Development economics: economic growth and development, indicators, features of developing countries, capital formation

A long-term process of improving the economic, social and institutional well-being of a country's people.

Economic development is a rise in real national income together with improvement in people's living standard, health, education and reduction of poverty and inequality. It is measured by the following indicators.

1. Per capita income: National income divided by population. A rising real per capita income shows a higher average income, but it ignores how income is distributed.
2. Human Development Index (HDI): A composite index prepared by the UNDP using life expectancy (health), education (years of schooling) and per capita income (standard of living).
3. Physical Quality of Life Index (PQLI): Based on literacy rate, infant mortality and life expectancy at age one.
4. Poverty and inequality: The share of the population below the poverty line, the Multidimensional Poverty Index and the Gini coefficient show whether the benefits of growth reach the poor.
5. Structural change: A fall in the share of agriculture in output and a rise in the share of industry and services show development.
6. Employment: A fall in unemployment and underemployment and a rise in productive jobs.
7. Social indicators: Access to safe drinking water, electricity, sanitation, health services and school enrolment.

A single indicator is not enough, so a combination of economic and social indicators gives a better picture.

Developing countries such as Nepal share the following major characteristics.

1. Low per capita income: Income per person is low, so living standards are low and savings are small.
2. Poverty and unemployment: A large share of people live below the poverty line, and unemployment and underemployment are widespread.
3. Dependence on agriculture: Most people depend on traditional, subsistence agriculture, which has low productivity.
4. Rapid population growth: High birth rates and a large dependent population put pressure on resources.
5. Capital shortage: Low savings and investment cause low capital formation.
6. Weak industrial base: Industry and technology are backward, so the country exports raw materials and imports manufactured goods.
7. Dual economy and unequal distribution: Modern and traditional sectors exist together, and income and wealth are unequally distributed.
8. Poor social indicators and infrastructure: Literacy, health, roads, energy and communication facilities are inadequate.
9. Trade deficit and foreign dependence: Imports exceed exports, and the country relies on foreign aid and remittances.

Capital formation means increasing the stock of real capital (machines, factories, roads, tools) by using part of current output for investment rather than consumption. It happens in three stages.

1. Creation of savings: Households, firms and the government must save. In Nepal savings are low because incomes are low, but remittance, banks, cooperatives and insurance companies help to raise them. Policies such as tax incentives and higher interest rates on deposits encourage saving.
2. Mobilisation of savings: Savings must be channelled to investors through banks, financial institutions, the stock market, bonds and cooperatives. In Nepal the expansion of bank branches in rural areas and use of mobile banking improves mobilisation.
3. Investment: Mobilised savings are used for productive investment in agriculture, hydropower, industry and infrastructure. This requires a stable political environment, entrepreneurs, and profitable opportunities.

Obstacles in Nepal: low income, a vicious circle of poverty, consumption of remittance on non-productive goods, weak financial markets and lack of investment opportunities.

Measures: increase income through productive jobs, encourage remittance to be invested, strengthen financial institutions, provide infrastructure and use foreign investment and aid wisely.

Economic growth is the sustained increase in a country's real output of goods and services (real GDP or real national income) over a long period of time. It is usually measured by the annual percentage rate of increase in real GDP.

Two major features of a developing economy are:

1. Low per capita income: most people have low incomes, leading to low living standards and widespread poverty.
2. Dependence on agriculture: a large share of the population depends on traditional, low-productivity agriculture, with a small industrial sector.

Two reasons for the low rate of capital formation in Nepal are:

1. Low income and low saving: because most people have low incomes and spend almost all of it on consumption, domestic savings available for investment are small.
2. Underdeveloped financial system and weak investment climate: limited access to banking in rural areas, political instability, poor infrastructure and a lack of entrepreneurship discourage investment.

Capital crisis is the shortage of capital in a developing country, caused by low savings and low investment. It results in low production and income, which again keeps savings low, a vicious circle of poverty.

The classical approach of economic development was put forward by Adam Smith, David Ricardo, Malthus and J. S. Mill. It sees development as a gradual growth of national output through capital accumulation under free markets.

Main ideas

1. Capital accumulation: Savings and investment are the main sources of growth. Profit of capitalists is reinvested to expand production.
2. Division of labour: Specialisation raises productivity (Adam Smith), and the size of the market limits it.
3. Free market and laissez-faire: The "invisible hand" guides resources efficiently, so the government should play a minimal role (defence, justice, public works).
4. Free trade: Trade based on absolute and comparative advantage widens markets and raises output.
5. Population and land: Malthus and Ricardo argued that population growth and diminishing returns on land reduce growth, and the economy ultimately reaches a stationary state.

Criticism: It ignores the role of government, technology and institutions, and its pessimistic view on population and the stationary state has not been borne out in history.

Economic growth is a quantitative increase in real national output or per capita income, whereas economic development is a broader qualitative change that includes growth along with better health, education, living standards and reduced poverty and inequality.