Mankind has been living in the world for about two million years. For the major part of these long ages of human existence, man led a life of hunting and gathering. Then,10000 years ago agriculture was discovered and settled life began. Civilizations rose and fell. Agriculture became the first wave that transformed human life. The industrial revolution that began in the 18th century became the second wave. The modern industrial economy and industrial society were born. The invention of electricity ,railways ,automobiles and aero plane led to faster growth of economies. Now, the computer the internet and satellite based communication, acting as the third wave, is transforming the world. These changes over long period of time have substantially increased production, prosperity, trade, wealth. Major part of the fruits of this prosperity has gone to the developed countries. Developing countries are slowly trying to catch up.
The study of this long period of economic transformation is the subject matter of history, particularly economic history. In economics we are concerned with changes during shorter durations. Even during shorter durations, economies (nations)do not grow, develop and prosper continuously and consistently. Ther can be periods of negative growth cyclical fluctuations. For a proper understanding of complex economic changes, we have to familiarize ourselves with some important economic concepts. Two important concepts relating to economic change are economic growth and economic development.
Sometimes, the words growth and development are used interchangeably. But in economics, the distinction between the two is important. Normally, growth refers to change in stature or size. For example, growth of a child or plant. Development is more than change in size. For example, development of a child refers to development of the personality of the child. Let us try to understand the distinction between economic growth and development.
View on Economic Growth
When an economy grows, its agriculture, industry and services will grow. There will be growth in consumption, investment and Government expenditure. Growth of all these sectors and activities is captured in the growth of Gross Domestic Product (GDP). GDP is the money value of all goods and services produced in the domestic territory of a country in one year (income received from abroad, like NRI remittances, is not included in GDP). When GDP is measured in terms of factor cost, it is written as GDPFC. Economic growth is the rate of growth of GDPFC.
Let us take an example. If look in to national accounts statistics published the Central Statistical Organization, we will find that the GDPFC at constant prices (base year 1993-94) for 1999-2000 and 2000-01 are Rs1000000crores and Rs 1060000 crores respectively. This means that he growth in the flow of goods and services during 2000-01 is to the tune of 60,000 crores in absolute terms. In relative terms, the growth is 6 percent. This is called the growth rate. Therefore, the rate of growth of GDPFC is called the economic growth rate. The growth rate is expressed in terms of percent per year or per annum.
The out put of goods and services need not grow every year. Sometimes, there may be contraction of out put. This means that the growth rate is negative. Negative growth is only occasional and temporary. In the long run, output grows continuously. Therefore economic growth may be seen as a long term tendency reflected by increase in flow of goods and services produced by the economy.
Some economists looks at economic growth in terms of growth potential of the economy. When the potential is being realized, growth is positive. When the potential is not realized, growth is negative. Non-realisation of potential may be due to various reasons. For example, in an agrarian economy, failure of rain may lead to negative growth. Similarily, in an export oriented economy, unexpected loss of foreign market may lead to negative growth. It is important to note that negative growth is temporary. The long term tendency is positive growth. Therefore, economists who view growth in terms of growth potential define economic growth as long term increase in production potential of the economy.
View on Economic Development
There is no consensus among economists as to what constitute economic development. There are different views. Let us examine some important views.
Human history itself is a chain of developments. During early times, for thousands of years, the only productive activity was hunting and gathering. Then agriculture evolved. With the onset of industrial revolution, production structure shifted from agriculture to manufacturing. Now production structure is changing in favour of services. These changes took place over a long sweep of time. Economic development literature doesn’t cover such a long sweep of time. Therefore let us look at what happened during the last two or three centuries.
Much of the economic development theory is based on the economic changes in the western world during the last two or three centuries. These changes can be broadly classified in to technological and Institutional. Economists noted changes in the constitution of output and deployment of labour in economic activities. This major shift was called structural change. Structural change reflected in increase in the proportion of non-agricultural output and increase in employment in non-agricultural activities. This structural change took place along with increase in output of all goods. Therefore economists who looked at development from structural change angle defined economic development as economic growth with structural change in favour of non-agricultural activities.
