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The terms Economic Growth and Economic Development are so closely interwoven in our economic structure that sometimes they are used synonymously with the each other. These two terms in general can also relate to terms like economic welfare, secular change, social justice and economics progress. But to be precise Economic Development and Economic Growth cannot be used inter changeably and they hold totally different meanings all together.
Broadly speaking Economic Development has been defined by various economists at different times from various angles but there can be no specific satisfactory definition. Economic Development is a normative concept. Â The definition of Economic Development as given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring Economic Development is theÂ Human Development Index. This was a measure introduced by the United Nations which measures Economic Development by taking into account life expectancy, adult literacy, access to all three levels of education, as well as people's average income which is a necessary condition of their freedom of choice. Freedom of choice will ensure greater accessibility to resources as thus would increase well-being and development would take place. On the other hand Economic Growth is a much narrower concept than economic development. It is an increase in a country's national output which can be caused by an increase in the quality of resources, increase in the quantity of resources & improvements inÂ technology. Thus Economic Growth does not encompass as broad a field as Economic Development. Economic Growth is measured using Gross Domestic Product (GDP) of a country which is the market value of all the goods and services produced within the geometric territory of a country within a given time period. Achieving Economic growth does not always ensure achieving Economic Development. They both differ in various respects. Economic Development is a qualitative concept while Economic Growth is a quantitative concept. We try to establish this fact using various examples.
Firstly we compare the Gross Domestic Product (GDP henceforth) growth with that of the Human Development Index of the country. Presently India's growth rate is around 8.5% (approx). According to IMF reports India was rankedÂ 140th by nominal GDPÂ in 2011 on a per capita income basis. India is considered to be one of the fastest growing economies of the world which has witnessed 200 times per capita growth after independence. So on an average India is among the fastest growing economies of the world with a high GDP growth. Thus it proves that India is witnessing an above average Economic Growth. But Economic Development has not witnessed such a drastic improvement. We measure Economic Development of India by analyzing the Human Development Index (HDI henceforth). According to the HDI reports presented by United Nations Development Program (UNDP) India ranks 119 among 192 countries. India's HDI rank is on an average with the South Asian average. HDI ranking of India is not increasing at par with it economic growth. Even though the GDP growth is increasing rapidly we can say that money is concentrated with a very small number of people while most people in our country still live below the poverty line. Thus due to inequality in income distribution we can say we have such a poor Human Development results. India's HDI rank has just increased one notch in the last decade. Thus we can sure rise in Economic Growth does not assure Economic Development. Thus we can say that they do not always go hand in hand.
Secondly we can say that Economic Growth being a totally quantitative concept. Growth suggests an increase in volume or quantity of something. Economic Growth strictly encompasses increase in the real or per-capita gross income. On the other hand Economic Development is a strictly qualitative concept. Development incorporates the diverse and broad aspirations of a 'good life'. In this sense we can cite the example that a person who is very rich but is physically disabled. Being rich and being economically well off ensures him of having a high Economic Growth. While he being physically disabled deprives him of enjoying a normal life and though he has economic stability he does not have accessibility to resources. He does not have the choice option though he can afford to. Thus Economic Growth is different from Economic Development as quantitative growth does not ensure a qualitative well being as well.
It has always been said that Economic Growth is associated with Developed countries while Economic Development with that of developing or under-developed countries. We stress on the barriers to development that these country might face:
HUMAN RESOURCE - The quality of the population is an important determinant of the economic progress of the country. Instead of a large population it is better to have a high quality, knowledgeable and well-trained population which is netter off for the development of country. Mostly in developing or under-developed countries we see that there is lack of proper training and maintenance of the working force. Thus they lack proper knowledge and fail to acquire the modern technical knowhow. In case they fail to move in pace with the developed countries.
POPULATION GROWTH - Another important characteristic of under-developed and developing countries is that of population expansion. A growing population ensures labour supply but a galloping population retards economic progress. It becomes stressful for an economy to feed, train and look after the well-being of such a huge population. A population growth is thus detrimental to our development.
