Module - 02

THEORIES OF
DEVELOPMENT AND INDIAN

ECONOMY

B.A. LLB SEM - III

MODULE – II

STRATEGIES OF
ECONOMIC GROWTH

DR. RAHUL MORE

Head, Department Of Economics
Abeda Inamdar Senior College, Pune.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

MODULE – II
STRATEGIES OF ECONOMIC GROWTH

 TOPICS IN THIS MODULE :
1. An overview of Theories of Development
2. Balanced and Unbalanced Growth
3. Big Push Theory
4. Relation between Population Growth and Per Capita Income
5. Concept of Sustainable Development – Sustainable Development Goals
6. Concept of Human Development – Determination of HDI and PQLI

 INTRODUCTION :

BALANCED GROWTH

The doctrine of balanced growth has several authors who interpret it in their own way. To
some it means investing in a backward sector or industry so as to bring it up to date to others. To
others, it implies that investment takes place simultaneously in all sectors or industries at once.
Balanced growth therefore, requires balance between different consumer goods industries and
between capital goods industries, between industry and agriculture, between social and export sector,
between social and economic overheads and directly productive investments, and vertical and
horizontal external economies. The theory of balanced growth states that there should be
simultaneous and harmonious development of different sectors of the economy so that all sectors
grow. For this balance is required between the demand and supply sides.

Rosenstein Rodan was the first economist who propounded the theory of balanced growth
without using these words in his 1943 article. He gives the example of a shoe factory. Suppose a
large shoe factory is started in a region where 20,000 unemployed workers are employed. If these
workers spent all their wages on shoes, a market for shoes would be created. But the trouble is that
the workers will not spend all of their wages on purchasing shoes. If instead, a whole series of
industries were started which produce the consumption goods on which workers would spend all
their incomes, all the industries would expand via the multiplier process. The planned creation of
such a complementary system of industries would reduce the risk of not being able to sell their
products and would lead to a large scale planned industrialization. According to Ragnar Nurkse –
the vicious circles or poverty are at work in the underdeveloped countries which retard the economic
development. If however they are broken, economic development would follow.

How to Break these Circles ?

Individual investment decisions cannot solve the problem. Nurkse states the famous example
of Rosenstein Rodan of the shoe factory to substantiate his argument suppose a shoe industry is set
up. If in rest of the economy, nothing is done to increase productivity and purchasing power the
market for the additional shoe output is likely to be deficient. People engaged in the industry will not
like to spend all their income on shoes, human wants being diversed. Nor will the people outside the

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

new industry buy a pair of shoes every year when they do not have enough to meet their bear
necessities. Thus, the new industries are likely to fail for want of adequate market.

How can the market be enlarged ?

The size of the market can be enlarged by the monetary expansion, by salesmanship and
advertising, by abolishing trade restrictions and by expanding the economic infrastructure. It can also
be widened either by a reduction in prices or by an increase in the money income by keeping money
constant. Therefore the only way out of this deadlock, according to Nurkse is “ more or less
synchronized application of capital to a wide range of different industries. This may raise the general
level of economic efficiency and enlarge the size of the market.

The doctrine of balanced growth requires a balance between different sectors of the economy
during the process of economic growth. There should be proper balance between investment in
agriculture and industry. Agriculture and industry are complementary. An increase in industrial
output requires an expansion of agricultural output. It is imperative that the agricultural sector must
also develop along with the industrial sector otherwise inflation will set in. A balance is also required
between the domestic sector and the foreign sector. Export revenue is an important source for
financing development.

In this way developing countries would become each others customers and increase their per
capita consumption of agricultural and manufactured goods with the increase in their income
elasticity of demand.

Criticisms :

1) Rise in Cost :- Simultaneous establishment of a number of industries is likely to raise money
and real cost of production and so make them economically unprofitable to operate in the absence
of sufficient capital.

2) No attention to reducing Cost :- Kindleberger observes that instead of starting with new
industries, Nurkse’s theory does not consider the possibility of cost reduction in existing
industries.

