THE ECONOMICSOF

DEVELOPMENT AND PLANNING

By the same author :

MACRO ECONOMIC THEORY

ADVANCED ECONOMIC THEORY

MODERN MICROECONOMICS

MONETARY ECONOMICS

INTERNATIONAL ECONOMICS

MANAGERIAL ECONOMICS

ENVIRONMENTIAL ECONOMICS : THEORY MANAGEMENT AND POLICY

MONEY, BANKING AND INTERNATIONAL TRADE & PUBLIC FINANCE

MICROECONOMIC THEORY

PRINCIPLES OF ECONOMICS

PUBLIC FINANCE & INTERNATIONAL TRADE

HISTORY OF ECONOMIC THOUGHT

DEMOGRAPHY

(Hindi Editions of all these Books are available)

(Punjabi Editions of the following Books are also available)

Modern MicroeconomicsMacroeconomic TheoryInternational Economics

THE ECONOMICSOF

DEVELOPMENT AND PLANNING

VRINDA PUBLICATIONS (P) LTD.

M.L. JHINGAN

Retired Deputy Director,Higher Education, Haryana

40TH REVISED AND ENLARGED EDITION

SIMPLY THE TEXT !

VRINDA PUBLICATIONS (P) LTD.B-5, Ashish Complex (opp. Ahlcon Public School),Mayur Vihar, Phase-I, Delhi-110091Tel. : 22755315, 22755316 Fax : 22757220E-mail : [email protected]:// www.vrindaindia.com

Typeset by : Harsimran Graphics, DelhiPrinted at : Nisha Enterprises, Delhi

ISBN 978-81-8281-385-4(The Economics of Development and Planning – 40th Edition)

First Edition : 1966Thirty Ninth Revised & Enlaged Edition : 2007Reprint : 2008, 2009Fourty Revised & Enlarged Edition : 2011Reprint:2012

All rights reserved. No part of this publication may be reproduced, copied or transmittedin any form or by any means, electronic or mechanical, including photocopy, recordingor by any information, storage and retrieval system, without written permission fromthe publishers.

© M.L. Jhingan, 1997Registered with Registrar of Copyrights, Government of India vide Registration No- L-17755/98

It is gratifying that this popular text book has been patronized by both teachers and students inIndia and abroad for more than four decades ever since it was first published in 1966.

The present edition has been substantially revised, rearranged and presented in a new formatwith new diagrams. The text contains some significant alterations and additions in a number ofchapters.

Rewrite of Chapters:

The Malthusian TheoryMill’s TheoryThe Classical TheoryThe Marxian TheoryThe Jorgenson ModelThe Models of Technical change.

New Chapters:

Economic Integration among Developing CountriesWTO and Developing CountriesMillennium Development Goals (MDGs).

I hope the present edition will be of immense help to candidates preparing for M.A., N.E.T., I.E.S.,Civil Services and other related examinations.

Suggestions to improve the book are solicited.

M.L. JHINGAN

PREFACE TOTHE 40th EDITION

This book examines the problems of economic development of underdeveloped countries. Thereis, however, no dearth of literature on the subject. But it is scattered in journals, reports and doctoraltheses. Some of the books on the subject deal with particular aspects of the problems ofunderdevelopment, while others are in the form of lectures delivered by eminent economists fromtime to time. There are very few books written in the textbook style. But they are mostly occidentalin nature. In certain cases, their appoach and presentation is abstract and difficult. I haveendeavoured to present the subject in a lucid and intelligible manner as possible as in orientalsetting.The book is intended to meet the requirements of M.A. and Honours students preparing for thepaper on Economics of Development and Planning. It will also prove useful to the candidates for thevarious competitive examinations. The syllabi of all the Indian Universities and those of theUniversities of Leeds, Manchester and London have been consulted for this purpose.I have drawn heavily on the writings of a vast galaxy of economists who have done much to enrichthe subject matter of economic development within the last two decades. However, no amount offootnoting can ever repay the debt I owe to them.My interest in the subject was aroused when I was a student of the University of Delhi. I had theopportunity to listen to a series of lectures delivered by Dr J.B. Condliffe of the University ofCalifornia and Mr Maurice Dobb of the University of Cambridge as Visiting Professors.*I imbibed further interest from the classroom lectures of Professors V.K.R.V. Rao, B.N. Ganguliand Raj Krishna on the different aspects of the subject though it was in its nascent state at that time.I wish to recall my indebtedness to all of them.I beg to acknowledge my sincere gratitude to the following publishers from whose publications Ihave borrowed copyright material: George Allen & Unwin Ltd., London; Prentice-Hall, New Jersey,USA; Oxford University Press, New York & London; Macmillan & Co., The Free Press; YaleUniversity Press; Routledge and Kegan Paul, London; John Wiley & Sons, Inc. N.Y.; OrientLongmans; Cambridge Universiy Press; Asia Publishing House, Bombay; Kitabistan, Allahabad;Central Book Depot, Allahabad; Allied Publishers, Bombay; and to many others.No word of gratitude is sufficient to appreciate the encouragement I have been receiving fromtime to time from my revered teachers, Mr K.N. Bhattaharya, Professor of Economics, NationalAcademy of Administration, Government of India, Mussoorie and Mr. N.K. Pant, Associate Directorin Economics, School of Correspondence Courses, University of Delhi. Without their help, thisbook could not have been possible. Needless to say, I alone am responsible for any errors whichmay remain.