Health services - For a country which itself is striving hard to achieve development, it becomes hard to give all the facilities to the teeming millions. Health conditions thus remain below average. These countries are characterised by low life-expectancy, high death rate, malnutrition and low maternal mortality rate. Thus the HDI of these countries is below average and is a hindrance to growth.
So Economic Growth and Economic development though are closely related, they always do not go hand in hand. There are certain basic differences in their structure. Also mostly under developed and developing countries are the ones who mostly fail to show a growth in both.
Anon., n.d. WHAT IS DEVELOPMENT?. In: BEYOND ECONOMIC DEVELOPMENT. s.l.:s.n.
CYPHER, J. ,. J. D., 2004. MEASURING ECONOMIC GROWTH AND DEVELOPMENT. In: THE PROCESS OF ECONOMIC DEVELOPMENT. s.l.:ROUTLEDGE, pp. 1-8.
Khan, M. H., 2007. Governance, Economic Growth AND DEVELOPMENT SINCE 1960S. ECONOMIC AND SOCIAL AFFAIRS, AUGUST, pp. 1-24.
Q2. Is development possible without state intervention? How has development theories looked at state role in economic development?
ANSWER: An economic system is defined as an institutional framework by which competition among people for the use of resources is coordinated. In reality an economic system is defined as a combination of various economic organizations and focus on the relationship between market and state as the two major organizations that determine the characteristics of the economic system. State is an institution (or organization) for monopolizing legitimate coercive force. Using this coercive force state coordinates people's activities according to a set rules and regulations. While Market is an institution comprised of rules for controlling voluntary transactions under the parameter of prices. It is also the functional body that coordinates the production and consumption of goods and services through voluntary transactions under the parameter of prices. It is also the functional body that coordinates the production and consumption of goods and services through voluntary transactions.
We can explain the evolving role of the state over the last half century. The decade following World War 2 and Great Depression in 1930s witnessed a great surge in state involvement. This was particularly prominent in the less developed countries that had recently owned independence from foreign rule and were bent on achieving rapid growth through the process of careful economic planning. It was believed that direct control of sectors by the state would facilitate macro management. This was the beginning of the state intervention into the free market system. Since then it has been considered an indispensible part for the development of an economy due to the following reasons.
Firstly the less developed or developing countries need to grow at a fast pace in order to move on with the fast changing world. Thus the need of the hour is the efficient allocation of resources. If this is left to the private entrepreneurs, whose sole motive is profit maximization, resources will not be put to full use. Inefficient resource use can hamper a countries growth process. Efficient use of resources will also promote employment and promote efficient production process. Thus government intervention is requires for the efficient use of resources and prevent the malpractices of the private entrepreneurs.
Secondly from if we look at social welfare, state intervention becomes very necessary. Private firms and entrepreneurs neglect the welfare aspect totally and thus it has mostly lead to a failure. State being a body for the people, of the people and by the people they never neglect the welfare aspect and they rank the welfare aspect before their profit motive. For the all round development of a state welfare aspect cannot be neglected as welfare of the people leads to improvement of human capital which is the most important for production process.
Thirdly if the whole power rests with the private entrepreneur there is often a chance of a capitalist state. Capitalism is based on private ownership and is based on wage-labour, competitive market and capital accumulation. State does not take care of any internal or external security of the country. It gives rise to inequality of wealth distribution as wealth gets concentrated with the rich capitalist class. It also thus promotes class conflicts and distinctions. There is also a fluctuation in employment. Thus socially capitalism is not acceptable. In such cases state intervention becomes extremely necessary for the development of the country.
Thus we see that the role of the state is indispensable. Development is impossible without intervention from the state. For the all round development and progress of a state there is an urgent need for the state to intervene in the proceedings of the state. This does not mean that private entrepreneurship should be abolished. We are talking of a right mix of the two or a Mixed Economy, where both have their fields to work upon and together work toward the development of the state.
