11.

2 INVESTIGATES THE
CHARACTERISTICS OF ECONOMIC
DEVELOPMENT PROCESS AND
MEASUREMENT

ECONOMIC DEVELOPMENT

DEFINITION
CHARATERISTICS OF ECONOMIC DEVELOPMNENT PROCESS
MEASURES OF ECONOMIC DEVELOPMENT

ECONOMIC DEVELOPMENT

DEFINITION OF ECONOM IC DEVELOPMENT

ECONOMIC DEVELOPMENT IS A TRANSFORMATIONAL PROCESS INCLUDES

QUANTITATIVE AND QUALITATIVE CHANGES OF HUMAN LIFE.

In the Economic development with economic growth social, cultural , political ,

environmental and cultural development will take place. This is known as multi
dimensional process because certain sectors will change with the economic development.

Economic growth is only one side reflects the quantitative changes. Economic development
includes the economic growth interconnected structural changes in an economy with
qualitative changes.

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 THE QUALITATIVE STRU CTURAL CHANGES OF EC ONOMIC DEVELOPMENT

1. Acceleration of industrialization
2. The agricultural contribution will decrease
3. Changes in trade pattern
4. Increase in productivity of factors of production
5. Improvement of production techniques and technology
6. Modernization
7. Changes in institutional structure

ACCELERATION OF INDUSTRIALIZATION

In the initial stages of development process the contribution by the industrial sector for
the total production and employment will increase
In maturity stage of development the service sector contribution will increase.
Application of technology for the production leads to increase in labour productivity
and wage rates
Human capital and physical capital relatively more use for the production techniques.
In this process the urban population will increase compared to the rural population.

THE AGRICULTURAL CONTRIBUTION WILL DECREASE

Compared to the industrial sector agricultural sector may contact.

The contribution for employment and the total production from the agricultural sector and
the rural sector will drops gradually

The excess labour in agricultural sector transfer to the higher wage level and higher
productivity jobs in industrial sector.

The technological development in primary sector(agriculture, mining and fishing) will

decline but when the labour force in the agricultural sector declines the per capita labour
productivity close to the productivity level of industrial sector.

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Alis Amsden development economist state that economic development is transforming
from the primary sector used unskilled labour to knowledge and training based sector.

CHANGES IN TRADE PATTERNS

Instead of export trade with small primary product list such as agricultural and fisheries
products, mining and quarrying, minerals and forestry export structure with diversified
export structure created.

Initially changes to nontraditional primary exports and simple industrial product exports
instead of primary exports. Next exports focused on the value added goods such as motor
vehicles, computers and bio technology products.

INCREASE IN HUMAN CAPITAL AND KNOWLEDGE

For the economic development it is important to increase the productivity. One step is to
raise the educational leve; and qualifications of current and future labour force. This is
known as accumulation of human capital. This can be build with formal school education
and practical training at work place.

Another method to improve productivity is to raise physical capital stock.

It is important to have an educated and trained labour force to use the higher level
technology.

The accumulation of human capital, accumulation of physical capital and application

of modern technology results in increase in labor productivity and increase in wage
levels and achieve the higher standard of living.

MODERNIZATION

According to the Gunnar Myradal wrote Asian Drama An Inqury into the poverty of
nations explores the reasons for the undeveloped nations being at that state and how they
achieve of their development objectives. He highlights the requirements of modernization

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of all sectors to achieve the development. This modernization includes the increase in
physical production activities such as

- Quality of goods and service production

- Techniques
- Institutional relationships

In addition

- Changes in attitudes of society and individuals

- Independency of the country internationally
- Opportunities to take independent decisions in political process
- Confirmation of selecting new controls

Important factor in modernization is the modernization of institutes. This includes

- Transformation of banking and insurance fields and

- Changes in government involvement

CHANGES IN INSTITUTIONAL STRUCTURE

Following changes should be take place.

