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In the subject Economics of Development & Growth










I, Miss. Priyal shah. student of M.Com Part-I Roll number 1917 hereby declare that the project for the Economic of Development & Growth titled, Study of Economic Growth & Development Submitted by Me for Semester-I During The academic year 2012-2013, is based on actual work carried out by me under the supervision of Prof.Aarti Sukheja.

I further state that this work is original and not submitted anywhere else for any examination.

Signature of student




This is to certify that the undersigned have assessed and evaluated the project on Study Of Economic Growth & Development(between India & China) Submitted by Miss. Priyal Shah. Student of M. Com Part-I. This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner:Prof. Aarti Sukheja

Principal:Dr.Dephne Pillai




The successful completion of project involved the contribution of time and efforts. This project would never have been completed without the valuable help extended to us by the subject teacher and project guide Prof. Aarti Sukheja.

Secondly would like to thank our Principal Dr. Daphne Pillai and Vice Principal Mr. A. N. Kutty for providing us such a prestigious institution.

Last but not least I would like to thank our Parents for making us capable in doing this project and giving their continuous support and guidance.


Introduction In recent years, there has come into existence a new branch of economics Known as the "Economics of Development". It refers to the problems of the economic development of underdeveloped or backward countries. In addition to the illuminating reports of the U.N.O. on the subject, some top ranking economists like Nurkse, Dobb, Staley, Buchanan, Rostow and Ellis have made some original contributions to the Economics of Development. The main reason for the growing popularity of "Economics of Development" as a separate branch of economic theory is the increasing tendency on the part of the newly independent countries of Asia and Africa to resort to developmental planning as a means to eliminate their age-old poverty and raise living standards. Meaning of Economic Development Economic development is a process whereby an economy's real national income as well as per capita income increases over a long period of time. Here, the process implies the impact of certain forces which operate over a long period and embody changes in dynamic elements. It contains changes in resource supplies, in the rate of capital formation, in demographic composition, in technology, skills and efficiency, in institutional and organisational set-up. It also implies respective changes in the structure of demand for goods, in the level and pattern of income distribution, in size and composition of population, in consumption habits and living standards, and in the pattern of social relationships and religious dogmas, ideas and institutions. In short, economic development is a process consisting of a long chain of inter-related changes in fundamental factors of supply and in the structure of demand, leading to a rise in the net national product of a country in the long run.

Definitions of Economic Development The term 'economic development' is generally used in many othersynonymous terms such as economic growth, economic welfare, secular change,social justiceand economic progress. As such, it is not easy to give any precise and clear definition of economic development. But in view of its scientific study and its popularity, a working definition of the term seems to be quite essential. Economic development, as it is now generally understood, includes thedevelopment of agriculture, industry, trade, transport, means of irrigation, power resources, etc. It, thus, indicates a process of development. The sectoral improvement is the part of the process of development which refers to the economic development. Broadly speaking, economic development has been defined in different ways and as such it is difficult to locate any single definition which may be regarded entirely satisfactory. Below given definition of UNEC 1. United Nations Expert Committee(UNEC) According to this Committee, "Development concerns not only man'smaterial needs but also the improvement of the social condition of his life.Development is, therefore, not only economic growth, but growth plus changesocial, cultural and institutional as well as economic". This definitionencompasses economic and non-economic aspects of development. Thisdefinition stresses on the expansion of development variables, and also improvingthe quality of those variables. For example, capital is a development variable.Not only the increased quantity of capital is needed but the improvement in itsproductivity is also required for development. Similar instances can be given inrespect of other development variables. The central point of this definition isthat quantitative and qualitative changes in development variables are consideredessential ingredients of economic development.

