What is Economic Development?

A Comparative Performance of Indian States

Amit S. Ray, Manmohan Agarwal, M. Parameswaran

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429647789
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Development performance is not merely economic growth and prosperity, but includes a multitude of goals. This monograph makes an attempt to conceptualize development, consisting of eight dimensions – material prosperity, education, health, economic security, personal security, environmental conditions, political voice and social connections. The authors implement this multidimensional concept to design not only an overall index of development (DI) for Indian states but also three sub indices, human development (HD), security (SEC) and voice and confidence (VC), that broadly represent three distinct aspects of development. The results clearly show that state level performances vary considerably across the various dimensions of development. No state does uniformly well or badly across all levels, thereby exposing the fallacy of branding the development experience of a particular state as ideal based on its achievement on some aspects of development. Since good performance in one dimension does not ensure doing well on other dimensions too, it would be inappropriate to ignore the performances on the three sub-indices and the eight dimensions. Recognition of such diversity of performance is particularly important in a federal structure, like India, where different states may have different development priorities. This study will enable states to reflect on whether they have been performing according to their priorities and if not, they may choose to tweak their policies or their development strategies.

Please note: Taylor & Francis does not sell or distribute the Hardback in India, Pakistan, Nepal, Bhutan, Bangladesh and Sri Lanka

1
Introduction

Democratic societies are typically those in which people are free to ask questions about the state and society they live in. It follows therefore, that debates on development performance of countries and states feature prominently in both popular and scholarly discourses, especially in the run up to elections. This is particularly true in a federal structure, where states display widely divergent development experiences and trajectories. These debates reflect a variety of perceptions regarding what constitutes economic development. Some states highlight their outstanding growth performance in terms of per capita income. Others may showcase their achievements in social outcomes, like health, education, or inclusiveness. Yet others may stress their social cohesion, peace, and political participation. And, of course, some states tout their investment climate to attract inflows of foreign direct investments and MoUs with private investors. Clearly, therefore, economic development is not perceived to be merely economic growth and prosperity, but includes a multitude of goals and dimensions. States are unlikely to perform equally and uniformly across various dimensions of development. Accordingly, in the midst of political debates, individual states pick and choose those aspects of development which showcase them as the best performing state. This creates confusion. The competing claims from diverse states, none of which may be factually incorrect, would definitely fail to portray a consistent, comprehensive, accurate and comparable picture of the development performance of different states and regions, similar to the legendary story of the elephant and the six blind men. This motivated us to venture into a scholarly exercise to conceptualize development in a multidimensional framework with a view to measuring it in a meaningful and robust¹ manner.

The concept of economic development has undergone major metamorphoses since the emergence of development economics as a distinct sub-discipline in the middle of the last century. Although the theoretical foundations of economic development can be traced back to the classical writers and thinkers like Adam Smith, David Ricardo, Karl Marx and others, it was not until the postcolonial era (with the emergence of numerous newly independent poor nations) that development economics emerged as a sub-discipline to tackle the problems of under-development in large tracts of the world.

Originally, economic development was thought to be synonymous with growth of income/GDP (Smith, 1776).² However, this led to rather pessimistic conclusions about the prospect for economic development. Ricardo (1817) explained how the process of growth would ultimately come to a halt at the point of the Ricardo-Malthus Trap, where the economy gets settled at a subsistence level.³ According to Marx (1867), while the productive capacity of the economy would continue to expand under capitalistic development, the vast majority of its people, namely the labour force, would not enjoy any improvements in their living conditions and the growing disparity between workers and capitalists would ultimately lead to a collapse of the entire system. But the facts of 19th century capitalist development, did not lend support to such pessimistic outcomes. Meanwhile, the growth of marginalist analysis provided a basis for using income as a measure of welfare/development that was extensively discussed from the 1930s onwards. But this discussion culminated in the recognition of numerous problems with per capita income as a meaningful measure of development.

The search for a better measure of development led to a plethora of academic contributions from various social science disciplines over the years that have enriched the understanding of development, incorporating new dimensions. This resulted in a broadening of the concept of economic development from income to basic needs to human development to capabilities and freedom over the last few decades, ultimately culminating in the Millennium Development Goals (MDGs) and the Sustainable Development Goals (SDGs). It is now recognized that development is a multidimensional concept encompassing human well-being that extends beyond material prosperity (Stiglitz et al. 2009). In fact, the contribution by Stiglitz et al. (2009) marks a paradigm shift in providing a generic framework that can be tailored to specific contexts for measuring economic development.