M.L. JHINGAN

* J.B. Condliffe, Technological Progress and Economic Development; M. Dobb, Some Aspects of Economic Development,Delhi 1951.

PREFACE TOTHE FIRST EDITON

PART ONE – BASIC PROBLEMS

1 Economics of Development : Concepts and Approaches 32 Economic Growth and Income Distribution : The Kuznets Hypothesis 243 Sustainable Development 294 Characteristics of An Underdeveloped Country 385 Obstacles to Economic Development 506 Factors of Economic Growth: Economic and Non-Economic 567 Chenery’s Patterns of Structural Change 688 Meaning and Characteristics of Modern Economic Growth 72

PART TWO – SOME THEORIES OF ECONOMIC DEVELOPMENT

9 Adam Smith’s Theory 8310 The Ricardian Theory 8811 The Malthusian Theory 9412 Mill’s Theory 10113 The Classical Theory 10614 The Marxian Theory 10915 The Schumpeterian Theory 11716 The Keynesian Theory 12417 Marx’ Stages of Growth 13118 Rostow’s Stages of Economic Growth 13619 Gerchenkron’s Great Spurt Theory 14720 Nurkse’s Theory of Disguished Unemployment as a saving potential 15221 Lewis Theory of Unlimited Supplies of labour 15922 Fei-Ranis Theory 16523 Jorgenson’s Neo-Classical Model of a Dual Economy 17224 Harris-Todaro Model of Migration and Unemployment 17925 Leibenstein’s Critical Minimum Effort Thesis 18626 Nelson’s Low-Level Equilibrium Trap 19227 The “Big Push” Theory 19528 The Doctrine of Balanced Growth 19929 The Concept of Unbalanced Growth 20630 Dualistic Theories 21331 The Dependency Theory of Underdevelopment 22332 The Limits to Growth Model 23333 Myrdal’s Theory of Circular Causation 238

PART THREE – SOME GROWTH MODELS

34 The Harrod-Domar Models 24535 The Kaldor Model of Distribution 257

B R I E FCONTENTS

36 The Pasinetti Model of Profit and Growth 26237 Joan Robinson’s Model of Capital Accumulation 26638 Meade’s Neo-Classical Model of Economic Growth 27239 The Solow Model of Long-Run Growth 27840 Kaldor’s Model of Growth 28541 The Model’s of Technical Change 29142 The Uzawa Two-Sector Growth Model 30043 The von Neumann Growth Model 30744 Steady State Growth 31245 The Golden Rule of Accumulation 31846 Growth Accounting 23247 The new Endogenous Growth Theory 33148 The Cambridge Capital Controversy in The Neo-classical Analysis of Growth 34449 The Fel’dman Model 35550 The Mahalanobis Model 360

PART FOUR – DOMESTIC MEASURES FOR ECONOMIC DEVELOPMENT

51 Capital Formation and Economic Development 37152 Role of Agriculture and Industry in Economic Development 38253 Monetary Policy in Economic Development 38854 Fiscal Policy in Economic Development 39355 Deicit Financing as an Instrument of Economic Development 40456 Price Policy in Economic Development 41157 Population Growth and Economic Development 41558 Human Capital Formation and Manpower 42459 Entrepreneurship in Economic Development 43960 Role of the State in Economic Development 444

PART FIVE – INTERNATIONAL MEASURES FOR ECONOMIC DEVELOPMENT

61 Foreign Trade and Economic Development 45562 The Debt Problem of LDCs 46163 New International Economic order (NIEO) 46764 Commercial Policy and Economic Development 47365 WTO and Developing Countries 48766 Foreign Capital and Aid in Economic Development 49367 Two-Gap Model and Costs-Benefits of Foreign Aid 50468 Private Foreign Investment and Multinationals 51169 Economic Integration Among Development Countries 51770 Millennium Development Goals (MDGs) 522

PART SIX – SOME PROBLEMS OF DEVELOPMENT PLANNING

71 Economic Planning 53372 Shadow Prices 56173 Project Evaluation and Cost-Benefit Analysis 56974 Controls under Planning 58275 Input-Output Analysis 59076 Linear Programming 59977 The Concept of Capital-Output Ratio 60578 The Choice of Techniques 61479 Transfer of Technology 62380 Investment Criteria in Economic Development 63081 Economic Planning and Price Mechanism 639

BiBliography 645-648

viii The Economics of Development and Planning

PART ONE – BASIC PROBLEMS

Chapter-1Economics of Development : Concepts and Approaches 3

Introduction ........................................................................................................................................................ 3Economic Development and Economic Growth .......................................................................................... 4Measurement of Economic Development ..................................................................................................... 5Basic Needs vs Economic Growth ................................................................................................................ 10Conclusion ........................................................................................................................................................ 11Human Development Indices ....................................................................................................................... 12Physical Quality of Life Index (PQLI) ......................................................................................................... 12Construction of PQLI ...................................................................................................................................... 14Human Development Index (HDI) .............................................................................................................. 15Constructing the Human Development Index (HDI) ............................................................................... 18Development Economics in Retrospect ....................................................................................................... 19