The orthodoxy of economists from Adam Smith and English Classical School to Neo-Classical School indicates that competition in a free market results in socially optimum allocation of resources. Adam Smith on the basis of his theory of 'Invisible Hand' recognized that mechanism of a free market would guide people towards the promotion of total economic welfare and maximize the wealth of nations. Though these economists considered market to be almighty, but in reality without state intervention it was not possible to achieve all round development. The interference with market mechanism was a necessary pre-requisite for a more rapid pace of development. While economists as Hume supported free trade against mercantilist restrictions, yet found a need for governmental intervention to preserve national economic advantage. Bentham too wanted state intervention for to promote the development of the state. He stressed that the objective of the government should be to promote greatest possible happiness of the community governed. State intervention thus was considered necessary for the development due to the following reasons:
Limitations of the market mechanism - Market is not able to achieve optimality in all economic activities. Market equilibrium many times may shift from equilibrium. In such cases government activities are needed to correct this failure.
Lack of perfect competition - As there is lack of perfect information in the market so there are chances of market failure.
Need for social justice - The market is the mechanism used to promote economic efficiency but not to improve income distribution. Redistribution system, such as progressive income tax and social security are required to improve economic welfare in a society. So these all can be implemented only by government intervention.
Development of Infrastructure - Many projects in developing countries should be undertaken which are profitable to the society and promote development. As private investors ignore such projects because they yield no profits. Thus state intervention becomes necessary. Investments for such projects are thus undertaken by the state.
Thus state intervention is necessary. Economists view this as an intervention into the space and liberty of the people. They say that this reduces the freedom of choice of the people. But the above cases show that state intervention is an indispensable part. It not only regulates the market mechanism but also moulds it in a way to promote an all round development for the society.
Casey, T. (2004, APRIL TUESDAY). Retrieved NOVEMBER 13, 2012, from WWW.ROSE-HULMAN.EDU: http://www.rose-hulman.edu/~casey1/Comparative%20Disadvantage.pdf
Leonard, P. (n.d.). RESTRUCTURING THE WELFARE STATE. Marxism Today , pp. 7-13.
Q6. A country decides to change from an inward oriented development strategy to an outward oriented development strategy. What does this mean? Discuss the likely consequences of changes in this policy.
ANSWER: A country following inward oriented development strategy refers to the policy of Import Substitution. Import substitution is a policy which many countries follow by erecting various barriers to importation of foreign goods and substituting these for domestically produced goods. In Import Substitution (IS henceforth) is a strategy that appreciates the local production via government intervention to the whole economy. When a country shifts from inward to outward oriented strategy, it means it opens up for trade with other countries. It shifts from Import Substitution to Export Promotion. In an Export Promotion (EP henceforth) strategy, the external demand is the source of activity. The main point of an EP strategy is to make production for international trade and hence to increase exports. Since the goal is to export goods abroad, the government provides assistance to those industries that have the potential for developing and competing in the world market.
In 1950s and 1960s it was widely believed that countries could create industrial bases only by substituting domestic manufactured goods for imports. From the mid 60s onwards, there was another possible path to industrialization via exports of manufactured goods primarily to advanced nations. Especially the countries, which have a huge internal market, had advantage of the IS strategy during 1960s but had to shift their strategies to EP strategy due to heft economic crisis. Instead of restricting trade such policies generally expand trade beyond market determined limits. Thus Outward oriented strategies play a major role in development of an economy. Shift of a country from an inward to outward oriented strategy is accompanied by a lot many changes. We discuss some of these changes below.
Countries shifting from an inward to outward oriented developmental strategy had to undergo a lot many structural changes. Firstly it was that of the change in the exchange rate. Exchange Rate is the rate at which one country exchanges its goods with that of another country. A flexible exchange regime is the most important necessity for having openness in trade. It prevents the appreciation of the local currency which worsens the trade balance of the country. This might b considered as an ill-effect of EP as increase in exports raises the foreign exchange inflow. To avoid this there should be flexibility of foreign exchange rate.
Secondly except this there is another important policy change which is required in order to remove the discrepancy due to the shift. It is the protection of the domestic industries especially for those who produce substitutes for the exported goods. Many of the domestic industries are not able to take a leap in the international market and thus require some kind of protection as they cannot compete with the huge firms. For the firms producing the same kind of good domestically the government must look at their interest and ensure some kind of protection. According to the IS strategy internal industries must be protected by some subsidies. By the same analogy exporters must get some protection as well. However, this kind of a subsidy may cause some further budget deficit for the government.
