Conceptions of Development

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Conceptions of Development

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Institute of Lifelong Learning, University of Delhi

Subject: Development Theory and Experience - I

Lesson: Conceptions of Development

Name: Ms. Isha Gangwani

College/ Department: Ramanujan College, University of Delhi


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Learning Objectives:

After reading this chapter, you will be able to understand:

Meaning and multidimensional scope of development

Limitation of GNP and GNP per capita as a measure of development

An overview of global economic growth and its relation with distribution of income

across countries

Mobility matrices as a tool to understand changing income distribution across

countries of the world

Existence of inequalities in income distribution within developing countries

The concept of human development, Human Development Index and its relation with

per capita income

Structural features of developing economies and the proximate causes leading to the

different circumstances in developed and developing economies


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Table of Contents:

Chapter: Conceptions of Development

1.

An Introduction to Development2. Per Capita Income as a Measure of Development

3. Growth and Income Distribution – A Historical Overview

3.1. Mobility Matrix

4. Income Disparities in Developing Countries

5. Human Development – A Capture of Multifaceted Development

5.1. Concept of Human Development

5.2.

An Index of Human Development5.3. Per Capita Income and Human Development

6. Structural Features of Developing Economies

7. Differences between Developed and Underdeveloped Economies and the

Underlying Causes – A Case Study

8. Conclusion

9. Sample Questions

10.

References


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1.

An Introduction to Development

Development is a crucial social task facing the economies of the world. While

economic growth is a macroeconomic concept dealing with increase in aggregate and

per capita incomes, development, on the other hand, is a much wider phenomenon.

It is a multifaceted task which takes into account the broad spectrum of

socioeconomic aspects of wellbeing.

As Paul Streeten puts it,

“We should never lose sight of the ultimate purpose of the exercise, to treat men and

women as ends, to improve the human condition, to enlarge people’s choices . . . a

unity of interests would exist if there were rigid links between economic production

(as measured by income per head) and human development (reflected by human

indicators such as life expectancy or literacy, of achievements such as self respect,

not easily measured). But these two sets of indicators are not very closely related.”

The concept of development covers the features of health, education and life

expectancy. The multidimensionality of development process is accompanied with

higher literacy rates, declining infant mortality rates, higher life expectancy, greater

access to health facilities etc.

For a long time, development performance of any economy has been assessed on

the basis of growth of GDP per capita. This may appear to be relevant to some

extent, as economic development can be linked with growth of per capita income.

However, the multitude of achievements under the development process -- access to

clean drinking water, access to health services, greater access to schools and

knowledge, access to sanitation – are not captured by the yardstick of aggregate

income variables. As Debraj Ray highlights, “It is perhaps universally accepted that

development is not just about income, although income has a great deal to do with

it.”

In this context, it is important to note what Lucas’ definition of development says. It

incorporates an implicit belief that the universal features of better health and

education that work together with development, rather, in some way, naturally result

from the growth of per-capita incomes in the longer run. In other words, the


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improvement in aggregate economic variables does, in some way, result in positive

socioeconomic outcomes.

However, a more popular and contrasting view is that the relation between income

and socioeconomic variables may not be automatic, and in fact may not exist at all.For instance, according to Human Development Report 2013, Jordan, Bhutan and

Swaziland have gross national incomes (per capita) which are nearly the same, but

Jordan is ranked much higher on the basis of human development index.

Thus, in this perspective, per capita GNP is insufficient and not a good proxy for

measuring the extent of development or underdevelopment in an economy. This calls

for a range of variables (perhaps narrower in scope) that work well as correlates of

the multifaceted processes under development. A major limitation in this respect is

the lack of such variables that capture the complex nature of development process.

This brings us back to the point that development is fuelled by growth in per capita

incomes.

To start with, we evaluate the feasibility and reliability of per capita income as a

measure of development.

2.

Per Capita Income as a measure of Development

Per capita income can be used as a measure to evaluate the degree of development

and underdevelopment in an economy. This essentially requires the conversion of

each country’s income into a common currency and then dividing by the population

of that country. This method is termed as the exchange rate method for conversion

of incomes into a common unit.

