ECONOMIC DEVELOPMENT

Misra and Puri (2003) define economic development to mean growth plus progressive changes in certain
critical variables that determine the well-being of the people. They assert that there are qualitative dimensions
in the development process which may be missing in the growth of a given economy expressed in terms of an
increase in the national product or the product per capita.

According to Mahbub (1971), the problem of development must be defined as a selective attack on the worst
forms of poverty. Development goals must be defined in terms of progressive reduction and eventual
elimination of malnutrition, disease, illiteracy, squalor, unemployment, and inequalities.

Misra and Puri (2003) note one major approach to the concept of economic development, referred to as the
traditional approach. The traditional approach defines development strictly in economic terms. According to
the traditional approach, economic development implies a sustained annual increase in Gross National
Product (GNP) at rates varying from 5 to 7 percent or more, together with such alteration in the structure of
production and employment that decreases the shares of agriculture in production and employment and
increases those of manufacturing and services sectors. Policy measures suggested in this case are those which
induce industrialisation at the expense of agricultural development. Such objectives as poverty elimination,
reduction of economic inequalities, and generation of employment are mentioned in passing reference only,
and in most cases, it is assumed that rapid gains in overall growth in GNP or per capita domestic product
would trickle down to people in one form or the other.

In his own contribution, Seers (1969) argues that the questions to be addressed about the meaning of
development in the right perspective should be:
 What has been happening to inequality?
 What has been happening to unemployment?
 What has been happening to poverty?
He suggests that if inequality, unemployment, and poverty have declined from high levels, then beyond
doubt, this has been a period of development for the country in question. If one or two of these central
problems have been growing worse, especially if all three have, it would be strange to call the result
‘‘development’’ even if the per capita income doubled.

ECONOMIC DEVELOPMENT AND ECONOMIC GROWTH

Economic development is, therefore, a process with noble ideals. Backward countries, without exception, are
endeavoring to make economic development a successful objective. It is worth noting the difference between
economic development and economic growth, as these two important economic concepts have often been
misplaced and confused in their meanings. Distinguishing between economic growth and development,
recent literature notes that economic growth refers to increases in a country’s real output of goods and
services or product per capita over time. Output is generally measured, in this case, by gross or net national
product. The term economic development, on the other hand, is more comprehensive. It implies progressive
changes in the socio-economic structure of a country.

Economic development involves a steady decline in agriculture’s share in Gross National Product (GNP) and
a corresponding increase in the share of industries, trade, banking, construction, and services. This
transformation in economic structure has been noted as being accompanied by a shift in the occupational
structure of the labour force and improvement in its skill and productivity. Put differently, whereas economic
growth merely refers to a rise in output, economic development implies changes in technological and
institutional organisation of production, as well as in the distributive pattern of income.

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THEORIES OF ECONOMIC DEVELOPMENT AND GROWTH
There are two famous theories of economic development and one important growth model to be discussed:
1. Schumpeter’s Theory
2. The Big Push Theory
3. The Harrod-Domar Growth Model

I. The Schumpeter’s Theory of Economic Development

In developing his theory, Schumpeter distinguishes between two types of influences on an economy: first are
the influences of changes in the availability of factors of production, which he refers to as growth component;
second are the influences of technological and social changes, which he characterised as development
component.

Schumpeter refers to economic growth as “changes in population and in the sum total of savings plus
accumulation corrected for the variation in the purchasing power of the monetary unit”. According to him,
changes in these two variables are both continuous and slow. He notes that development is a distinct
phenomenon and entirely foreign to what may be observed in the tendency toward equilibrium. It is a
phenomenon that cannot be explained economically.

According to Schumpeter, growth component represents the contribution of changes in the utilisation of the
factors of production. The supply of land being fixed, growth component represents only the contribution of
variations in the size of population and of increases in the produced means of production, which Schumpeter
distinguishes from capital. Population growth is considered as an external factor in the Schumpeter’s
treatment of economic change. Schumpeter believes that the rate at which population changes is determined
by factors outside the system.

Similar to population growth, increases in producer goods is said to belong to the growth component of
economic change. Schumpeter asserts that an increase in the supply of producer goods ordinarily depends on
the positive savings flow. The rate of savings in any economy, in turn, rarely rises abruptly. Increases in
savings rate are slow and gradual and often require infinitesimal steps. Schumpeter believes that savings are
rarely independent factor of change.

Schumpeter looked at profit as an outcome of the development process. It gets completely eliminated in the
circular flow of economic life, since the value of the output is exactly same as the value of productive factors
employed to produce it.

