United States, Canada, Australia and Japan.

According to Prof. Simon Kuznets in his Nobel Memorial Lecture defined

economic growth “as a long-term rise in capacity to supply increasingly
diverse economic goods to its population, this growing capacity is based on
advancing technology and the institutional and ideological adjustments that
it demands.

(In his earlier book Modern Economic Growth, 1966, Kuznets defined
economic growth “as a sustained increase in per capita or per worker
product, most often accompanied by an increase in the population and
usually by sweeping structural changes”).

This definition has three components:

1. The sustained increase in the supply of goods.

2. Advancing technology.

34
3. An efficient and wide use of technology and its development, institutional
and ideological adjustments must be made to affect the proper use of
innovations generated by advancing stock of human knowledge.

Characteristics of modern economic growth

Modern economic growth has different characteristics. According to prof.,

Simon Kuznets has pointed out six characteristics of modern economic
growth that have emerged in the analysis based on national product and its
components, population.

1. High rates of growth of per capita product and population

Modern economic growth, as revealed by the experience of the developed
countries since the late eighteenth or early nineteenth century, is
characterized by the high rates of increase in per capita product
accompanied by substantial rates of population growth. The extremely
high rates of increase are at least five times as high for population and at
least ten times as high for production as observable in the past.

Prof Kuznets has showed the following examples

COUNTRIES POPULATION PER CAPITA

GROWTH % PRODUCT(GDP)%

United kingdom 6.1 14.1

Sweden 6.7 28.3

Italy 6.8 18.7

USSR 6.9 53.8

USA 21.6 42.5

35
This characteristic state that there should increase in both per capita and
population but the increase in population must be lower than the increase in
per capita.

2. The rise in productivity

Modern economic growth is characterized by a rise in the rate of per capita

product due primarily to improvements in the quality of input, which have led
to greater efficiency, or a rise in productivity per unit of input.

This is traceable either to an increase in input of resources of labor and

capital or to an increase in efficiency, or to both. Increase in efficiency
implies greater output per unit of input.

According to Kuznets, we find that the rate of increase in productivity is large

enough to account for almost the entire growth of product per capita in the
developed countries.

The growth of national products has been due to the enormous contribution
to population, which led to a large increase in labor force. The increase in
national production turn led to a considerable increase in capital
accumulation and hence in reproducible capital. As a result, there has been a
significant increase in capital accumulation and reproducible capital.

The proportion of the labor force to the total population has shown an
upward trend in all developed countries as shown in the table below:

Country Proportion of Labor Force to Total

Population
Denmark 29.4%
United States 25.2%
Canada 18.3%
Belgium 15.8%
Germany | 15.8%
Sweden 14.6%
Great Britain 13.1%

The increase in the proportion of the labor force to the total population may
be attributed to several factors, including a shift in the age structure of the
population in favor of the working age, a decline in birth rates and in the
proportions of the population below working age, an increase in the
participation of women in gainful occupations, and a lowering of the age of

36
retirement. Regardless of the reason, the proportion of gainfully occupied
individuals to the total population has increased.

However, economic growth of developed nations has been accompanied by

the long-term decline in the number of man-hours per capita.

This tendency reflects an increase in efficiency or productivity. Leaving the

exceptional case of Italy where man-hours per capita declined by 7.5 per
cent per decade.

3. High rate of structural transformation

Structural transformations in modern economic growth include the shift away

from agriculture to non-agricultural activities, from industry to services, a
change in the scale of productive units and a related shift from personal
enterprises to impersonal organization of economic firms, with a
corresponding change in the occupational status of labor:

The share of the agricultural sector in total product declined in all developed
countries except Australia. As shown in the table below:

Country Agricultural Industrial Sector

Sector Decline Rise (%)
(%)
Great Britain 22% (in 1841) to 56%
5% (in 1955)
France 42% (in 1872-82) 52%
to 9% (in 1962)
United States 49% (in 1879) to 42%
9% (in 1939-48)
Japan 63% (in 1878-82) 49%
to 14% (in 1962)

The table summarizes the decline in the agricultural sector and the rise in
the industrial sector for various countries over specific periods.

The rapidity of structural transformations in modern economic growth can

also be illustrated by the changes in the distribution of labor force among the
three major sectors. (agriculture, industry and service)

37
The inter-sectoral shifts were accompanied by growth in the scale of firms
and changes in the type of organization within sectors such as
manufacturing or trade, from small, incorporated firms to the large corporate
units with the rapid shift in industrial structure and rapid change in
technology.

There were also rapid shifts in allocation of products among types and sizes
of producing norms, and consequently in the allocation of labor force. There
was high inter industry, interstate and inter-occupational mobility of the
labor force among employees from blue-to white-collar jobs, from less to
more skilled occupations and from small to large enterprises.

4. Urbanization

Modern economic growth has characterized by the movement of an

increasing proportion of population in developed countries from rural areas
to urban areas; this urbanization is largely a product of industrialization.

The economies of scale arising from non-agricultural pursuits because of

technological changes led to the movement of a large proportion of labor and
population from the rural to the urban areas.

As the technical means of transportation, communication and organization

grew more effective, there was the spread of increasing optimum scale units.

The effects of urbanization on modern economic growth of developed

nations led to the decline in birth-rate and the shift toward the small family.

It brought people together from different rural areas who initiated and learnt
from each other and from those already living in towns.

Besides, urbanization affected the level and structure of consumer

expenditure in developed countries in three ways, according to Prof. Kuznets.

 Urbanization led to an increased division of labor, specialization, and

the shift of activities from non-market-oriented family or village
pursuits to market-oriented firms.
 Urbanization also made the satisfaction of an increasing number of
wants more costly due to congestion and overcrowding, leading to
difficulties in housing, sanitation, water, transportation, and other basic
amenities in the cities. These extra costs of urban life increased
consumer expenditure on different types of consumer goods.

38
  The demonstration effect of the city life led to imitation of
consumption patterns by the large immigrants, which led to increased
consumer expenditure

5. The outward expansion of developed countries

The outward expansion of developed countries with their European origin has
been primarily due to the technological revolution in transportation and
communication. This led to more direct political dominance over the
colonies, the opening of previously closed areas like Japan and the partition
of undivided areas like sub-Saharan Africa. It was the threat of force on the
part of the developed countries that led to the spread of growth in Japan and
the USSR.

On the other hand, the partition of Africa and greater political dominance
over the colonies were due to the revival of imperialism, which was
responsible for the outward expansion of developed countries like Germany
and the United States in the last quarter of the 19th century.

However, modern economic growth failed to spread to LDCs due to two

factors:

First, such countries do not possess a stable and flexible political and social
framework, which may accommodate rapid structural changes and
encourage growth-promoting groups in society.

Second, the colonial policies followed by the developed countries limit

political and economic freedom in LDCs. As a result, the LDCs have failed to
take advantage of the spread of modern economic growth and have
continued to remain backward apart from Japan.

6. International flow of men, goods and capital

The international flow of men, goods and capital increased from the second
quarter of the 19th century to First World War but decline began with First
World War and continued till the end of Second World War. There has been,
however, rise in some of these flows since the early 1950s.

(a) Migration.

The cumulative and increasing volume of international migration since the

late 1840s and continuing to the First World War has an important bearing-
upon the patterns of modern economic growth. International migrations were

39
at an annual level of over a quarter of a million in 1846-50 and rose to a
peak of about 1.5 million in 1906-15.

The addition of intercontinental migration would have raised the annual

volume of international migration in the decade before First World War to
close to 2 million, according to Kuznets’ estimates. .

The factors which led to these international migrations were the easing of
intercontinental transportation by steamships and of intracontinental
migration in Europe by railways. However, migration flows to the United
States was due to the pull of better economic conditions. However, in the
long run the push had been an important factor due to the progressive
impact of the dislocation produced by the modernization of agriculture and
industry in Europe.

This ‘push factor’ was primarily responsible for intercontinental migrations

from Europe to North and South America, to European colonies in Africa and
offshoots in Oceania.

(b) Flow of Goods.

Prof. Kuznets traces out four factors that led to greater increase in growth of
foreign trade than of domestic output over the decades before First World
War in the old developed countries:

• The first was the revolution in transportation of commodities with the

development of steam railroads and ocean transportation.

• The second was the decision by the United Kingdom to develop free
trade and international division of labor.

• The third was the relaxation of trade barriers by all the developed
countries.

• The last was the opening of the West in the United States, in Canada,
Australia and Argentina leading to European specialization in industry

(c) Flow of Capital

. The international flow of foreign capital investments grew rapidly from the
second quarter of the 19th century to the First World War.

40
 For the three major exporters of capital (Great Britain, France and Germany),
capital outflow for the period 1874-1914 averaged between $0.5 and $1.1
billion per year at 1913 prices.

The increase in the cumulative total of foreign capital invested by these

three countries rose from $4.9 to $35.3 billion over the period at 1913 prices,
which comes to a rate of growth per decade of 64 per cent. A substantial
portion of these capital flows went to developed countries was based on
political rather than economic considerations.

To sum up, modern economic growth is a long-term increase in capacity to

produce goods and services. This modern economic growth is characterized
by a high rate of growth of per capita product and population, the rise in
productivity, high rate of structural transformation, urbanization, and
outward expansion of developed countries and international flow of men,
goods and capital.

CHAPTER SEVEN: THEORIES OF ECONOMIC GROWTH AND

DEVELOPMENT

As group 8, we were assigned to summarize this unit by starting on

dependency theory up to Harrod-Domar Growth model.

DEPENDENCY AS THEORY OF ECONOMIC DEVELOPMEMT

In Economics, Dependency theory means a sociological and economic

theory that explains the persistent poverty and underdevelopment of certain
countries as a result of their relationship with wealthier nations. It argues
that this relationship is exploitative, with the wealthier nations benefiting at
the expense of the poorer ones. Dependency theory is a reaction to the
Modernization Theory. Underdeveloped countries have to create national
development goals and follow an independent pattern of development,
whereby the state has a key role in practice.

Dependency theory explains why some countries remain poor while others
become rich. It looks at how the global economy creates an unfair system
where richer countries (called the core) benefit from the resources and labor

41
of poorer countries (called the periphery). Let’s break down the main ideas in
simple terms:

1. Core and Periphery

 Core countries: These are wealthy, developed nations (like the US,
UK, and Japan). They have strong industries, advanced technology, and
produce expensive, high-quality goods.