It is observed that the distribution of per capita income across countries is highly

skewed. According to the World Development Report (1996), the total world output

produced in 1993 was $ 24 trillion. Only 20 percent of this output was produced in

low-income and middle-income countries, comprising 85 percent of the world’s

population. Another striking observation is that per capita income of the world’s

richest country, Switzerland, is as high as 400 times that of the poorest country,

Tanzania.


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In short, huge income disparities exist across countries. Moreover, to evaluate the

degree of inequality in its true sense, it is important to note that the measure of per

capita income by exchange rate method suffers from drawbacks. It is biased for the

following reasons:

• Incomes are commonly underreported in developing countries in order toavoid taxes.

• Moreover, in low income countries, a large part of the income generated is

used for self consumption. This is particularly true for subsistence farmers.

Such incomes or output do not get reported in national accounts.

• Exchange rate conversions apply correctly only to a limited set of traded

goods. Prices of non-traded goods are not correctly reflected in the exchange

rate. Although Purchasing Power Parity (PPP) estimates do help in reducing

disparities to some extent, but not all the way.

• In measuring GNP, we use market prices of all goods and services which may

not always be appropriate as market may not always be competitive. Also,

the cost of market imperfections and externalities are also ignored. Because

of such factors, the true value of marginal social benefits and costs does not

get reflected in prices.

Nevertheless, using sophisticated measures of GDP and shadow pricing help

overcome these problems.

3.

Growth and Income Distribution – A Historical

Overview

In 1960, average per capita income of the richest 5 percent nations of the world was

29 times that of the poorest 5 percent nations. It is notable that this disparate

distribution has remained broadly unchanged over the subsequent two and a half

decades uptil 1985.

Although the overall picture has remained largely constant, an important feature of

interest is the diverse growth experience of different nations that contributed to the

changing landscape. On one hand is the rapid growth experience by Japan, Thailand,

and the four Asian Tigers uptil 1990, and of course, not to forget the emerging

superpower, China experiencing phenomenal rise since the 1980s. On the other hand

are the declining economies of Latin America and sub-Saharan America. According to


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a study, per capita income in Latin America fell by 11% during the 1980s and

continued to fall in 1990s (except Chile and Columbia).

In Africa, Nigeria and Tanzania substantially deteriorated, while Kenya and Uganda

remained more or less stagnant.

Such divergent experiences of the nations across the world can be explained by

indigenous and independent political, social and macroeconomic factors influencing

these nations.

Thus, we can conclude that: While the extent of disparities at the global level has

remained the same, individual nation experiences justify their own ups and downs.

In light of the divergent economies of the world, Debraj Ray makes a mention of the

doubling time phenomenon that can change the face of the world. Doubling time is

the number of years taken to double the per capita income of a country. It can be

calculated:

Doubling Time = 70 / Current Rate of Growth

Another study by Parente and Prescott (1993) for the same period acknowledged

similar patterns. The study gave two important results. First, a large proportion of

countries changed their position in terms of income by 1 percent or more per year,

relative to US. Second, the positive and negative income changes of different

countries over these years have been roughly symmetrical, thus keeping the overallincome distribution of the world unchanged.

These results respectively imply two things. One, relative economic progress can be

a common feature to countries at different levels of income without any trap. The

other is the possibility of better off economies to slip away and decline. As Debraj

Ray puts it, “Economic Development is more like a treacherous road, than a divided

highway where only the privileged minority is destined to ever drive on the fast

lane.”

Nevertheless, we cannot ignore the tendencies of low income countries to perpetually

remain trapped. And also the convergence hypotheses by which economies are

bound to converge to similar standards of living in the longer run.


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3.1 Mobility Matrix

It is important in this context to understand the forementioned phenomenon by the

illustrative method of 'mobility matrices' developed by Quah (1993).

Understanding Mobility Matrix

• Mobility matrix is a tool used to display the income mobility of countries over

a period of time.

• We take two points of time over which we want to study the change in income

distribution.