Another factor that influences the development component of economic change is the change in social
climate. With respect to the social factors, Schumpeter’s approach is similar to that of the Marxist theory.
According to him, because of the fundamental dependence of the economic aspect of things on everything
else, it is
not possible to explain economic change by previous economic conditions alone.
Schumpeter assumes that the economic state of people does not emerge simply from the preceding economic
conditions, but only from the preceding total
situation.

Theory of the Big Push

This big push theory originated from Rosentein-Rodan. According to Rodan, the need for big push in
underdeveloped countries arises from at least three indivisibilities, including (Misra and Puri, 2003):
1. Indivisibility in the production function;
2. Indivisibility of demand; and
3. Indivisibility in the supply of savings.

 Indivisibility in the Production Function

Rodan notes that indivisibilities of inputs, processes, or outputs give rise to increasing returns or economies
of scale, and may require a high optimum size of a firm.
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  Indivisibility (or Complementarities) of Demand
Indivisibility of demand requires that a country sets up simultaneously a large number of industries producing
variety of goods, so that workers in these industries would become consumers of one another’s goods. This
encourages expansion of markets for industrialgoods. In this way, outputs of the various industries will not
go unsold.

 Indivisibility in the Supply of Savings

Rodan argues that substantial investment in a number of industries requires a high enough level of savings.
Because underdeveloped countries are plagued by low income levels, it is necessary that in the first stage of
development, when income rises due to investment increases, mechanisms must be put in place to raise the
marginal rate of savings in the second stage in comparison to the average savings rate.

The logic behind Rodan’s theory of the big push is that it brings into focus the need for a massive effort on
the part of the underdeveloped countries to industrialise if they are serious about economic development. The
theory warns that piece-meal efforts of developing one or two industries would be of no avail.

Criticisms of the Big Push Theory

The big push theory has been criticised by economists on a number of grounds, some of which are
summarised below:
 Inadequacy of Resources
The most important criticism of the big push theory is that it fails to recognise the all important fact that the
amount of resources in underdeveloped countries is very limited. The argument is that the theory presupposes
not only an ample supply of capital but also of other scarce factors of production in the underdeveloped
countries. A big push as suggested by the theory would likely amount to starting more projects than the
country’s resources can cope with
.
 Difficulties in Implementation
As observed by Myint (1969: 120), the governments of underdeveloped countries are likely to encounter
serious difficulties in executing various projects according to a planned time-table, and in keeping the
different implementing agencies continually informed about progress in carrying out the plans. These
difficulties are likely to create serious obstacles in the implementation of programmes of large-scale
industrialisation as suggested by the big push theory.

 Neglect of the Agricultural Sector

Critiques argue that the big push theory suggests a programme of comprehensive industrialisation without
mention of agriculture. It is difficult to think of economic development in the primarily agricultural and
labour surplus economies by neglecting agriculture. The neglect of agriculture would constitute a serious
bottleneck to the programmes of industrialisation both in the short and in the longrun. It becomes difficult to
meet the food requirements of the people engaged in the new industries, and in the long run, the size of the
market would fail to expand significantly.

 Generation of Inflationary Pressures

It has been argued that since agriculture is neglected by the theory of the big push, food shortages are likely
to substantially push up food prices. This and other arguments suggest that programmes of the big push
theory are associated with the risk of inflationary pressures.

 Too Much Emphasis on Indivisibilities

The emphasis on indivisibilities pays limited respect to the broader aspects of social reform which are vital if
a stationary economy is to begin to develop on the basis of its own resources and incentives.

 Neglect of the Importance of Techniques

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The theory of the big push was noted to have neglected the importance of techniques in it’s over enthusiasm
for capital formation. Development depends increasingly on techniques and less on direct capital formation in
the productive processes.

 Difficulties in a Mixed Economy

It has been noted that most underdeveloped countries have a mixed economy system which provides for the
co-existence of both private and public sectors. If these sectors are complementary in nature, no difficulties
are likely to arise; but if they are competitive, there are likely to be serious difficulties in actual
implementation of the big push strategy of development.

 Not Supported by History

The big push theory seems to suggest that whenever a large scale influence is exerted on the process of
capital formation, a stationary economy begins to develop. It was observed that this is not in conformity with
historical events.