All developed western economies underwent structural changes. Therefore, economists assumed that all economies will travel along the same path of structural change. When this did not happen, economists emphasized the need for Institutional changes to bring about structural transformation. By institutional changes they meant facilitating institutions like appropriate policies, systems of governance, markets, attitudinal changes, etc. If we look at economic development from this angle we will have to say that development is economic growth plus something. Therefore, we can define economic development as economic growth plus.
Another view of development is from the angle of welfare and the basic problem faced by the economy. Suppose, in an economy GDP grow fast. structural changes happened. Percapita income rose sharply. But along with these desirable changes, the basic problem of poverty, unemployment and inequalities got aggravated. Then, we cannot call this development. This means that development has to be related to the welfare of the people. Welfare depends not only on the size of the output, but also on its distribution. From this perspective, economists define economic development as economic growth with redistribution of resources in favour of the relatively worse off.
View on Sustainable Development
Is development sustainable?. Can we continue with development for a long period of time?. This an important issue in modern development economics.
Sustainable development is a development that can sustain itself. There are economists who believe that present patterns of development are not sustainable. Sustainable development will become difficult in developed countries due to their wasteful consumption style. Sustainable development will become difficult in developing countries due to their large and exploding population. Therefore, if development is to be sustainable, wasteful consumption expenditure have to be avoided and population should be controlled. Let us discuss this topic in some detailed manner.
There are two major factors that make development unsustainable. First is the modern production technology that exhausts non-renewable resources. Second is the highly polluting nature of the present production system. These two combine to make present pattern of development unsustainable.
Natural resources can be broadly grouped into two categories -1) non-renewable resources such as coal and petroleum. There is only a finite quantity of these resources and once their stock is completely exhausted through wasteful consumption, they can not be regenerated. 2) renewable resources such as forests, animals, water, etc. If these resources are used carefully and optimally, they can be regenerated and renewed. Some economists argue that the present pattern of development is unsustainable because it is heavily dependent on non-renewable resources. It would be difficult to sustain development if the non-renewable resources are exhausted.
Another threat to sustainability comes from the highly polluting nature of modern production. Modern huge machines and factories emit lots of smoke, chemical wastes and poisonous gases. These emissions cause pollution of air, water and atmosphere. Wasteful consumption and exploding population necessitates more production. More production means more pollution. Nature has the capacity to absorb some pollution. But, if pollution exceeds nature’s absorptive capacity, life of future generations will be in danger.
We have seen that greedy wasteful consumption and ever exploding population necessitates more production. More production means more pollution and depletion of non-renewable resources. These consequences adversely affect future generations. Therefore, if development is to be sustainable the needs of future generations have to be protected. World commission on environmental degradation in its report titled ‘Our Common Future’ defines sustainable development as that level of development which takes care of the needs of the present generation without compromising the needs of the future generations.
Development is a process, not a level. It is a path to achieve certain goals. Therefore, modifying the World Commission’s definition, we can define sustainable development as a path of development in which options of future generations are not compromised by the path taken by the present generation.
It is important to note that it is difficult to determine the path of sustainable development. There is no such perfect path of sustainable development. Threats to sustainability should remind us about the need to reduce wasteful consumption and control population. Gandhiji’s great words of wisdom are relevant here. He said, “the earth provides everything for every man’s need, but not for every man’s greed.”
View on Quality of Life
In traditional economies, great importance was given to the concept ‘standard of living’. It was assumed that the aim of economic policy is to improve the standard of living of the people. And this can be achieved through raising the percapita income. Higher incomes will ensure better food, better clothing, better houses…in fact, more of every requirement.
The idea of ‘quality of life’ is an improvement over the concept of standard of living. Standard of living is concerned only with the requirements that money (income) can buy. Standard of living is income related. Quality of living going beyond standard of living and adds more dimensions to it. clean air, safe drinking water, hygienic sanitation facilities, literacy, health, higher life expectancy, gender equality, social harmony, human rights, etc. enhances quality of life.
Modern economists have constructed indices like Physical Quality of Life Index (PQLI), Human Development Index (HDI), etc. incorporating some of the above mentioned constituents of quality of life.
Obsession with standard of living can damage the quality of life. Increasing income, through increased production, can improve the standard of living. But the pollution that increased production causes can reduce the quality of life. This is the reason why in modern economics, we give more importance to quality of life than to standard of living.