• We take the per capita incomes of the countries as a fraction of the world's

per capita income, at both points of time. For example, if a country's per

capita income is $1000 and the world average is $4000, then it will give an

index of 1/4

• In the following example, the different categories used are 1/4, 1/2, 1, 2 and

∞. The category 1/4 contains all countries having per capita income one-

fourth or lesser than the world average per capita income. The category 2

contains all countries between 1 and 2 index (i.e. countries earning p.c.i

which is between the world average and twice of it)

• The diagram below illustrates a mobility matrix for the period 1962-84. The

first row and the first column mentions the categories used in the example.

The first row refers to the income distribution in the year 1962 and the

columns refer to the year 1984.

• Any particular entry in a cell tells us the number of countries that have

transited from one category to another in their period from 1962-1984. For

example, 20% of the countries which were between half the average per

capita income and the average per capita income made a transition to fall

between half one-fourth and half the world average per capita income.


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1/4 1/2 1 2 ∞

1/4 76 12 12 0 0

1/2 52 31 10 7 0

1 9 20 46 26 0

2 0 0 24 53 24

∞ 0 0 0 5 95

The Income Mobility of Countries, 1962-84Source: Figure 2.5, Chapter 2, Debraj Ray,

Development Economics, 1998

Some notable observations:

•

Note that high numbers on the main diagonal imply larger number ofcountries in any income category showing lesser income mobility.

• Stickiness or lack of mobility is observed to be maximum among richest and

poorest countries, with numbers being as high as 76 and 95 at the extremes

of the main diagonal.

• Income mobility is seen to be relatively higher among the middle income

countries. For example, a large number of countries in the category between

1/2 and 1 have either jumped to better or worse categories in the next period

(averagely high numbers can be seen around the centre of the mobility

matrix).

• Another visible feature is that low and middle income countries (row 1/4 and

1/2) have a greater tendency to slip in the lower categories in the next

period, implying overall tendencies of average economies to move in the

downward direction.

Such patterns suggest the clichéd belief that the low-income, underdeveloped

economies tend to remain stuck in the poverty trap. At the same time, a

rather contrasting view pointed out by Debraj Ray is that low-income

backward economies enjoy privileges that are instrumental in achieving rapid

growth. These are: new technologies from advanced economies, high

marginal productivity of capital because of abundance of labor, opportunity to

learn from the failures of other nations. Hence, by this view, disparities

should get eliminated in the longer run.


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4. Income Disparities in Developing Countries

As we have already seen, global development is characterized by a highly skewed

distribution of income across nations. However, sadly, this is not the only problem

with the global development scenario. The astonishing income inequalities that exist

within the developing nations cannot be ignored. Pronounced prosperity is seen to be

coexisting with abject poverty in the cities of Mumbai, Mexico city, Manila and others

of the developing world. As Debraj Ray puts it, "the poor are twice cursed: once for

living in countries that are poor on average, and then for being on the receiving end

of the high levels of inequality in those countries."

What explains this heterogeneity is the fundamental nature of the development

process which brings with itself the unevenness and the imperfections associated

with it.

In underdeveloped economies, where income levels are extremely low, a significantly

large proportion of people are poor. Hence, there is not a vast gap between the

income shares of the poorest segment and the richest segment of the population.

As economic progress takes place, the richer sections of the society reap the benefits

first. Hence, the proportionate income shares of the topmost quintiles of the

population increases relative to the lowest quintiles, thus increasing the income gapbetween the rich and the poor.

At even higher levels of income, the benefits of growth trickle down to the poor, thus

reducing the inequalities.

An example has been quoted by Debraj Ray to support the above mentioned

argument. It plots the income shares of the richest 20% and the poorest 40% of the

population of a set of fifty seven countries arranged in the order of increasing per

capita income. The results show that: (1) poorest 40% earn averagely 15 percent

lesser income, (2) There is an overall tendency for discrepancies to increase for

middle income countries vis-a-vis extremely low and extremely high income

countries. Thus, once again, income inequalities appear to be relatively higher

among middle income nations.


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Income shares of poorest 40% and richest 20% for fifty-seven countries arranged in order of increasing per capita income (PPP)

Source: Figure 2.6, Chapter 2, Debraj Ray, Development Economics, 1998

The fact that low levels of incomes in underdeveloped nations coincides with largeinequalities reflects the inaccessibility to the basic services of health and education.