Characteristics of Developing Countries

1. Low life expectancy is measured against the average age that the individual is expected to reach 2. Low standard of education- Education and training determine the standard according to which the population of a country functions and produces goods and services. One must remember that there are approximately 80 million children in the poor South who do not go to school at all, therefore one can understand why poor countries are faced with unemployment. Without the necessary training people cannot be prepared for a vocation. This means that such people have no chance of improving their own conditions. 3. Poor health careThe percentage of a countrys budget that is allocated to health services largely determines the standard of health care in that country. If we consider the average percentage of 4% in developing countries as opposed to the 96% in developed countries as shown on the graph on page 12, it is easy to understand why the hospitals in many poor countries are in such a shocking condition. There are simply not enough doctors and facilities for the number of inhabitants of the countries. 4. UnemploymentOver-population and low literacy are some of the main causes of unemployment. Everybody would like to have a job in order to make money to earn a living. People who are unemployed cannot be selfsupporting and therefore they are unable to make any contribution to the economy of the country. 5. Poor nutrition and limited access to safe waterOnly 43% of the worlds food production comes from countries that accommodate 80% of the global population. This, together with the low life expectancy and inadequate education and training, as well as insufficient industries, provides a recipe for malnutrition (a condition that arises when people do not eat enough nourishing food). Approximately 30% of the children in the poor Countries do not have enough food to eat every day.

In developing countries many people are dependent on a stream or a river for their daily supply of fresh water. The water from these sources is not always safe and clean and if people use the water just as it is, it could lead to outbreaks of diseases such as cholera, which cause many deaths every year.

Threats to Developing Countries:

1. Significance of Industrial SectorMost of the developed countries in the world have given much importanceof the development of industrial sector. They have large capacities to utilise resources of production, to maximise national income and to provide employment for the jobless people. As we are quite aware that these countriesreceive the major portion of their national income from the nonagriculture sectors which include industry, trade, transport, and communication For instance,England generally receives nearly 50% of her national income from industrialsector, 21% from transport and commerce, 4% from agriculture and 25% from other sectors. The same case is with the U.S.A., Japan and other West European countries. But in India and other developing countries agriculture contributes, say, 35 to 40 percent, to their national income. 2. High Rate of Capital Formation Developed countries are generally very rich, as they maintain a high levelof savings and investment, with the result that they have huge amount of capitalstocks. The rate of investment constitutes 20 to 25 percent of the total nationalincome. The rate of capital formation in these countries is also very high.Besides this, well-developed capital market, high level of savings, broaderbusiness prospects and capable entrepreneurship have led to a high growth ofcapital formation in these economies. 3. Use of High Production Techniques and Skills High production techniques and skills have become an essential part ofeconomic development process in the developed countries. The new techniqueshave been used for the exploitation of the physical human resources. Thesecountries have, therefore, been giving priority to the scientific research, so asto improve and evolve the new and technique of production.

Consequently,these countries find themselves able to produce goods and services of a betterequality comparatively at the lesser cost. It is because of the use of highproduction techniques and latest skills, that the countries like Japan, Germanyand Israel could have developed their economies very rapidly, though theyhave limited natural resources. 4. Low Growth of Population The developed countries, like the U.S.A., the U.K. and other WesternEuropean countries have low growth of population because they have lowlevel of birth rate followed by low level of death rate. Good health conditions,high degree of education and high level of consumption of the people have ledto maintain low growth of population followed by low level of birth and deathrates. The life expectancy in these countries is also very high. The high rate ofcapital formation on the one hand and low growth of population have resultedin high level of per capita income and prosperity in these countries. Consequently,the people in these countries enjoy a higher standard of living and work togetherunitedly for more rapid economic and industrial development of the nations.Besides this, the entire society, its structure and values are found to be Economic dedicated to the goal of rapid economic and industrial development. The positionof individuals in the society is decided by the ability of the persons and not bytheir birth, caste or creed. Dignity of labour is maintained. The economic motiveand strong desire to lead a better social life always inspire people to contributeto the process of development. The main objective of rapid economicdevelopment, particularly in the developed economies is to achieve the level ofstagnant economic growth, so that they may maintain the existing economicstatus and exercise control over business cycle.