3) Fails as a theory of development :- Development implies the process of change of one type of
economy into another more advanced type. But this doctrine would involve the super imposition
of entirely new self contained modern sector upon and equally self contained traditional sector.

4) Dis-proportionality in factors :- In some country labour is in abundance but capital and
entreprenerual skills are scarce and vice-versa.

5) Shortage of resources :- The doctrine of balanced growth fails to solve the problem of shortage
of resources. It is based on Say’s Law that supply creates it’s own demand. But supply of goods
refers to the demand for factors especially for capital which does not create its own supply.

6) Wrong Assumptions of increasing returns :- If simultaneous investments are made in all
related sectors, the appearance of bottlenecks of raw materials, factor shortages etc will lead to
decrease in returns.

7) The concept of Balanced Growth is applicable to developed countries and not under-developed
countries.

8) Does not consider Planning :- This doctrine of Balanced Growth is primarily related to private
enterprise economy where the need for planning does not arise. Infact simultaneous investment
in all sectors requires planning direction and co-ordination by the government.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

UN - BALANCED GROWTH

The theory of Unbalanced Growth as propounded by Prof. Albert Hirschman, in his book
Strategy of Economic Development, is just opposite of the doctrine of balanced growth. This theory
has been supported by several leading economists like H.W.Singer, C.P.Kindleberger, Paul Streeten,
W.W.Rostow and so on which are in fact the criticisms of the theory of balanced growth. According
to this concept, investments should be made in selected sectors rather than simultaneously in all
sectors of the economy. Underdeveloped countries possess shortage of capital and other resources in
such quantities as to invest simultaneously in all sectors. Therefore, investments should be made in
selected sectors. It is imbalance rather than balance between different sectors of the economy that
stimulates economic growth in underdeveloped countries. In the opinion of Hirschman, if the
economy is to be kept moving ahead, the task of development policy is to maintain tensions,
disproportions and disequilibria. Here we can conclude that, the development of leading sectors and
not the development of all sectors simultaneously, should be done in accordance with the pre-
designed strategy for achieving the sustained growth in the underdeveloped countries.
Hirschman’s Strategy :- The concept of Balanced Growth has been popularized by Hirschman. It
is his contention that deliberate unbalancing the economy ( Investment in leading sectors of the
economy ) according to the pre-designed strategy, is the best way to achieve economic growth in an
underdeveloped economy. According to Hirschman, investments in strategically selected industries
or sectors of the economy will lead to new investment opportunities and lead to further economic
development. He regards development as a “ Chain of Disequilibria ”. Development can only take
place by unbalancing the economy. This is possible by investing either in Social Overhead Capital (
SOC ) or in Directly Productive Activities ( DPA ). The former creates external economies while the
latter appropriates external economies.

Unbalancing the Economy with Social Overhead Capital :- Social Overhead Capital has been
defined as “ Comprising those basic services without which primary, secondary, and tertiary
productive activities cannot function.” In basic services are included investment on education, public
health, communications, transportation and conventional public utilities like light, water, power,
irrigation and drainage schemes, etc. A large investment in SOC will encourage private investment
later in Directly Productive Activities ( DPA ). Eg. Cheaper supply of electricity may stimulate the
establishment of small industries, commerce and trade. Unless SOC investments provide cheap or
improved services, private investments in DPA will not be encouraged. In this way, the social
overhead capital ( SOC ) approach to economic development is to imbalance the economy so that
subsequent investments in directly productive activities ( DPA )are stimulated.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