5. Human Development – A Capture of Multifaceted

Development

5.1 Concept of Human Development

Income distribution is highly unequal within and across countries of the world. Not

only this, the degree of disparate income distribution varies from country to country.

Given the heterogeneity of income distribution within and across countries and given

the multifaceted nature of development, it would be a highly lopsided approach to

excessively depend on GNP per capita as an indicator of development.


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When evaluating the degree of development or underdevelopment, it is highly

important to comply with definition of development which incorporates advancing

human conditions, leading a long and healthy life, a decent living standard,

expansion of knowledge of individuals, social and economic empowerment of women,

expansion of human capabilities.

The achievement of these conditions would translate into higher literacy rates among

men and women, increased enrolments in schools and colleges, raised life

expectancy at birth, declining infant and child mortality, improved nutritional status

and so on.

It is not uncommon that a country's status by per capita income may sharply differ

from the performance of any of these basic indicators. For instance, women

empowerment is likely to lead to reduced infant mortality and better nutritional

status of children, but it may not be a perfect correlate with the income status.

An observed empirical example in this context would make things clearer. Refer to

the table below, which gives the statistics of per capita income distribution, and a

few indicators of human development for two countries, Srilanka and Gautemela.

Country Per

Capita

Income

(1993

PPP)

Share

of

poorest

40%

(in %)

Share

of

richest

20%

(in %)

Life

Expectancy

(years)

Infant

Mortality

Rate

(per

1000)

Access

to safe

water

(% of

pop.)

Adult

Literacy

Rate

(%)

Srilanka 2990 22 39 72 18 60 89

Gautemala 3350 8 63 65 48 62 54

One can see that, Gautemala is a richer country than Srilanka in terms of per capita

income, but Srilanka does better in terms of all development indicators except

access to safe drinking water. Clearly, a visible factor that explains for this is thehighly unequal distribution of income in Gautemela. Other than this is the overall low

income level and ofcourse, the government policies in the area of health and

development.

In short, we can conclude that: while GNP per capita may indicate a happy picture,

human development indicators may display a different story altogether.


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5.2 An Index of Human Development

In order to assess and rank countries on the basis of various socioeconomic

indicators, a formal and composite measure of human development is globally used.

This is known as the Human Development Index. It is a scientific method of

combining all important indicators of development. The HDI has three important

dimensions to it. First, the health dimension is reflected by life expectancy at birth.

Second, educational level is reflected in a composite measure which is a weighted

average of adult literacy rate (two-third weight) and a combination of enrollment

rates in primary, secondary and tertiary education (one-third weight). The third

component of HDI is the per capita income reflecting the overall standard of living.

The statistic is obtained by taking a simple average of the three indicators.

The index takes a value between zero and one, and it is often interpreted as 'fractionof ultimate development' or a measure of 'ultimate bliss'. It is so because the index

may vary among poorer, and has a tendency to iron out differences across richer

countries. Hence, the index may be especially useful to identify countries which may

be relatively richer in terms of GDP, but ranked poorly in terms of socioeconomic

goals captured under human development.

For example, New Zealand, Switzerland, Japan and Canada are all high income

countries with human development index ranging between 0.91 and 0.92. Among

medium HDI countries, Botswana has high income compared to Brazil, while its HDI

is 0.63 and Brazil’s HDI is 0.73

5.3 Per Capita Income and Human Development

Although per capita income or its equal distribution does not automatically ensure

human development, we still cannot simply disregard GDP per capita as a proxy for

development. As Debraj Ray argues, rising income levels would indeed be followed

improved educational and health status of the nation. This brings us back to the

Lucas' definition of development discussed earlier in the chapter.

To test the degree of relevance of the same, Debraj Ray has done a very useful

study to evaluate the scope of the "explanatory power" of GDP per capita over other

basic indicators.


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He has done a scatter plot between per capita income and three major components

of human development: life expectancy at birth, infant mortality rate and adult

literacy rate. Broadly, the result was a high degree of correlation in each of the three

cases implying that per capita income is a "powerful correlate of development."