Economic Development and Economic Growth Normally in economic textbooks, growth and development are used synonymously, and this usage is widely acceptable. However, in particular, thetwo terms have been distinguished by different economists as follows; 1. To some economists, economic development refers to the process ofexpansion of backward economies, while economic growth relates to that of advanced economies. 2. Schumpeter, however, uses the term "economic development" as aspontaneous and discontinuous change in the stationary state which disturbs the equilibrium state previously existing. And the term "economic growth" is used to denote a steady and gradual change in the long run which comes through a general increase in the rate of saving and population in a dynamic Economy

Factors Affecting Economic Growth The process of economic growth is a highly complex phenomenon and I influenced by numerous and varied factors such as political, social and culturalfactors. As such economic analysis can provide only a partial explanation ofthis process. To repeat here the remark of Prof. Ragnar Nurkse in thisconnection, "Economic development has much to do with human endowments,social attitudes, political conditions and historical accidents. Capital is a necessary but not a sufficient condition of progress". The supply of natural resources, the growth of scientific and technological knowledge-all these too have a strong bearing on the process of economic growth. We shall briefly notice some of these factors one by one. A. Economic Factors The following are the important factors which determine the economic growth of an economy. 1. Natural Resources The principal factor affecting the development of an economy is the natural resources. Among the natural resources, we generally include the land area and the quality of the soil, forest wealth, good river system, minerals and oil resources, good and bracing climate, etc. For economic growth, the existenceof natural resources in abundance is essential. A country deficient in natural resources may not be in a position to develop rapidly. In fact natural resourcesare a necessary condition for economic growth but not a sufficient one. Japanand India are the two contradictory examples. As pointed out by Lewis, "otherthings being equal man can make better use of rich resources than they can ofpoor". In less developed countries, natural resources are unutilized, underutilizedor misutilised. This is one of the reasons of their backwardness. There is littlereason to expect natural resource development if people are indifferent to the products or service which such resources can contribute. This is due to economicbackwardness and lack of technological factors. According to Professor Lewis, A country which is considered to be poor in resources may be considered very rich in resources some later time, not merely

because unknown resourcesare discovered, but equally because new methods are discovered for the knownresources". Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because it has been able todiscover new use for limited resources. 2. Capital Formation Among several economic factors, capital formation is another important factor for development of an economy. Capital may be defined as the stock ofphysical reproducible factors of production. Capital accumulation and capitalformation, both of these terms carry the same meaning which may be understoodsimply by the stock of capital. As we know, capital formation is cumulative and self-feeding and includes three interrelated stages; a) the existence of realsavings and rise in them; b) the existence of credit and financial institutions tomobilise savings and to divert them in desired channels; and c) to use thesesavings for investment in capital goods. 3. Technological Progress The technological changes are most essential in the process of economic growth. Adam Smith, the father of political economy, pointed out the great importance of technological progress in economic development. Ricardo visualised the development of capitalist economies as a race between technological progress and growth of population. The great importance of technological progress in capitalist development was recognised by Karl Marxtoo. 4. Human Resources A good quality of population is very important in determining the rate of economic progress. Instead of a large population a small but high quality of human race in a country is better for development. Thus, for economic growth,investment in human capital in the form of educational and medical and such other social schemes is very much desirable.

5. Population Growth

Labour supply comes from population growth. But the population growth should be normal. A galloping rise in population retards economic progress. Population growth is desirable only in a under-populated country. It is, however,unwarranted in an overpopulated country like India. In fact, a high populationgrowth at the rate of 2.5 percent per annum is very much detrimental to the economic growth of our country. 6. Social Overheads Another important determinant of economic growth is the provision of social overheads like schools, colleges, technical institutions, medical colleges,hospitals and public health facilities. Such facilities make the working populationhealthy, efficient and responsible. Such people can well take their country economically forward. 7. Organisation In the process of growth, organisation is very important. It is organization that emphasises maximum use of the means of production in production. Orginisation is complementary to capital and labour and helps production to reach the maximum level. In the modern economic system, the entrepreneur performs the duty of an organiser and bears all risks and uncertainties. Hence,entrepreneurship is an indispensable part in the process of economic growth.For instance, the Industrial Revolution in England succeeded because of the entrepreneurship.