Unbalancing the Economy with Directly Productive Activities :-
Another way of creating the imbalance in the economy is to make investment in DPA at the

first instance. If the investment is first made in DPA the shortage of SOC may raise the cost of
production substantially. This rise is bound to increase the price level. Therefore, this in price level
may create uncertainty and unfavorable climate for fresh investments in DPA. To avoid this
uncertainty, political pressures may stimulate investments in SOC.
Linkage Effects :- According to Hirschman, creating of unbalances is pre-requisite of economic
growth. However, the problem is one of finding the kind of imbalance that is likely to be most
effective. Any investments may have both ‘ Forward Linkage ’ and ‘ Backward Linkage ’ effects.
The former encourages investment in subsequent stages of production and the latter in earlier stages
of development.
1) Forward Linkage :- It refers to the growth of certain industries owing to the initial growth of

those which supply raw material. Expansion of steel industry, for example, will encourage
industries making steel furniture, automobiles, machines, etc using steel as their basic inputs.
2) Backward Linkage :- Growth of a set of industries stimulates the growth of those which supply
raw materials. It encourages investment in earlier stages of production. Setting up of a steel plant,
for example, would stimulate the demand for steel scrap, coal and other related goods.

 CRITICISMS :-
1) Inadequate Attention to the Composition, Direction and Timing of Unbalanced Growth.
2) Beyond the capabilities of underdeveloped countries.
3) Lack of basic facilities.
4) Lack of factor mobility.
5) Emergence of Inflationary Pressure.
6) Linkage effects not based on data.
7) Too much emphasis on investment on investment decisions.
8) Neglect of the Agricultural Sector.
9) Neglect of the Consumer Goods Industries.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

THEORY OF BIG PUSH

Rosenstein Rodan

Prof. Rosenstein Rodan was the fore runner in the development of Big Push Theory. This
theory is based on the principle of Big Push or by the way of big investment for development in an
underdeveloped country so that it can make commendable progress and to overcome obstacles for
development. The slow investment cannot solve the purpose to launch the economy successfully on
the path of progress of development. Therefore the investment below a certain level will be a mere
wastage and will not enable the economy to break the vicious circle of poverty. The theory states that
proceeding ‘ bit by bit ’ will not launch the economy successfully on the development path; rather a
maximum amount of investment is a necessary condition for success. In underdeveloped countries,
there is little scope in investing in modern industries which need large investment. If the modern
methods of production and distribution are applied, the profit will be large. On the other hand, to
invest individually will not be beneficial if it is done separately. It will be beneficial only if they are
organized together. The process of development is associated with many discontinuities, jumps and
lumps and small dose of investment does not help to bring the pace of economic development. For
launching economic development in an economy, certain individuals and external economies of
minimum quantum of investment is a necessary condition. There exists certain indivisibilities which
will hinder the occurrence and transmission of these external economies. These indivisibilities can
be removed by the large dose of investment (i.e) Big Push. There are 3 kinds of indivisibilities ;

1) Indivisibilities in Production Function :- According to him indivisibilities in production
function refer to the indivisibilities in inputs, outputs and process of production etc. they lead to
increasing returns i.e increase in output, income and employment and lowering the capital output
ratio. The most important instance of this indivisibility is Social Overhead Capital (SOC). It considers
SOC such as power, transport, communications, housing, education etc. as the most important
examples of indivisibility and of external economies on the supply side. The SOC is characterized
by four indivisibilities. a) Indivisibility of time. b) Indivisibility of durability. c) Indivisibility of Long
Gestation Period. d) Indivisibility of an irreducible industry mix of public utilities.

2) Indivisibility of Demand :- Rosenstein Rodan as well as Prof Ragnar Nurkse stressed the
importance of Indivisibility of demand for expanding the size of the market. Small size of market
and low Per Capita Income are 2 main characteristics of underdeveloped countries which in turn
reduce the income and purchasing power of people. Indivisibility of demand provides necessary path
for economy for steady growth. Without the intervention of government in decision making process,
no fruitfull success is possible.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

3) Indivisibility in Supply of Saving :- It means a high income elasticity of saving. Therefore
a high quantum of investment is required for complementary industries and this requires a high
volume of saving. But in underdeveloped countries, savings are low as the income is low. To reduce
the gap between income and expenditure, rate of saving should be created and increased.