 Periphery countries: These are poorer, less developed nations (like

many in Africa, Latin America, and Asia). They usually export raw
materials (like coffee, oil, or minerals) and simple products.

Example: A poor country might sell cheap raw materials like cocoa beans,
but it has to buy expensive chocolate bars from a rich country that processes
the beans.

2. Unfair Trade Relationships

 Rich countries buy raw materials from poor countries at low prices.
Then, they turn these materials into finished goods (like cars or
computers) and sell them back to the poor countries at high prices.

 This means the poor countries end up spending more than they earn.
This is called an unequal exchange.

Example: If a poor country sells cotton but buys clothes made from that
cotton at a higher price, it loses money in the trade.

3. Dependence on Rich Countries

 Poor countries often depend on rich countries for things like

technology, investments, and loans.

 This makes it hard for them to grow independently. If rich countries

decide to stop trading or lending money, poor countries can face big
problems.

42
Example: If a poor country needs to build a factory, it might need a loan
from a rich country. But paying back the loan with high interest can leave
them in debt.

4. Role of Big Companies (Multinational Corporations)

 Large international companies from rich countries often control

important industries in poor countries.

 These companies make big profits, but most of the money goes back to
the rich countries instead of staying in the local economy.

Example: An oil company from a rich country might extract oil from a poor
country. They sell the oil globally and keep most of the profit, giving little
back to the country where the oil was found.

5. Political and Social Impact

 Dependency doesn’t only affect economies—it also impacts politics.

Rich countries often influence decisions in poor countries.

 In many cases, wealthy local leaders benefit from these relationships

and don’t help the rest of the population.

Example: Some leaders in poor countries may support policies that help rich
countries or foreign companies because it benefits them personally, even if it
hurts their people.

In simple word, Dependency theory shows how global systems favor rich
countries and keep poor countries from developing. To grow stronger, poor
countries need to reduce their dependence on rich nations and build self-
sufficient economies.

1. EXTERNAL TRADE THEORIES

External Trade Theory is an important part of Dependency Theory. It
explains how trade between rich and poor countries is often unfair and
43
keeps poorer nations dependent on wealthier ones. In other word,
External Trade Theory shows that the global trading system often
favors rich countries, keeping poor countries dependent and
underdeveloped. Changing this pattern requires fairer trade practices
and stronger local industries. Let's break it down in simple terms: How
Does It Link to Dependency? In an ideal world, trade would benefit
both sides equally.

But in reality, external trade often favors richer countries. Here's how:
Selling Cheap, Buying Expensive: Poor countries usually export raw
materials (like oil, cocoa, or minerals) at low prices. Meanwhile, they
have to buy finished products (like electronics or cars) from rich
countries at much higher prices. This creates a trade imbalance.
Example: A developing country sells cotton to a developed country.
The rich country turns it into clothing and sells it back at a much higher
price. Unequal Exchange This trade imbalance is called unequal
exchange.

Poor countries end up spending more than they earn, which keeps
them economically weak. Over time, this drains their wealth and
makes it hard to invest in their own development. Dependency on Raw
Materials Poor countries often depend heavily on a few raw materials
for most of their income. If prices for these materials drop in the global
market, their entire economy suffers. In contrast, rich countries have
diverse economies and are more stable Example: If a country depends
only on exporting bananas, a price drop or bad harvest can cause a big
economic crisis. Role of Big Companies Large multinational
corporations (MNCs) from rich countries often control trade.

They decide prices, control production, and take most of the profits.
This leaves poor countries with little control over their own resources.

44
 Theories of Circular Deterioration of Terms of Trade This theory posits
that the prices of primary commodities tend to decline relative to
manufactured goods over time, leading to a deterioration in the terms
of trade for countries that rely heavily on exporting these primary
products.
The advancements in technology for producing industrial goods enable
industrialized nations to boost their incomes and improve living
standards. Additionally, due to the flexible demand in the global
market, these countries can also command higher prices. The situation
in developing countries is the opposite: technological progress in
primary production results in lower prices because of the inelastic
demand.

This mechanism leads to deteriorating exchange relations between

industrialized and developing countries How Does This Happen? Falling
Prices for Raw Materials: Poor countries mostly export raw materials
like coffee, oil, or minerals. Over time, the prices of these raw materials
tend to drop because: There’s too much supply (many countries selling
the same products) Rich countries might find cheaper alternatives or
use technology to reduce their need for these Materia Rising Prices for
Manufactured Goods: At the same time, rich countries export
expensive, high-tech products (like cars, phones, and medicines).
These goods usually become more expensive over time due to better
technology and high demand.

The Cycle Repeats: Because poor countries keep earning less from
their exports but pay more for imports, they fall deeper into economic
trouble. They have to export more just to afford the same amount of
imported goods, which keeps them stuck in a cycle of poverty.
The external trade theories, also known as international trade theories, are
frameworks that explain the dynamics of trade between countries. These

45
theories help to understand why countries engage in trade, what goods and
services they choose to exchange, and how these exchanges impact
their economies. some of these theories includes:

a) Theories of Circular Deterioration of Terms of Trade (PREBISCH)

This theory posits that the prices of primary commodities tend to decline
relative to manufactured goods over time, leading to a deterioration in the
terms of trade for countries that rely heavily on exporting these
primary products. The advancements in technology for producing industrial
goods enable industrialized nations to boost their incomes and improve living
standards. Additionally, due to the flexible demand in the global market,
these countries can also command higher prices.

The structure of supply and demand is such that industrialized countries

offer industrial products and buy raw products and the developing industries
do the reverse.

▪ According to Engel's law, the demand for raw materials tends to be

inelastic while the demand for industrialized goods is elastic

. ▪ The technological progress in the production of industrialized goods not

only makes it possible for industrial countries to increase their incomes and
thus the standard of living, but, because of the elastic demand on the world
market, also to enforce higher prices.

▪ The situation in developing countries is the opposite: technological

progress in primary production results in lower prices because of the inelastic
demand.

▪ This mechanism leads to deteriorating exchange relations between

industrialized and developing countries (and, as well, between the
industrialized and the agricultural sector in developing countries). MYINTs

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and RAO's 'theory of partial pauperization' and PERROUX's 'theory of
dominating economy argue along very similar lines

THEORY OF IMMISERIZING GROWTH

Theory of Immiserising Growth (Bhagwati)

This theory, describes a paradoxical situation where economic growth can

lead to a decline in a country’s welfare. This phenomenon occurs primarily in
developing nations that are heavily reliant on exports. The core idea is that
while a country may experience an increase in output and wealth due to
growth, it can simultaneously suffer from a deterioration in its terms of trade.

The theory of Immiserizing growth was populised by Jagadish Bhagwati, an

American economist, in 1958.The possible effects of growth in a large
country are: Output (wealth) effects Terms of trade effects
The output effects of growth are that, as a result of growth the output of a
nation (output per labor) increase. The terms of trade effect are that if the
volume of trade increases as a result of growth in a large country at constant
relative prices, the terms of trade may deteriorate. On other hand, if the
volume trade decreases at constant relative commodity prices, the terms of
trade may improve for the country.
Bhagwati points out that, when a country experiences economic growth
either as a result of factor growth or technical progress, the terms of the
country deteriorate. This is in large country; growth causes a sharp decline in
terms of trade of the nation that will neutralize the entire benefits of the
economic growth.
Meaning that the prices it receives for its exports fall relative to the prices it
pays for imports. As a consequence, BHAGWATI later asked for a speedy
industrialization including heavy industry for larger countries.
MECHANISMS BEHIND IMMISERIZING GROWTH
1. Export dependency: when countries are heavily reliant on export for
their economic growth and often leads to an increase their export
volumes. However, if this increases cause a significant drop in the
prices of their exports on the global market (deterioration of terms of
trade), the revenue generated may not compensate for the losses
incurred from lower prices.
2. Adverse International Demand Conditional: Economic growth can
lead to unfavorable international demand conditions. For instance, if a
developing nation increases its traditional exports but faces declining

47
 demand and or competing from other countries, this can further
intensify the negative impact on its terms of trade.
3. Influence on world prices: For immiserizing to occur, the growing
country must have some influence over world prices. This is typically
true for developing nations that export primary commodities. If their
increased supply leads to price drops, they may find themselves worse
off despite the higher production level.
4. Welfare Implications: The core idea behind immiserizing growth is
that while GDP may rise due to increased production and export
activities, social welfare measured through factors like income
distribution and equality of life may decline if the economic gains do
not translate into improved living standard for the population.

2. IMPERIALISM THEORY
Imperialism theory refers to a set of ideas and frameworks that explain how
and why powerful nations extend their influence and control over weaker
regions or countries.

This theory encompasses various economic, political, and social factors that
drive nations to seek dominance, often through colonization, military
conquest, or economic exploitation.

Different theories have their own explanation of the reason for the pressure
for expansion but it is always seen as the result of the inability to cope
internally with the consequences of permanent technological innovation and
their effects on the society.

3. DEPENDENCIA THEORIES

The multitude of approaches combined under the heading 'Dependencia'

like imperialism theories are based on the assumption of an external
dependency of developing countries which makes exploitation possible. The
process started with the political and military dependency of colonies which
have been exploited through the destruction of the indigenous life style and
culture, economic extraction, and forced integration into the international
division of labor

48
Dependencia theory explains why developing countries, especially in Latin
America, struggle to achieve economic growth. It argues that these nations
remain poor because of their economic dependence on wealthy,
industrialized countries.

This dependence creates a cycle of underdevelopment, where resources

flow from the "periphery" (poor countries) to the "core" (rich countries).

Key Points:

1. Historical Dependency:
Many developing countries were once colonies. Even after
independence, they continued to rely on exporting raw materials and
importing finished goods. This unequal relationship stunts their
economic growth.
2. Unequal Trade Relations:
Developing countries sell cheap natural resources and agricultural
products to rich nations, who then sell back expensive manufactured
goods. This creates a trade imbalance that benefits the wealthier
countries.
3. Economic Exploitation:
Foreign investments and multinational corporations often extract
profits from developing countries, leaving them with little benefit. High-
interest loans from international organizations also increase debt and
dependency.
4. Limited Industrial Growth:
Dependencia theorists believe developing nations remain trapped in
primary sectors (like agriculture and mining) and don’t develop
advanced industries. This keeps them reliant on the global economic
system controlled by richer nations.

