• UGI USER
  • May 08, 2024
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ECONOMIC GROWTH AND DEVELOPMENT

Introduction

The concept of progress within the realm of economics has undergone significant evolution over time. Initially, the term “progress” was predominantly used to describe advancements in the economic sector. This term broadly encapsulated improvements in the economic conditions of a country or region, without much differentiation in the nuances of economic change. However, as the study of economics became more nuanced and complex, scholars and practitioners began to recognize the need for more specific terminology to accurately describe the different aspects of economic change. This led to the introduction and frequent use of the terms “growth” and “development” within the economic discourse.

 

Distinguishing Between Growth and Development

By the 1960s and 1970s, a clear distinction between “economic growth” and “economic development” was established, reflecting a deeper understanding of the multifaceted nature of economic progress. This distinction is crucial for both theoretical analysis and practical policy-making.

  • Economic Growth: This term came to be narrowly defined as an increase in a country’s output of goods and services, typically measured by the growth in Gross Domestic Product (GDP) or Gross National Product (GNP). Economic growth is quantifiable and reflects the capacity of an economy to produce more goods and services over time. It’s often seen as a necessary condition for development but not sufficient on its own to ensure overall economic progress.
  • Economic Development: Unlike economic growth, development encompasses a broader spectrum of changes in an economy. It refers to the overall improvement in the standard of living, reduction in poverty, equitable distribution of income, and enhancement of the quality of life among the population. Economic development is concerned with both the quantitative and qualitative aspects of economic change, including improvements in health, education, and environmental sustainability, alongside economic growth.

The Interplay Between Growth and Development

The nuanced understanding of the terms “growth” and “development” underscores the complex     interplay between quantitative increases in economic output and qualitative improvements in human well-being. It is widely acknowledged that while economic growth is essential for providing the necessary resources for development, it does not automatically translate into economic development. Effective policy-making requires a balanced focus on both growth and development to achieve sustainable progress. This involves strategies that not only aim at increasing the economic output but also at distributing the benefits of growth equitably among the population and improving the overall quality of life.

CONCEPT OF ECONOMIC GROWTH

Economic growth stands as a pivotal concept within the study of economics, encapsulating the dynamic expansion of a nation’s economic capabilities over time. This expansion is not merely a reflection of increased quantities but denotes a fundamental enhancement in the quality of life and the efficiency of economic processes.

Definition and Key Indicators

Economic growth is fundamentally defined by the enhancement of various economic indicators over time, most notably the real per capita income. This measure adjusts for inflation, providing a clear view of economic progress by indicating the average income per person, adjusted for the cost of living changes over a period.

  • Real Output Increase: At its core, economic growth signifies a boost in the total physical or real output, which is the aggregate production of goods and services aimed at fulfilling human desires. For instance, a noticeable year-over-year increase in car production within an economy exemplifies such growth.
  • Quantifiable Nature: The growth is inherently quantifiable, allowing for its measurement in absolute terms. This quantitative change is most commonly gauged using Gross National Product (GNP) or Gross Domestic Product (GDP), offering a clear numerical representation of economic performance.
  • Positive Connotation: While growth can technically be positive or negative, the term is predominantly used in a positive context, highlighting periods of economic expansion rather than contraction.

Mechanisms of Economic Growth

Economic growth materializes through a multifaceted interplay of factors, each contributing to the overall expansion of economic capabilities:

  • Increase in Tangible Capital Goods: The accumulation of physical assets, such as machinery, buildings, and infrastructure, directly enhances productive capacity, facilitating increased output and efficiency.
  • Technological Improvement: Innovations and advancements in technology play a critical role in economic growth. They not only improve the efficiency of production processes but also introduce new products and services, expanding economic horizons.
  • Growth of the Labour Force: An expanding labour force, coupled with improvements in employment rates and workforce skills, significantly contributes to the economy’s ability to produce goods and services.
  • Increase in Human Capital: Investment in education and training enhances the skills and productivity of the workforce, termed human capital, which is a crucial driver of economic growth.

Implications of Economic Growth

The concept of economic growth carries profound implications for a nation’s economic health and its citizens’ quality of life. A steady growth rate is indicative of a vibrant economy, characterized by job creation, increased income levels, and improved standards of living. Furthermore, economic growth facilitates a country’s ability to invest in public services, infrastructure, and social welfare programs, thereby enhancing the well-being of its populace.

However, it is essential to consider that economic growth also presents challenges, particularly in terms of environmental sustainability and social equity. The pursuit of growth must therefore be balanced with policies aimed at ensuring environmental protection and reducing economic disparities.

FACTORS AFFECTING ECONOMIC GROWTH

 Economic growth is a complex phenomenon influenced by a myriad of factors that interact in various ways. Understanding these factors is essential for formulating effective economic policies and strategies.