Chapter-2Economic Growth and Income Distribution : The Kuznets Hypothesis 24

The Kuznets Hypothesis ................................................................................................................................ 24Causes of Increase in Inequality with Development ................................................................................ 26Causes of Reduction in Inequality with Development ............................................................................ 27Its Critical Appraisal ....................................................................................................................................... 27

Chapter-3Sustainable Development 29

Meaning ........................................................................................................................ .................................... 29Objectives of Sustainable Development ...................................................................................................... 30Environmental Problems ............................................................................................................................... 30Causes of Environmental Degradation ....................................................................................................... 32Policies for Sustainable Development .......................................................................................................... 33Measuring Sustainable Development .......................................................................................................... 35

CONTENTS

Chapter-4Characteristics of An Underdeveloped Country 38

Meaning of the Term ‘Underdeveloped’ ..................................................................................................... 38Different Criteria of Underdevelopment .................................................................................................... 39Characteristics of an Underdeveloped Country ........................................................................................ 42General Poverty ............................................................................................................................................... 42Agriculture, the Main Occupation ............................................................................................................... 43A Dualistic Economy....................................................................................................................................... 43Underdeveloped Natural Resources ............................................................................................................ 44Demographic Features ................................................................................................................................... 44Unemployment and Disguised Unemployment ....................................................................................... 45Economic Backwardness ................................................................................................................................ 46Lack of Enterprise and Initiative .................................................................................................................. 47Insufficient Capital Equipment ..................................................................................................................... 48Technological Backwardness ..................................................................................................... .................... 48Foreign Trade Orientation ............................................................................................................................. 49

Chapter-5Obstacles to Economic Development 50

Vicious Circles of Poverty .............................................................................................................................. 50Low Rate of Capital Formation ..................................................................................................................... 52Socio-cultural Constraints .............................................................................................................................. 53Agricultural Constraint .................................................................................................................................. 54Human Resources Constraint ....................................................................................................................... 55Foreign Exchange Constraint ........................................................................................................................ 55

Chapter-6Factors of Economic Growth: Economic and Non-Economic 56

Economic Factors ............................................................................................................................................. 56Non-Economic Factors .................................................................................................................................... 62Social Factors .................................................................................................................................................... 62Human Factor .................................................................................................................................................. 65Political and Administrative Factors ............................................................................................................ 66

Chapter-7Chenery’s Patterns of Structural Change 68

Introduction ...................................................................................................................................................... 68Development Processes .................................................................................................................................. 69Accumulation Processes ................................................................................................................................. 69Resource Allocation Processes ...................................................................................................................... 69Demographic and Distributional Processes ............................................................................................... 70Conclusion ........................................................................................................................................................ 71

Chapter-8Meaning and Characteristics of Modern Economic Growth 72

Meaning ............................................................................................................................................................ 72Characteristics of Modern Economic Growth ............................................................................................ 73High Rates of Growth of Per Capita Product and Population ................................................................ 73

x The Economics of Development and Planning

The Rise in Productivity ................................................................................................................................. 74High Rate of Structural Transformation ...................................................................................................... 75Urbanisation ..................................................................................................................................................... 76The Outward Expansion of Developed Countries .................................................................................... 77International Flow of Men, Goods and Capital ......................................................................................... 77Conclusion ..................................................................................................................... ................................... 80

PART TWO – SOME THEORIES OF ECONOMIC DEVELOPMENT

Chapter-9Adam Smith’s Theory 83

The Theory ........................................................................................................................................................ 83A Critical Appraisal ........................................................................................................................................ 86Its Applicability to Underdeveloped Countries ......................................................................................... 87

Chapter-10The Ricardian Theory 88

Ricardo’s Theory .............................................................................................................................................. 88A Critical Appraisal ........................................................................................................................................ 92Underdeveloped Countries and Ricardo’s Theory .................................................................................... 93

Chapter-11The Malthusian Theory 94

The Theory ........................................................................................................................................................ 94Measures to Promote Economic Development .......................................................................................... 96A Critical Appraisal ........................................................................................................................................ 98Its Applicability to Underdeveloped Countries ......................................................................................... 99

Chapter-12Mill’s Theory 101

Introduction .................................................................................................................................................... 101The Theory ...................................................................................................................................................... 102A Critical Appraisal ...................................................................................................................................... 104Applicability of Mill’s Theory on Underdeveloped Countries ............................................................. 104

Chapter-13The Classical Theory 106

The Theory ...................................................................................................................................................... 106Its Criticisms ................................................................................................................................................... 107

Chapter-14The Marxian Theory 109

Introduction .................................................................................................................................................... 109The Marxian Theory ..................................................................................................................................... 110The Marxian Process of Economic Development ....................................................................................110

Contents xi

Downfall of Capitalism ................................................................................................................................ 113A Critical Appraisal ...................................................................................................................................... 114The Marxian Theory and Underdeveloped Countries ........................................................................... 115