 Harrod-Domar Growth model

The Harrod-Domar model is a Keynesian economic theory that explains how
investment and savings drive economic growth. The model emphasizes the
relationship between savings, investment, and output growth, particularly in
the context of developing economies. It suggests that there is no natural
reason for an economy to have balanced growth.

Assume: 1. Aggregate demand and supply would be in balance when

investment (It) in any period equaled the change in national income (Yt-Yt-1)
times the capital to output ratio (k). The capital to output ratio indicates the

49
value of capital required to produce one unit of output in a single time
period.

2. At equilibrium in a closed economy intended investment would equal

intended savings (St ), which gives the initial equilibrium condition.

The rate of growth is determined jointly by the national savings ratio and
national capital to output ratio. The more a nation can save and invest the
quicker it can grow

Mathematical Framework: The model uses a simple equation to

relate these concepts:

Saving Ratio
Rate of Growth of GDP =
Capital output Ratio

Here, the savings ratio represents the proportion of income that is saved
rather than consumed, while the capital-output ratio indicates how much
capital is needed to produce a certain amount of output.

e.g. assume k = 3, s = 6%

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But, if one can increase national savings from 6% to 15%

 ASSUMPTIONS OF Harrod-Domar Growth model

1. Constant Savings Rate: People and businesses always save a fixed
portion of their income.
Example: If the savings rate is 10%, then for every $100 earned, $10 is
saved.
2. Constant Capital-Output Ratio (ICOR): The amount of capital (like
machines and buildings) needed to produce one unit of output (goods and
services) stays the same.
Example: If $5 worth of machines is needed to produce $1 of goods, this
ratio doesn't change.
3. Savings Equal Investment: All savings are used for investment, and
there’s no money left unused.
Example: If $10 is saved, it’s all used to build new factories or buy
equipment.
4. No Changes in Technology: Technology stays the same; there are no
improvements or innovations that could increase efficiency.
Example: A factory's machines don’t get better over time.
5. Full Employment of Resources: All resources, including workers and
capital, are fully used. There’s no unemployment or unused factories.
Example: Every person who wants a job has one, and all machines are
running.
6. No Depreciation of Capital: Machines and buildings don’t wear out or
break down over time.
Example: Equipment lasts forever without losing value or needing
replacement.
7. Closed Economy: The country doesn’t trade with others; all growth
comes from within.

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Example: All goods and services are produced and consumed domestically,
with no imports or exports.

The Harrod-Domar Growth Model has been widely used to

understand economic growth, but it also has several limitations and
criticisms. The following are some key criticisms explained below:
1. Ignores Technological Progress: The model assumes that technology
stays the same, which is unrealistic. In reality, technological advancements
play a huge role in economic growth.
Example: Modern inventions like the internet and automation have boosted
productivity, but the model doesn’t account for these changes.
2. Assumes Constant Capital-Output Ratio: The model assumes that the
relationship between capital (machines, factories) and output (goods
produced) never changes. In reality, this ratio can vary due to efficiency
improvements or changes in production methods.
Example: A new, more efficient factory might produce more goods with the
same amount of capital.
3. Unrealistic Assumption of Full Employment: The model assumes that
all resources, including workers and machines, are always fully used.
However, in the real world, unemployment and idle resources are common.
Example: During a recession, many workers lose their jobs, which the model
does not consider.
4. Neglects the Role of Human Capital: The model focuses only on
physical capital (like machines and buildings) but ignores the importance of
education, skills, and training (human capital).
Example: A highly skilled workforce can boost growth even without new
machines, but this factor is missing in the model.
5. Assumes a Closed Economy: The model assumes that the economy
does not trade with other countries. In reality, international trade, foreign
investment, and global markets significantly impact growth.

52
Example: A country that exports goods can grow faster, but this effect is not
considered in the model.

In Conclusion: The Harrod-Domar model, originally designed to analyze

business cycles, was later modified to explain economic growth, indicating
that growth relies on labor and capital. Increased investment fosters capital
accumulation, driving economic growth. In less developed countries (LDCs),
abundant labor contrasts with a lack of physical capital, hindering progress.
Low average incomes in these nations limit savings and subsequently reduce
investment and capital stock accumulation.

The model suggests that economic growth relies on policies aimed at

boosting investment through increased savings and more efficient use of
that investment via technological advancements. It concludes that
economies do not naturally achieve full employment and stable growth rates,
aligning with Keynesian views.

The Harrod-Domar Growth Model faces criticism for its assumptions,

particularly the notion that growth alone can ensure full employment, based
on a fixed ratio of labor and capital usage. It inaccurately portrays economic
cycles as solely driven by output changes and conflates economic growth
with development, overlooking that growth is merely a part of broader
development. Additionally, it suggests that poorer nations should borrow for
capital investment to spur growth, despite historical evidence indicating this
often leads to repayment difficulties.

The savings rate is a crucial factor in the Harrod-Domar model, but its
manipulability through policy depends on the policymaker’s control over the
economy. Additionally, savings rates may be affected by the overall per
capita income and its distribution within society.

The Harrod-Domar Growth model has been criticized for overemphasizing

capital accumulation as a driver of development, neglecting the political,

53
social, and institutional barriers that also play crucial roles. Additionally, its
origins in the post-WW II context, particularly influenced by the Marshall Plan,
lead to assumptions that developing countries share similar conditions with
Europe during that period.

References: Provided class material ‘Economic of Development’ on

chapter 7 called theories of economic growth and development.

*M. L NGANJHI NOTES.

*Bauer, P.T., Indian Economic Policy and Development.

* Aggarwal and Singh, (ed.) The Economics of Underdevelopment,

Accelerating Investment in Developing Countries.

* Keynes, J.M., The General Theory of Employment, Interest and

Money.

* Bhagwati J. and Chakravarthy, S., Contributions of Indian Economic

Analysis

CHAPTER SEVEN: THEORIES OF ECONOMIC GROWTH AND

DEVELOPMENT

1. Modernization Theory
➢ The Western countries serve as a model

➢ Underdevelopment is seen as an initial state whereby countries lagged

behind.

➢ According to modernization theories, internal factors in the countries,

such as illiteracy, traditional agrarian structure, the traditional attitude of the
population, the low division of labour, the lack of communication and
infrastructure, etc., are responsible for underdevelopment.

54
➢ Consequently, a change of these endogenous factors is the strategy for
development

1.1 DUALISM THEORIES

Dual Sector model of Lewis
▪ It was based on the assumption that developing countries are
characterized by dual economies with both traditional agricultural sector and
modern industrial sector.

▪ The traditional agricultural sector was assumed of subsistence nature with

low productivity, low income, low savings and underemployment. The
industrial sector was assumed to be technologically advanced with high
levels of investment operating in an urban environment.

▪ Development in dualism concepts is the suppression of the traditional

sector by concentrating on and expanding the modern sector. In time, it is
assumed that the trickle-down effects will reduce and abolish dualism.

▪ The anticipated trickle-down effects hardly ever happened. In praxis,

development plans following this line of thinking led to failures like the early
Indian development planning.

▪ Therefore, other authors, like JORGENSON, LELE, and MELLOR, emphasize

the important role of agriculture at the beginning of development, i.e.,
preceding or parallel to industrial development in order to provide enough
internal resources for the development process In economics, dualism refers
to the existence of two distinct sectors, systems, or modes of economic
activity within a country or region, often characterized by stark differences in
terms of development, structure, or technology. The term "economic
dualism" typically describes the coexistence of a modern, advanced sector
alongside a traditional, underdeveloped one. These sectors can have
different levels of productivity, technology, income, and living standards.
There are several key forms of economic dualism:

55
1. Rural-Urban Dualism:

One of the most common forms of dualism in economics is the distinction

between the rural and urban sectors. This dualism is seen in many
developing countries, where:

Urban Sector: Often consists of modern industries, services, and higher

levels of infrastructure development, with access to capital, technology, and
better-paying jobs.

Rural Sector: Characterized by traditional agriculture, lower productivity,

limited access to technology, and less developed infrastructure, often with
lower living standards.

This rural-urban divide can contribute to disparities in income, education,

health care, and employment opportunities, exacerbating inequalities
between these two sectors.

2. Traditional-Modern Dualism:

This form of dualism highlights the division between the traditional and
modern sectors of the economy:

Traditional Sector: Includes low-tech, labor-intensive activities, often based

on subsistence agriculture, handicrafts, or informal services.

Modern Sector: Includes high-tech, capital-intensive industries, such as

manufacturing, finance, and technology, which are typically more productive
and have higher wages.

The process of economic development often involves the transformation of

the traditional sector into a modern sector, a key focus of economic

56
modernization theories. However, in many developing nations, these two
sectors coexist, with the modern sector remaining limited in scope or not
fully integrated into the broader economy.

3. Capitalist-Subsistence Dualism:

In some economies, particularly in developing countries, there is a

coexistence of a capitalist economy focused on profit maximization, private
ownership, and competitive markets, alongside a subsistence economy
where people rely on self-sufficiency and produce goods primarily for their
own consumption rather than for the market.

Capitalist Sector: Dominated by large enterprises, industries, and foreign

investments.

Subsistence Sector: Typically involves small-scale farming or informal

economic activities focused on family or community needs.

This type of dualism can create challenges in terms of policy and economic
integration, as the two sectors often have different priorities, technological
levels, and access to resources.

4. Labor Market Dualism:

This form of dualism refers to the segmentation of the labor market into two
distinct groups:

Primary Labor Market: High-paying, stable jobs with benefits, often in formal
sectors with clear career paths and job security (e.g., professionals, skilled
workers in large industries).

Secondary Labor Market: Low-paying, unstable jobs with little or no benefits,

often in informal sectors, characterized by part-time work, temporary
contracts, and fewer opportunities for advancement (e.g., low-skilled
workers, service sector jobs).

57
This dualism can lead to significant inequalities in wages, working conditions,
and access to social protection.

5. Economic Dualism and Development:

Economists such as Arthur Lewis have used the concept of dualism in

development theory, particularly in his dual-sector model. Lewis proposed
that developing economies typically start with a traditional agricultural
sector and a small modern industrial sector. Economic development occurs
when labor moves from the low-productivity agricultural sector to the higher-
productivity industrial sector, thus driving overall economic growth.
However, this shift can be slow, and the persistence of dualism can hinder
full economic development, leading to persistent inequality.

Challenges and Implications of Economic Dualism:

Inequality: Economic dualism often results in significant disparities in income,

education, health care, and living standards between the two sectors.