Economic Factors

  • Natural Resources
  • Importance: Natural resources such as land, soil quality, forest wealth, minerals, oil resources, and climate significantly impact economic growth.
  • Conditions: Their presence is crucial but not the sole determinant of economic growth. The efficient utilization of these resources matters greatly.
  • Examples:
  • Underutilization: In some African countries, despite being rich in natural resources, these resources remain unutilized, underutilized, or misutilized.
  • Efficiency over Resources: Countries like Singapore and Japan, despite having limited natural resources, have achieved high levels of development through efficiency and innovation.
  • Capital Formation
  • Process: Involves the investment of a community’s savings into capital goods, such as plants, equipment, and machinery, leading to an increase in productive capacity and worker efficiency.
  • Outcome: It ensures a larger flow of goods and services by transforming savings into investment, thus fostering economic growth.
  • Technological Progress
  • Impact: Plays a pivotal role by introducing new and better production methods and improving existing ones.
  • Benefits: Leads to increased productivity and makes fuller use of natural resources. For instance, the adoption of power-driven farm equipment has significantly increased agricultural output.
  • Global Influence: Western economies have particularly benefited from technological advancements.
  • Entrepreneurship
  • Role: Entrepreneurs identify new investment opportunities, take risks, and invest in burgeoning business ventures.
  • Challenge in Developing Countries: A lack of entrepreneurship is often a bigger impediment to growth than deficiencies in capital, infrastructure, or human resources.
  • Human Resource Development
  • Methods: Investments in human capital through education and healthcare.
  • Effects: Enhances the knowledge and skills of the population, contributing significantly to economic growth.
  • Population Growth
  • Contribution: Provides labor supply and expands the market for goods and services, thus facilitating economic growth.
  • Caveat: Growth should be sustainable; overly rapid population growth can be detrimental.
  • Social Overheads
  • Infrastructure: Educational institutions and healthcare facilities contribute to creating a responsible and productive population that drives economic progress.

Non-economic Factors

  • Political Stability
  • Relevance: A stable, effective government with transparent and efficiently implemented policies inspires investor confidence, attracting domestic and foreign capital, which accelerates economic development.
  • Social and Psychological Factors
  • Influence: Social values, perspectives, and institutions evolve with education and cultural transformation, fostering innovation and entrepreneurship.
  • Education
  • Impact: Plays a crucial role in human resource development, improving labor efficiency, and encouraging the adoption of new ideas, thereby supporting economic development.
  • Desire for Material Advancement
  • Necessity: Societies must value progress and eschew attitudes that stifle risk-taking and enterprise, such as excessive self-denial or fatalism, to foster economic development.

NEED FOR MEASURING ECONOMIC GROWTH

The measurement of economic growth is a fundamental process that impacts various crucial aspects of an economy, including tax collection, interest rates, inflation, and foreign trade. Understanding and quantifying economic growth accurately are essential for several reasons:

  • Setting and Achieving Targets:
  • Economic measurements enable governments and policymakers to set realistic and achievable targets for the country’s development.
  • By reviewing growth rates, adjustments can be made to ensure that these targets are met, enabling a structured and strategic approach to economic development.
  • Sustainability of Growth Rates:
  • Continuous monitoring of economic growth is vital to identify trends and ensure that growth rates are sustainable.
  • Without proper measurement, there is a risk of economic overheating or underperformance, both of which can have severe long-term effects.
  • Inflation and Deflation Control:
  • Measuring economic growth helps in monitoring inflationary and deflationary trends.
  • Policymakers can use growth data to implement measures to stabilize prices, thereby protecting the economy from the adverse effects of inflation or deflation.
  • Transformation of the Economy:
  • Accurate growth measurements allow for strategic planning in transitioning the economy’s focus from one sector to another, such as from agriculture to manufacturing to services.
  • This transition is essential for the modernization of the economy and for maintaining competitiveness in the global market.
  • Addressing Social Challenges:
  • Economic growth data is crucial for planning and implementing strategies aimed at poverty eradication and employment generation.
  • Understanding growth patterns helps in allocating resources more effectively towards social welfare programs.
  • Financial Planning and Budgeting:
  • Predictions of tax revenues based on economic growth measurements are essential for government budgeting and financial planning.
  • This enables more accurate estimates of public spending, investments, and allocations in various sectors.
  • Guidance for the Private Sector:
  • The private sector relies on publicly available economic data to make informed investment decisions.
  • Growth measurements provide businesses with insights into potential opportunities and risks in the market.

Historical Context: Simon Kuznets and GDP

  • In the 1930s, Simon Kuznets developed the concept of Gross Domestic Product (GDP) to quantify a nation’s total economic output.
  • GDP has since become a primary indicator of economic growth, encompassing the total value of all goods and services produced over a specific time period.
  • This measure has allowed for standardized comparisons of economic performance both within and across countries, contributing significantly to our understanding of economic development and progress.

UPSC PREVIOUS YEAR QUESTION

1. Economic growth in country X will necessarily have to occur if: (2013)

(a) There is technical progress in the world economy.
(b) There is population growth in X.
(c) There is capital formation in X.
(d) The volume of trade grows in the world economy.