However, capturing this multidimensionality of development in precise and quantitative terms is a daunting task. There are two key steps involved in this process. First, there is the need for conceptual clarity on what constitutes economic development. Second, with this clarity, one needs to strike an appropriate concordance between the conceptualization of development and its quantification.

International agencies have followed two different paths in assessing development in quantitative terms. First, the World Bank, in its flagship publication – the annual World Development Reports, continues to use per capita income as a measure of development. But it supplements this with the structural approaches pioneered by Simon Kuznets (Kuznets 1966) and carried forward by Hollis Chenery (Chenery and Taylor 1968, Chenery and Syrquin 1975). According to this school of thought increases in per capita income are accompanied with structural changes, such as varying contributions of different sectors (primary, secondary and tertiary) to aggregate income and employment, demographic transition, changing rural-urban balance etc. The second is the approach adopted by UNDP in its annual Human Development Reports. This approach adds to income a set of indicators capturing other aspects of development (essentially health and education) to come up with a composite index. Unfortunately, neither of these two approaches takes into account adequately the recent scholarship on the conceptualizations of multidimensional economic development.

There are also numerous individual studies that have attempted to measure economic development in a multidimensional framework, both internationally and for India. However, none of them seem to have a holistic and consistent conceptual framework underlying their measurement. In hindsight, it appears that most studies have picked and chosen selected indicators from a diverse set without any adequate justification. Interestingly, there are no empirical studies yet, to our knowledge, which use the Stiglitz et al. (2009) framework to design a multidimensional measure of development in specific contexts. Our study attempts to bridge this gap in the literature. It has the specific goal of arriving at a comprehensive multidimensional measure of development that we illustrate with the performance of Indian states.

Over the last seven decades since India’s independence, its development experience has been rather asymmetric across various regions and states. To begin with, at the time of independence different states of India were at widely divergent levels with respect to different parameters of development. Their trajectories of development have also often been very different from each other. Punjab, for instance, achieved significant prosperity through the development of agriculture. Maharashtra and Gujarat, on the other hand, followed a trajectory of industrialization-led development. Kerala did not make significant strides in industry or agriculture, but made astounding progress in different social dimensions of development – almost comparable to developed country standards. West Bengal, which once was a leading state producing and exporting skills and intellectual capital to the rest of the country, has now on casual observation turned into an exporter of unskilled services, such as maid services and construction work.⁴

The present study attempts to compare the status of development of Indian states, by constructing a comprehensive and holistic measure of development using objective and quantifiable criteria, derived from the development scholarship that have emerged from the rich and diverse streams of literature. Amidst this varied development experience of different states of India, we hope to arrive at a uniform and consistent yardstick to understand their relative levels at the current juncture.

Needless to mention, there are many indices that have been constructed to evaluate the state of development, or some particular aspects of it, in the context of India. However, more often than not, construction of these indices was driven by specific objectives and motivations, such as generating a criterion for public resource allocation among Indian states or providing an indicator of the more lucrative destinations for investors etc. Unfortunately, even after a thorough scan of the existing literature on the subject, it is difficult to find any index of development designed for Indian states that attempts to operationalize a holistic concept of ‘development’.

We therefore seek in this book to (1) conceptualize economic development from the existing literature, entailing a detailed critical review of the evolution of the concepts of development, (2) review comprehensively the empirical literature on measuring development, both internationally and for India, (3) design a measure of development to illustrate how the conceptual framework provided by Stiglitz et al. (2009) may be applied to a specific context, namely the comparative performance of Indian states at a point in time, (4) briefly reflect on the comparative performance of Indian states based on our multidimensional measure.

But what is the ultimate purpose of ranking states within this multidimensional concept of development? This exercise is not to evaluate different Indian states according to their performance or provide an ideal model of development but to try to objectively understand how states compare with each other, not only in an overall developmental ranking but also with respect to each dimension of development that we conceptualize.