Per capita income and life expectancy for developing countries


Per capita income and adult literacy rates for developing countries



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Per capita income and infant mortality rates for developing countries


Whatever imperfections that exist may be explained by income inequalities, govt.

policies, cultural and social attitudes etc.

In fact, in another study by Das Gupta (1993), correlation between per capita

income and other indicators is observed to be even stronger, wherein he has used

rank orderings instead of actual level of these variables.

To conclude, we can neither discredit human development no nor per capita income

as indicators of overall advancement. Rather the approach should be more balanced

with a greater emphasis on per capita income which would eventually and

automatically spell out in the form of better socioeconomic conditions.

6.

Structural Features of Developing Economies

i. Demographic Characteristics

Underdeveloped countries experience very high birth rates and death rates. As

development takes place, death rates drop significantly, leading to rapid population

growth. High population growth leads to declining per capita incomes. A positive

bonus of this is the fruits of demographic dividend that developing economies enjoy.


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However, these coexist with the problems of child labor and lower school enrolment

rates and literacy rates in poor countries.

ii. Occupational and Production Structure

Most developing countries derive a significant proportion of their output from

agriculture and large proportion of labor force living in rural areas derives income

from agriculture and related activities.

An important feature is that agriculture in developing countries is characterized by

lower productivities because of excessive labor overburdening the land and capital

resources.

iii. Rapid Rural-Urban Migration

The “push” factors of rural distress caused by massive poverty shift workers from

agriculture to the urban sector. The movement is reinforced by the “pull’ factors

higher wages and displayed additional benefits in the organized urban sector. A large

section of population is employed the services sector, which is mostly the result of a

fallback due to lack of industrial jobs. The enormous services sector is indicative of

the large size of the informal economy that exists in these developing economies.

iv. International Trade

Cross border trade is a significant part of global trade. Both rich and poor countries

engage in imports and exports of goods and services. In terms of trade, the

difference between developed and developing countries comes from the composition

of the trade. In terms of the composition of the trade basket, developing countries

are mostly exporters of primary goods like food grains, cash crops, raw materials.

They are also major exporters of textile garments and light manufactured items. On

the other hand, the exports of developed countries comprise of manufactured goods,

ranging from heavy capital goods to light consumer durables.

7.

Differences between Developed and Underdeveloped

Economies and the Underlying Causes – A Case Study

Patha Dasgupta in his book "Economics: A Very Short Introduction" compares the lives

of two children, Becky living in US and Desta in Ethiopia. The author uses a problem-

oriented approach to explain why some people are rich and some poor.


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Becky, who lives in a suburban town in America, comes from a small family of four. Her

father works in a property law firm, and her mother, who was earlier in publishing, is

now a house wife and engages in voluntary work. Becky and her brother study in school

and Becky pursues her ambition to become a doctor.

The family lives in a two storey house, owns two cars, and goes for vacations and do

sometime engage in leisure activities. They have access to banking facilities, financial

assets, insurance and pension schemes.

On the other hand, Desta comes from a small village in Ethiopia. Her father is a farmer

growing staple crops on land awarded by the government. The harvest is mainly used

for subsistence consumption. Her mother, apart from doing household chores, brews

maize to supplement the family income. Desta has five siblings. The brothers assist the

father in agricultural activities and are identified as 'assets' of the family. The sisters

help the mother in performing household chores. Only her younger brother is sent to a

local school. The family lives in a grass roofed mud hut with no supply of electricity and

water. The family significantly depends on communal property resources for water, land

for grazing and woodlands.

There are no financial institutions in the village and the income is highly dependent on

the harvest which is supported by rains. They may participate in the community

insurance scheme and funds are borrowed within the kinsfolk. Because of low and

fluctuating incomes, the problems of hunger, malnourishment, and high infant mortalityare not uncommon.

So, both the families face vastly different situations, opportunities, obstacles

and futures. The opportunities for Desta and her family are far more limited as

compared to Becky.

What processes explain or lead to such outcomes? What can influence the

processes?

What are the proximate causes behind the differences between Becky's and

Desta's worlds?

Large income disparities have long existed for about two hundred years. The ratio of

average incomes in the US and Africa has increased 3 to 20 over the last two centuries.