B. Non-Economic Factors Both of the economic or noneconomic factors do play an important role in the process of economic growth. In this regard, socio-economic, cultural, psychological and political factors are also equally significant as are economicfactors in economic development of the LDCs Cairncross rightly observes : "Development is not just a matter of having plenty of money, nor is it purely an economic phenomenon. It embraces all aspects of social behaviour; the establishment of law and order; scrupulousness in business dealings, includingdealings with the revenue authorities; relationships between the family,

literacy,familiarity with mechanical gadgets and so on". We discuss here some of the essential noneconomic factors which determine the economic growth of an economy. 1. Political Factors Political stability and strong administration are essential and helpful inmodern economic growth. It is because of political stability and strongadministration that the countries like the U.K. the U.S.A., Germany, Franceand Japan have reached the level of highest economic growth in the world. But in most of the poor countries there is political instability and weak administration which have largely influenced their economic development programmes. It is, therefore, essential for their faster economic development to have a strong, efficient and incorrupt administration. In conclusion, we cansay that a clean, just and strong administration can put an economy on the wayto rapid economic development. Lewis rightly comments that "no country hasmade progress without positive stimulus from intelligent governments". 2. Social and Psychological Factors Modern economic growth process has been largely influenced by social and psychological factors. Social factors include social attitudes, social valuesand social institutions which change with the expansion of education and transformation of culture from one society to the other. The Industrial Revolutionof England and other Western European countries in the 18th century was largely influenced by the spirit of adventure and the expansion of education which led to new discoveries and inventions and consequently to the rise of thenew entrepreneurs. Social attitudes, values and institutions changed. Joint familysystem was replaced by the new single family system which further led to therapid economic development in these countries. 3. Education It is now fairly recognised that education is the main vehicle of development. Greater progress has been achieved in those countries, where education is wide spread. J.K. Garlbraith in his book "Economic Development"has rightly stressed the role of education as an engine of economic growth.

4. Urbanisation Another noneconomic factor promoting development is the process ofurbanisation. In poor agrarian economies, the structural change must begin with the change in the size of population in rural and urban sectors. 5. Religious Factors Religion plays a great role in economic growth. It may give rise to a peculiar sense of self-satisfaction. For example, the Hindu religion encouragesfaith in fate and prevents people from working hard. They are educated to remain satisfied with their lot and to hate risk and enterprise. Then our religiongives a higher place to spirit than matterObstacles to Economic Development Broadly speaking, the features of an under developed economy create obstacles in the way of economic development, and hamper economic progress.These features emerge out of economic, social, political, religious and institutionalfactors. It would be wrong to conclude that only economic factors are responsiblefor poverty or economic backwardness of a country. Non-economic factors are equally responsible for the under development of an economy. The factorsdiscouraging economic development may be classified into economic and noneconomic factors which are as under. The important economic factors which obstacles to economic development are: Vicious Circles of Poverty Most important feature of underdeveloped countries is their dependence on vicious circles of poverty which may be considered as the highest bottleneckin the process of their economic development. Poverty is not only distressing but it is also demoralising. A poor man is one who is regarded as a disgrace tothe society and a cause of humiliation to himself, and who is unable to have proper food and a suitable house. Neither he helps himself, nor he is able to serve others. He is burden on society. A poor man always finds himself havingbeen caught in a vicious circle of poverty. Since he lacks the means to prosper,he remains poor.What is true to an individual, is also true to the country as a whole.Since an underdeveloped economy lacks the proper and modern means of economic

development, its economic development becomes an uphill task. Since its rate of investment and growth potential is so little, it has to remain poor. We find circular relationships, known as the "vicious circles of poverty which reveal the low level of economic development in Less Developed Countries (LDCs). Prof. Nurkse defines the concept of "Vicious Circles of Poverty" in these words: "It implies a circular constellation of forces tending toact and react upon one another in such a way, as to keep a poor country in a state of poverty.... A country is poor because it is poor." The vicious circles operate in an underdeveloped economy on the supply as well as on the demand side. On the supply side deficiency of capital and lowvolume of savings, create vicious circles whereas low purchasing power createsvicious circle on the demand side

Difference between Economic Development and Economic Growth in India and China:Introduction:India and China are the most growing and developing nations of Asia. These two countries are the most powerful country in coming future. There growth and development are largely affected due to their highest number of population. But theses country were managing and increases their world trade with many different nations and emerging as a Most Developing Nations.