Slow Development: The coexistence of advanced and underdeveloped

sectors can slow the overall development process, as the modern sector may
not have sufficient links to the traditional sector.

Policy Challenges: Dualism creates challenges for policymakers who must

balance the needs of the modern and traditional sectors, ensuring that
development is inclusive and equitable.

In summary, economic dualism in economics highlights the existence of two

distinct and often unequal sectors within a national economy. This dualism
can manifest in terms of rural-urban divides, traditional-modern economic
structures, labor market segmentation, or capitalist-subsistence contrasts.
The coexistence of these two sectors can have significant policy-making
implications for economic development, inequality, and policy-making.

1.2 STRATEGY THEORIES

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Unbalanced growth theory

The theory was put forward by Alfred Hirschman; Contrary to the theory of
balanced growth, in Hirschman's opinion, the real bottleneck is not the
shortage of capital, but lack of entrepreneurial abilities. It states that
investment should be made in selected sectors rather than simultaneously in
all sectors; Growth happens from leading sector to other sectors of economy
one by one;

Instead of concentrating on more investments, focus investment in a key

industry with forward and backwards linkages; Resource constraints in
developing countries necessitate prioritization as to where to invest first; The
big push should be only for a limited number of industries, hence initially
unbalanced growth; This will initially result in unbalanced growth such that
inducing development in key sectors first, will create overcapacity here;
cheapening their output due to economies of scale;

Unequal development of various sectors often generates conditions for rapid

development; More-developed industries provide undeveloped industries an
incentive to grow the key sectors for initial investment should be determined
on the basis of industrial backward and forward linkages

Development was a chain of disequilibria, and the task of development

policy was to maintain tensions, disproportions, and disequilibria.
Industrialization of certain leading sectors would pull along the rest of the
economy

Balanced growth theory

Pioneered by Ragnar Nurske, it suggests that govt needs to make large

investments in a number of industries simultaneously. The real bottleneck in
breaking the narrow market is seen here in the shortage of capital, and,
therefore, all potential sources have to be mobilized. In order to ensure the
balanced growth, there is a need for investment planning by the

59
governments. Briefly, it means simultaneous and harmonious growth of all
sectors so that all sectors can growth in agreement. New investments in
different branches of production can

Development is seen here as expansion of market and an increase of

production including agriculture. A number of projects that begun
simultaneously in different industries might provide markets for one another

Balanced growth concerns investment done simultaneously across many

industries massive injection of new technology, machines, production
processes is the key to development There is a need for domestic
industrialization large scale industrial investments (i.e. expanded supply)
would also generate large scale demand, hence leading to: BALANCED
GROWTH

Big Push theory

▪ This theory is an investment theory which stresses the conditions of take-

off. The argumentation is quite similar to the balanced growth theory but
emphasis is put on the need for a big push.

▪ Rosenstein-Rodan gave this theory stating that a big push or large

comprehensive program is needed to overcome the obstacles to growth. Bit
by bit moving is not successful otherwise small program will lose their effect

The large-scale industrialization and infrastructural development are key;

More investment is needed in many places at one time; The big push needs
to come from the state; The argumentation is quite similar to the balanced
growth theory but emphasis is put on the need for a big push

Theory of Development Poles (PERROUX)

The promotion of regional development centres will serve as focal point and
incentive for further development. Such a regional concentration helps to
reap the benefits of technological external economies and makes the growth
centre attractive to entrepreneurs, thus initiating further development.

60
This theory is a sort of 'regional unbalanced growth theory' which uses
temporary regional imbalances to initiate development. Little attention is
given to the process which is necessary to ensure a spread or linkage from
the centres to the hinterland without which the poles may transform the
economy of the region into a dual economy

ROSTOW’s stages of Growth

W.W Rostow has given five stages of growth:

Traditional stage; This is the first stage in the development process where
the economy is still in infancy and there is little progress taking place. It has
the following features:

• Subsistence production where output is for home consumption.

• No use of money as a medium of exchange.

• There is a high degree of communal organization where people work

together as a community.

• Traditional beliefs in culture lead to a lot of conservatism.

• There are cases of disease and the nearest hospital is the bush.

• Production is highly labour intensive.

• There is almost no formal employment and organized income.

• There is nothing like investment and savings in the economy and the
economy is closed from external world.

• High levels of resource wastage through unproductive activities like

funeral rites, birth cerebrations, marriage, etc.

Transitional stage/pre-condition to take off

The societies are in the process of transition. It is the period when the society
lays the foundation for take-off and never to revert to the traditional era. The

61
society is first influenced by the external forces from MDCs. The idea of
economic progress spreads. The society then starts to imitate the advanced
society. In this stage, the following features exist

: • Dualism arises at this stage. Dualism is the co-existence of two

contradicting sectors in an economy, one developed and the other under
developed. e.g. commercial agriculture versus subsistence agriculture,
agriculture versus industry.

• The society starts moving away from dominant subsistence sector and
traditional methods of production are reduced.

• A market economy starts emerging where people exchange their output

for money.

• Industrialization starts more so the processing industry, these are normally

agro-based industries processing agricultural output.

• Entrepreneurs start to emerge. Economic Growth, Development and

Underdevelopment.

• Saving and investment start and rise up to 5% of the Gross Domestic

product.

• Development of a national identity and shared economic interests.

• Mobility of labour begins.

• Education starts spreading.

• Banks and other institutions for mobilizing capital appear

. • Investments in communications and manufacturing take place.

• Entrepreneurs start to emerge. i.e. new enterprising people come forward

to mobilise savings.

Take off stage to self-sustained growth stage

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Self-sustained growth means a reduction on foreign dependence.
This is the stage when the obstacles to steady growth are finally overcome.
The forces of economic progress from the modern economic activities
expand and dominate the society. The economy becomes self-propelling. This
stage involves rapid transformation in the country’s social, cultural, political
and economic spheres. It has the following characteristics:

• Barriers to development are eliminated. Strong economic infrastructure

like banks, hospitals, schools are set up.

• Savings and investment grow to between 5% and over 10% of the Gross
Domestic Product, new industries are introduced and industrial growth takes
faster rates.

• More employment opportunities are created; people’s incomes rise

because wages are higher.

• Idle resources are put to more efficient use through exploitation by the
industries.

• Modern and advanced technology is introduced in all sectors of the

economy.

• Skilled and qualified labour and entrepreneurs start coming up.

• Education and literacy rates increase at faster rates.

• Rate of urbanization increases faster.

• Both industrialization and markets expand.

• One or more leading sectors of the economy develop.

• The increase in per capita output should outstrip the growth of population.

Prematurity stage/Drive to maturity stage (self-sustained growth)

The growing economy drives to extend modern technology over all the
economic activities. It is a period of long sustained economic growth. New

63
production techniques replace the old ones and new sectors are created. This
stage has the following features:

• The rate of saving and investment is between 10% and 20% of GDP.

• The economy undergoes fundamental political, social and economic

advancements, technology progresses rapidly.

• Production for export grows further and there is limited importation of

manufactured goods.

• The industrial sector is transformed from small scale to heavy

industrialization.

• Agricultural mechanization emerges and such heavy agricultural machines

like tractors, combine harvesters, multi crop thresher are used to increase
agricultural productivity.

• There is maximum utilisation of the country’s resources.

• Modernisation of the economy is very high and traditional norms, beliefs

and customs are kicked away.

• There are high levels of employment opportunities and white-collar jobs

increase in availability.

• Goods formerly imported are produced at home with import substitution

industrial strategy.

• New import requirements develop and new export commodities to match

the imports develop.

• The character of entrepreneurship changes to a better one.

• Real wages start rising.

• It is at this stage that the economy demonstrates its technological and

entrepreneurial skills to produce anything it may choose.

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Stage of high mass consumption

This is the last stage in growth where the economy has reached its climax. It
is the stage when the leading sectors of the economy shift from producing
mainly capital goods to producing consumer goods. The incomes of the
majority rise beyond what is necessary for subsistence. The structure of the
population changes from being predominantly rural to predominantly urban.
It has the following characteristics:

• All resources in the country are fully exploited and utilised.

• Consumer durables like washing machines, cookers etc. become

necessities in every household.

• Incomes of the people are extremely high due to full employment

conditions.

• Industrial growth is at its peak and they start producing luxuries like
cosmetics, necklaces among others.

• The rates of saving and investments are over 20% of gross domestic
product.

• There are high rates of exportation and the country’s balance of payment
position improves.

• Urbanisation increases thus increase in the urban population.

• A country starts lending and donating to other nations.

• People reduce working hours and start enjoying leisure, they even start
going abroad to tour and rest. • There is more allocation of funds to social
welfare and social security than to industry which leads to the emergence of
a welfare state.

• The proportion of the population working in offices or skilled factory jobs

dominates the working class.

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Note; It is important to note that some stages over lap into others, so it
may be difficult to identify the exact stage at which a society lies according
to the features stated by Professor Walt Whitman Rostow.

Applicability of the theory

in low developing countries as talked about by Rostow, developing

countries have tended to go through the same path though there is still a
long way to go. The following features can be seen in the developing
countries:

• Subsistence production where output is for home consumption is very

common in developing countries as a means for survival.

• No use of money as a medium of exchange. In some areas, exchange is

through barter system while generally money is used as a medium of
exchange in all societies

. • There is a high degree of communal organisation where people work

together as a community through cooperatives.

• Traditional beliefs in culture lead to a lot of conservatism. This is very

common in developing countries and it has led to low quality output.

• Production is highly labour intensive and this is because of the inadequacy

in capital in developing countries.

• High levels of resource wastage through unproductive activities like

funeral rites, birth cerebrations, marriage etc. are common practices in
developing countries.

• Dualism is common. Dualism is the co-existence of two contradicting

sectors in an economy one developed and the other under developed. e.g.
commercial agriculture versus subsistence agriculture, agriculture versus
industry.

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• industrialization is common especially the processing industry. These are
normally agro-based industries processing agricultural output, as mentioned
in the pre-conditions to take off stage.

• Entrepreneurs are emerging and this has increased saving and investment
leading to increase of the gross domestic product.

• There are high cases of labour mobility in the developing countries both
internal and external.

Criticisms of Rostow’s theory

Rostow’s theory of growth is criticized as shown below:

• Rostow talks about progressing from stage to stage but does not show the
mechanism of how it is done.

• Some countries have already entered into the last stage of the age of High
Mass consumption before going through the fourth stage of maturity, e.g.
Canada, Australia.