The people of different states might value different dimensions of development differently at the margin and therefore may end up with divergent performances along different dimensions. A multidimensional concept of development will enable states to reflect on their development experience and focus their attention on dimensions or areas where they think they should be performing better relative to other states. This is absolutely important.

Moreover, states (and their political dispensation) tend to have their own understanding of development which is often partial. Accordingly, their policy focus remains confined to the objective of making progress along those dimensions only. The present study brings to the centre-stage the multidimensionality of the concept of development derived from the existing scholarship and literature and attempts to quantify each of them in order to arrive at a holistic measure, without losing sight of the individual elements. The states may now broaden their perspective on development by looking at their relative performance in various dimensions.

Notes

¹ The measure is resilient, i.e. not susceptible to large variations with small changes in the method and/or indicators.

² It has now been recognized that growth and development are not synonymous. For instance, a person may grow in height or in weight but may not develop in terms of his intellectual capabilities. Likewise, a region may experience economic growth through proliferation of new manufacturing industries, but the resulting pollution could severely reduce health of the people.

³ Smith (1776) had already conjectured that society would ultimately settle at a low level of wages and profits.

⁴ This statement is based on casual observations – construction and other unskilled services workers flock en mass from West Bengal to Kerala and a large contingents of maids in the NCR are from West Bengal.

2
Evolving Concepts of Development

2.1 Introduction

The concept of development has a chequered history. This history shows that, although per capita GDP has often been used as an indicator of development, the concept of development has not always remained synonymous with the growth of per capita income. There have been swings in how development has been viewed and conceptualized in the economics literature. It is only since the emergence of development economics as a sub-discipline after the second world war, that the literature has witnessed an almost continuous broadening of the concept of development. Now it is frequently identified with quality of life, as we shall discuss below. After all, ‘development’ has to mean an improvement in the living condition of an individual or a society.

In this chapter, we attempt to trace the evolution of the concept of development in the literature on economics, beginning with classical and neoclassical economic thought. We then discuss how development in the sense of levels of living is intertwined with the concept of welfare and the difficulties in making spatial and inter-temporal welfare comparisons. Next we discuss the limitations of GDP as a measure of development and move on to elaborate on the concepts of development, extending beyond GDP – poverty, basic needs, human development, capabilities and freedom – culminating in the introduction of Millennium Development Goals (MDGs) in 2000 followed by a revised set of Sustainable Development Goals (SDGs) in 2015.

2.2 The idea of development in the pre-classical and the classical literature

Though broadly speaking the English-speaking classical economists tended to equate development with growth in per capita income, there were dissenting voices especially among continental economists.

Most of the classical economists followed in the footsteps of Adam Smith (1776–1964) who opines in Book 1 of his Wealth of Nations that the greater the division of labour, the greater the output and the possibility of consumption. The wealthier nations have scope for a greater division of labour. In the same vein he argues that manufacturing allows for greater division of labour than agriculture and so leads to greater opulence. As he says on page 6: ‘This impossibity of making so complete and entire a separation of all the different branches of labour employed in agriculture is perhaps the reason why the improvement of the productive powers of labour in this art does not always keep pace with their improvement in manufactures.’

The other classical writers also used the size of the national pie or more particularly the wage rate (reflecting average earnings of the masses) as a measure of welfare. They reached a rather pessimistic conclusion where the process of growth or economic expansion will ultimately come to a halt due to rising food prices resulting from scarcity of land, commonly termed as the Ricardo-Malthus Trap. This state of no growth can be called the classical stationary state.¹ This group of classical economists is called the ‘pessimist school’ by Schumpeter (1954). Mill (1848) reached a similar conclusion, though for him the stationary state was not to be so deplored as in the case of Ricardo-Malthus. He believed that man would learn to reduce the rate of growth of population so that the wage rate in the stationary state allowed for some degree of comfort. According to the Malthusian adjustment process, whenever per capita food availability (or, in other words, the wage rate) is above the subsistence level, population would grow faster than the output of food. This would lead to a fall in the per capita food availabi...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of Tables
• Acknowledgements
• 1. Introduction
• 2. Evolving Concepts of Development
• 3. Measuring Development: International Approaches
• 4. Measuring Development: Studies on India
• 5. From Conceptualization to Implementation: Designing a Composite Measure of Development for Indian States
• 6. Where are the Indian States?
• 7. Concluding Remarks
• References