Difference between Economic Growth in India and China:

In the inevitable comparisons that economists and businesspeople make between Asia's two rising giants, China and India, China nearly always comes out on top. The Chinese economy historically outpaces India's by just about every measure. China's fast-acting government implements new policies with blinding speed, making India's fractured political system appear sluggish and chaotic. Beijing's shiny new airport and wide freeways are models of modern development, contrasting sharply with the sagging infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great Recession, India once again seems to be playing second fiddle. Pundits around the world laud China's leadership for its well-devised economic policies during the crisis, which were so effective in restarting economic growth that they helped lift the entire Asian region out of the downturn. Now, however, India may finally have one up on its high-octane rival. Though India still can't compete on top-line economic growth the World Bank projects India's gross domestic product (GDP) will increase 6.4% in 2009, far short of the 8.7% that China announced in mid-January India's economy looks to be rebounding from the downturn in better shape than China's. India doesn't appear to be facing the same degree of potential dangers and downside risks as China, which means policymakers in New Delhi might have a much easier task in maintaining the economy's momentum than their Chinese counterparts. "The way I see it is that

the growth in India is much more sustainable" than the growth in China, says Jim Walker, an economist at Hong Kongbased research firm Asianomics. Indias edge is due to the different stimulus programs adopted by the two countries to support growth during the downturn. China implemented what Walker calls the biggest stimulus program in global history. On top of government outlays for new infrastructure and tax breaks, Beijing most significantly counted on massive credit growth to spur the economy. The amount of new loans made in 2009 nearly doubled from the year before to $1.4 trillion representing almost 30% of GDP. The stimulus plan worked wonders, holding up growth even as Chinas exports dropped 16% in 2009. But now China is facing the consequences of its largesse. Fears are rising that Beijings easy-money policies have fueled a potential property-price bubble. According to government data, average real estate prices in Chinese cities jumped 7.8% in December from a year earlier the fastest increase in 18 months. The credit boom has also sparked worries about the nations banking system. Many economists expect the large surge in credit to lead to a growing number of nonperforming loans (NPLs). In a November report, UBS economist Wang Tao calculates that if 20% of all new lending in 2009 and 10% of the amount in 2010 goes bad over the next three to five years, the total amount of NPLs from Chinas stimulus program would reach $400 billion, or roughly 8% of GDP. Though Wang notes that the total is small compared with the level of NPLs that Chinese banks carried in the past, she still calls the sum staggering. Policymakers in Beijing are clearly concerned. Since December, they have introduced a series of steps to cool down the housing market and restrict access to credit by, for example, reintroducing taxes on certain property transactions and raising the required level of cash that banks have to keep on hand in an effort to reduce new lending. India, meanwhile, isnt experiencing nearly the same degree of fallout from its recession-fighting methods. The government used the same tools as every other to support growth when the financial crisis hit cutting interest rates, offering tax breaks and increasing fiscal spending but the scale was smaller than in China. Goldman Sachs estimates that Indias government stimulus will total $36 billion this fiscal year, or only 3% of GDP. By comparison, Chinas two-year, $585 billion package is roughly twice as large, at about 6% of GDP per year. Most

important, India managed to achieve its substantial growth without putting its banking sector at risk. In fact, Indias banks have remained quite conservative through the downturn, especially compared with Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008. As a result, economists see continued strength in Indias banks. A January report by economic-research outfit Centennial Asia Advisors noted that based on available data, there was no sign that domestic banks nonperforming assets were deteriorating materially. Nor do analysts harbor the same concerns that Indias monetary policies are sending prices of Indian real estate to bubble levels. Indias growth, though less stellar, does have the reassuring factor that the [risks of] asset price bubbles are less, says Rajat Nag, managing director general of the Asian Development Bank in Manila. India maintained robust growth without Beijings hefty stimulus in part because it is less exposed to the international economy. Chinas exports represented 35% of GDP compared with only 24% for India in 2008. Thus India was afforded more protection from the worst effects of the financial crisis in the West, while Chinas government needed to be much more active to replace lost exports to the U.S. More significantly, though, Indias domestic economy provides greater cushion from external shocks than Chinas. Private domestic consumption accounts for 57% of GDP in India compared with only 35% in China. Indias confident consumer didnt let the economy down. Passenger car sales in India in December jumped 40% from a year earlier. What we see [in India] is a fundamental domestic demand story that doesnt stall in the time of a global downturn, says Asianomics Walker. The Indian economy is not immune to risks. The government has to contend with a yawning budget deficit, and last years weak monsoon rains will likely undercut agricultural production and soften rural consumer spending. But rapid growth is expected to continue. The World Bank forecasts Indias economy will surge 7.6% in 2010 and 8% in 2011, not far behind the 9% rate it predicts for China for each of those years. Indian Prime Minister Manmohan Singh, when speaking about his countrys more plodding pace of economic policymaking, has said that slow and steady will win the race. The Great Recession appears to have proved him right.