Other than these there are some more structural changes which are needed. Among them choice of appropriate technology is of quite relevance. To compete in the international market it is very necessary to choose the appropriate technology which will suite the country's techniques and will also be up to the mark. Then comes human capital. With changing policy and upgradation of technology it becomes very necessary to upgrade the human capital. There becomes an immediate need to invest in the human capital for increasing their technical knowhow and skills. There should also be appropriate allocation of resources as it reduces the cost of production and to promote export it is very evident that goods should be produced at cheaper rates. Proper allocation of resources is important for any economy and especially for those which have recently undergone structural changes. For efficient allocation of resources what we need is efficient institutional control. Thus planning for a proper institution is also required.
Thus shift of an economy from inward to outward oriented developmental strategy is something associated with not only change in its orientation but also is accompanied by a lot of structural changes and reforms. A country which undergoes such a drastic change is sure to undergo its consequences. We try to enlist some of them below:
Encourages Competition - As the country opens up for free trade there obviously a rise in competition. There are firms competing to capture the foreign market. This in turn promotes innovation in the good. Thereby it promotes economic efficiency.
Welfare aspect - As countries trade, a lot of exchange of goods and services take place. In turn this widens the choices of the goods a consumer can make. Trading exposes the consumers of a country to a greater variety of goods and services. As we already know that human development and welfare is measured by how much the choice factor of the consumer is widened.
Technical opportunities - When countries open up for trade through EP, it permits countries to take better advantage of the technical opportunities available to them by taking the advantage of economies of scale and overcoming the indivisibilities of production.
Technological upgradation - When countries open up for trade, along with exchange of goods and services there is also an exchange of technological knowhow and modern inventions. This helps in the upgradation of the technological state of the country.
Difference in marketing structure:Â The availability of the marketing facilities in different countries may vary widely. For example, an advertisement medium very effective in one market may not be available or may be under developed in another market. Thus we can say that due to differences in marketing structure the structure of one country might not fit into the structure of another country.
DifferentÂ Monetary Systems:Â Each country has its own monetary system. In case ofÂ domestic marketing thereÂ is onlyÂ one currency prevailing in the country. The exchange value of each country'sÂ currency is different from that ofÂ the other.Â The exchange rates between currencies fluctuate every day.Â This will pose problems for the economy and thus might hamper trade.
Outward orientation is not only increasing the exports but also opening all the goods and services to trade. Furthermore, structural changes in capital movements must also be made. In a world like ours it is impossible for a country to achieve self-sufficiency and thus in such a case trading becomes indispensable. Achieving self-sufficiency is almost a myth today. So the only way available today for the subsistence of an economy is outward orientation. When trade takes place we see that there is an all round development taking place. This is the only way of globalization. Export growth rates are now proxies for trade policy orientation. Positive relation between export growth rates and output growth rates are used to establish superiority of outward oriented strategies in fostering economic growth.
CLARKE, D. B., 1977. DO OUTWARD-ORIENTED DEVELOPING ECONOMIES INDUSTRIALIZE FASTER?. INTERNATIONAL ECONOMIC JOURNAL, 11(3), pp. 1-9.
YILMAZKUDAY, H., n.d. Export PromotÄ±on vs. Import SubstÄ±tutÄ±on. ECONOMIC AND POLITICAL WEEKLY, pp. 1-14.
Q6. What do we understand by neo-liberalism? Discuss its key features.
ANSWER: Neo-liberalism is traditionally known as a political movement beginning in the 1960s that lends traditional liberal concerns for social justice with an emphasis on economic growth. The term neo-liberalism was first coined by Alexander Rustow and Colloque Walter Lippmann. Neo-liberalism is thought of as the return and spread of a particular aspect called of liberal tradition, namely economic liberalism. Economic liberalism basically means that a state should abstain from intervening into the economy and rather leave the market on the individuals and rims to regulate. The English Oxford Dictionary describes neo-liberalism as, "a modified or revived form of traditional liberalism, (especially) one based on belief in free market capitalism and rights of the individual" (Oxford English Dictionary 1989a). In a layman's language neo-liberalism is a system that stresses on price mechanism as the sole power in controlling the market and in turn enhances the role of private sector.