Chapter-15The Schumpeterian Theory 117

The Theory ...................................................................................................................................................... 117Criticisms of the Theory ............................................................................................................................... 121Schumpeter’s Analysis and Underdeveloped Countries ...................................................................... 122

Chapter-16The Keynesian Theory 124

Summary of Keynes Theory ........................................................................................................................ 124Applicability of Keynes’ Theory to Underdeveloped Countries .......................................................... 125Keynesian Assumptions and Underdeveloped Countries .................................................................... 126Tools of Keynesian Economics and Underdeveloped Countries .......................................................... 127

Chapter-17Marx’ Stages of Growth 131

The Primitive Communal Stage .................................................................................................................. 132The Slave Stage .............................................................................................................................................. 132The Feudal Stage ........................................................................................................................................... 133The Capitalist Stage ...................................................................................................................................... 133The Socialist or Communist Stage .............................................................................................................. 134Marx vs. Rostow ............................................................................................................................................ 134

Chapter-18Rostow’s Stages of Economic Growth 136

The Traditional Society ................................................................................................................................. 136The Pre-conditions for Take-off .................................................................................................................. 137The Take-off .................................................................................................................................................... 138The Drive to Maturity ................................................................................................................................... 141The Age of High Mass-Consumption ........................................................................................................ 141Criticism of the Stages of Economic Growth ............................................................................................ 142Importance and Limitations of Take-off for Underdeveloped Countries ........................................... 144The Take-Off and India ................................................................................................................................ 145

Chapter-19Gerchenkron’s Great Spurt Theory 147

Gerschenkron’s Great Spurt Theory .......................................................................................................... 147Six Generalisations ........................................................................................................................................ 147Common Characteristics of Nations .......................................................................................................... 148How to Bring About the Great Spurt? ....................................................................................................... 148Critical Appraisal .......................................................................................................................................... 150Gerschenkron vs. Rostow ............................................................................................................................ 151

xii The Economics of Development and Planning

Chapter-20Nurkse’s Theory of Disguised Unemployment as a Saving Potential 152

Meaning of Disguised Unemployment ..................................................................................................... 152Nurkse’s Theory ............................................................................................................................................. 153Limitations of the Concept ........................................................................................................................... 155A Realistic View ............................................................................................................................................. 157

Chapter-21Lewis Theory of Unlimited Supplies of labour 159

The Lewis Theory .......................................................................................................................................... 159A Critical Appraisal ...................................................................................................................................... 163

Chapter-22Fei-Ranis Theory 165

The Theory ...................................................................................................................................................... 165Assumptions ................................................................................................................................................... 166A Critical Appraisal ...................................................................................................................................... 170

Chapter-23Jorgenson’s Neo-Classical Model of a Dual Economy 172

The Jorgenson Model .................................................................................................................................... 172Assumptions of the Model ........................................................................................................................... 173Conclusion ..................................................................................................................... ................................. 176A Critical Appraisal ...................................................................................................................................... 177Jorgenson Vs. Fei-Ranis ................................................................................................................................ 178

Chapter-24Harris-Todaro Model of Migration and Unemployment 179

Assumptions of the Model ........................................................................................................................... 179The Model ....................................................................................................................................................... 180Policy Implications of the H-T Model ........................................................................................................ 183Its Critical Appraisal ..................................................................................................................................... 184

Chapter-25Leibenstein’s Critical Minimum Effort Thesis 186

Leibenstein’s Theory ..................................................................................................................................... 186A Critical Appraisal ...................................................................................................................................... 190

Chapter-26Nelson’s Low-Level Equilibrium Trap 192

Nelson’s Theory ............................................................................................................................................. 192Sets of relations .............................................................................................................................................. 193Factors that Avoid Trap ................................................................................................................................ 194

Contents xiii

Chapter-27The “Big Push” Theory 195

Rosenstein-Rodan’s Thesis ........................................................................................................................... 195Indivisibilities in the Production Function ............................................................................................... 196Indivisibility of Demand .............................................................................................................................. 196Indivisibility in the Supply of Savings ...................................................................................................... 197A Critical Appraisal ...................................................................................................................................... 197

Chapter-28The Doctrine of Balanced Growth 199

Meaning of Balanced Growth ..................................................................................................................... 199Explanation of the Theory ........................................................................................................................... 200Criticisms of the Doctrine of Balanced Growth ....................................................................................... 203

Chapter-29The Concept of Unbalanced Growth 206

Introduction .................................................................................................................................................... 206Hirschman’s Strategy .................................................................................................................................... 206A Critical Appraisal ...................................................................................................................................... 209Its Limitations ................................................................................................................................................ 210Balanced Vs. Unbalanced Growth ............................................................................................................. 211Conclusion ...................................................................................................................................................... 212

Chapter-30Dualistic Theories 213

Social Dualism ................................................................................................................................................ 213Technological Dualism ................................................................................................................................. 217A Critical Appraisal ...................................................................................................................................... 219Financial Dualism .......................................................................................................................................... 220

