DYNAMIC LINKS BETWEEN ECONOMY AND HUMAN DEVELOPMENT Submitted to: Ms. Kiran Bala Das (Faculty- Economics) Submitted by: Trishna Das Roll No. – 167 Semester: I Section-B B.A.-LL.B. (Hons.) Programme: Principles of Economics Date of Submission: 26 th August 2013 1 | Page
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DYNAMIC LINKS BETWEEN ECONOMY AND HUMAN DEVELOPMENT
Submitted to:
Ms. Kiran Bala Das
(Faculty- Economics)
Submitted by:
Trishna Das
Roll No. – 167
Semester: I Section-B
B.A.-LL.B. (Hons.)
Programme: Principles of Economics
Date of Submission: 26th August 2013
HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR (C.G.)
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ACKNOWLEDGEMENTS
I feel highly elated to work on the topic Dynamic Links between Economy and Human
Development because it has significant importance in the current scenario.
I express my deepest regard and gratitude for our Faculty of Economics. Their consistent
supervision, constant inspiration and invaluable guidance have been of immense help in
understanding and carrying out the importance of the project report.
I would like to thank my family and friends without whose support and encouragement, this
project would not have been a reality.
I take this opportunity to also thank the University and the Vice Chancellor for providing
extensive database resources in the Library and through Internet.
Trishna Das
Semester – I
Roll No. - 167
Section – B
B.A.-L.L.B (Hons.)
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RESEARCH METHODOLOGY
This project report is based on Descriptive Research Methodology. Secondary and Electronic
resources have been largely used to gather information and data about the topic. Books and other
reference as guided by Faculty have been primarily helpful in giving this project a firm structure.
Websites, dictionaries and articles have also been referred.
OBJECTIVES
To study the importance of economic growth
To study the factors affecting economic growth
To study human development
To study the Human Development Index
To study the links between economic growth and human development
STATISTICAL TOOLS.
Diagrams have been used to make this project on Dynamic Links between Human Development
and Economic Growth attractive and easy to understand. It was a highly informative experience.
Human development (HD) is increasingly viewed as the ultimate objective of development in
place of economic growth (EG). Yet, the links between HD and EG remain of critical importance
since EG would appear to be a foremost contributor to sustained progress in HD. Moreover, not
only are improvements in HD the fundamental development goal, but HD is itself an important
contributor to EG over time. HD has been defined as ‘a process of enlarging people’s choices’
(UNDP, 1990: 10). This definition is, of course, very broad, and includes non-material aspects
such as the many dimensions of political, cultural and social freedoms. Clearly, there exist strong
connections between EG and HD. On the one hand, EG provides the resources to permit
sustained improvements in HD. On the other, HD improvements raise the capacities of economic
agents who make the critical contributions to EG. Each of these relationships has often been
acknowledged separately—for example, the way in which EG affects HD forms part of the basic
needs literature, while the impact of improved labour quality on economic growth has been
widely explored in the human capital literature. EG is influenced by natural resources and both
economic and non economic factors. Natural resources often decide the limitations of
development. Economic factors include available capital stock and the rate of its accumulation,
capital-output ratio in various sectors, agricultural surplus, conditions in foreign trade and
economic system. Some non economic factors include size and quality of human resources,
political freedom, social organization, technical know-how, absence of corruption, but above all,
will to develop on the part of the people plays an important role in determining the pace and
direction of development.
The ultimate objective of all efforts is human development.
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ECONOMIC GROWTH
Economic growth is an important factor in reducing poverty and generating the resources
necessary for human development and environmental protection. There is a strong correlation
between gross domestic product (GDP) per capita and indicators of development such as life
expectancy, infant mortality, adult literacy, political and civil rights, and some indicators of
environmental quality. However, economic growth alone does not guarantee human
development. Well-functioning civil institutions, secure individual and property rights, and
broad-based health and educational services are also vital to raising overall living standards.
Despite its shortcomings, though, GDP remains a useful proxy measure of human well-being.
The world economy has grown approximately fivefold since 1950, an unprecedented rate of
increase. The industrialized economies still dominate economic activity, accounting for US$22.5
trillion of the US$27.7 trillion global GDP in 1993 [1]. Yet a remarkable trend over the past 25
years has been the burgeoning role played by developing countries, in particular the populous
economies of east and south Asia.