CYCLICAL AND STRUCTURAL GROWTH

Aspect Cyclical Growth Structural Growth
Definition Cyclical growth refers to the fluctuations in economic growth that occur in cycles over the short term due to various external factors. Structural growth is the long-term increase in economic capacity and output brought about by underlying fundamental changes in the economy.
Drivers – Short-term factors such as government subsidies, low global prices, favorable weather conditions (e.g., better monsoon), low inflation, etc. – Long-term factors such as demographic changes (e.g., demographic dividend), implementation of effective macroeconomic policies, and employment generation.
Characteristics – Highly dependent on the external economic environment and market conditions. – Based on intrinsic changes within the economy that enhance productivity, efficiency, and innovation.
Potential for De-growth – Cyclical de-growth can occur if the external factors turn unfavorable, leading to a temporary decline in economic growth. – Structural de-growth or negative growth can happen due to unfavorable long-term factors, such as an ageing population, poor macroeconomic indicators, or high unemployment rates.
Examples – A country experiencing rapid economic growth due to a temporary surge in commodity prices or a significant increase in consumer spending driven by a tax cut. – A country witnessing sustained growth over decades due to improvements in education, technology adoption, and a transition to higher value-added sectors of the economy.
Implications – Cyclical growth is subject to fluctuations and can lead to periods of economic instability or recessions when the growth cycle turns negative. – Structural growth implies a steady improvement in the standard of living and economic stability, although it may be challenged by long-term structural issues.

GROWTH VS DEVELOPMENT

Basis of Comparison Growth Development
Concept An improvement in an economy’s physical output of goods and services over time. A positive change both quantitatively and qualitatively in an economy.
Effect Indicates growth in both the national and per capita incomes. Denotes positive changes in the lives of citizens related to improvement in their quality of life. Quantitative and qualitative improvements are noted.
Factors Measured by the increase in real GDP, per capita income, or components like consumption, exports, investments, etc. Does not consider qualitative metrics like happiness. Involves reduction of poverty, illiteracy, unemployment, measurement of Human Development Index (HDI), Happiness Index, reduction of stunting and wasting, etc. Focuses on qualitative metrics.
Time Period Relevant for short-term periods and is measured in a specific timeframe. A long-term process that isn’t measured in a fixed time period.
Government’s Role An automatic procedure that might or might not result from government intervention or policy. Usually requires targeted policies and government intervention to address specific issues.
Change It Brings An increase in indicators of growth such as GDP, investment, consumption, etc. Progress in the general quality of life of people, reflecting improvements in health, education, and overall wellbeing.
Relevance More relevant in developed economies where basic development (health, education, etc.) has already taken place. More pertinent for evaluating the standard of living and development in developing nations, where there’s a significant scope for improvement in life quality metrics.

INDICATORS OF ECONOMIC GROWTH

Economic growth is a crucial aspect of a nation’s development, reflecting its capacity to enhance the living standards of its population over time. Traditional metrics like Gross Domestic Product (GDP), Gross Value Added (GVA), and Gross National Product (GNP) have long been the cornerstone for measuring economic progress.

Traditional Economic Indicators

Per Capita Income

  • Definition and Importance: Per capita income measures the average income earned per person in a given area in a specified year. It is a widely recognized indicator of economic prosperity, revealing the level of economic activity and the size of an economy. By assessing the growth of real per capita GNP, one can gauge a nation’s efficiency in increasing its output at a rate surpassing its population growth, indicating sustainable economic expansion.
  • World Bank Classification: The World Bank classifies countries into four income groups based on Gross National Income (GNI) per capita, as follows:
    • Low income: Less than 1036 USD
    • Lower-middle income: 1036-4045 USD
    • Upper-middle income: 4046-12535 USD
    • High income: More than 12535 USD

This classification helps in understanding the economic standing of nations on a global scale.

Alternative Economic Indicators

Natural Resources Accounting

  • Rationale: Natural resources like biodiversity, soil, water, and air, often overlooked in traditional economic accounts, are vital for sustainable development. Unlike man-made capital, natural capital has not been adequately valued in economic terms, leading to unsustainable exploitation.
  • Objective: By incorporating natural resources accounting, policymakers can devise strategies that promote the sustainable use of these resources, ensuring long-term economic growth that does not compromise ecological balance.

Big Mac Index

  • Overview: Introduced by the Economist, the Big Mac Index is an informal way of measuring the purchasing power parity (PPP) between two currencies. It uses the price of a Big Mac burger as a benchmark to compare the purchasing power across different countries.
  • Significance: This index offers a grounded comparison of currency value, unaffected by short-term market fluctuations typical of exchange rates. It serves as a practical tool for understanding economic conditions from a consumer’s perspective.

Limitations of Traditional Indicators

While GDP, GNP, and GVA are critical for evaluating economic progress, they possess several limitations:

  • Inequality: These measures do not account for income distribution within a population, potentially masking disparities in wealth and living standards.
  • Non-market Activities: Unpaid work and informal economies are not captured, overlooking significant aspects of economic activity.
  • Sustainability: There is a lack of consideration for whether current economic activities deplete natural resources or harm the environment, questioning the long-term viability of growth measured this way.

SHARE OF DIFFERENT SECTORS IN THE ECONOMY

The economy is often divided into three main sectors to better understand and analyze its composition and the contributions of different types of activities.

