Chapter 14: Economic Growth and Development

14.1 Meaning of Economic Growth and Development

Economic Growth

Economic growth is an increase in activity in an economy. It refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced. Refers to a steady physical increase in a country’s productive capacity which is identifiable by a sustained increase in a country’s real output of goods and services or real national income over time. It is a quantitative concept and may not be accompanied by an increase in the quality of life. It does not necessarily mean economic development.

Economic Development

This is a more comprehensive concept as compared to economic growth, as it is a qualitative approach. It refers to an increase in per capita income which is equitable associated with an improvement in the indicators of the quality of life (literacy, infant mortality, life expectancy and population per doctor). For it to arise, absolute number of poor in a given country should not be increasing, and this means that there is increased employment opportunities

Economic development implies fundamental changes in economic and social structure of a country. It implies changes in the composition of output and allocation of inputs by sectors i.e. positive changes in technical, structural (infrastructure) and institutional (health education, financial) arrangements. It is associated with decline in share of agricultural sector and a corresponding increase in value of the manufacturing and service sectors. The concept of economic development also considers underlying determinants of economic growth; thus a more comprehensive than economic growth i.e. encompasses a broader scope. To measure economic development, one needs to adopt a broader measure of economic welfare than gross national product per capita.

14.2 Characteristics/Indicators of Economic Development

  • Improved economic performance as measured by GDP (gross domestic product)-this is the total value of final goods and services produced within a country divided by the total population.
  • Improved standards of living characterized by high income, equality, good health and adequate education.
  • Improvement in levels of technology being used.
  • Changes in levels of personal, political and institutional freedoms
  • High levels of productivity low population growth and dependence.
  • Numerous international trade benefits
  • Efficiency and effectiveness of domestic economic institutions.
  • Stability and flexibility of political social institutions.
  • Numerous entrepreneurial, scientific and technological research and development capabilities.
  • Higher life expectancy: This could be as a result of increased food supply, minimal war prevalence’s as well as low incidences of diseases.
  • Higher literacy levels: According to U.N., adult literacy is arrived by checking the percentage of those aged 15 years and more in a region and are able to write a short, simple sentence as part of their everyday life.
  • Lower levels of poverty levels i.e. absolute: one has barely enough to survive from day to day and relative poverty – poorness in relation to another person.
  • Demographic indicators which are positive i.e. population characteristics, marital status, gender, age, literacy levels.
  • Disease indicators: countries suffering high losses from diseases and epidemics are termed as developing and those with fewer losses are termed as developed.
  • Improved productivity of factors of production thereby achieving more output per unit of a factor.
  • Shift from agricultural to manufacturing sector.
  • Increased industrialization hence chances of unemployment are minimal.
  • Improved infrastructure (roads and electrification).
  • Reduction of gap between the poor and rich.

Goals of Economic Development

  • Increase in per capita income-this should be higher as compared to the overall population
  • Alleviation of poverty i.e. those who struggle to get basic needs i.e. simple clothing, shelter and food.
  • Reduction of income inequality
  • Reduction of unemployment
  • Reduction of regional disparities.
  • Maintenance of environment. Efforts have been made for there to be sustainable development which will last without damaging the environment. Development is therefore judged by how productive activities are controlled in order to conserve the environment e.g. planting trees
  • Industrialization-this involves transforming the economy from agricultural to an industrial one.
  • To ensure there is improved social services i.e. health, education to eliminate the effect of disease and ignorance.

Negative Effects of Economic Development

  • Degradation of environment-this occurs due to industrial development which might destroy the natural habitats of wildlife polluting air and water and the government may be forced to spend a lot of money in protecting or conserving the environment
  • Overcrowding in slums-provision of basic social services becomes difficult in slums thereby resulting in low standards of people
  • Rendering knowledge and skills obsolete: this is mainly through technical advancement thus affecting job opportunities of many people
  • Creating social tensions-creating social tensions-this may occur due to income distribution among individuals and regions. Political instability may also occur due to unsatisfied expectations from some groups of people.

Factors that Hinder Economic Development

  • Lack of inducement to invest.
  • Lack of social infrastructure. 3.
  • Inadequate capital.
  • Inability to save.
  • Rapid population growth-due to low per capita income realized.
  • Low natural resource endowment.
  • Poor technology been used.
  • Attitude and beliefs of a society and how they perceive things that do not incorporate change.
  • Poor human resource endowment.
  • Unfavourable domestic environment
  • Indivisibility of capital: leads to slow development. Some machines cannot be bought due to their large sizes and price.
  • Dependence from other countries.
  • Political instability.

Factors Determining Growth and Development

  • Human resource: countries must be concerned with the quality of their human resource. Planners trying to hasten economic development emphasize on; control of diseases and improved health and nutrition as well as improved education, reduced illiteracy as well as trained workers.
  • Natural resources: land is the most important available resource, i.e. land productivity can be increased by adding fertilizers and adopting the latest methods of tillage.
  • Capital: in advanced economies 10-20% of income may go into capital contrast the poorest countries are often able to save 5% of national income. Moreover much of the low level saving goes to provide the growing population with housing and simple tools and little is left over for development.
  • Technology: economic development relies on japan a country which joined the industrial race at the end of 19th century sent students abroad to learn western technology. Relying and adopting of foreign technologies has made japan to move into its position today as the world second largest industrial economy. This example has shown how countries can thrive by adapting foreign science and technology to local market conditions.
  • Less burden debt: when debts are paid off, neo-colonialism is also done away with giving a county even more political independence and stability.
  • Increased exportation and decreased importation: this translates to a surplus budget as well as favourable balance of trade as well as balance of payment account.