Chapter-31The Dependency Theory of Underdevelopment 223

Introduction .................................................................................................................................................... 223Meaning of Dependency .............................................................................................................................. 224The Dependency Theory .............................................................................................................................. 224Dependency : A Historical International Process .................................................................................... 225Foreign Capital .............................................................................................................................................. 225Technological Dependence .......................................................................................................................... 226Trade and Unequal Exchange ..................................................................................................................... 226Dualism ........................................................................................................................................................... 227Policy Implications of Dependency Theory .............................................................................................. 228Critical Appraisal .......................................................................................................................................... 229Emmanuel’s Theory of Unequal Exchange ............................................................................................... 231

Chapter-32The Limits to Growth Model 233

xiv The Economics of Development and Planning

Introduction .................................................................................................................................................... 233The Model ....................................................................................................................................................... 234Predictions of the Model .............................................................................................................................. 234Its Graphic Explanation ................................................................................................................................ 235Its Criticisms ................................................................................................................................................... 235Its Implications ............................................................................................................................................... 237Conclusion ...................................................................................................................................................... 237

Chapter-33Myrdal’s Theory of Circular Causation 238

Introduction .................................................................................................................................................... 238The Myrdal Thesis ......................................................................................................................................... 239Regional Inequalities .................................................................................................................................... 239International Inequalities ............................................................................................................................. 241A Critical Appraisal ...................................................................................................................................... 242

PART THREE – SOME GROWTH MODELS

Chapter-34The Harrod-Domar Models 245

Introduction .................................................................................................................................................... 245Requirements of Steady Growth ................................................................................................................ 245Assumptions ................................................................................................................................................... 246The Domar Model ......................................................................................................................................... 246The Harrod Model ......................................................................................................................................... 247A Comparative Study of the Two Models ................................................................................................. 251Limitations of these Models ........................................................................................................................ 252Application of Harrod-Domar Models to Underdeveloped Countries ............................................... 253Limitations of these Models from the Standpoint of Underdeveloped Countries ............................ 254

Chapter-35The Kaldor Model of Distribution 257

The Kaldor Model ......................................................................................................................................... 257Its Criticisms ................................................................................................................................................... 260

Chapter-36The Pasinetti Model of Profit and Growth 262

The Model ....................................................................................................................................................... 262Comparison with the Kaldor Model .......................................................................................................... 265

Chapter-37Joan Robinson’s Model of Capital Accumulation 266

The Robinson Model ..................................................................................................................................... 266A Critical Appraisal ...................................................................................................................................... 270Its Weaknesses ............................................................................................................................................... 270Its Applicability to Underdeveloped Countries ....................................................................................... 271

Contents xv

Chapter-38Meade’s Neo-Classical Model of Economic Growth 272

The Meade Model .......................................................................................................................................... 272A Critical Appraisal ...................................................................................................................................... 277

Chapter-39The Solow Model of Long-Run Growth 278

Introduction .................................................................................................................................................... 278Assumptions ................................................................................................................................................... 278The Model ....................................................................................................................................................... 279A Critical Appraisal ...................................................................................................................................... 282Weaknesses ..................................................................................................................................................... 283Applicability of Solow Model to Underdeveloped Countries .............................................................. 283

Chapter-40Kaldor’s Model of Growth 285

Introduction .................................................................................................................................................... 285Assumptions ................................................................................................................................................... 285The Model ....................................................................................................................................................... 286A Critical Appraisal ...................................................................................................................................... 290

Chapter-41The Models of Technical Change 291

Introduction .................................................................................................................................................... 291Neutral and Non-Neutral Technical Change ........................................................................................... 291Hicks Neutrality ............................................................................................................................................ 292Its Criticisms ................................................................................................................................................... 293Hicks Non-Neutral Technical Change ....................................................................................................... 293Disembodied and Embodied Technical Change ......................................................................................296Embodied Technical Change Model-Vintage Approach ........................................................................ 298

Chapter-42The Uzawa Two-Sector Growth Model 300

The Uzawa Model ......................................................................................................................................... 300Equations of The Model3 ............................................................................................................................. 301Working of the Model ................................................................................................................................... 303A Critical Appraisal ...................................................................................................................................... 305

Chapter-43The von Neumann Growth Model 307

The Neumann Growth Model ..................................................................................................................... 307A Critical Appraisal ...................................................................................................................................... 311

xvi The Economics of Development and Planning

Chapter-44Steady State Growth 312

Meaning .......................................................................................................................................................... 312Properties of Steady State Growth ............................................................................................................. 313Flexibility of n ................................................................................................................................................ 313Flexible Capital-Output Raio (v) ................................................................................................................ 313Flexibility of Saving Ratio (s) ...................................................................................................................... 315Flexible Saving Ratio (s) and Flexible Capital-Output Ratio (v) .......................................................... 315Technical Progress ......................................................................................................................................... 316

Chapter-45The Golden Rule of Accumulation 318

Introduction .................................................................................................................................................... 318The Golden Rule Path ................................................................................................................................... 319Representation of the Golden Rule ............................................................................................................ 320The Neoclassical Case ................................................................................................................................... 321