Early 15 and 17th till early 19th century we saw the rise of mercantilism and it was at its peak when nation states were formed in Europe. These were ruled by powerful state with powerful aristocrats where there were these rich classes of aristocrats owning land and property. The poor masses of Europe were treated as slaves and their conditions deteriorated. Trade was given importance and these newly formed states engaged themselves in trade and even in war to accumulate more and more wealth in forms of gold and this were assumed to be the key for development and prosperity. The urge and greed for wealth and power lead to the colonization of various countries in Asia and Africa. After the invention of steam engine which resulted in heavy industrialization new ideas started to evolve. The idea of liberalism though it didn't mean just economic liberalism but it believed in freedom to individual like freedom from dictatorship, freedom of owning property etc. Classical liberalism is often associated with the belief that the state ought to be minimal, which means that practically everything except armed forces, law enforcement and other non-excludable goods ought to be left to the free dealings of its citizens, and the organizations they freely choose to establish and take part in. Liberalism at one point of time was an influential political ideology, but with passing time it has gradually lost its significance. Neo-liberalism in short can be referred to as the revival of the dying liberalism. It was Adam Smith who came up with the idea of "Invisible Hand" which referred to the free functioning of the market without any market intervention. It meant minimal state intervention and all the powers related to market functioning and others rested with the elite group. Neo-liberalism can be thought of as an entirely new paradigm for economic theory and policy-making and it is the ideology behind the most recent stage in the development of capitalist society. At the same time it counted for a revival of the economic theories of Smith and his intellectual heirs in the nineteenth century. Neo-liberalism can also be of two types -
First comes Classical Neo-liberalism which stems from classical liberalism and was concerned with the erosion of liberty in those times in Europe which formed the basis of neo-liberalism. Second comes Economic Neo-liberalism stems out from the rift between classical liberalism and economic liberalism and it concentrated on the personal sphere and the property rights of the people.
We try and discuss some of the key features of neo-liberalism:
To start off with we mention the core feature of neo-liberalism - free market mechanism with least state intervention. According to economists, to ensure maximum well-being of the people it is necessary that the power rest with the people as well. Neo-liberalism stressed on the fact that all decisions regarding production, means of production and those related to human capital should rest with a certain elite group of people. There should be minimal role of the state in the economy. David Harvey thus defines neo-liberalism as, "Neoliberalism is in the first instance a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets and free trade..... State interventions in markets (once created) must be kept to a bare minimum...."
Neo-liberalism prioritized ownership of private property. It was thought that right to private property would ensure individual freedom and thus would lead to welfare of the individual. It was thought that the state should not hold any property nor should it propose to interfere with decisions relating to market. All property and decision making power rested with the individuals. But mostly it was seen that he power rested with the rich merchant class who owned the factors of production. The poor were all the same neglected and lived under deplorable conditions.
Neo-liberalism could also include a perspective on moral virtue: the good and virtuous person is one who is able to access the relevant markets and who actively takes part in the functioning of the market. He or she is willing to accept the risks associated with participating in free markets, and to adapt to rapid changes arising from such participation (Friedman 1980). Individuals are also seen as being solely responsible for the consequences of the choices and decisions they freely make relating to production in the market. Instances of inequality and glaring social injustice are morally acceptable, at least to the degree in which they could be seen as the result of freely made decisions (Nozick 1974; Hayek 1976).
Some claim that neo-liberalism is a form rule of a country by and for the benefit of large corporations. It has often been referred to as corpotocracy. Since large corporationsÂ tend to fulfill all the conditions of a wealthy entity they do so at the cost of social and economics welfare of the poor class of peasants. This gave rise to a growing disparity among the rich class of merchants and the poor class of
peasants. Thus the rich continued to grow richer and the poor continued to become poorer.
Thus above mentioned are some of the key features of Neo-liberalism. Neo-liberalism was a kind of revolution in our history which has changed the system and proceedings of the world. Neo-liberalism cannot be defines with a single definition. Attempts have been made over a great period of time to define neo-liberalism in the context of ideology, economic theory, development theory, or economic reform policy. But still till date we cannot find a suitable definition to it. We can simply call it a revolutionary movement brought about for the welfare of the poor masses and to free them from the intervention of the state.