Basically, an economy can experience actual or potential growth, i.e.

  • Actual economic growth refers to the annual percentage increase in national output which typically fluctuates in accordance with the phases of trade cycle (aspect of inflation).
  • Potential economic growth is the rate at which the economy would grow if all the resources, e.g. human beings and machinery were fully utilized.

Benefits of Economic Growth

  • Contributes to a higher standard of living: provided economic growth results in a higher real income per capita, this should imply that a greater quantity of better quality commodities is made available to each person to consume.
  • Economic growth can help to reduce poverty: in many developing countries a considerable proportion of people live in absolute poverty which implies that they can’t satisfy their basic needs. Economic growth may provide a greater access to commodities e.g. food, housing and clothing that enable the poor to satisfy their basic needs more adequately.
  • It can redistribute income without making anyone worse off. Although economic growth does not necessarily improve the income distribution, in situations where economic growth is taking place, it may be possible to change the distribution of income so as to achieve greater equity without making anyone worse off. 4. Increases chances of creation of employment
  • Possibility of increased investments is also evident.
  • There is reduction of dependency as economy becomes self-sufficient.

Common Characteristics of Developing and Under Developed Countries

  • Low per capita income
  • Heavy dependence on agricultural sector-subsistence farming.
  • Considerable dependence on a narrow range of products: usually primary products to generate a substantial proportion of their export revenues.
  • Inadequate infrastructure and social services i.e. roads, sewerage systems, health and education are strained.
  • Low-capital-labour rates/ratios: this limits their ability to use modern production methods and this leads to a vicious circle of poverty in many developing countries
  • Illiteracy levels are high.
  • High population growth rate is experienced.
  • Poverty levels are high, i.e. one has cash but can’t meet his/her needs and wants.
  • They have foreign debt in developed countries.
  • There exists classes i.e. low, middle and upper brought up by different purchasing powers.
  • Political instability; public scandals; elections and hardships are the talk of the day
  • High proportion of labor force engaged in agriculture.
  • Low level of technology being used in production
  • Foreign trade orientation/dependence on developed countries. Such countries earn less from their export trade and spend more on imports.
  • Disparity in income distribution i.e. less than 20% rich people compared to over 90% poor people in these economies.
  • Low level of savings and investments
  • Problems of unemployment.
  • Underutilization of natural resources.

Obstacles to Economic Development

  • The vicious circle/cycle of poverty: this refers to a self-reinforcing situation whereby certain factors exist that tend to perpetuate an undesirable developing countries the vicious circle of poverty can be viewed from the demand side and supply side. Demand side implies that low levels of income lead to low levels of demand which in turn lead to low rates of investment and a corresponding deficiency of capital, low productivity and low income. From a supply side perspective low productivity implies low real income which in turn implies low saving and low level of investment that contributes to deficiency of capital. The deficiency of capital contributes to a low level of productivity and low income as shown below diagrammatically; lack of capital-low savings-low investments-low productivity-low income.
  • Human resource constraints: individuals lack key skills and knowledge required for economic development. Lack of adequate skilled human lead to low productivity, factor immobility and limited occupational specialization. Underdeveloped human resources imply that there is a low level of knowledge about alternative production techniques, natural resources, existing market conditions and opportunities.
  • A low level of capital formation: poverty can be considered as both a cause and a consequence of a country’s low rate of capital formation. Capital is an important accompanying factor of production. Labor as an input is more productive when it has more machinery to work with.
  • Socio-cultural constraints: this constitutes a formidable obstacle to development in many developing countries. Economic development is profoundly influenced by social attitudes e.g. attitudes may be influenced by ethnic distinctions and regional loyalties which may inhibit geographical mobility
  • Foreign exchange constraints: this countries have experienced limited gains from trade compared to developed countries. This is because they are usually dependent on primary exports subject to long term declining terms of trade compared to manufactured products. Primary products are also subject to greater price fluctuations compared to manufactured goods.
  • Lack of entrepreneurial skills vital in development process entrepreneurs can be considered as playing the role of combining existing factors of production in new and more efficient ways.
  • Corruption and resource management: public funds meant for development projects sometimes are diverted to private use. Donor funds aimed at economic development have been mismanaged and consequently their impact in areas such as poverty alleviation has often been limited.
  • Inappropriate policies have sometimes been applied in developing countries i.e. the inappropriate strategy of import substitution which generally proved to be ineffective. Appropriate policies have not been implemented or are partially implemented
  • Developing countries have also been particularly vulnerable to health epidemics g. AIDS-this is partly because of inadequate health facilities; loss of life and reduced productivity

Development Planning

Development planning is a process through which one focuses on the future and it involves resource allocation, resource accumulation and resource management. The development plans are classified on basis of:

  • Degree of coverage: comprehensive or partial
  • Degree of government control: directive (it outlines the economic targets to be achieved), indicative (they are broad and outlines of intended economic purpose), or transformational (outlines strategies for securing a complete change in an economy) plans.
  • Time dimension: long term, medium term or short term plans.