A major factor in this development has been the steady integration of the global economy. Since
the Second World War, international trade has grown consistently faster than output and now
accounts for approximately 25 percent of world GDP. Other measures of globalization include
the enormous expansion of international financial markets, the spread of new technologies that
have revolutionized international communications and encouraged the development of
transnational patterns of production and consumption, and the fourfold increase in foreign direct
investment flowing to developing and transition economies over the past decade.
However, this overall picture masks large, growing disparities among the developing countries;
not all countries have been able to take advantage of the benefits of globalization. Since about
1980, the fastest-growing economies of Asia and Latin America have been characterized by high
rates of domestic savings, declining dependence on agriculture, and a rapid growth in trade,
especially of manufactured exports. The emerging economies of the developing world – such as
Brazil, China, Indonesia, and Mexico – have been increasingly attractive to private finance; two
thirds of the US$95.5 billion foreign direct investment flows in 1995 went to just six developing
countries. In addition, of the estimated 12 million jobs created by transnational corporations’
investment in developing countries, about half are in China.
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FACTORS IN ECONOMIC GROWTH
Natural Resource
Until the 1930s, development or under development of an economy was often explained in
terms of natural resources available. Jacob Viner, William J. Baumol and W.A. Lewis are some
of the leading economists who attach great importance to natural endowments of a country for its
development. Jacob Viner has stated, “Much obviously depends on the character of the physical
environment, or the ‘quality’ in my terminology, of the natural resources considered as factors of
production...An unfavourable physical environment can be a major obstacle to development.”1
Indeed, development and prosperity of a number of countries may be associated, among other
things, with the kind and size of the resources base they have. Availability of fertile soil with
abundant supply of water for irrigation purposes provides favourable conditions for agricultural
development. Similarly, adequate reserves of coal and petroleum and water resources for
electricity generation can be profitably utilised by an underdeveloped country for its
transformation into a developed economy. Minerals like iron ore, copper, tin, bauxite and
uranium, if available in plenty, can induce the process of industrialisation. Sea coast provides
navigation facilities necessary for overseas trade. As it has happened in Japan and Scandinavian
countries, coast can prove to be a source of abundant supply of fish. Without these resources
there is not much hope for economic development. The natural endowments of a country
place general limits on the possibilities of economic development. However, resources
availability is not a sufficient condition for human progress. A number of countries in Latin
America, Africa and Asia are favourably endowed with natural resources, yet their achievements
in terms of economic progress are rather disappointing. Many parts of the world which are
presently underdeveloped are poor in terms of natural resources. Cases of Afghanistan and Tibet
are often cited to prove that lack of natural resources can turn out to be a major obstacle to
development. But this point is not to be stretched too far, as man often succeeds in overcoming
the problems arising from the scarcity of natural resources. Switzerland, for example, has
scarcely a single physical advantage for development, yet in wealth per capita it ranks as high as
Germany, Britain and the U.S.A. which are rich in the physical endowments.
1 Jacob Viner, “Economics of Development”, in A.N. Agarwal and S.P. Singh (eds.) Economics of Underdevelopment (New York, 1963) pp. 16-17
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Furthermore, the relative role of natural resources in economic development of a country tends to
decline as an economy grows. Theodore Schultz has pointed out that the ratio of the natural
resources to the complex of all resources used in poor countries is about 20-25 percent as against
5 percent or even less in developed industrial countries.2
ECONOMIC FACTORS
In a country’s economic development role of economic factors is decisive. The stock of capital
and the rate of capital accumulation in most cases settle the question whether at a given point of
time a country will grow or not.
Capital formation: The strategic role of capital in raising the level of production has traditionally
been acknowledged in economics. With the development of growth economics in post World
War-2period its role in economic progress has been increasingly emphasised. The Harod-Domar
model of growth has treated capital as the crucial factor in economic growth. It is now
universally admitted that a country which wants to accelerate the pace of growth has no choice
but to save a high ratio of its income, with the objective of raising the level of investment. Great
reliance on foreign aid is highly risky and thus has to be avoided. Economists highly assert that
lack of capital is the principle obstacle to growth and no developmental plan will succeed unless
adequate supply of capital is forthcoming.
Marketable surplus of agriculture: Increase in agricultural production accompanied by a rise in
productivity is important from the point of view development of a country. But what is more
important is that the marketable surplus of agriculture increases. The term ‘marketable surplus’
refers to excess of output in the agricultural sector over and above what is required to allow the
rural population to subsist. The importance of marketable surplus emanates from the fact that the
urban industrial population subsists on it. With the development of an economy, the ratio of the
urban population increases and increasing demands are made on agriculture for food grains.