• Rostow bases his theory on American and European history and defines
the American norm of high mass consumption as an integral to the economic
development process to all industrial societies, so his model has no impact
on other nations especially the developing agricultural nations.

• Rostow fails to demarcate one stage from the other as the features
especially stage one and stage two; and stage four and five tend to overlap
into each other. So, it is difficult to demarcate one stage of growth from the
other.

• Some countries have achieved high savings – 5 to 15% — but they have
never taken off.

• Rostow does not appreciate that some countries were born free of some
stages. Rostow does not consider nations like U.S.A and Canada, which were
born free of the traditional stage.

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• Rostow bases his theory on savings, showing that growth occurs as the
rate of savings increase with advancing stages but savings do not show a
picture of economic growth because they are autonomous.

• Whitman Rostow gives rates of savings and investment at different stages

but does not show how the rates are determined, so they become unrealistic

Theory of Circular Causation (MYRDAL)

▪ Myrdal opposes the strategy of development poles because social systems

and economic processes do not develop towards an equilibrium but, on the
contrary, factors tend to cumulate to positive or negative cycles.

▪ Under laissez faire' conditions in developing countries, there is a tendency

towards a negative cumulation.

▪ In principle, Myrdal's theory is a negation of the monocausal explanation

of problems of developing countries by economic factors alone. Rather, in a
comprehensive way, all social relations have to be incorporated

2. Dependency Theory
The Dependency Theory is a reaction to the Modernization Theory.
Modernization is hindering development of the third world by keeping the
third world underdeveloped (the ruling bourgeoisies of the first world
ensured a ready market for their finished goods and a cheap supply of raw
materials for their factories). The solution, and therefore the strategy, of the
dependency theorist is to weaken the grip of the global system with trade
barriers, controls on multinationals, and the formation of regional trading
areas. Underdeveloped countries have to create national development goals
and follow an independent pattern of development, whereby the state has a
key role in practice. Dependency theory focuses on self‐reliance through
socialistic strategies; local community‐driven development with communal
ownership with emphasis on rural development

2.1. EXTERNAL TRADE THEORIES

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▪ The structure of supply and demand in industrialized and developing
countries is such that industrialized countries are able to reap the benefits
from international trade.

▪ This transfer of resources makes development impossible, and these

unequal trade relations are seen as the reasons for underdevelopment

2.1.1. Theories of Circular Deterioration of Terms of Trade

(PREBISCH)

▪ The structure of supply and demand is such that industrialized countries

offer industrial products and buy raw products and the developing industries
do the reverse.

▪ According to Engel's law, the demand for raw materials tends to be

inelastic while the demand for industrialized goods is elastic.

▪ The technological progress in the production of industrialized goods not

only makes it possible for industrial countries to increase their incomes and
thus the standard of living, but, because of the elastic demand on the world
market, also to enforce higher prices.

▪ The situation in developing countries is the opposite: technological

progress in primary production results in lower prices because of the inelastic
demand.

▪ This mechanism leads to deteriorating exchange relations between

industrialized and developing countries (and, as well, between the
industrialized and the agricultural sector in developing countries). MYINTs
and RAO's 'theory of partial pauperization' and PERROUX's 'theory of
dominating economy argue along very similar lines.

2.1.2. Theory of Immiserising Groth (Bhagwati)

This theory follows the argumentation of the theory of circular deterioration

of terms of trade and concludes that countries, in order to improve their

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balance of trade, have to increase their exports to compensate for falling
prices. This means a further deterioration of terms of trade. The unchanged
structure of supply intensifies the structural dependency and, regardless of
growth, there is no development but only 'Immiserising growth.' This
situation is especially pertinent for countries with agrarian monoculture. As a
consequence, BHAGWATI later asked for a speedy industrialization including
heavy industry for larger countries.

2.1.1. IMPERIALISM THEORY

The imperialism theory explains the domination of underdeveloped areas by
industrialized countries as the consequence of different economic and
technological levels and unequal power potential resulting from a different
economic growth. The consequence of the development of industrial
capitalistic societies is a pressure for expansion which may lead to military or
political acquisition (colonies) or to maintaining economic dependence
(developing countries). Different theories have their own explanation of the
reason for the pressure for expansion but it is always seen as the result of
the inability to cope internally with the consequences of permanent
technological innovation and their effects on the society.

2.1. DEPENDENCIA THEORIES

The multitude of approaches combined under the heading 'Dependencia' like

imperialism theories are based on the assumption of an external dependency
of developing countries which makes exploitation possible. The process
started with the political and military dependency of colonies which have
been exploited through the destruction of the indigenous life style and
culture, economic extraction, and forced integration into the international
division of labour. The deformation of the economic and social system leads
to structural heterogeneity: rich elites and marginal masses, the destruction
of traditional economy oriented towards fulfilling the internal needs. Thus,
the centre-periphery relationship reproduces itself within developing
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countries. Between metropolis and rural hinterland, relations are similar to
those existing between industrial and developing countries.

1.Key concepts:
Theory: In economic, is a solid explanation of how something works in the
economy. It is based on a lot of evidence and has been tested and checked
many times.
Economic growth: refers to an increase in the production of economic
goods and services over a specific period compared to a previous period
Economic development: refers to the process by which a nation, region, or
community improves the economic, political, and social well-being of its
people. It encompasses a wide range of activities and policies aimed at
enhancing the economic performance and quality of life in a specific area.
2.Theories of economic growth, development
a. Introduction
Economic growth and development models are theories that explain how
economies grow and improve over time. These models focus on factors like
capital investment, technology, education, and government policies. They
aim to identify the best ways to increase wealth, reduce poverty, and
improve living standards. Different models offer varying approaches
depending on the country's needs, resources, and challenges.
b. Examples of theories or models on economic growth,
development and their implications
I. International economic order theory and basic needs theory
(1970s)
The emergence of the New International Economic Order and the Basic
Needs Theory in the 1960s was accompanied by empirical studies on
inequality, unemployment, and dualism. These studies highlighted those
developing countries experienced greater income inequality compared to
developed nations.
Implications of that theory on economic growth and development
are:
 Focus on equity and redistribution (International Economic Order)
It aimed to create a more just global economic system by promoting the
transfer of wealth and resources from developed to developing nations. It

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 focused on fostering equitable growth and reducing global inequality,
rather than solely emphasizing overall economic growth (NIEO, 2024).
It highlighted the need for developing countries to have greater access to
international markets, better terms of trade, and more equitable
participation in global economic governance.
 Emphasis on Structural Change (International Economic Order)
The NIEO called for structural changes in the global economic system,
including changes in trade relations, international finance, and
industrialization strategies. The NIEO sought to foster industrialization and
technological progress in developing countries to establish more balanced
economic systems. This would help reduce their reliance on developed
nations.
 Prioritizing Basic Needs (Basic Needs Theory)
The Basic Needs Theory emphasized meeting the fundamental needs of
people (such as food, shelter, health, and education) as a priority for
development, rather than focusing solely on economic growth indicators
like GDP.
 Role of the State (Basic Needs Theory)
The Basic Needs Theory suggested that the state should play an active
role in ensuring the provision of basic goods and services to its
population. This led to the development of social welfare programs and
the idea that the state should directly intervene in economic affairs to
guarantee minimum living standards for all citizens.
The NIEO has been criticized for its unrealistic goals of wealth redistribution
and its reliance on state intervention, which may hinder economic growth.
The Basic Needs Theory has been criticized for focusing too much on
immediate welfare rather than long-term growth and potentially fostering
dependency. Both approaches have been seen as idealistic and difficult to
implement effectively in the global economic system.
However, rapid industrial growth in the West is depleting the Earth's natural
resources, leading to the potential collapse of ecosystems. This
overconsumption poses serious threats to both social stability and economic
systems. The unchecked expansion could result in widespread environmental
damage. Urgent action is needed to avoid future catastrophes.

II. Neoclassical Liberalism and Structural Adjustment Programmes

(1980s)

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Classical liberals argue that minimal state intervention leads to a stronger
economy and society, as it allows individuals the freedom to explore their
potential. This encourages people to focus on their strengths, fostering self-
reliance and responsibility. Ultimately, it promotes personal and societal
growth.
Neoclassical liberalism was influenced by politicians like Margaret Thatcher
and Ronald Reagan. They were emphasized on Lending and aid became key
tools for encouraging market-oriented reforms.
Neoclassical Liberalism Overview:
 Market Efficiency: Neoclassical liberalism emphasizes the efficiency of
free markets, minimal government intervention, and the belief that
market forces should determine prices, production, and distribution of
goods.
 Focus on Economic Growth: It stresses that economic growth is best
achieved when countries adopt market-oriented policies that reduce state
control, promote competition, and encourage private sector activity.
 Trickle-down Effect: The theory posits that when economies grow
through free market reforms, the benefits will eventually "trickle down" to
all sections of society, including the poor.
Structural Adjustment Programs (SAPs) in the 1980s:
 IMF and World Bank Initiatives: SAPs were implemented by
international financial institutions like the IMF and World Bank, typically as
conditions for loans and aid to developing countries.
 Policy Focus: These programs promoted the adoption of free-market
economic policies, such as cutting government spending, selling
government-owned businesses, reducing regulations, opening up trade,
and lowering the value of currencies.
 Goal of SAPs: The primary aim was to stabilize economies, reduce
inflation, encourage foreign investment, and integrate developing
countries into the global market by promoting export-oriented growth.

Neoclassical liberalism and structural adjustment programs (SAPs) of the

1980s are often criticized for focusing too much on making markets efficient
while ignoring fairness, leading to more income inequality and social
problems. SAPs required developing countries to cut spending, privatize
state assets, and open up trade, but these measures often slowed economic
growth and weakened public services. Although the goal was to boost the
economy, these policies overlooked the importance of investing in education,

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healthcare, and infrastructure. Critics say this short-term focus on fixing
budgets came at the cost of long-term growth and better living conditions.

In summary, while neoclassical liberalism and Structural Adjustment

Programs promoted market-based reforms for economic growth, their
implementation in the 1980s raised significant concerns about their social,
political, and long-term economic consequences for developing countries.