Sector Sub-sector Share at the current price (approx. figures)
Primary Agriculture, Forestry and Fishing, Mining and Quarrying 22%
Secondary Manufacturing, Electricity, Gas, Water Supply and Other Utility Services, Construction 26%
Tertiary Trade, Hotels, Transport, Communication and Broadcasting, Financial, Real Estate and Professional Services, Public Administration, Defence and Other Services 54%

Primary Sector

The primary sector of the economy includes activities directly related to natural resources and raw materials. This sector’s primary activities include agriculture, forestry, fishing, and mining. It is a fundamental part of the economy because it supplies raw materials for the secondary and tertiary sectors. With a share of approximately 22% at current prices, the primary sector forms a substantial base for the economy, though its share is smaller compared to the tertiary sector. This can be attributed to the shift towards a more service-oriented economy and the varying productivity levels across sectors.

Secondary Sector

The secondary sector encompasses activities involved in transforming raw materials into finished or semi-finished products. This includes manufacturing, as well as electricity, gas, water supply, and other utility services, and construction. With a share of approximately 26% at current prices, the secondary sector plays a critical role in industrializing and developing the economy, offering employment opportunities and contributing to the country’s infrastructure and technological advancement.

Tertiary Sector

The tertiary sector, or the service sector, includes a wide range of activities that provide services rather than goods. These activities include trade, hotels, transport, communication and broadcasting, financial, real estate and professional services, and public administration, defence, and other services. Dominating the economic structure with a share of approximately 54% at current prices, the tertiary sector reflects the economy’s evolution towards services and knowledge-based activities. This sector’s growth signifies a higher standard of living and a shift towards a more consumer-oriented economy.

This breakdown highlights the dynamic nature of an economy, showing a significant shift towards the tertiary sector, indicative of a mature, service-oriented economy. While the primary and secondary sectors remain crucial for their foundational contributions, the tertiary sector’s predominance underscores the importance of services in driving economic growth and development.

ECONOMIC DEVELOPMENT

Historically, the discipline of economics primarily focused on augmenting the quantity of a country’s production and income. It was predicated on the notion that an increase in production inherently leads to an escalation in national income, thereby elevating the standard of living for its citizens. This approach, prevalent until the 1950s, did not distinguish between the concepts of “growth” and “development.”

Distinguishing Growth from Development

  • Economic Growth: Traditionally referred to the increase in a country’s output and income.
  • Economic Development: Represents both a quantitative and qualitative transformation in the lives of individuals, characterized by an amelioration in their economic conditions. It encompasses social and economic dimensions, signifying a holistic improvement beyond mere financial gains.

Components of Economic Development

Economic development is multifaceted, involving enhancements in various spheres:

  • Social and Cultural: Improvements in education, healthcare, and societal norms that elevate the quality of life.
  • Political: Strengthening governance, law, and order, and democratic processes that ensure stability and fairness.
  • Economic: Enhancements in infrastructure, industry, and services that bolster economic stability and growth.

For example, India’s economic growth has led to increased wages, greater savings, improved infrastructure, and a positive shift in public attitudes, illustrating the broad impacts of development.

Economic Growth vs. Economic Development

A crucial distinction to understand is that economic growth does not always equate to economic development. While growth focuses on increasing output and income, development emphasizes overall well-being and quality of life improvements. For instance, certain Middle Eastern countries have experienced significant income growth without a commensurate level of development, highlighting the disparities between these concepts.

The Role of the Welfare State in Economic Development

With the rise of the “welfare state” concept, the focus has shifted towards ensuring the well-being of citizens through comprehensive development strategies.

  • Definition: A welfare state is a governance model where the state plays a pivotal role in securing economic and social welfare for its citizens, aiming for equal opportunities and wealth distribution.
  • Functions: Modern welfare states undertake responsibilities in healthcare, education, sanitation, insurance, and infrastructure, ensuring that the basic needs of life are met for all.
  • Indian Context: India’s constitution embodies the principles of welfare through its “Fundamental Rights and Directive Principles,” influenced by Gandhian philosophies such as trusteeship and ensuring welfare measures are a constitutional mandate.

INDICATORS OF ECONOMIC DEVELOPMENT

Indicator Description Dimensions/Variables Notable Aspects
Gross National Happiness (GNH) Coined by Jigme Singye Wangchuck in the 1970s as an alternative to GDP. Focuses on well-being rather than economic growth. 1. Sustainable socio-economic development

2. Cultural preservation

3. Environmental conservation

4. Good governance

 – Nine domains measured in 33 indicators

– Multidimensional index – Advantages include focus on well-being

– Challenges include subjective nature and survey duration
Happiness Index Published under the Gross Happiness Report by the UN Sustainable Development Solution Network, aiming to assist in policy-making for citizen happiness. 1. Income

2. Healthy life expectancy

3. Social support

4. Freedom

5. Trust

6. Generosity

 – Inspired by Bhutan’s GNH

– First released in 2012

– Finland ranked as happiest country in 2022

– India ranked 136th
Genuine Progress Indicator (GPI) Developed by “Redefining Progress” to assess well-being considering social and environmental factors. – Factors in environmental loss, resource depletion, and crime rates – Deducts costs of environmental and social issues
Social Progress Index Published by the Social Progress Imperative, includes social and environmental costs with a focus on:

1. Basic human needs

2. Foundations of well-being 3. Opportunity

 – Based on the writings of Amartya Sen and Joseph Stiglitz – Different weighting from GPI
OECD’s Better Life Index Launched in 2011, considers eleven metrics of well-being. Income, Housing, Jobs, Community, Education, Environment, Governance, Health, Life satisfaction, Safety, Work-life balance – Broad range of well-being metrics
Quality of Life Index (QOLI) Focuses on basic necessities and equitable wealth distribution, among other factors. Food, shelter, clothing, clean environment, healthcare, literacy, political and civil rights – Addresses shortcomings of income-based indicators
Physical Quality of Life Index (PQLI) Developed by D. Morris in the 1970s, it measures quality of life through: 1. Life expectancy 2. Infant mortality  3. Literacy – Normalized scale from zero to one – Considers three times as many indicators as QOLI
Human Development Index (HDI) Developed by Mahbub Ul Haq and Amartya Sen, it measures human development in: 1. Health 2. Knowledge 3. Standard of living – Health measured by life expectancy – Knowledge by literacy and enrollment rates – Standard of living by GNI per capita – Includes an “Inequality Adjusted” version since 2010

JOBLESS GROWTH

Jobless growth refers to a phenomenon in which an economy experiences growth in Gross Domestic Product (GDP) but does not witness a proportional increase in employment opportunities. This discrepancy results in high unemployment rates even as the economy expands. In India, for instance, a 10% rise in GDP has been associated with just a 1% increase in job creation, highlighting a significant lag in employment generation relative to economic growth. This trend has been observed in both the manufacturing and services sectors, where the potential for employment has not been fully realized.

Causes of Jobless Growth in India

  • COVID-19 Impact: The pandemic led to significant job losses, and the subsequent recovery has been insufficient in reabsorbing the unemployed, underemployed, and new job seekers. This resulted in a drop in the labor force participation rate to 40% among the 900 million Indians of legal working age.
  • Service-Led Growth: India’s economy has increasingly been dominated by knowledge-based services, which are inherently less labor-intensive compared to manufacturing sectors.
  • Lack of Reforms: Various structural issues, including infrastructure bottlenecks, complex labor laws, and the hidden costs of doing business, have impeded job creation.
  • Import Dependence: Early failures to implement import substitution policies led to over-reliance on imports, stunting the development of domestic industries.
  • Restrictive Labor Laws: Legislation like the Industrial Disputes Act has discouraged employment in the manufacturing sector. For example, businesses with more than 100 workers are required to obtain government permission to lay off employees, a permission that is seldom granted.
  • Neglect of MSMEs: Medium and small enterprises, despite being labor-intensive, suffer from poor treatment and limited access to credit.
  • Misaligned Incentives: Government incentives for investment are often based on the amount invested rather than the number of jobs created.

Impact of Jobless Growth in India

  • Social Unrest: The lack of job opportunities has led to incidents of social unrest, exemplified by the violent protests against the Agneepath scheme.
  • Decline in Female Workforce Participation: The World Bank noted a drop in the percentage of working women from 26% in 2010 to 19% in 2020, with the CMIE reporting a further decline to 9% by 2022.
  • Shifts in Agricultural Employment: Although the number of people employed in agriculture was on a decline, COVID-19 reversed this trend, indicating a fallback to primary sector employment in the absence of better opportunities.
  • Skills Mismatch: Despite a surplus of labor, there is a notable lack of skills, as seen in sectors like transportation where a shortage of skilled drivers leaves trucks idle.

Solutions to Address Jobless Growth

  • Reform Labor Laws: Enact better labor legislation at both central and state levels, focusing on acts that currently hinder employment growth.
  • Link Job Creation with Development: Integrate employment schemes with national development projects, such as utilizing MGNREGA workers for infrastructure projects.
  • Education Sector Reforms: Introduce skill-based and vocational training at various levels of education to align the workforce with industry needs.
  • Promote Labor-Intensive Industries: Encourage sectors like food processing, textiles, and leather, which are known for their employment potential.
  • Reskill the Workforce: Implement or sponsor training programs for the existing workforce to meet the evolving demands of the economy.

Government Initiatives

  • Regulatory Changes: Some states have relaxed labor laws, allowing businesses to retrench workers without government permission up to a certain threshold.
  • Skill India Programme: Launched in 2015 to provide skill development training aligned with industry demands.
  • PM Employment Generation Programme: Introduced in 2008 to create employment opportunities in rural and urban areas through the Khadi and Village Industries Commission.
  • MGNREGA: Guarantees 100 days of unskilled manual work per financial year to rural households.
  • Make in India: Aims to boost manufacturing and attract foreign investment by offering production-linked incentives.
  • Focus on MSME Sector: Includes redefining the MSME sector, the RAMP scheme, and financial packages during the COVID pandemic to promote exports.
  • Atma Nirbhar Bharat Abhiyan: Focuses on enhancing manufacturing, supply, and demand within the Indian economy.
  • PM Mudra Yojana: Provides collateral-free loans to promote entrepreneurship.

UPSC PREVIOUS YEAR QUESTION

1.  The nature of economic growth in India is described as jobless growth. Do you agree with this view? Give arguments in favour of your answer. (2015)

Okun’s Law

Okun’s Law, named after Arthur Okun, a professor at Yale University in the 1960s, provides a simple yet insightful way to understand the relationship between economic growth and employment. This empirical economic observation has been a fundamental tool for policymakers and economists to assess and strategize economic policies.