Difference between Economic Development of India and China:On May 1, World Expo 2010 will open its doors in Shanghai, China. The theme of the exposition is "Better City - Better Life" and signifies Shanghai's new status in the 21st century as a major economic and cultural center. More than 190 countries and more than 50 international organisations have registered to participate, and China expects to receive almost 100 foreign leaders and some 70 million people - the largest number of visitors in the history of the world's fairs in terms of gross numbers. What could be a more fitting venue for this World Expo than China - the country expected shortly to overtake Japan's prized position as the second largest market in the world described by economist Jeffrey Sachs as the most successful development story in world history. The size of the economy has doubled every eight years for three decades - the fastest rate for a major economy in recorded history. A recent report by PricewaterhouseCoopers forecasts that China could overtake the US economy as early as 2020. But China is not alone. India is also among the world's fastest growing economies and together with China, has contributed nearly 30% to global economic growth as the balance of economic power continues to shift from West to East. Contrary to popular belief, both China and India are not emerging economies, they are actually "re-emerging." China and India have particular strengths and competitive advantages that have allowed each of them to weather the global financial crisis better than most countries and to gain ground in the "catching-up game" with the developed world. Beware the sleeping giant India, often referred to as the "sleeping giant", has emerged as the fourth largest market in the world when its GDP is measured on the scale of purchasing power parity. Both economies are increasing their share of world GDP, attracting high levels of foreign investment, and are recovering faster from the global crisis than developed countries. Each country has achieved this with distinctly different approaches - India with a "grow first, build later" approach versus a "top-down, supply driven" strategy in China. Although China's income per head is still low at about $3,566, less than onetenth of what Americans have, it is more than three times higher that of Indians (just over $1,000). China is currently the fifth fastest-growing consumer economy in the world, and is on course to become the third-largest by 2020, with India close behind and expected to move into the fifth position by 2025. Chinese consumers

are indeed putting into practice Deng Xiaoping's famous quote, "It is glorious to get rich". The country recently surpassed the United States to become the world's largest automobile market and has huge potential remains in terms of future purchasing power. China is also the first country in the world to have met the poverty reduction target set in the U.N. Millennium Development Goals, and enjoys the remarkable success of having lifted more than 400 million people out of poverty. This contrasts sharply with India, where 456 million people (42% of the population) still live below the poverty line, defined by the World Bank at $1.25 a day. Different means, same end The two countries' economic performance has been very differently orchestrated. China's growth has been mainly investment and export-driven, focusing on low-cost manufacturing, with domestic consumption as low as 36% percent of GDP. On the other hand, India's growth has mostly been derived from a strong services sector and buoyant domestic consumption. India is also much less dependent on trade than China, relying on external trade for about 20% of its GDP versus 56% for China.

Chinese economy has grown at much faster rate than Indian, but India seems to be catching up. The average estimated productivity growth rate of China (5.9%) is more than double that of India (2.4%). The di erence between same-deator average growth rates of India and China reduces signicantly (by as much as 70%) for manufacturing sector. Both import and export are signicantly correlated of with trends in growth rate of output-per-worker and productivity for India and China pointing towards presence of conventional TradeGrowth link. While increased growth of spending are accompanied by increase the growth rate of productivity in China, in India the correlation is negative. For India, service sector growth trend is more strongly correlated with government spending and infrastructure.