III. The developmental state (1990s)

In the 1990s, a new debate emerged about the role of the state, as structural
adjustment programs had significantly impacted the economies of Third
World countries. Many people observed that poverty became worse during
the early years of these programs.
The developmental state model highlights that economic growth is not just
about increasing GDP but also about fostering social equity and sustainable
development.
the developmental state emphasized on strategies which plays crucial role in
economic progress as well as development:
 Active State Role: The developmental state emphasizes the
government’s proactive role in guiding and fostering economic growth
rather than leaving it entirely to market forces.
 Strategic Industrial Policy: Governments prioritize specific sectors for
growth, supporting them with subsidies, protectionist measures, and
investment in infrastructure to stimulate industrialization.
 Partnership with Private Sector: The state works closely with
businesses to drive innovation, create jobs, and boost productivity,
ensuring economic policies align with long-term development goals.
 Focus on Social Development: Investment in education, healthcare,
and social infrastructure is central, recognizing that human capital is
essential for sustained economic growth.
 Poverty Reduction and Inequality: Through targeted policies and
redistribution measures, the developmental state seeks to ensure
economic growth benefits a broader population, addressing inequality.
 Institutional Capacity: A strong, capable, and efficient bureaucracy is
crucial to implementing policies effectively and avoiding corruption or
inefficiency.
However, A decline in education funding forced many students to drop out of
school. Market liberalization led to higher food prices, resulting in increased
malnutrition. While economies grew rapidly, poverty levels remained high,

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showing unequal benefits. At the same time, the gap between the rich and
poor widened as the wealthy became even richer. This created a cycle of
inequality and hardship for many.
IV. Globalization, Environmental care (2000 onwards)
The main focus is on human development while prioritizing the planet.
Challenges like environmental resource depletion and global warming
highlight the need to address global environmental issues as part of
development strategies. This requires coordinated action by governments
worldwide to ensure sustainability. However, various groups seek answers to
different questions, hoping to find solutions to development challenges
Measures Taken for Sustainable Economic Growth and Development
(2000 Onwards)
 Promotion of Renewable Energy: Investing in solar, wind, and other
renewable energy sources to reduce reliance on fossil fuels and cut
carbon emissions.
 Sustainable Agriculture: Encouraging eco-friendly farming practices to
protect soil, water, and biodiversity while ensuring food security.
 Global Climate Agreements: Countries signed agreements to limit
global warming and work together on climate action.
 Green Technology Development: Supporting innovation in
technologies that reduce environmental impact, such as energy-efficient
appliances and electric vehicles.
 Corporate Responsibility: Businesses adopting sustainable practices,
such as reducing waste, recycling, and minimizing their carbon footprint.
 Conservation Efforts: Protecting forests, oceans, and other ecosystems
to maintain biodiversity and mitigate climate change impacts.
 Public Awareness Campaigns: Educating people about the importance
of sustainability and encouraging eco-friendly habits.
 Circular Economy Initiatives: Promoting reuse, recycling, and waste
reduction to reduce environmental pressure and resource depletion.
 Carbon Pricing Policies: Implementing taxes on carbon-emit trade
systems to discourage high greenhouse gas emissions.
 Global Cooperation: Governments and organizations collaborating on
policies and initiatives for sustainable development worldwide.
In conclusion, economic growth and development theories have evolved
significantly over time, reflecting the changing priorities and challenges of
global economies. From addressing inequality and basic needs in the 1970s
to the structural adjustments of the 1980s, and the rise of developmental
states in the 1990s, each approach has offered valuable insights while facing
its limitations. The focus has shifted further in the 2000s to integrating

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sustainability and environmental care into development strategies. This
evolution highlights the need for balanced policies that promote economic
growth while ensuring social equity and environmental sustainability.
Effective collaboration between governments, businesses, and communities
is essential to address the complexities of modern development challenges.
By learning from past experiences and adopting innovative, inclusive, and
sustainable practices, the global community can foster long-term progress
and resilience.

CHAP EIGHT (DEVELOPMENT STRATEGIES AND PROCESS)

MEANING OF DEVELOPMENT STRATEGIES: Development strategies refer
to long-term plans or policies that a country or region adopts to achieve
sustainable economic growth and improve the well-being of its population.
These strategies aim to address various economic challenges and capitalize
on opportunities to foster economic progress. They can vary based on the
country’s specific context.
They often include,
1.Agricultural development:
refers to the process of improving agricultural practices, production
systems, and infrastructure to enhance the efficiency, productivity, and
sustainability of farming. It involves adopting new technologies, improving
crop yields, reducing post-harvest losses, and ensuring better resource
management, such as water, soil, and energy. The following can be done to
ensure agriculture development among others,

Property rights: should be well defined and explain who has the
right of ownership.

Land reform: This should be part of the development process but it

should not be forced to the population.
International agreements: This concerns the abolition of price
controls and trade liberalization in agriculture etc.

2.Diversification of Industrial Base:

refers to expanding the range of industries within an economy to reduce
reliance on a few dominant sectors. This strategy aims to foster economic
resilience, stimulate growth, create jobs, and mitigate risks associated with

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economic downturns in any single industry. The following are importance of
Diversification of Industrial Base:
-Reduce reliance on single commodity
-Imports substitution
-Exports Promotion Many developing countries too reliant on primary
commodities
-Subject to wide price fluctuations and instability
-Expansion of industrial base would help avoid over-reliance on single
commodity
3.Trade Strategies:
refer to the policies and approaches adopted by governments to manage
their trade with other nations, aiming to achieve specific economic goals
such as growth, industrialization, job creation, and poverty reduction. These
strategies help countries leverage international trade to stimulate
development, enhance competitiveness, and integrate into the global
economy. These are some trade approaches being used:
-Export-Oriented strategies: Focus on Boosting exports to drive economic
growth.
- Import Substitution: Focus on Reducing reliance on imported goods by
fostering domestic production.
- Free Trade Strategy: Focus on Promoting open markets with minimal trade
barriers.
- Regional Trade Integration: Focus on Promoting trade within a specific
region by forming economic unions or trade blocs.
4.Population control:
refers to policies and measures adapted by government to manage the rate
of population growth to ensure it aligns with a country’s economic, social,
and environmental resources. The aim is to create a balance between
population size and the available resources, leading to sustainable
development and improved quality of life. Population control has the
following significance:
-Reduce Dependency Ratio: is the proportion of dependents (children
under 15 and elderly over 65) to the working-age population (15-64). A high
dependency ratio puts pressure on the economy, social services, and
working population. Reducing it can promote economic stability and growth.
Migration policies: significantly impact population dynamics, labor
markets, and economic growth. These policies manage the flow of people

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across borders to balance labor supply and demand, reduce skill shortages,
and support population stability.
- Optimum population: refers to the ideal number of people that can be
supported by a country’s resources, infrastructure, and economy at the
highest possible standard of living. It balances tavailability of resources and
labor with the demand for goods, services, and environmental sustainability.
5.Encourage saving and Investment:
are critical drivers of economic growth and sustainable development. They
provide the capital needed for infrastructure, business expansion,
technological innovation, and social services. Encouraging these behaviors
fosters economic stability, creates jobs, and enhances living standards.
6.Cancellation of international debt:
refers to the partial or complete forgiveness of a country's external debt by
international creditors, such as foreign governments, international financial
institutions (e.g., IMF, World Bank), and private lenders. This strategy is often
employed to assist heavily indebted developing countries in redirecting
resources from debt repayment to critical development needs like education,
healthcare, and infrastructure. These are some importance of cancellation of
international debt:

-Increased Public Investment: Funds previously used for debt

repayment can be redirected to public services, boosting sectors like
education, healthcare, and infrastructure.

- Increased Sovereignty: Countries regain greater control over their

economic policies without the constraints of debt repayment conditions

Development Process

The development process refers to the series of steps a country goes

through to achieve economic development. It involves the transformation of
the economy from a low-income, subsistence-based system like that of
agriculture to a modern, industrial, and diversified economy.

Professor Walt Whitman Rostow is one of the pronounced development

economists. After studying the trend of economic development in various
countries, he came up with the conclusion that, development follows
specific stages. He postulated that the transition from underdevelopment
to development can be described through 5 gradual stages or steps. He

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described these stages together with the features through which all
countries pass to attain hyper rates of economic growth and development.

Rostow's Stages or process of Economic Development

Rostow proposed a linear model of economic development in his 1960 book

"The Stages of Economic Growth: A Non-Communist Manifesto". His theory
outlines five stages that economies pass through as they develop:

1. Traditional Society: This is the first stage in the development process

where the economy is still in infancy and there is little progress taking place.

 Characteristics:
 Economy based on subsistence agriculture
 Limited technology and static social structure.
 High influence of tradition and religion.
 Minimal productivity and surplus.


2. Preconditions for Take-Off: The societies are in the process of

transition. It is the period when the society lays the foundation for take-off
and never to revert to the traditional era.

 Characteristics:
 Emergence of more modern scientific and technological
advancements.
 Development of infrastructure (e.g., roads, ports, communication).
 Increased investment and shift towards a commercial economy.
 Growth in entrepreneurship and national identity.

3. Take-Off to self-sustained growth stage: Self-sustained growth

means a reduction on foreign dependence. This is
the stage when the obstacles to steady growth are finally overcome. The
forces of economic progress from the modern economic activities expand
and dominate the society.

 Characteristics:
 Rapid industrialization and growth in certain sectors (usually
manufacturing).

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  Increased urbanization and a rise in new industries.
 Political and social institutions support industrial growth.
 Economy grows faster than population growth, creating surpluses.

4. Drive to Maturity: The growing economy drives to extend modern

technology over all the
economic activities. It is a period of long sustained economic growth. New
production techniques replace the old ones and new sectors are created.

 Characteristics:
 Diversification of the economy across multiple industries.
 Technological innovation spreads to all sectors.
 Improvement in education and skill levels.
 Rising living standards and a shift from heavy industries to consumer
goods

5.Age of High Mass Consumption: This is the last stage in growth where
the economy
Has reached its climax.
It is the stage when the leading sectors of the economy shift from producing
mainly capital goods to producing consumer goods.

Characteristics:

shifts Economy towards consumer-oriented industries

High incomes, widespread material wealth, and mass consumption.

Service sector becomes dominant.

Emergence of welfare systems and increased leisure.