The Essence of Okun’s Law

Okun’s Law investigates the dynamics between economic output (or growth) and the labor market, specifically the correlation between GDP growth and unemployment rates. The law posits:

  • Positive Correlation between Output and Employment: This suggests that an increase in economic output (GDP) is generally accompanied by an increase in employment. The rationale is straightforward: as businesses expand and produce more goods and services, they require more labor, leading to higher employment levels.
  • Negative Correlation between Output and Unemployment: Conversely, when economic output increases, unemployment rates tend to decrease. This is because higher production necessitates more workers, reducing the number of unemployed individuals.

Understanding the Relationships

  • Positive Relationship: If variable X increases, variable Y is also likely to increase. In the context of Okun’s Law, as GDP (X) grows, employment (Y) also increases.
  • Negative Relationship: If variable X increases, variable Y is likely to decrease. Here, as GDP (X) grows, unemployment (Y) decreases.

Formula and Calculation

Although Okun did not originally formalize his observation into a strict mathematical formula, subsequent economists have developed various models to quantify this relationship. A common version of the formula can be articulated as:

ΔU = −k × ( ΔGDP − t )

Where:

  • ΔU represents the change in unemployment rate,
  • k is Okun’s coefficient (which varies by country),
  • ΔGDP is the percentage change in real GDP,
  • t is the threshold GDP growth rate necessary to keep unemployment stable, often around 2-3% for many economies.

Practical Implication

A key takeaway from Okun’s Law is the benchmark it sets for GDP growth required to impact unemployment significantly. The law states that a country’s GDP must grow at a rate of approximately 4% per year to achieve a 1% reduction in the unemployment rate. This benchmark helps governments and policymakers estimate the level of economic growth needed to lower unemployment substantially.

CONCEPT OF DEVELOPED, DEVELOPING AND LEAST DEVELOPED COUNTRIES

The classification of countries into developed, developing, and least developed categories is based on various economic indicators and criteria such as Gross Domestic Product (GDP), industrialization, the Human Development Index (HDI), infrastructure, and standard of living. These classifications help in understanding the economic status and development needs of different nations.

Developed Countries

  • Characteristics: Developed countries are characterized by a high level of GDP, advanced infrastructure, and a high standard of living. They possess a highly developed service sector that plays a significant role in their economy. These countries are considered post-industrial, meaning they have transitioned from an economy based primarily on manufacturing to one dominated by services.
  • Economic Features: They exhibit stable economic growth, low levels of poverty, and high levels of productivity. Their populations enjoy high income, access to quality healthcare, education, and a wide range of services and goods.
  • Examples: Examples of developed countries include the United States, Germany, and Japan. These nations have advanced technological capabilities, efficient healthcare systems, and robust educational institutions.

Developing Countries

  • Characteristics: Developing countries, sometimes referred to as underdeveloped, exhibit lower standards of living, less developed infrastructure, and lower HDI values. They often have significant portions of their populations living in poverty, with economies that rely heavily on agriculture or the extraction of natural resources.
  • Economic and Social Features: These countries face challenges such as high population growth rates, unequal income distribution, low levels of savings and investment, and low productivity. They often have high rates of unemployment and are technologically backward.
  • Newly Industrialized Countries: A subset of developing countries known as Newly Industrialized Countries (NICs), such as India and China, are experiencing rapid urbanization and development. These countries are attracting significant amounts of investment and are positioned between developed and developing countries in terms of economic development.

Least Developed Countries (LDCs)

  • UN Criteria: The United Nations categorizes nations as LDCs based on three criteria: a per capita income of less than USD 1,035, weak human resources, and high economic vulnerability.
  • Characteristics: Most LDCs exhibit extreme poverty, inadequate healthcare, low levels of education, and fragile economic conditions. These countries have the most urgent need for development assistance to improve their populations’ living standards.
  • Review and Classification: The classification of LDCs is reviewed every three years to adjust for economic progress or regression. A significant number of LDCs are located in Africa.

World Bank Classification (2022)

The World Bank classifies countries based on per capita income into four categories:

  • Low Income: Per capita income of USD 1,085 or less.
  • Lower-Middle Income: Per capita income between USD 1,086 and USD 4,255.
  • Upper-Middle Income: Per capita income between USD 4,255 and USD 13,205.
  • High Income: Per capita income of more than USD 13,205.

It is important to note that countries classified as high income might still be considered developing due to certain economic structures, such as reliance on oil and gas exports, which can mask underlying developmental challenges.

Common Features of Underdeveloped Countries

Underdeveloped countries share several economic and social challenges, including low per capita income, poor standards of living, high population growth rates, unequal income distribution, low levels of productivity, technological backwardness, high levels of unemployment, and low social indicators of development such as literacy rates and life expectancy.

NITI AAYOG: INDIA@75- OBJECTIVE TO ENHANCE ECONOMIC GROWTH

Aspect Current Situation Objectives Way Forward
Economic Growth The share of manufacturing in India’s GDP is low compared to other lower- and middle-income countries. Capital-intensive sectors like automobile and pharma have witnessed the highest growth. India struggles to leverage its labour and skill cost advantages in developing a large-scale and labour-intensive manufacturing sector. – Steady increase in GDP growth rate to achieve a target of 8% during 2018 to 2023

– Raise the investment rate from 29% to 36% of GDP.