Chapter-46Growth Accounting 323

Introduction .................................................................................................................................................... 323Solow’s Sources of Growth .......................................................................................................................... 324Its Criticisms ................................................................................................................................................... 325Denison’s Sources of Growth ...................................................................................................................... 325Its Criticisms ................................................................................................................................................... 327Jorgenson-Griliches’ Sources of Growth ................................................................................................... 328Measurement of Sources of Growth .......................................................................................................... 329Its Criticisms ................................................................................................................................................... 330

Chapter-47The New Endogenous Growth Theory 331

Introduction .................................................................................................................................................... 331The Solow-Swan Model ................................................................................................................................ 332Implications of the Model ............................................................................................................................ 334The Convergence-Divergence Controversy .............................................................................................. 334Absolute or Unconditional Convergence .................................................................................................. 335Empirical Evidence ....................................................................................................................................... 335Conditional Convergence ............................................................................................................................ 336Empirical Evidence ....................................................................................................................................... 336Conclusion ...................................................................................................................................................... 337Arrow’s Learning by Doing and Other Models ....................................................................................... 338The Lucas Model ........................................................................................................................................... 339Romer’s Model of Technological Change.................................................................................................. 340Criticisms of New Growth Theory ............................................................................................................. 341Policy Implications of New Growth Theory ............................................................................................. 342Implications for Developing Countries ..................................................................................................... 342

Contents xvii

Chapter-48The Cambridge Capital Controversy in The Neo-classical Analysis of Growth 344

Introduction ................................................................................................................... ................................. 344The Capital Controversy .............................................................................................................................. 344The Neo-Classical Capital Theory .............................................................................................................. 345Assumptions .................................................................................................................... ............................... 345The Cambridge Criticisms ........................................................................................................................... 347Joan Robinson’s Critique .............................................................................................................................. 347Samuelson’s Critique and the Surrogate Production Function ............................................................. 348Assumptions .................................................................................................................... ............................... 348Surrogate Production Function ................................................................................................................... 349Its Criticisms ................................................................................................................................................... 351More about the Cambridge Critique .......................................................................................................... 353Conclusion ..................................................................................................................... ................................. 354

Chapter-49The Fel’dman Model 355

The Model ....................................................................................................................................................... 355Comparison with the Domar Model .......................................................................................................... 357Implications for Economic Development .................................................................................................. 358

Chapter-50The Mahalanobis Model 360

Introduction .................................................................................................................................................... 360Two-Sector Model .......................................................................................................................................... 360Relation of the Mahalanobis Two-Sector Model with the Domar Model ........................................... 363Four-Sector Model ......................................................................................................................................... 364A Critical Appraisal ...................................................................................................................................... 367

PART FOUR – DOMESTIC MEASURES FOR ECONOMIC DEVELOPMENT

Chapter-51Capital Formation and Economic Development 371

Meaning of Capital Formation .................................................................................................................... 371Importance of Capital Formation ............................................................................................................... 372Reasons for Low Rate of Capital Formation ............................................................................................. 373Sources of Savings ......................................................................................................................................... 375Sources of Capital Formation ...................................................................................................................... 376

Chapter-52Role of Agriculture and Industry in Economic Development 382

Agriculture and Economic Development ................................................................................................. 382Role of Industrialisation ............................................................................................................................... 384A Critical Appraisal ...................................................................................................................................... 386Interrelationship between Agricultural and Industrial Development ................................................ 386

xviii The Economics of Development and Planning

Chapter-53Monetary Policy in Economic Development 388

Meaning and Importance ............................................................................................................................. 388Main Features of Monetary Policy ............................................................................................................. 388

Chapter-54Fiscal Policy in Economic Development 393

Meaning and Importance ............................................................................................................................. 393Taxation as the Most Effective Instrument of Fiscal Policy ................................................................... 398Role of Public Borrowing in Economic Development ............................................................................ 401Role of Public Expenditure in Economic Development ......................................................................... 402

Chapter-55Deicit Financing as an Instrument of Economic Development 404

Meaning .......................................................................................................................................................... 404Role of Deficit Financing .............................................................................................................................. 405Its Adverse Effects ......................................................................................................................................... 406Safe Limits of Deficit Financing .................................................................................................................. 409

Chapter-56Price Policy in Economic Development 411

The Nature of Price Policy ........................................................................................................................... 411Objectives of Price Policy ............................................................................................................................. 411

Chapter-57Population Growth and Economic Development 415

Introduction .................................................................................................................................................... 415Effects of Population Growth on Economic Development .................................................................... 415Factors Promoting Economic Development ............................................................................................. 416Factors Retarding Economic Development .............................................................................................. 417The Theory of Demographic Transition .................................................................................................... 420Its Criticisms ................................................................................................................................................... 422

Chapter-58Human Capital Formation and Manpower 424

Meaning and Importance of Human Capital Formation ....................................................................... 424Problems of Human Capital Formation .................................................................................................... 426Criteria for Investment in Human Capital ............................................................................................... 428Manpower Planning in LDCs ..................................................................................................................... 432Manpower Shortage ...................................................................................................................................... 432Manpower Surplus ........................................................................................................................................ 433Strategy for Manpower Planning ............................................................................................................... 434Estimating Future Manpower Requirements ........................................................................................... 436