Besides these 3 Indivisibilities, Rodan also mentioned, “ Psychological Indivisibilities ”. it
implies that there must be proper psychological environment which may influence the people to adopt
the path of economic development.
 CRITICISMS :

1. Inadequacy of Resources
2. Problem of Co-ordination
3. Neglect of Agricultural Sector
4. Neglects the role of International Trade
5. Institutional and Administrative Difficulties
6. Neglects the importance of techniques
7. Ignores Promotion of further Investment
8. Too much emphasis on Indivisibility

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

SUSTAINABLE DEVELOPMENT

Sustainable development is a concept that appeared for the first time in 1987 with the
publication of the Brundtland Report, warning of the negative environmental consequences of
economic growth and globalization, which tried to find possible solutions to the problems caused by
industrialization and population growth.
 HOW TO ACHIEVE SUSTAINABLE DEVELOPMENT :

Many of the challenges facing humankind, such as climate change, water scarcity, inequality
and hunger, can only be resolved at a global level and by promoting sustainable development: a
commitment to social progress, environmental balance and economic growth.

As a part of a new sustainable development roadmap, the United Nations approved the 2030
Agenda, which contains the Sustainable Development Goals, a call to action to protect the planet
and guarantee the global well-being of people. These common goals require the active involvement
of individuals, businesses, administrations and countries around the world.
 WHAT ARE THE SUSTAINABLE DEVELOPMENT GOALS ?

The Sustainable Development Goals, also known as the Global Goals, are a call from the United
Nations to all countries around the world to address the great challenges that humanity faces and to
ensure that all people have the same opportunities to live a better life without compromising our
planet.

17 GOALS FOR A BETTER WORLD

You can refer to this website for more information about Sustainable Development Goals
https://www.un.org/sustainabledevelopment/poverty/

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

CONCEPT OF HUMAN DEVELOPMENT & DETERMINATION OF HDI AND PQLI

 MEANING OF HUMAN DEVELOPMENT
The term 'Human Development' may be defined as an expansion of human capabilities, a

widening of choices, an enhancement of freedom, and a fulfillment of human right. At the beginning,
the idea of human development incorporates the need for income expansion of human capabilities.
Hence developn1ent cannot be equated solely to income expansion.

Income is not the sum-total of human life. As income growth is essential, so are health,
education, physical environment and freedom. Human development should embrace human rights,
socio-eco­ political freedoms. Human Development Index ( HDI ) is constructed to serve as a more
human measure of development than a strictly income based benchmark of per capita GNP.

The UNDP defines Human Development as a process of enlarging people's choice, and
strengthen human capabilities in a way which enables them to lead longer, healthier and fuller life.
From this broad definition of Human Development, one gets an idea of three critical issues involves
in human development interpretation.
These are,

1. 1.To lead a long and healthy life
2. To enjoy a decent standard of living
3. To be educated
Barring these three critical parameters of human development as a process of enlarging People’s
choices, there are additional choice that includes political freedom, other guaranteed human rights,
and various ingredients of self-respect.

 COMPONENTS OF HUMAN DEVELOPMENT :-

1. EQUALITY : If the development is viewed in tern1s of enhancing peoples basic capabilities,
people must enjoy equitable access to opportunities such may be called equality related
capabilities.

2. SUSTAINABILITY : Another important fact of human development is that development should
'keep going' should last long.

3. PRODUCTIVITY : Another important component of human development is productivity which
requires investment in people. This is called investment in human capital. Investment in human
capital and physical capital can add more to productivity.

4. EMPOWERMENT : The empowerment of people particularly women is another component of
human development. In other words, genuine human development requires empowerment in all
aspects of life.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

 DETERMINATION OF HDI AND PQLI

1. DETERMINATION OF HDI :

Definition of HDI :

United Nations development program has defined human development as a process of enlarging
people's choices and their level of well-being.

Meaning of HDI :

The Human Development index ( HDI ) is a statistical composite Index of life expectancy,
education and per capita income indicators, which are used to rank countries into four tiers of human
development. A country scores higher HDI when the life span is higher, and the GDP per capita is
higher. The HDI was developed by a Pakistani economist Mahbub UI Haq which was further used
to measure the country's development by United Nations Development Program. The Index is based
on the human development approach, developed by UI Haq, often framed in terms of whether people
are 'able to be' and 'do' desirable things in life. Human Development is measured by constructing
Human Development Index ( HDI ).