– Increase exports of goods and services from USD 478 billion to USD 800 billion by 2022-23.

 Raising Investment Rates: – Increase tax-GDP ratio to 22% by 2022-23.

– Justify direct taxes on corporate and individual income while reducing tax compliance burdens.

– Increase government contribution to fixed capital formation to at least 7% of GDP.

– Boost public investment in housing and infrastructure.

– Exit non-strategic CPEs to attract private investment.

– Encourage PPP-based private infrastructure investment.

Macroeconomic Stability:

Lower government debt-to-GDP ratio.

– Reduce effective revenue deficit.

– Flexible fiscal deficit targets based on economic conditions.

– Maintain inflation between 2% to 6%.

Efficient Financial Intermediation:

– Deepen financial markets, improve risk assessment, and make capital more accessible.

– Governance reform in public sector banks.

– Leverage Gift City for financial sector liberalization.

– Explore alternative sources for long-term investment through bond market deepening and fiscal consolidation.
Export and Manufacturing Focus — — – Enhance efficiency in the logistics sector.

– Rationalize power tariff structures for global competitiveness.

– Complete connectivity projects like DMIC and dedicated freight corridors.

– Implement flexible labour provisions and encourage fixed-term employment across sectors.

– Support 12 champion service sectors including IT, ITeS, medical, travel, and tourism.

– Strengthen Export Promotion Councils.

– Integrate closely with South Asian and South East Asian countries.
Employment Generation — – Generate employment for new entrants and those migrating from the agriculture sector. – Focus job creation in manufacturing, construction, and services sectors.

– Enhance employability through better health, education, and skilling outcomes.

INEQUALITY AND SOCIOECONOMIC INDICATORS

It encompasses a broad spectrum of metrics including health outcomes, education, life expectancy, infant mortality, crime rates, drug use, birth and fertility rates, death rates, asset ownership, and the disparity between wealth and consumption. By examining these indicators, we aim to understand the multifaceted impact of inequality on the socioeconomic landscape of India.

  • Health Outcomes, Income Inequality, and Per Capita Income
  • Correlation Analysis: It is observed that the index of health outcomes in Indian states is positively correlated with income inequality and per capita income. This implies that improvements in health outcomes are associated with enhancements in both the condition of inequality and the per capita income of the populace.
  • Underlying Factors: Improved health outcomes can lead to a more productive workforce, thereby boosting economic growth and potentially reducing income disparities.
  • Education, Life Expectancy, Infant Mortality, and Crime
  • Comprehensive Evaluation: Similar to health outcomes, the indices of education, life expectancy, infant mortality, and crime rates exhibit the same positive correlation with income inequality and per capita income.
  • Implications: This trend suggests that advancements in education and life expectancy, alongside reductions in infant mortality and crime rates, are conducive to economic prosperity and the mitigation of inequality.
  • Drug Use vs. Inequality and Per Capita Income
  • Lack of Correlation: There is a notable lack of correlation between drug use and both inequality and per capita income among Indian states. This indicates that increases in drug usage do not necessarily align with improvements or declines in levels of inequality or economic well-being.
  • Birth and Fertility Rates
  • Decline with Improvement: Both birth rate and fertility rate tend to decline as inequality improves and per capita income increases. This trend can be attributed to better access to education and family planning resources, which often accompany economic development.
  • Death Rates Unaffected: Interestingly, death rates do not show a significant correlation with either inequality or per capita income, highlighting the complex interplay of factors that influence mortality rates.
  • Asset Ownership and Corruption Inequality
  • Weak Positive Relationship: There exists a weak positive relationship between inequality in asset ownership and the inequality of corruption, as measured by the Gini coefficient. This suggests that states with higher consumption inequality also tend to have higher levels of asset ownership inequality.
  • Broader Implications: This relationship may reflect the broader socio-economic disparities and governance issues within these regions.
  • Wealth vs. Consumption Disparity
  • Significant Disparity: The analysis reveals a significant disparity between wealth and consumption across Indian states. This disparity underscores the unequal distribution of economic resources and the variations in living standards within the country.
  • Permanent Income Hypothesis
  • Consumption Smoothing: The permanent income hypothesis posits that individuals and households tend to smooth their consumption over time through savings or borrowings, aiming for a stable living standard regardless of temporary income fluctuations.
  • Relevance to Inequality: This hypothesis highlights how consumption patterns may not directly correlate with current income levels, further complicating the relationship between socioeconomic indicators and inequality.

RELATIONSHIP BETWEEN INEQUALITY AND POVERTY

The relationship between inequality and poverty is a critical aspect of economic and social analysis, capturing how the distribution of wealth and resources affects individuals and societies.

Inequality

Inequality refers to the unequal distribution of assets, income, or consumption within a population. It manifests in various dimensions, including but not limited to:

  • Economic Inequality: Differences in the distribution of wealth and income.
  • Social Inequality: Disparities in access to education, healthcare, and opportunities based on social class, race, gender, etc.
  • Spatial Inequality: Variations in living standards and access to resources across different geographical regions.

Economic inequality, which focuses on the disparity in income and assets, is the most directly related to poverty.