THE HARROD-DOMAR’S THEORY OF ECONOMIC GROWTH

Harrod-Domar’s theory argues that a country’s investment level at a given period is determined at the
equilibrium levelof national income by the marginal propensity to save, so that economic growth becomes a
function of the marginal propensity to save and thecapital/output ratio (Domar, 1948). In algebraic terms,
with Y representing national income, K capital expenditures, I investment expenditures, S savings, and d
changes, the rate of income growth, G is defined by: G = dY/Yt

Harrod’s initial concern was noted to be on the time path of equilibrium level of national income. Harrod
believes that savings depend on income, but investment is determined by an accelerator, which in economic
boom, would lead to an expansion of incomeabove the equilibrium path, to run the economy up against
output ceilings, or in economic depression, to contraction, which would halt growth by keeping actual growth
below the potential growth.

The basic principles of the Harrod-Domar’s model are as follows:

 First, any change in the rate of investment flow per year, I(t), will produce a dual effect: it will affect
the aggregatedemand as well as the productive capacity of the economy.
 Second, the demand effect of a change in I(t) operate through the multiplier process, so that an
increase in I(t) will raise the rate of income flow per year, Y(t), by a multiple of the increment in I(t).
 Finally, the capacity effect of investment is measured by the change in the rate of potential output the
economy is capable of producing.

FACTOR INFLUENCING GROWTH AND DEVELOPMENT

Other important factors influencing economic growth and development in
Schumpeter’s context include: technological change, entrepreneurship, capital, and credit. These are
discussed as follows:

 Technological Change
Schumpeter visualised two broad types of technological changes: continuous technological change in which
technologies develop from the prevailing technologies, and discontinuous technologies. According to
Schumpeter, continuous technological changes give rise to economic growth, while discontinuous
technological changes give rise to economic development.

 Entrepreneurship
Schumpeter believes that the entrepreneur is neither a financier nor a technician; he or she is merely an
innovator who carries out discontinuous technological changes resulting in economic development. He also
assumes that the activities of entrepreneurs are greatly influenced by the social climate. In a depressing social
climate, the possibility of widespread innovative activities will be limited. In addition, any attempt to restrict
independence and to violate capitalist rationality will discourage entrepreneurial activities.
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  Capital
Schumpeter defines capital as that sum of means of payments which is available at any moment for
transference to entrepreneurs. He notes however, that not all means of payment should be regarded as capital
and that if means of payment are not used for diverting means of production from their existing uses to the
new ones, they do not serve any development purpose and as such, would not be considered as capital.
According to Schumpeter, capital is a concept of development to which nothing in the circular flow of
economic activities corresponds.
 Credit
Schumpeter assigns a unique role to credit in economic development.
Entrepreneurs need credit in order to carry out innovations that give rise to economic development. Every
kind of extension of credit for purposes of innovation is by definition the granting of credit to the
entrepreneur, and forms an element of development. The need of credit arises from the requirements of
development.

Conclusion
This unit has brought into focus the definitions of economic development. It informs us of the basic
difference between the two often confused terms in economics, economic development and economic
growth. Economic growth refers to increases in a country’s real output of goods and services or product per
capita over time. The term economic development, on the other hand, is more comprehensive. It implies
progressive changes in the socio-economic structure of a country. It involves a steady decline in agriculture’s
share in Gross National Product (GNP) and a corresponding increase in the share of industries, trade,
banking, construction, and services.

This unit has dealt with some background issues in development and growth theories. The unit is of the
opinion that in order to make useful contributions to issues bordering on economic development in Nigeria,
you need to be armed with the basic principles of economic development and growth at the preliminary
stages. Of major focus in the discussion were the big push theory of development and Harrod-Domar’s theory
of growth. Some shortfalls of thesetheories were isolated for further scrutiny.

REFERENCES
Domar, E. D. (1948). “Capital Expansion, Rate of Growth and Employment,” Econometrica, April.

Myint, H. (1969). The Economics of the Developing Countries. London: Hutchinson University Press.

Onwe, O. J. (1993).“Theories of Development and Growth”. In Ezeaku, L. C. (Ed.) Growth, Development

and Planning. Agulu: Levrene Publishers.

Mahbubul, H. (1971). “Employment and Income Distribution in the 1970s: A New Perspective,” Pakistan
Economic and Social Review, June-December.

Misra, S. K. & Puri, V. K. (2003). Growth And Development. (Mumbai: Himalaya Publishing House.

Onwe, O. J. (1993). “Theories of Development and Growth,” in Ezeaku, L. C. (Ed.) Growth, Development
and Planning. (Agulu: Levrene Publishers.

Seers, D. (1969). “The Meaning of Development.” Eleventh World Conference of the Society for
International Development, New Delhi.