These demands must be met adequately; otherwise the consequent scarcity of food in urban areas
will arrest growth.
2 Theodore W. Schultz, “Connections Between Natural Resources and Economic Growth” in Carl Eicher and Lawrence Witt (eds.), Agriculture in Economic Development (Bombay 1970), p 227
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Conditions in foreign trade: The classical theory of trade has been used by economists for a long
time to argue that trade between nations is always beneficial to them. In the existing context the
theory suggests that the presently less developed countries should specialise in production of
primary products as they have comparative cost advantage in their production. The developed
countries on the contrary have a comparative cost advantage in manufacturers including
machines and equipments and should accordingly specialise in them. In the past it was argued
that free trade based on this kind of specialisation was not beneficial to a developing economy.
Economic system: The economic system and the historical setting of a country also decide the
development prospects to a great extent. There was a time when a country could have a laissez
faire economy and yet face no difficulty in making economic progress. England’s economy was
precisely the one in which there was minimal government intervention, and yet it steadily
developed over a long period. In today’s entirely different world situation, a country would find
it difficult to grow along the England’s path of development. The Third World Countries of the
present times will have to make their own path of development. They cannot hope to make much
progress by adopting a laissez faire economy.
NON ECONOMIC FACTORS
Human resources: Human resources are an important factor in economic development.
Economists often see population as an obstacle to growth rather than a factor which will assist
the developmental activity. Nevertheless, man makes positive contribution to growth. Man
provides labour power for production and if in a country labour is efficient and skilled, its
capacity to contribute to growth will decidedly be high. The productivity of illiterate, unskilled,
disease ridden and superstitious people is generally low and they do not provide any hope to
developmental work in a country. If a country can manage to use its manpower properly, it will
prove to be an important factor in development. But in case human resources remain either
unutilised or the, manpower management remains defective, the same people who could have
made a positive contribution to growth activity prove to be a burden on the economy.
Technical knowhow and general education: It has never been doubted that the level of technical
knowhow has a direct bearing on the pace of development. As the scientific and technical
knowledge advances, man discovers more and more sophisticated techniques of production
which steadily raise the productivity levels. Under assumptions of a linear homogenous
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production function and a neutral technical change which does not affect the rate of substitution
between capital and labour, Robert M. Solow has observed that the contribution of education to
the increase in output per man hour in the United States between 1909 and 1949 was more than
that of any other factor3. T.W. Schultz, A.K. Sen, and some others in the recent years have
emphasised the contribution of investment in man for economic development.
Political freedom: Looking to the world history of modern times one learns that he processes of
development and underdevelopment are interlinked and it is wrong to view them in isolation. We
all know that the underdevelopment of India, Pakistan. Bangladesh, Sri Lanka, Malaysia, Kenya
and a few other countries, which were in the past British colonies, was linked with the
development of England. England recklessly exploited them and appropriated a large portion of
their economic surplus. This made a significant contribution to Britain’s economic development.
The colonies, however, were forced to remain backward in the process. Dadabhai Naoroji has
also candidly explained in his classic work ‘Poverty and Un-British Rule in India’ that the drain
of wealth from India under the British was the major cause of the increase in poverty in India
during that period, which in turn arrested the economic development of the country. Hence,
political freedom is an essential condition for the economic development of the country.
Social organization: Mass participation in development programmes is a pre-conditin for
accelerating the growth process. However, people show interest in the development activity only
when they feel that the fruits of growth will be fairly distributed. Experiences from a number of
countries suggest that whenever the defective social organisation allows some elite groups to
appropriate the benefits of growth, the general mass of people develop apathy towards state’s
development programmes. Under the circumstances, it is futile to hope that masses will
participate in the development projects undertaken by the state.
Corruption: corruption is rampant in developing countries at various levels and it operates as a
negative factor in their growth process. Until and unless these countries root out corruption in
their administrative system, it is most natural that the capitalists, traders and other powerful
economic classes will continue to exploit national resources for their personal interests.
Furthermore a substantial portion of the outlay on development projects is appropriated by the
government officials and other functionaries by employing corrupt means. The regulatory system
is also and licenses are not always granted on merit. The art of tax evasion has been perfected by
3 Robert M. Solow, “Technical Change and Aggregate Production Function” , Review of Economics and Statistics, Vol 34, no.3, pp312-320, August 1957
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certain sections of developing countries and quite often tax is evade by them with the connivance
of government officials. Under conditions of rampant corruption it is futile to think that the pace
of development will be fast. It is , however, surprising that one finds hardly any reference to
corruption as a growth arresting factor in the literature that has appeared on development and
underdevelopment in recent years.