Contents xix

Chapter-59Entrepreneurship in Economic Development 439

Role of the Entrepreneur .............................................................................................................................. 439Factors Impeding the Growth of Entrepreneuship ................................................................................. 440How to Encourage Entrepreneurship ........................................................................................................ 442

Chapter-60Role of the State in Economic Development 444

Introduction .................................................................................................................................................... 444Changes in Institutional Framework ......................................................................................................... 445Organisational Changes ............................................................................................................................... 446Social and Economic Overheads ................................................................................................................. 447Agricultural Development ........................................................................................................................... 450Industrial Development ............................................................................................................................... 451Monetary and Fiscal Policies ....................................................................................................................... 452Increase in Foreign Trade ............................................................................................................................. 452

PART FIVE – INTERNATIONAL MEASURES FOR ECONOMIC DEVELOPMENT

Chapter-61Foreign Trade and Economic Development 455

Introduction .................................................................................................................................................... 455Importance of Foreign Trade ....................................................................................................................... 455Direct Benefits ................................................................................................................................................ 456Indirect Benefits ............................................................................................................................................. 457Its Criticisms ................................................................................................................................................... 458Overview ......................................................................................................................................................... 459Conclusion ...................................................................................................................................................... 460

Chapter-62The Debt Problem of LDCs 461

Introduction .................................................................................................................................................... 461The Debt Crisis ............................................................................................................................................... 462Causes of the Debt Crisis ............................................................................................................................. 462Measure to Solve the Debt Crisis ................................................................................................................ 463Long-Term Suggestions ................................................................................................................................ 465

Chapter-63New International Economic order (NIEO) 467

Origin ............................................................................................................................................................... 467Objectives (or Features) of NIEO ................................................................................................................ 468Implementation of NIEO Programme ....................................................................................................... 469Conclusion ...................................................................................................................................................... 472

xx The Economics of Development and Planning

Chapter-64Commercial Policy and Economic Development 473

Meaning ........................................................................................................................ .................................. 473Arguments For and Against ........................................................................................................................ 473Export Promotion Vs. Import Substitution ............................................................................................... 485Conclusion ..................................................................................................................... ................................. 486

Chapter-65WTO and Developing Countries 487

Introduction .................................................................................................................................................... 487The WTO ......................................................................................................................................................... 487Its Objectives ................................................................................................................................................... 488Its Functions ................................................................................................................................................... 488WTO Agreement ............................................................................................................................................ 489WTO and Developing Countries ................................................................................................................ 489The Doha Round ............................................................................................................................................ 490

Chapter-66Foreign Capital and Aid in Economic Development 493

Types of Foreign Aid ..................................................................................................................................... 493Role of Foreign Aid In Economic Development ...................................................................................... 494Case For Foreign Aid .................................................................................................................................... 495Case Against Foreign Aid ............................................................................................................................ 497Tied Vs. Untied Aid ...................................................................................................................................... 498Factors Determining the Amount of Foreign Aid for Economic Development ................................. 500Aid or Trade .................................................................................................................................................... 502

Chapter-67Two-Gap Model and Costs-Benefits of Foreign Aid 504

Two-Gap Model ............................................................................................................................................. 504Its Limitations ................................................................................................................................................ 506Importance of Two-Gap Analysis ............................................................................................................... 507Costs and Benefits of Aid ............................................................................................................................. 508Its Implications ............................................................................................................................................... 510

Chapter-68Private Foreign Investment and Multinationals 511

Nature .............................................................................................................................................................. 511Merits of Private Foreign Investment ........................................................................................................ 511Demerits of Private Foreign Investment ................................................................................................... 512Multinational Corporations and LDCs ..................................................................................................... 513Meaning .......................................................................................................................................................... 513Spread of MNCs ............................................................................................................................................ 514Merits of MNCs ............................................................................................................................................. 514Demerits of MNCs ......................................................................................................................................... 515An Overview .................................................................................................................................................. 516

Contents xxi

Chapter-69Economic Integration Among Development Countries 517

Need for Economic Integration ................................................................................................................... 517Benefits from Economic Integration .......................................................................................................... 518Problems of Economic Integration ............................................................................................................. 519Measures to Encourage Economic Integration among Developing Countries .................................. 520Conclusion ...................................................................................................................................................... 521

Chapter-70Millennium Development Goals (MDGs) 522

Introduction .................................................................................................................................................... 522Goals and Targets .......................................................................................................................................... 522Strategies ......................................................................................................................................................... 523How to Achieve the Goals ........................................................................................................................... 524Implementation of Millennium Development Goals (MDGs) in India ............................................... 526Progress of Millennium Development Goals ........................................................................................... 528

