The Meaning and Measurement of Economic Development

The Meaning and Measurement of Economic Development

Scope of the Chapter

This chapter discusses the meaning, calculation, and basic indicators of economic growth and development; the classification of rich and poor countries; the price index problem; the distortion in comparing income per head between rich and poor countries; adjustments to income figures for purchasing power; alternative measures and concepts of the level of economic development besides income per head; the problems of alternative measures; and the costs and benefits of economic development.

Growth and Development

A major goal of poor countries is economic development or economic growth. The two terms are not identical. Growth may be necessary but not sufficient for development. Economic growth refers to increases in a country’s production or income per capita (Box 2-1). Production is usually measured by gross national product (GNP) or gross national income (GNI), used interchangeably, an economy’s total output of goods and services.

Economic development refers to economic growth accompanied by changes in output distribution and economic structure. These changes may include an improvement in the material well-being of the poorer half of the population; a decline in agriculture’s share of GNP and a corresponding increase in the GNP share of industry and services; an increase in the education and skills of the labor force; and substantial technical advances originating within the country.

As with children, growth involves stress on quantitative measures (height or GNP), whereas development draws attention to changes in capacities (such as physical coordination and learning ability, or the economy’s ability to adapt to shifts in tastes and technology). The pendulum has swung between growth and development.1 A major shift came near the end of the UN’s first development decade (1960–70), which had stressed economic growth in poor countries. Because the benefits of growth did not often spread to the poorer half of the population, disillusionment with the decade’s progress was widespread, even though economic growth exceeded the UN target. In 1969, Dudley Seers signaled this shift by asking the following questions about a country’s development

What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have become less severe, then beyond doubt this has been a period of development for the country concerned.

If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result “development,” even if per capita income has soared. (Seers 1969:3–4) At the U.N. Millennium Summit in September 2000, world leaders adopted the Millennium Development Goals (MDGs), setting “targets for reducing poverty, hunger, disease, illiteracy, environmental degradation, and discrimination against women” (U.N. Development Program 2000).

The project is directed by Columbia University’s Jeffrey Sachs, with advice from senior representatives from U.N. agencies and an International Advisory Panel, with independent experts in relevant fields, supported by the research of thematically orientated task forces

The MDGs, using 1990 as a benchmark, set targets for 2015. The targets include

  1. reducing the people suffering from hunger and living on less than a dollar a day from one of six billion (17 percent) to half that proportion
  2. According to the U.N. Development Program (2003:2–3) and the World Bank (2003h:58–60), the $1/day poverty rate for 2000 was 17 percent. Two economists contend that the World Bank’s approach is flawed methodologically, thus overstating poverty. Surjit Bhalla (2002:150) estimates poverty at 13 percent. If we use Xavier Sala-i-Martin’s (2002:34–42) estimate of 7 percent, the world already reached the MDG target in the late 1990s (Chapter 6

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