1. Government function should be changed as facilitator and incentive provider

2. It is important of growth in infrastructure such as roads, ports, communication
facilities, electricity and water
3. Building efficient financial syatem( banks, business share exchange centers,
insurance firm)
4. Establish legal system
5. Protection of property rights
6. Building efficient regulatory system

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 APPROACHES OF ECONOMIC DEVELOPMENT

Until 1970 economic development is only an economic phenomenon. It is expected that

with the acceleration of Total or Per capita Gross Domestic Product the benefits of
growth will fall to all by creating employment and other development
In 1950, 1960 the countries which follows the development approach are succeed in
economic growth targets but standard of living of them is not considerably changed.
Therefore definition is not sufficient and new approach of Redistribution from
Growth introduced. This includes the policies for
o Elimination of poverty
o Reducing income disparity
o Reducing unemployment
According to Dudley Seers in 1969 economic development research paper Meaning of
Development points certain questions.
The question ask about a countrys development therefore What has been happening to
poverty? What has been happening to unemployment? What has been happening to
inequality? If all three of these have declined from high levels, then beyond doubt this
has been a period of development for the country concerned. If one or two of these
central problems have been growing worse , especially if all three have it would be
strange to call the development even if per capita income doubled
According to his explanation acceleration of economic growth and increase in per capita
Gross Domestic Product is not satisfactory to achieve the economic development.
This new development approach required with the economic growth trickle down the
benefits, elimination of poverty, reduction of unemployment and reduction of income
disparity.
Dudley Seers statement is an explanation of actual situation .ie In 1960 and 1970 the
countries which achieve economic growth of per capita but standard of living was not
improved. These countries
o employment level
o equity level and

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 o the standard of living of the people who earn low income 40% from the
population

has declined.

But according to the previous approach they are considered as developing countries.
But according to the new criteria there was development took place.

According to the World Development Report in 1991 development is considered as

multi dimensional process
The main challenge beyond the development is the improvement of qualitative
status require commonly increase in income , but it is not adequate and more is
expected. Favorable education, higher health and nutrition level, eradication of
poverty, unpolluted environment, open up equal opportunities for everybody,
strengthen personal freedom and rich culture is required.
In 1970 international community and policy makers major concern the problem of
poverty in developing countries. There is doubt on the economic growth is trickle down
and standard of living will increase.
Therefore 1976 World Employment Council of International Labour Organisation
stated that it is required a development strategy which flows from bottom to top
based on basic needs. They explain by the fulfillment of human wants it can be
influence to the poverty problem. Special concern is provided for the basic needs such
as food, water, clothing, shelter and health.
According to the Economist Amarthya Zen the final objective of development is not
increase in economic growth but the objective of development is increase in standard of
living and helps to enjoy independency. He has further stated that poverty is based on
limitations of abilities. The objective of development is to create appropriate
environment to
1. Improve the abilities of all people
2. Open up the opportunities to current and future generation

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 Development can be considered as the transformation living standard of people from
unfavorable level to favorable level. There are five reasons for the unfavorable living
standard.
1. Limitation of physical things
2. Physically weak
3. Unfavorable social relationships
4. Insecurity
5. Loss of power

MEASUREMENTS OF ECON OMIC DEVELOPMENT

Economic Growth signifies the increase in per capita income or increase in GNP. In present
times, the term economic growth refers to sustained increase in a countrys output of goods
and services, or more precisely product per capita. Output is generally measured in terms
of GNP.

THE LIMITATIONS OF PER CAPITA REAL GROSS DOMESTIC PRODUCT

1. Creation of double counting errors

2. Not showing the quality improvements and inclusion of new products
3. Not report the non market activities
4. Include the economic bad
5. Not consider the externalities
6. Not shown the income distribution
7. Not shown the indebtedness to the foreign countries and depletion of foreign
resources
8. Only consider the goods and services related to physical welfare
9. Not shown the structural changes in the economy
10. It is not favouable to use norminal exchange rates to compare with the other
countries

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 PURCHASING POWER PAR ITY

This uses the long term equilibrium rate of two currencies to equalize their purchasing
power. It is based on the law of one price: the theory states that in ideally efficient markets
identically goods should have only one price.

The purchasing power rate equalizes the purchasing power of different countries in their
home countries for a given basket of goods. Purchasing Power Parity basis is arguably
more useful when comparing differences in living standards on whole between nations. It
is because PPP takes into the relative cost of living and the inflation rates of different
countries rather than just a norminal GDP comparison. The best known and most used
purchasing power parity exchange rate is the international dollar.

PPP is the amount of certain basket of basic goods which can be bought in the given
country with the money it produce..

G.D.P based on purchasing power parity can be calculated by multiplying the real Gross
Domestic Product by price level of the based country and divide by the mid year
population. Following formula can be used.