TOPIC: ROLE OF AGRICULTURE, INDUSTRY AND SERVICE IN CONOMIC

DEVELOPMENT

1. The ROLE OF AGRICULTURE TO ECONOMIC DEVELOPMENT

Agriculture, defined as the practice of cultivating soil, growing crops, and
raising animals for food, fiber, and other products, plays a pivotal role in
economic development in less developed countries. The contribution of
agriculture to economic development are the followings:

 Providing more food to the rapidly expanding population: In

LDCs, there is high Population growth rates which makes food

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 production dominates the agricultural sector. In LDCs, food production
is vital for economic growth, with increased productivity raising
farmers' incomes and boosting food demand due to higher per capita
income.
 Increasing the demand for industrial products and thus
necessitating the expansion of the secondary and tertiary
sectors; Agriculture drives economic development by increasing
income and demand for industrial products, stimulating the growth of
the secondary (manufacturing) and tertiary (services) sectors. This
expansion creates more jobs and boosts industrial output. As a result,
overall economic activity rises, fostering long-term growth. Activity
rises, fostering long-term growth.
 Providing additional foreign exchange earnings for the import
of capital goods for development through increased
agricultural exports; Agriculture contributes to economic
development by generating foreign exchange through increased
agricultural exports. These earnings can be used to import capital
goods necessary for infrastructure and industrial growth. This boosts
productivity and accelerates overall economic development.
 Providing productive employment; agriculture promotes economic
development by providing productive employment, especially in rural
areas where a large portion of the population depends on farming.
This increases income levels and reduces unemployment. As a result,
overall productivity and economic stability improve, fostering long-
term growth.
 Capital formation: Agriculture drives economic development by
generating surplus income, which can be reinvested into capital
formation. This reinvestment in infrastructure, machinery, and
technology boosts productivity in both agriculture and other sectors.
Increased capital formation accelerates economic growth and
industrialization.

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  Economic Stability: Reduces urban migration and balances rural-
urban income.
Example: Agricultural policies in Vietnam help stabilize rural economies.

 Rural Development: Enhances infrastructure and services in rural

areas.
Example: Agricultural cooperatives in Ethiopia improve community
services

 Raw Materials: Supplies essential inputs for industries.

Cotton farming supports the textile industry globally
Examples: 1. Agriculture in Rwanda employing 70% of the population
and it contributes approximately 30% to the country GDP.
2. KENYA IS ABOUT 30-35(GDP)

3. GHANA IS ABOUT 25-35 TO THE COUNTRY GDP.

2. THE ROLE OF INDUSTRY TO ECONOMIC DEVELOPMENT

Industrialization is the process of manufacturing g consumer goods and
capital goods and of creating social overhead capital in order to provide
goods and Services to both individuals and businesses. Such industrialization
plays a Major role in the economic development of LDCs.

 Industrialization is a pre-requisite for economic development:

For development to take place, the share of the industrial sector
should rise and that of the agricultural sector decline, as a result, the
benefits of industrialization will “trickle down” to the other sectors of
the economy in the form of development of agricultural and service
sectors leading to the rise in employment, output and income.
 Provide employment Industrialization is essential in overpopulated
LDCs to provide employment for the underemployed or disguised
unemployed in agriculture. These workers, whose marginal product is
negligible, can be shifted to industry without reducing agricultural

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 output. This shift raises overall productivity, making industrialization
crucial for economic development.
 Increasing returns and economies of scale: Industrialization is
crucial in LDCs as it leads to increasing returns and economies of
scale, which agriculture cannot provide. It promotes training, better
communication, and inter-sectoral linkages, while driving urbanization
and a dynamic economy. This makes industrialization more effective
for development than focusing on agriculture alone.
 Reduce dependence: LDCs need industrialization to reduce their
dependence on primary products, which are subject to price
fluctuations and deteriorating terms of trade: Relying on primary
exports and importing manufactured goods worsens their economic
situation. Shifting to import-substituting and export-oriented
industrialization strategies is key for development.
 Diversification: People enjoy the fruits of modernization in the form
of a variety of goods and services available in urban centers due to
industrialization. These also affect the rural sector through the
demonstration effect. Thus, industrialization tends to raise the living
standards and promotes social welfare.
 Industrialization brings social transformation, social equality, more
equitable distribution of income and balanced regional development in
the process of economic development.
 Infrastructure Development: Stimulates the growth of
transportation and utilities.
Example: Industrial hubs in India have led to improved road and rail
networks.
 Innovation and Technology: Drives research and development
initiatives.
Example: Silicon Valley in the U.S. is a center for tech innovation.
 Global Competitiveness: Enhances a nation's position in
international markets.

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 Example: Japan's electronics industry is renowned for global
competitiveness
A CRITICAL APPRAISAL

The early industrialization policies in LDCs have failed to deliver the

expected economic and social benefits, such as reducing income inequality,
unemployment, and regional imbalances. These policies have led to issues
like rural stagnation, urban underclass growth, inadequate education,
ineffective governance, and high population growth. As a result, economists
now argue that development should not solely begin with industrialization.
Instead, it should involve a balanced and harmonious growth of both
agriculture and industry, with successful industrialization often being
supported by sustained agricultural development in most LDCs.

INTERRELATIONSHIP BETWEEN AGRICULTURAL AND INDUSTRIAL

DEVELOPMENT

The interrelationship between agriculture and industrial development is

crucial for the growth of LDCs. While early debates emphasized the
importance of either agriculture or industry, it is now recognized that both
sectors must progress together. It explained about how Agriculture Driving
Industrial Growth and how Industrialization Supporting Agricultural
Development:

Agriculture Driving Industrial Growth

Raw materials for agro-based industries: Agriculture provides essential

raw materials (e.g., crops, livestock) for industries such as food processing
and textiles.

Boosts demand for industrial goods: Increased agricultural productivity

leads to higher rural incomes, which drive demand for industrial products
(e.g., machinery, consumer goods).

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Generation of income and savings: Agricultural growth generates income
and savings that can be invested into further development, fueling both
sectors' growth.

Multiplier effect: Higher rural incomes from agriculture stimulate demand

for non-agricultural goods and services, accelerating industrialization.

Industrialization Supporting Agricultural Development:

Increased income and labor demand: Industrial growth raises incomes

and increases demand for labor-intensive agricultural commodities.

Capital for modernization: Industrial development provides the capital

needed for agricultural modernization through technology, mechanization,
and infrastructure.

Urban job opportunities and remittances: Job creation in urban

industries leads to remittances from workers that support rural agricultural
activities.

Improved infrastructure: Industrialization enhances transportation and

infrastructure, improving market access for agricultural products.

Promotes education and new ideas: Industrialization and urbanization

bring education, innovations, and improved living standards to rural areas,
benefiting agricultural practices.

Increased consumer goods: Industrial growth generates goods (e.g.,

fertilizers, machinery) that boost agricultural output, leading to higher rural
incomes and further growth in both sectors.

Finally, Harmonious development of both agriculture and industry is

essential for sustainable economic growth in LDCs, fostering job creation,
improved living standards, and long-term growth. Mutual reinforcement:
Both sectors support and stimulate each other, with agriculture providing

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raw materials and capital for industries, and industrialization offering
resources and market access to enhance agricultural productivity.

3. THE ROLE OF SERVICES TO ECONOMIC DEVELOPMENT

Services, in an economic context, refer to intangible activities or benefits
provided to consumers or businesses that fulfill their needs and enhance
their overall well-being. Services play a crucial role in economic
development, contributing significantly to growth, employment, and
improving living standards:

 Employment Generation: The service sector is a major source of

employment, particularly in sectors like education, health, retail, finance,
and tourism. As countries urbanize and industrialize, jobs in these sectors
often increase, leading to a reduction in poverty and an improvement in
living standards.
 Economic Growth: As economies develop, there is a shift from
agriculture and industry to a service-oriented structure. Sectors like
finance, healthcare, education, and IT become key drivers of growth. In
developed economies, services often make up a significant portion of
GDP.
 Increased Productivity: Services can enhance the productivity of other
sectors. For example, financial services help businesses access capital,
logistics services improve supply chain management, and information
technology supports innovation and efficiency across industries.
 Human Capital Development: Services like education and healthcare
are crucial for developing human capital. A well-educated and healthy
workforce is essential for fostering innovation, increasing productivity,
and driving economic development.
 Infrastructure Development: Services contribute to the development
of infrastructure, such as transportation, telecommunications, and
utilities. Efficient infrastructure is necessary facilitating business
operations, promoting trade, and enabling economic activities.

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 Global Trade and Investment: Many services, especially in areas like
IT, finance, and tourism, are highly exportable. Countries that provide
high-quality services can attract foreign investment, foster international
trade, and integrate into the global economy.
 Diversification and Stability: The services sector contributes to
economic diversification, minimizing reliance on a single industry (such as
agriculture or manufacturing). A robust services sector can offer stability
during economic recessions in other sectors.
 Sustainability: Services that foster sustainability, like environmental or
renewable energy services, play a key role in long-term economic
development by advancing environmental objectives and tackling climate
change issues.
THE INTERRELATIONSHIP BETWEEN AGRICULTURE, INDUSTRY, AND
SERVICES TO ECONOMIC DEVELOPMENT

Is fundamental to the economic development of many countries, particularly

in less developed economies.

Supply chain dynamics play a central role in connecting these sectors.

Agricultural products serve as raw materials for various industries, such as
food processing, textiles, and biofuel production. Once processed, these
goods are distributed through the service sector, which includes
transportation, retail, and logistics. This continuous flow of goods and
services ensures that agricultural outputs are transformed into consumable
products, which can then be sold to both domestic and international
markets. The service sector, in turn, plays a critical role in facilitating these
transactions, ensuring that the products reach the end consumer efficiently,
thus linking the primary agricultural sector with the industrial and service
sectors.

Investment and development

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Form another key interrelationship between the sectors. Profits generated
from industrial activities, especially in agro-based industries, can be
reinvested into agriculture. This reinvestment might come in the form of
improved technology, such as mechanization or advanced irrigation systems,
which enhances agricultural productivity. Additionally, industries involved in
the production of agricultural inputs, such as fertilizers, pesticides, and
machinery, contribute directly to increasing the efficiency and output of
farming. As agriculture becomes more productive, it can meet the growing
demand for raw materials from industry while also providing surplus goods
for export, further contributing to economic development and industrial
growth.

Lastly, rural development

Is deeply connected to the growth of agriculture, industry, and services. As

agricultural productivity improves, it leads to increased rural incomes, which
in turn drive demand for services in rural areas. These services may include
education, healthcare, financial services, and infrastructure development
such as roads and electricity. As industries grow and create jobs in urban
areas, the rural population benefits from remittances and increased demand
for agricultural products. Moreover, improved rural infrastructure, such as
better roads and communication systems, makes it easier for farmers to
access markets and sell their goods. This interrelationship not only fosters
agricultural growth but also supports broader rural development, ensuring
that both the rural and urban sectors contribute to the country's overall
economic progress.