Need for Development Planning

  • Markets do not operate efficiently in developing countries due to inappropriate and inefficient allocation of resources, subsistence sector, commodity and factor markets are badly organized
  • Market failure argument: trade-off between efficiency and equity exists. Market failure leads to gross disparities between social and private valuations of alternative investment projects.
  • The foreign aid argument/bargain: to persuade donors that money will be used as an essential ingredient in a well-conceived and internally consistent plan of action
  • Resource mobilization and allocation argument (coordinating investments): development planning is assumed to help modify the restraining influence of limited resources by recognizing existence of particular constraints and by choosing and coordinating investment projects so as to channel these scarce factors into their most productive outlets
  • The attitudinal/psychological argument: development planning helps to put/rally people behind the government cutting  across class, caste (dividing people in classes), race, religions and  tribal factors in a national campaign to eliminate poverty, ignorance and disease.
  • Project evaluation/ranking projects: a pre-determined criteria is used and when there are deviations they are noted and corrective measures taken before it is too late.
  • Stimulation of effort: a well laid out development plan may help the government stimulate efforts of people in the desired showing possible achievement the government may persuade its people to invest with greater confidence, put greater efforts towards fulfillment of planned objectives and to see the need for making sacrifices in order to achieve the required level of domestic savings.
  • Sectorial forecasts-planning provides the government with a long term view of the various sectors of the economy i.e. agricultural, manufacturing or service industries
  • To ensure long term decision making
  • Avoiding duplication-this may occur when industries are located in different parts of the country. Over emphasis on one area and leaving the other one is thus minimized.
  • Promoting balance in regional development.

Conditions for a Successful Development Plan

  • Establishment of a planning body-Here we have economists, statisticians and engineers.
  • Availability of statistical data-for use by the planners.
  • Fixing of realistic targets and priorities: Targets should be SMART, consistent and realistic so as to attain a predetermined growth rate in economy.
  • Maintenance of proper balance in the economy i.e. public, private, agriculture and industrial sector.
  • Incorruptible and efficient administration.
  • Strong education base: a firm education base is essential for strong administration.
  • Proper development policy arrived though scientific and market research
  • Noninterference by politicians-without public support the plan is bound to fail

Limitations/Problems Encountered While Planning In Developing Countries

  • Insufficient and unreliable data-such data greatly diminishes the accuracy and internal consistency of economy-wide quantitative plans
  • General lack of appropriately qualified and experienced personnel plans made by foreign experts. Formulation and carrying out a comprehensive and detailed plan is likely to be frustrated, e.g. in Kenya most students are the ones that assist patients in hospitals.
  • Lack of necessary technical facilities and resources e.g. powerful computers-this limits ability to develop accurate and comprehensive economic models.
  • A limited range and effectiveness of policy instruments because many individuals in developing countries put many of people out of reach of planners
  • The high levels of illiteracy in developing countries put many of people out of reach of planners
  • Unanticipated economic disturbances-these may be external or internal-most developing countries have “open economies “with considerable dependence on the vicissitudes of international trade, aid and private foreign involvement.
  • Institutional weaknesses: e.g. lack of coordination between say planners and administrators, excessive bureaucratic procedures which makes the process of planning difficult as the decision making process is unnecessarily too long and political bureaucratic corruption is also evident.
  • Deficiencies in plans and their implementation: this tend to be overambitious and vague on specified policies for achieving stated objectives. There exists a large formulation and implementation gap.
  • Lack of political will: lack of commitment and political will on part of many developing countries leaders and high level decision makers.
  • High costs are incurred and this affects the country’s total budget.
  • Rigidity: economic plans are usually rigid and may not be easily or readily adaptable to changing economic conditions.
  • Existence of large subsistence sector making planning unrealistic
  • Problem of private sector-an economy with  the public and private sector may give incentives to the private sector may require to give incentives to private sector hoping that it will operate in the desired direction. This sometimes may not be possible as those in the private sector may be pursuing very different objectives from those of planners.
  • Transfer of inappropriate development plans from developed countries which may end up failing in developing countries
  • Lack of clear policies to guide the planners.
  • Reliance on donor funding’s from developed countries and if this is not realized implementation of this projects becomes difficult.
  • Failure to involve local people in planning.
  • Natural calamities-plans are frustrated directly or indirectly if funds meant for a particular project would be diverted from planned purpose to be used in combatting calamity.
  • Over ambitious plans-some plans especially those meant to impress donors so that they release foreign aid may be unrealistic and the plans finally become difficult to implement.
  • Lack of cooperation among the executing parties-i.e. among the experts e.g. a conflict between the ministry of finance and planning agencies. The plan may not take off.
  • Inflation-if prices are rising too rapidly the resultant change in planned resource costs may negatively affect its implementation.