While US income has grown 30 times in size, Ethiopia's income has not significantly


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changed. Such widening disparities are reflected in incomes at the micro levels (in

Becky's and Desta's family).

On the basis of GDP per capita, countries tend to cluster in two main groups - poor

nations (much like Desta's world), and rich nations (Becky's world). Between the two are

the thinly spread large cluster of middle income countries. Poor nations are more likely

to be caught up in trap and are mostly unable to shift themselves to the higher income

categories.

Richer countries are characterized by better equipment, greater accumulation of physical

capital, higher quality of human capital because of better education and health indices.

There is also greater access to safe drinking water and basic amenities. Gender

inequalities tend to be lower in high income countries. These countries invest highly in

research and development, newer ideas and innovation and are the first ones to achieve

advances in technology.

In poor nations, agricultural output contributes significantly to the GDP (25 percent or

more) while this proportion is less than 5 percent in rich countries. In poor countries,

more than 70 percent of the population resides in rural areas and rural economies

mainly derive production inputs from nature.

The human development index is higher in rich countries compared to poorer countries.

There is no single driving force that can cause countries to be rich or poor. Economicgrowth may be triggered by certain forces pushing the economy into the 'virtuous cycle

of prosperity'. On the other hand is the 'vicious cycle of poverty' which traps the

backward nations.

The author relates the inherent circumstances to the macroeconomic history. Economies

tend to enjoy certain advantages compared to others due to favorable factors like

geographical location, natural land features, proximity to the coastline, species of

animals etc.

Countries may be rich and economically superior also because they harbor vast natural

resources. However, due to colonization, some countries have not been able to take

advantage of their vast resource base and have continued to remain poor.


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Lastly, in some countries, the institutions are such that permit and promote good health,

education, skills, ideas and freedom to move in society. Such positive outcomes may

also be supported by social infrastructure in the economy.

8.

Conclusion

Development is a multidimensional concept that covers the broad spectrum of

socioeconomic aspects of wellbeing and it goes beyond the concept of economic growth

and rising incomes. While GDP and per capita income have long been used as measures

of development, they suffer from their limitations.

In the last few decades, the different nations of the world have witnessed divergent

growth experiences at different times. However, still the overall picture remains the

same in terms of disparate distribution of income at the global level. Inequalities exist

not only at the global level but also within the countries. Income inequalities are

particularly higher in poor, developing nations. This is explained by the very nature of

development, which is an uneven process, benefitting the richest first.

Human Development is a concept designed to capture the multifaceted nature of

development. An appropriate measure for the same is Human Development Index,

which takes into account three crucial dimensions – health, education and economic

wellbeing.

In general, developing economies of the world are characterized by some structural

features in common. Some of these are: demographic feature of high birth rate and

death rate and rapid population growth as death rates fall, occupational and production

structure dominated by primary sector and the basket of exports mainly comprising

agricultural output and raw materials, and rural distress and poverty leading to forceful

migration to urban areas.

Lastly, the vastly different situations and circumstances have been related with inherent

circumstances, geographical features, difference in endowments of natural resources,

social and political institutions, large income disparities etc.


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9.

Sample Questions

1. Explain the concept of development. What are the various indicators of

development?

2. Discuss the feasibility and reliability of GNP and GNP per capita as measures of

development. What are the problems associated? 3. “Development is not just about income, although income has a great deal to do

with it.” Explain the statement.

4. What is mobility matrix? Construct a mobility matrix with:

i. zero income mobility

ii. perfect income mobility

5. "The poor are twice cursed: once for living in countries that are poor on average,

and then for being on the receiving end of the high levels of inequality in those

countries." Elucidate.6. What are some of the structural characteristics of developing countries?

7. Explain the concept of human development. What are the aspects that are

captured under Human Development Index?

8. Critically examine the historical experience of developing countries with reference

to the features of underdevelopment.

9. What are the proximate causes of vast differences in the situations,

opportunities, obstacles and futures of Becky’s and Desta’s worlds?

10.

References

Debraj Ray, Development Economics, (DE) Princeton University Press, 1998

Partha Dasgupta, Economics: A Very Short Introduction (AVSI), Oxford

University Press, 2007


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Conceptions of Development

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