PART SIX – SOME PROBLEMS OF DEVELOPMENT PLANNING

Chapter-71Economic Planning 533

Meaning of Economic Planning .................................................................................................................. 533Need for Planning in Underdeveloped Countries .................................................................................. 534Plan Formulation and Requisites for Successful Planning .................................................................... 536Problems of Development Planning .......................................................................................................... 539Planning by Direction and Planning by Inducement ............................................................................. 540Financial and Physical Planning ................................................................................................................ 543Perspective Planning and Annual Planning ............................................................................................ 545Indicative Planning and Imperative Planning ......................................................................................... 547Democratic Planning and Totalitarian Planning ..................................................................................... 549Rolling and Fixed Plans ............................................................................................................................... 551Planning under Capitalism and Socialism ............................................................................................... 554Centralised and Decentralised Planning .................................................................................................. 556Corrective Planning and Development Planning ................................................................................... 557Planning in a Mixed Economy .................................................................................................................... 558Planning Models ............................................................................................................................................ 559

Chapter-72Shadow Prices 561

Introduction .................................................................................................................................................... 561Need For the Use of Shadow Prices ........................................................................................................... 561Meaning of Shadow Prices .......................................................................................................................... 562Determination of Shadow Prices ................................................................................................................ 563Difficulties of Shadow Price ........................................................................................................................ 566Uses of Shadow Prices .................................................................................................................................. 567

xxii The Economics of Development and Planning

Chapter-73Project Evaluation and Cost-Benefit Analysis 569

Meaning ........................................................................................................................ .................................. 569Its Stages .......................................................................................................................................................... 570Methods of Evaluation ................................................................................................................................. 570Cost-benefit Analysis .................................................................................................................................... 570Evaluation on the basis of Cost-Benefit Criteria ...................................................................................... 571Evaluation on the Basis of Benefits ............................................................................................................ 576Evaluation on the Basis of Costs ................................................................................................................. 577Importance of Data for Evaluation ............................................................................................................. 577Limitations of Cost-Benefit Analysis ......................................................................................................... 578Use of Cost-Benefit Analysis in Developing Countries .......................................................................... 579Its Difficulties ................................................................................................................................................. 579Use of Cost-Benefit Analysis in India ........................................................................................................ 580Some Suggestions .......................................................................................................................................... 581

Chapter-74Controls under Planning 582

Need for Controls .......................................................................................................................................... 582Types of Controls ........................................................................................................................................... 583Aims of Physical Controls ............................................................................................................................ 583Limitations of Physical Controls ................................................................................................................ 587

Chapter-75Input-Output Analysis 590

Meaning .......................................................................................................................................................... 590Use of Input-Output Model in Planning ................................................................................................... 591Feasibility and Consistency of the Plan .................................................................................................... 592The Leontief Solution .................................................................................................................................... 594The Dynamic Input-Output Model ............................................................................................................ 585Limitations of Input-Output Analysis ....................................................................................................... 596Use of Input-Output Technique in Planning ............................................................................................ 597

Chapter-76Linear Programming 599

Meaning .......................................................................................................................................................... 599Conditions and Generalisations ................................................................................................................. 600Assumptions ................................................................................................................................................... 600Programming Technique—Its Application in Planning ......................................................................... 601Limitations of Linear Programming .......................................................................................................... 602Uses of Linear Programming in Planning ................................................................................................ 603

Chapter-77The Concept of Capital-Output Ratio 605

Meaning .......................................................................................................................................................... 605Capital-Output Ratio in Underdeveloped Economies ........................................................................... 606Factors Determining Capital-Output Ratio .............................................................................................. 607Nature of Capital-Output Ratio .................................................................................................................. 609

Contents xxiii

Case for Low or High Capital-Output Ratio ............................................................................................ 610Limitations .................................................................................................................... .................................. 611Importance in Planning ................................................................................................................................ 613

Chapter-78The Choice of Techniques 614

Meaning .......................................................................................................................................................... 614Process of Technological Development ..................................................................................................... 615Labour-intensive Techniques ...................................................................................................................... 615Capital-intensive. Modern Techniques ...................................................................................................... 616Use of Abandoned Techniques of Advanced Countries ......................................................................... 617Intermediate Technology ............................................................................................................................. 618Appropriate Technology .............................................................................................................................. 618Labour-intensive vs Capital-intensive Techniques ................................................................................. 620Conclusion ...................................................................................................................................................... 622

Chapter-79Transfer of Technology 623

Introduction .................................................................................................................................................... 623Need for Transfer of Technology ................................................................................................................ 624Channels of Technology Transfer ............................................................................................................... 626Problems in Technology Transfer ............................................................................................................... 627Appropriate Package of Technology Transfer .......................................................................................... 628

Chapter-80Investment Criteria in Economic Development 630

Introduction .................................................................................................................................................... 630The Capital-Turnover Criterion .................................................................................................................. 630The Social Marginal Productivity Criterion ............................................................................................. 632The Reinvestment Criterion ........................................................................................................................ 634The Time Series Criterion ............................................................................................................................ 636Conclusion ...................................................................................................................................................... 638

Chapter-81Economic Planning and Price Mechanism 639

Introduction .................................................................................................................................................... 639Price Mechanism in a Planned Economy .................................................................................................. 640Price Mechanism in an Underdeveloped Economy ................................................................................ 641

Bibliography 645-648

xxiv The Economics of Development and Planning

Contents

Documents

level equilibrium

big push theory

international

private foreign

neutral technical

endogenous

millennium

modern economic