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Concept of Economic Growth, Economic Development

Economic growth has been defined in two ways. In the first place, economic growth is defined as sustained annual increases in an economy’s real national income over a long period of time. In other words, economic growth means rising trend of net national product at constant prices.

This definition has been criticized by some economists as inadequate and unsatisfactory. They argue that total national income may be increasing and yet the standard of living of the people may be falling. This can happen when the population is increasing at a faster rate than total national income.

For instance, if national income is rising by 1% per year and population is increasing at 2% per year, the standard of living of the people will tend to fall. This is so because when population is increasing more rapidly than national income, per capita income will go on falling. Per capita income will rise when the national income increases faster than population.

Therefore, the second and better way of defining economic growth is to do so in terms of per capita income. According to the second view, “economic growth means the annual increase in real per capita income of a country over the long period. Thus Professor Arthur Lewis says that “economic growth means the growth of output per head of population.” Since the main aim of economic growth is to raise the standards of living of the people, therefore the second way of defining economic growth which runs in terms of per capita income or output is better.

Another point which is worth mentioning in regard to the definition of economic growth is that the increase in national income or more correctly increase in per capita income or output, must be a ‘sustained increase’ if it is to be called economic growth.

By sustained increase in per capita income we mean the upward or rising trend in per capita income over a long period of time. A mere short-period rise in per capita income, such as that occurs over a business cycle, cannot be validly called economic growth.

Now, almost universally, rates of economic growth are measured both in terms of increase in overall Gross National Product (GNP) or Net National Product (NNP) and increase in per capita income. While Gross National Product (GNP) measures the total output of goods and services which an economy is capable of producing, per capita income measures how much of real goods and ser­vices which an average person of the community will have for consumption and investment, that is, average level of living of a citizen of a country.

Meaning of Economic Development: Traditional View

As mentioned above no distinction was drawn between economic growth and development in the beginning of the evolution of economics of development. However, since the seventies it has been thought necessary to distinguish between economic growth and economic development. There are two views even about the concept of economic development.

The traditional view has been to interpret it in terms of planned changes in the structure of national product and the occupational pattern of labour force and also the institutional and technological changes that bring about such changes or accompany such changes.

It may be noted that Kuznets in his study of Modern Economic Growth interpreted the process of modern economic growth which involves these structural changes. In this view during the process of economic growth share of agriculture in both national product and employment of labour force declines and that of industries and services increases.

Various strategies of development which were suggested until ‘seventies’ generally focussed on rapid industrializa­tion so that structural transformation could be achieved. For this purpose appropriate institutional and technological changes were recommended to bring about such structural changes. Thus C.P. Kindleberger writes, economic growth means more output and economic development implies both more output and changes in the technical and institutional arrangements by which it is produced.

Thus, according to traditional view, economic development implies growth plus structural change. Structural change refers to changes in technological and institutional factors which cause shift of labour from agriculture to modern manufacturing and services sectors and also generate self-sustaining growth of output.

An aspect of structural change which is of special mention is that during the process of economic development there occurs a shift of working population from low productivity employment in agriculture to the modern industrial and services sectors having higher levels of productivity of labour.

That is, during the process of economic development percentage share of working population in agriculture sharply falls whereas percentage shares of working population employed in modern industrial and services sectors substantially increase.

Along with this change in sectoral distribution of labour force there occurs a change in sectoral composition of national income in which percentage contribution of agriculture to national income declines, percentage contributions to national income of industrial and services sectors increase.

This occurs due to the change in pattern of consumption of the people as economy grows and people’s income increases as well as due to the changes in levels of productivity in the different sectors of the economy.

It is worth mentioning that in this view causal references were made to the role of some social factors such as growth of literacy, education and good health in economic development but they were considered to be of secondary importance.

On the whole, in this view of economic development which generally prevailed till seventies, development was considered to be an economic phenomenon in which benefits from growth in overall GNP or per capita GNP and the structural changes accompa­nying it would trickle down to the poor and unemployed. No separate or special attention was paid to eliminate mass poverty and unemployment and to reduce inequalities in income distribution.

The Concept of Economic Development: The Modern View

The experience of the developing countries during the sixties and seventies showed that whereas target rates of economic growth were in fact achieved trickle-down effect in the form of creation of more employment opportunities, rise in wages and improvement in income distribution did not operate.

The problems of poverty, unemployment and income inequality further worsened instead of getting reduced during the process of growth in the Fifties and Sixties in the developing countries. For instance, in India Dandekar and Rath found that 40 per cent of rural population in India lived below the poverty line in 1968-69.

Using somewhat different approach, B.S. Minhas estimated that 37 per cent of rural population in India lived below the poverty line in 1967-68. Similarly, the magnitude of poverty and unemployment and the extent of income inequalities also increased in many other developing countries.

Thus, due to the failure of traditional strategies of development in solving the problems of poverty, unemployment and inequality, it was realized in the seventies that the concept of development should be broadened so that it should signify that well-being of the people has increased.

This led to the view that economic development should not be judged on the basis of growth in GNP alone. Therefore, when we regard the well-being of the masses as the ultimate objective of development, we have to see whether poverty and unemployment are decreasing and how the increases in gross national product or national income are being distributed among the population.

Economic devel­opment will take place in true terms only if the poor people are raised above the poverty line. Late Prof. Sukhamoy Chakravarty rightly writes, “The rate of growth strategy is by itself an inadequate device to deal with the problems of generating employment opportunities and for reducing economic disparities. Much depends on the composition of the growth process and how growth is financed and how benefits from growth process are distributed.”

It is worth mentioning that there is no guarantee that when there is increase in GNP, employment will also increase. It can happen that with the use of more capital-intensive technique while produc­tion may be increasing at a rapid rate, employment may be falling instead of rising.

ECONOMIC DEVELOPMENT

Economic development is the development of economic wealth of countries, regions or communities for the well-being of their inhabitants. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

It typically refers to improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP is a specific measure of economic welfare that does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice. Economic growth of any specific measure is not a sufficient definition of economic development.

Economic development, the process whereby simple, low-income national economies are transformed into modern industrial economies. Although the term is sometimes used as a synonym for economic growth, generally it is employed to describe a change in a country’s economy involving qualitative as well as quantitative improvements.

Economic development is a broader concept than economic growth. Development reflects social and economic progress and requires economic growth. Growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development.

Economic development first became a major concern after World War II. As the era of European colonialism ended, many former colonies and other countries with low living standards came to be termed underdeveloped countries, to contrast their economies with those of the developed countries, which were understood to be Canada, the United States, those of western Europe, most eastern European countries, the then Soviet Union, Japan, South Africa, Australia, and New Zealand. As living standards in most poor countries began to rise in subsequent decades, they were renamed the developing countries.

There is no universally accepted definition of what a developing country is; neither is there one of what constitutes the process of economic development. Developing countries are usually categorized by a per capita income criterion, and economic development is usually thought to occur as per capita incomes rise. A country’s per capita income (which is almost synonymous with per capita output) is the best available measure of the value of the goods and services available, per person, to the society per year. Although there are a number of problems of measurement of both the level of per capita income and its rate of growth, these two indicators are the best available to provide estimates of the level of economic well-being within a country and of its economic growth.

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