Per Capita GNP based on Purchasing power

parity = PiUS X QiSL
Mid Year Population

QiSL is the goods and service produced in Sri Lanka. PiUS is the prices of the goods and
services at U.S.A.

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 COMPOSITE INDICES US ED IN MEASUREMENTS OF ECONOMIC
DEVELOPMENT

1. Physical Quality of Life Index-PQLI

2. Human Development Index-HDI

PHYSICAL QUALITY OF LIFE INDEX-PQLI

Morris .D.Morris economist in 1977 U.S.A Overseas Development Council has presented
this index and following components are included.

1. Life expectancy at Birth

This means that the average number of years a child born today is expected to live
there is no change in mortality pattern.
2. Infant Mortality Rate
This means the death of infants less than I year as a % of live births in a certain year.
Infant Mortality Rate= no of infant death less than 1 year x 1000
The no of live births
3. Literacy Rate
This means writing and reading ability of the people.

This index value spreads from 1-100. The optimum level reflects by 100 and worst position
reflects by 1.

This index has the weakness of focus more on health and nutrition and it is not adequate
measure for the measurement of development.

HUMAN DEVELOPMENT IN DEX

The first Human Development Report introduced a new way of measuring development by
combining indicators of life expectancy, educational attainment and income into a
composite human development index, the HDI. The breakthrough for the HDI was the
creation of a single statistic which was to serve as a frame of reference for both social and

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economic development. The HDI sets a minimum and a maximum for each dimension,
called goalposts, and then shows where each country stands in relation to these goalposts,
expressed as a value between 0 and 1.

CALCULATING THE HUMAN DEVELOPMENT INDICE S: GRAPHICAL

PRESENTATION

1. The education component of the HDI is now measured by

- Mean of years of schooling for adults aged 25 years and expected years of schooling
for children of school entering age.
- Expected years of schooling estimates are based on enrolment by age at all levels of
education and population of official school age for each level of education. Expected
years of schooling is capped at 18 years.
- The indicators are normalized using a minimum value of zero and maximum values
are set to the actual observed maximum value of mean years of schooling from the
countries in the time series, 19802010, that is 13.1 years estimated for Czech
Republic in 2005. Expected years of schooling is maximized by its cap at 18 years.
The education index is the geometric mean of two indices.
2. The life expectancy at birth component of the HDI is calculated using a minimum
value of 20 years and maximum value of 83.4 years.

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 This is the observed maximum value of the indicators from the countries in the time
series, 19802010. Thus, the longevity component for a country where life
expectancy birth is 55 years would be 0.552.
3. For the wealth component, the goalpost for minimum income is $100 (PPP) and the
maximum is $107,721 (PPP), both estimated during the same period, 1980-2011.

The decent standard of living component is measured by GNI per capita (PPP$)
instead of GDP per capita (PPP$)

The scores for the three HDI dimension indices are then aggregated into a composite index
using geometric mean. The HDI facilitates instructive comparisons of the experiences
within and between different countries.

CLASSIFICATIONS OF C OUNTRIES BASED ON HD I

1. Country with very high human development->0.900

2. Countries with high human development-0.800-0.900
3. Countries with medium level development-0.500-0.799
4. Countries with low human development-0.000-0.499

STRENGTHS AND WEAKNESSES OF HUMAN DEVELOPMENT INDEX

STRENGTHS

- Countries can be categorized into 3 different groups based on HDI

- The index has considered about social factors such as life expectation, education and
health
- This is a very important index which provides useful information about factors
included in development and countries which have been succeed at the
development process

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 WEAKNESSES

- This index does not facilitate to identify the disparity of development that can be
seen in the countries internal due to the index is a aggregate measure of
development
- It does not consider all sector that comes under human development
Ex: Participation, Human Security, Political Freedom,etc
- It does not consider qualitative differences
- Ex: quality of school education, quality of health service.
- This index ignored the environmental aspects which are affected to the
development

THE COMPONENTS WHICH SHOULD BE INCLUDED IN THE HUM AN

DEVELOPMENT

1. Mental health
2. Empowerment
3. Political independence
4. Favourable social relationship
5. Equality
6. Working environment
7. Leisure facilities
8. Political security
9. Economic freedom
10. Environmental quality

THE INDEXES PREPARED FOR MEASURE GENDER INEQUALITIES IN

DEVELOPMENT

1. Gender Related Development Index-GDI

2. Gender Empowerment Measure-GEM
3. Gender Inequality Index

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