 IMPORTANCE OF HUMAN DEVELOPMENT :

1. It is an End : Economic growth is only a means while Human Development is an end. In other
words the entire process of economic development is to improve human conditions and enlarge
people's choices.

2. Helps to control population : Improved education make people understand the benefits of small
family. Increased medical facilities help to reduce infant mortality and birth rate.

3. Increases efficiency : With Human development there is an improvement in health, nutrition and
education. This helps to increase efficiency and productivity of labour.

4. Better utilisation of resources : Improved efficiency of human resources leads to better
utilisation of other resources.

5. Creates healthy society : The educated people do not get involved in anti- social activities like
riots, religious conflicts, heatedness etc. This helps to set up a healthy society based on mutual
understanding and co-operation.

6. Saves environment : The educated people know the evil effects pollution caused by population
growth, deforestation industrial waste etc. They will try to conserve ((save) environment.

 PHYSICAL QUALITY OF LIFE INDEX ( PQLI )

Physical Quality of Life Index (P.Q.L.I) was developed by famous economist Morris David in
1979 for 23 developed and developing countries. Morris David used the following three indicators
to prepare a composite index known as Physical Quality of Life Index:

 Life Expectant Rate (L.E.I)
 Infant Mortality Rate (I.M.I)
 Basic Literacy Rate (B.L.I)

Life Expectant Rate ( L.E.I )

Life expectancy means average number of year a person is expected to live. As per census of
2011, it is 66.8 years in India.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.

Infant Mortality Rate ( I.M.I )

It refers to the number of infants dying within one year of their birth out of every 1000 births.
As per census report of 2011, it is 47 per 1000. Higher infant mortality is harmful for economic
development.

Basic Literacy Rate ( B.L.I )

Any person above the age of 7 year who can read and write in any one language with an
ability to understand it is considered as literate. As per census 2011, it is 74.04% in India. For each
of the above indicator, the performance of individual country is rated on a scale of 1 to 100 where 1
represents the worst performance and 100 represent the best performance. P.Q.L.I is then constructed
by averaging these three indicators giving equal weight to each of them.

 STEPS TO CALCULATE PHYSICAL QUALITY OF LIFE :

1. Find percentage of the population that is literate ( literacy rate ).
2. Find the infant mortality rate. ( out of 1000 births )
3. Find the Life Expectancy. Life Expectancy = ( Life expectancy – 42 ) × 2.7
4. Physical Quality of Life =

( Literacy Rate + Infant Mortality Rate + Life Expectancy )
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3

 ADVANTAGE OF PQLI

1. Q.L.I helps to government to understand the overall welfare in the economy and how well its
welfare policies are being implemented. This helps the government to take corrective action.

2. The method followed to measure P.Q.L.I is standard for all the countries. Therefore, it can be
used to make comparison between countries and this helps the relatively underdeveloped
countries to take corrective measure.

3. The three indicator i.e. life expectancy rate, infant mortality rate and literacy rate very well
represent the welfare of the people of the country. A country wherein all the three indicators are
good can be said to be a developed economy.

4. It considers the distribution of welfare in the country. A country cannot have a high average of
literacy rate, life expectancy and low infant mortality rate unless a large part of the population is
covered by the benefits of economic development.

 LIMITATIONS OF P.Q.L.I.

1. It ignores many factors which influence the quality of life such as employment, housing, justice,
social security as well as human rights.

2. It is a simple average of literacy rate, infant mortality rate and life expectancy rate i.e. all the
factors have been giving equal weightage. However, it is difficult to understand the rationale
behind giving equal importance to all factors.

3. It does not explain the structural change in the economy of a country. Moreover, it does not at all
consider economic or monetary concept. Hence, it is a poor measure of Economic Development
as well as Economic Growth.

DR. RAHUL MORE, HOD Economics, Abeda Inamdar Sr. College, Notes for Private Circulation Only.