Desire to develop: development activity is not a mechanical process. The pace of economic
growth in any country depends to a great extent on people’s desire to develop. If in some country
level of consciousness is low and the general mass of people has accepted poverty as its fate,
then there will be little hope for development. Richard T. Gill has candidly remarked, “the point
is that economic development is not a mechanical process; it is not a simple adding up of
assorted factors. Ultimately, it is a human enterprise. And like all human enterprises, its outcome
will depend finally on the skill, quality and attitudes of the men who undertake.4
HUMAN DEVELOPMENT
4 Richard T. Gill, Economic Development: Past and Present (New Delhi, 1965), p. 19
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In the recent year the search for an alternative to GNP as a measure of economic development
has led to the computation of Human Development Index. The United Nations development
programme introduced the HDI in the first Human Development Report prepared under the able
stewardship of Mahbub ul haq, and published in 1990. The measure has been enlarged & refined
over the years & many related indices of Human Development like- gender related development
index(GDI), gender empowerment measure(GEM), human poverty index(HPI)have been
developed in subsequent Human Development Reports published annually by UNDP.
The first Human Development Report in 1990 opened with the simply stated premise that has
guided all subsequent Reports: “People are the real wealth of a nation.” By backing up this
assertion with an abundance of empirical data and a new way of thinking about and measuring
development, the Human Development Report has had a profound impact on policies around the
world.
"The basic purpose of development is to enlarge people's choices. In principle, these choices can
be infinite and can change over time. People often value achievements that do not show up at all,
or not immediately, in income or growth figures: greater access to knowledge, better nutrition
and health services, more secure livelihoods, security against crime and physical violence,
satisfying leisure hours, political and cultural freedoms and sense of participation in community
activities. The objective of development is to create an enabling environment for people to enjoy
long, healthy and creative lives."
Mabub ul Haq
(1934-1998)
Founder of the Human Development Report
THE HUMAN DEVELOPMENT INDEX: WORKING
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The first Human Development Report introduced a new way of measuring development by
combining indicators of life expectancy, educational attainment and income into a composite
human development index, the HDI. The breakthrough for the HDI was the creation of a single
statistic which was to serve as a frame of reference for both social and economic development.
The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows
where each country stands in relation to these goalposts, expressed as a value between 0 and 1.
The education component of the HDI is now measured by mean of years of schooling for adults
aged 25 years and expected years of schooling for children of school entering age. Mean years of
schooling is estimated based on educational attainment data from censuses and surveys available
in the UNESCO Institute for Statistics database and Barro and Lee (2010) methodology).
Expected years of schooling estimates are based on enrolment by age at all levels of education
and population of official school age for each level of education. Expected years of schooling are
capped at 18 years. The indicators are normalized using a minimum value of zero and maximum
values are set to the actual observed maximum value of mean years of schooling from the
countries in the time series, 1980–2012, that is 13.3 years estimated for the United States in
2010. The education index is the geometric mean of two indices. The life expectancy at birth
component of the HDI is calculated using a minimum value of 20 years and maximum value of
83.57 years. This is the observed maximum value of the indicators from the countries in the time
series, 1980–2012. Thus, the longevity component for a country where life expectancy birth is 55
years would be 0.551.
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For the wealth component, the goalpost for minimum income is $100 (PPP) and the maximum is
$87,478 (PPP), estimated for Qatar in 2012.
The decent standard of living component is measured by GNI per capita (PPP$) instead of GDP
per capita (PPP$) The HDI uses the logarithm of income, to reflect the diminishing importance
of income with increasing GNI. The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric mean. The HDI facilitates instructive
comparisons of the experiences within and between different countries.
Formula for calculating HDI
Old method (before 2010 Report)
The HDI combined three dimensions last used in its 2009 Report:
Life expectancy at birth, as an index of population health and longevity
Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting)
and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third
weighting).
Standard of living , as indicated by the natural logarithm of gross domestic product per capita at
purchasing power parity.
This is the methodology used by the UNDP up until its 2011 report.
The formula defining the HDI is promulgated by the United Nations Development Programme
(UNDP) In general, to transform a raw variable, say , into a unit-free index between 0 and 1
(which allows different indices to be added together), the following formula is used:
where and are the lowest and highest values the variable can attain,