Poverty

Poverty is a state where individuals or groups are unable to meet a certain standard of living or consumption, often leading to inadequate access to basic needs such as food, clean water, shelter, education, and healthcare. Poverty can be understood in two main contexts:

  • Absolute Poverty: This is a condition where individuals fall below a specific threshold of income or consumption, making it impossible to afford basic necessities. This threshold is often defined by international benchmarks, such as the World Bank’s poverty line of $1.90 per day (as of my last update).
  • Relative Poverty: In this context, poverty is measured in relation to the overall distribution of income or resources in a society. Individuals are considered relatively poor if their income or consumption levels are significantly below the median or average of their community or country, indicating disparity rather than just survival.

The Interrelation of Inequality and Poverty

The relationship between inequality and poverty is complex and multidimensional. A few key points highlight their interdependence:

  • Inequality as a Measure of Poverty: Inequality, by detailing the distribution of income or assets, inherently includes a focus on those at the bottom of the distribution scale. Therefore, high levels of inequality can signal significant poverty within a society, particularly in relative terms.
  • Relative Poverty as a Reflection of Inequality: Since relative poverty is defined by how individuals’ income or assets compare to the broader population, it is directly influenced by inequality. A society with high inequality is likely to have a larger proportion of its population classified as relatively poor.
  • The Dual Aspect of Poverty: Viewing poverty as both an absolute and relative concept allows for a more nuanced understanding of deprivation. While absolute poverty focuses on survival and basic needs, relative poverty highlights social inclusion and equality of opportunity.

Implications

Understanding the relationship between inequality and poverty has important policy implications. Efforts to reduce poverty must address both its absolute and relative dimensions. Policies aimed at reducing absolute poverty focus on raising the lowest levels of income and consumption through direct interventions such as social welfare programs, education, and healthcare access.

Conversely, reducing relative poverty and inequality requires addressing the structural factors that lead to unequal distribution of resources. This can include progressive taxation, wage policies, and investments in public services that benefit lower-income groups more significantly.

Furthermore, the relationship between inequality and poverty suggests that in some contexts, reducing inequality can lead to a decrease in poverty, even if the absolute income levels of the poorest do not change significantly. This highlights the importance of considering both the distribution of resources and the absolute standards of living in combating poverty and fostering a more equitable society.

CIRCULAR ECONOMY OR CIRCULARITY

Circular Economy

The Circular Economy, or Circularity, represents a paradigm shift in economic thinking, focusing on sustainability and resource efficiency. This approach aims to transcend the traditional linear model of “take, make, waste” by creating a system where resources are utilized to their fullest extent, minimizing waste and environmental impact. It envisions an economy that is restorative and regenerative by design, ensuring that products and processes conserve resources and reduce pollution.

Core Principles

The Circular Economy is built on four foundational principles:

  • Minimize waste and pollution: Through design and innovation, the goal is to reduce the generation of waste and the release of harmful substances into the environment.
  • Extend product and material lifespan: By improving durability, repairability, and upgradability, products last longer, and materials are kept in use.
  • Regenerate natural systems: This principle emphasizes the restoration of ecosystems and the sustainable management of natural resources.
  • Shift from consumer to user: This involves changing the perception of ownership to encourage the use of services (sharing, leasing) instead of owning products outright.

Importance and Benefits

  • Resource Efficiency: By minimizing raw material use and reducing input costs, the circular economy enhances the sustainability levels of industries.
  • Economic Growth: It promotes productive and efficient production processes, enabling sustainable GDP growth.
  • Waste Management: Addresses issues related to waste disposal, managing solid waste, and reducing pollution in air, water, and land.
  • Cost Reduction: For individuals and businesses, it leads to lower costs, increased efficiency, and fewer negative externalities like pollution.
  • Job Creation: Fosters job opportunities and productivity while ensuring environmental sustainability and reducing carbon emissions.

Applications

  • Construction Sector: Promotes the reuse of building materials and the multiple uses of spaces.
  • Food and Agriculture: Encourages urban farming, digital sharing of knowledge, and the recycling of nutrients back into the agricultural system.
  • Transport and Mobility: Supports the development of durable electric vehicles, reuse of materials, and efficient transit systems.

Limitations

  • Energy and Pollution: The recovery and recycling processes can consume significant energy and produce pollution.
  • Waste Segregation: Challenges in segregating waste at the source due to the lack of consumer awareness and infrastructure.
  • Feasibility Concerns: The concept, while idealistic, faces practical challenges and uncertainties regarding its economic impact and scalability.

Way Forward

  • Integrate Circular Principles: Incorporate circular economy considerations into decision-making at all levels of governance and business.
  • Innovation: Develop new products and business models that align with circular economy principles.
  • Collaboration: Promote partnerships across industries and value chains to facilitate the transition to a circular economy.

 

UPSC PREVIOUS YEAR QUESTIONS

 

1.  Economic growth in country X will necessarily have to occur if: (2013)

(a) There is technical progress in the world economy.
(b) There is population growth in X.
(c) There is capital formation in X.
(d) The volume of trade grows in the world economy.

2.  The nature of economic growth in India is described as jobless growth. Do you agree with this view? Give arguments in favour of your answer. (2015)