As conclusion: Agriculture, Industrialization and Services play a crucial role

in economic development, contributing significantly to growth, employment,
and improving living standards, Capital formation the harmonious
development of agriculture and industry then service is essential for steady
economic growth in LDCs. Each sector—agriculture, industry, and services—

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plays a vital role in driving economic development. Their interdependence
fosters sustainable growth and improves living standards, showcasing the
need for a balanced approach in economic policies.

CHAP 10: DEVELOPMENT PLANNING

ECONOMIC PLANNING

There is no common agreements between different economist about the true

meaning of term Economic planning, because any type of state intervention
within economy is treated as planning, but can intervene without making any
plan. Planning is techniques, a means to an end being realization of a certain
pre-determined and well-defined aims and objectives laid down by central
authority. The end may be to achieve economic, social, political or military
objectives. However, even though there is no common agreed definition of
economic planning, some economists tried to explain it and some of their
definitions are under:

Economic planning is defined by Prof. L. Robbins as “collective control or

suppression of private activities of production and exchange.” This definition
emphasizes the role of a central authority in managing economic activities,
suggesting that economic planning involves a deliberate effort to regulate
and direct the production and distribution processes within an economy.
Economic planning implies that there is a collective approach to managing
resources and activities rather than leaving them entirely to individual
market forces. This suggests that the government or a central authority
plays a significant role in shaping economic outcomes.

Economic planning is defined by Dalton as “the deliberate direction by

persons in charge of large resources of economic activity towards chosen
end.” This definition emphasizes the intentional and strategic nature of
economic planning, highlighting that it involves a conscious effort by those
who manage significant economic resources to steer activities toward
specific objectives.

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Economic planning, as articulated by Lewis L. Lordwin, represents a
systematic approach to managing economic activity through coordinated
efforts aimed at achieving specific societal goals.

According to Professor Dickinson, economic planning is the making of major

economic decisions by a determinate authority on the basis of a
comprehensive survey of the economy as a whole. Emphasizes that
economic planning involves a systematic approach where decisions
regarding production, distribution, and consumption are made based on an
analysis of the entire economic landscape.

The key components of this process include determining what goods and
services should be produced, how much should be produced, the methods
and locations for production, and the allocation of resources among different
sectors and populations.

Even though there is no uniformity of opinion on the subject, yet economic

planning as understood by the majority of economists implies deliberate
control and direction of the economy by a central authority for the purpose
of achieving definite targets and objectives within a specified period of time.

Needs of Economic Planning

Economic planning is essential for several reasons, particularly in ensuring

that resources are allocated efficiently and effectively to meet the needs of
society. Below are the primary needs for economic planning:

 Resource Allocation: One of the fundamental needs for economic

planning is the efficient allocation of scarce resources. In any economy,
resources such as labor, capital, and raw materials are limited.
Economic planning helps determine how these resources can be

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 distributed among various sectors to maximize productivity and
minimize waste.

 Stability and Predictability: Economic planning provides a

framework for stability within an economy. By setting clear goals and
guidelines, it reduces uncertainty for businesses and consumers alike.
This predictability encourages investment and consumption, which are
vital for economic growth.

 Addressing Market Failures: Markets do not always operate

efficiently on their own due to various failures such as monopolies,
externalities, or public goods issues. Economic planning can help
correct these market failures by implementing policies that promote
competition, regulate industries, or provide public goods that would
otherwise be underprovided by the market.

 Social Welfare Improvement: Economic planning aims to improve

social welfare by addressing inequalities and ensuring that basic needs
are met across different segments of society. Through targeted
programs and policies, planners can focus on poverty alleviation,
education, healthcare access, and other critical areas that enhance
overall quality of life.

 Long-term Development Goals: Planning is crucial for setting long-

term development objectives that align with national interests. It
allows governments to outline strategies for sustainable growth,
technological advancement, infrastructure development, and
environmental protection over extended periods.

 Crisis Management: During times of economic crisis—such as

recessions or natural disasters—effective economic planning becomes
even more critical. It enables governments to respond swiftly with

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 appropriate measures to stabilize the economy, support affected
populations, and facilitate recovery efforts.

 Coordination Among Sectors: Economic planning fosters

coordination among various sectors of the economy (e.g., agriculture,
industry, services). This coordination ensures that different parts of the
economy work together harmoniously towards common goals rather
than competing against each other inefficiently.

 Data-Driven Decision Making: Effective economic planning relies on

comprehensive data collection and analysis about current economic
conditions and trends. This data-driven approach allows planners to
make informed decisions based on empirical evidence rather than
assumptions or outdated information.

 Adaptation to Global Changes: In an increasingly interconnected

world, economies must adapt to global changes such as trade
dynamics, technological advancements, and environmental challenges.
Economic planning helps countries anticipate these changes and
develop strategies to remain competitive in a global marketplace.

 Enhancing Public Participation: Finally, effective economic

planning often involves engaging stakeholders from various sectors—
government agencies, private sector actors, civil society organizations
—to ensure that diverse perspectives are considered in decision-
making processes. This participatory approach can lead to more
inclusive policies that reflect the needs of all citizens.

PLAN FORMULATION AND REQUISITES FOR SUCCESSFUL PLANNING

Planning formulation is the process of creating a structured approach to

achieve specific goals and objectives within an organization or economy. For
any plan to be successful, certain prerequisites must be in place:

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  Planning Commission: The first prerequisite for a plan is the setting
up of a planning commission which should be organized in a proper
way; such group should consist of economists, statisticians and
engineers dealing with various aspects of the economy.

 Clear Objectives: The planning process must begin with clear

objectives that align with the overall mission of the organization or
economy. Without clear objectives, it becomes challenging to measure
success or make informed decisions.

 Comprehensive Data Collection: Accurate data is essential for

effective planning. This includes both quantitative data (e.g., financial
reports) and qualitative data (e.g., stakeholder opinions).
Comprehensive data collection enables informed decision-making.

 Stakeholder Involvement: Engaging stakeholders throughout the

planning process is crucial. Their insights can provide valuable
perspectives on needs and expectations while fostering buy-in for the
plan’s implementation.

 Flexibility: Plans should be adaptable to changing circumstances.

Economic conditions can shift rapidly due to various factors such as
market dynamics or regulatory changes; thus, flexibility allows
organizations to respond effectively.

 Effective Communication: Clear communication of plans ensures

that all stakeholders understand their roles and responsibilities. It also
facilitates collaboration across different departments or sectors
involved in implementing the plan.

PROBLEMS OF DEVELOPMENT PLANNING

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Development planning faces numerous challenges that can hinder the
successful implementation of projects aimed at improving socio-economic
conditions. These problems can be categorized into several key areas:

1. Poor Project Planning

Effective development planning requires thorough preparation and foresight.

However, many projects suffer from inadequate initial planning, which can
lead to unrealistic expectations and objectives. This often results in a
mismatch between project goals and the resources available, ultimately
compromising the project’s success.

2. Inadequate Management Skills

The complexity of development projects necessitates skilled management to

navigate social, economic, and political factors. Unfortunately, a lack of
trained personnel with the necessary management skills can lead to
ineffective oversight and execution of projects. This inadequacy can manifest
in poor decision-making and inefficient use of resources.

3. Lack of Accountability

Accountability is crucial for ensuring that all stakeholders are responsible for
their roles within a project. When accountability mechanisms are weak or
absent, it can lead to mismanagement, corruption, and a failure to meet
project objectives. Stakeholders may not feel compelled to adhere to
timelines or quality standards without clear accountability structures.

4. Lack of Stakeholder Involvement

Successful development planning relies on the active participation of various

stakeholders, including local communities, government entities, and non-
governmental organizations (NGOs). A failure to engage these groups can
result in projects that do not address the actual needs or priorities of those

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they aim to help, leading to resistance or lack of support from the
community.

5. Unrealistic Plans

Many development plans are based on overly optimistic assumptions about

available resources, timelines, and stakeholder engagement. When these
plans do not align with reality, they often fail to achieve their intended
outcomes. This disconnect can stem from insufficient data collection or
analysis during the planning phase.

PLANNING BY DIRECTION AND PLANNING BY INDUCEMENT

Planning by Direction

Definition: Planning by direction is a top-down approach where decisions

are made by higher authorities or central planners. This method typically
involves setting clear objectives and directives that must be followed by
lower levels of management or local entities. It emphasizes control,
standardization, and adherence to predetermined goals.

ADVANTAGES OF PLANNING BY DIRECTION

1. Clarity and Focus: By setting specific goals and objectives, the

executor understand what is expected to them and how their roles
contribute to the overall mission. This clarity helps align individual
efforts with economic priorities, ensuring that everyone is working
towards common objectives.

2. Improved coordination: when clear plan established, it facilitates

communication and collaboration across various levels of the
hierarchy. This improved coordination reduces redundancy in efforts

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 and ensures that resources are utilized effectively, leading to more
efficient operations.

3. Flexibility in response to change: By regularly reviewing plans and

adjusting them as necessary, organizations can adapt quickly to new
challenges or opportunities without losing sight of their overall goals

DISADVANTAGES OF PLANNING BY DIRECTION

 Planning by direction is always inflexible. Once a plan has been

drawn, it becomes impossible to revise any part of it, necessitated by
circumstances. For, it is an extremely difficult task to alter a part of
the plan without altering the whole of it.

 Planning by direction is a costly affair. It requires an army of clerks,

statisticians, economists, and other trained personnel. Large funds are
spent on conducting innumerable surveys and censuses.

 Planning by direction is associated with a bureaucratic and totalitarian

regime. There is complete absence of consumers’ sovereignty. People
are not allowed to spend and consume according to their choice. Even
the right to choose one’s occupation does not exist. Both the consumer
and labor markets are determined by the planning authority.

Planning by Inducement

Planning by inducement is a more decentralized approach that encourages

participation from various stakeholders in the planning process. It focuses on
motivating individuals or organizations to achieve desired outcomes through
incentives rather than mandates.

There is no compulsion but persuasion. There is freedom of enterprise,

freedom of consumption and freedom of production. But these freedoms are
subject to state control and regulation. People are induced to act
in a certain way through various monetary and fiscal measures. For

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example, If the planning authority wishes to encourage the production of a
commodity, it can give subsidy to the firms. And if it finds scarcity of goods
in the market, it can introduce price control and rationing.

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