Unit 1 | unit 1 basic issues in economic development

EDI

Unit 1

Basic Issues in Economic Development

Q1) Mention the characteristics of Underdevelopment countries with special reference to India.

A1) The characteristics of Underdevelopment countries with special reference to India are-

Low per Capita Income
Inequitable Distribution of Wealth and Income:
Predominance of Agriculture
Deficiency of Capital
High Rate of Population Growth
Unemployment and Underemployment
A Dualistic Economy
Technical Backwardness

Q2) Explain the features of low per capita income of underdeveloped countries.

A2) An underdeveloped country is a poor country. The per capita income of the people of India is very low in comparison with that of the USA, the UK, Canada, Australia and Japan. In 1992-93 India’s per capita income was as low as Rs. 6248 (current prices) while it was 40 times higher in the USA, India’s poverty was the legacy of the colonial rule.

The low per capita income is reflected in the low standards of living of the people. In India food is the major item of consumption and about 75 per cent of the income is spent on it compared to 20 per cent in advanced countries.

People in India mostly take cereals and other starches to the total absence of nutritional foods such as meat, egg, fish and dairy products. Education is an integral part of the country’s development process; yet only 52 per cent people of India are literate.

People live in extremely insanitary conditions and without any proper medical care. Thirty-five per cent of the people are below the poverty line, who are ill-fed, ill-clothed, ill-housed and ill- educated. Poverty is the basic problem facing the country.

Q3) Explain the features of Inequitable Distribution of Wealth and Income of underdeveloped countries.

A3) Like most underdeveloped countries the distribution of income and wealth in India is inequitable. The gap between the haves and the have-nots over the years has actually widened and there has been concentration of wealth and economic power in the hands of a few to the detriment of the common people.

This is not surprising because private ownership of the means of production inevitably leads to concentration of wealth in a few hands. Income inequalities result from the concentration of wealth and capital.

Economic growth in a capitalist economy has a tendency to increase disparities in income distribution. The various estimates made by different committees indicate that the inequalities of income and wealth have widened rather than narrowed as a result of planned economic development in India. The problem of mass poverty is a corollary to income inequalities.

Q4) Explain the features of predominance of agriculture of underdeveloped countries.

A4) In an underdeveloped country two-thirds of the people live in rural areas and their main occupation is agriculture. A developed economy is generally a highly industrialised country where agriculture occupies a comparatively less important place.

The larger part of the national income is derived from agriculture and allied pursuits whereas the share of the manufacturing sector is only 17 per cent of the national income. In a developed economy, a comparatively smaller proportion of the population is dependent on agriculture; it is only 3 per cent in the USA whereas in India about 65 per cent of the population is dependent on agriculture.

The heavy concentration in agriculture is a symptom of poverty. Agriculture as the main occupation of the people of India is mostly unproductive. It is mainly carried on in an old fashion way with obsolete methods of production.

As a result, the yield from land is very low and the peasants continue to live at a bare subsistence level. In the recent past, attempts have been made to adopt modern agricultural technology which has increased agricultural productivity. Even then yields for major food crops in India are much below those in the USA or Japan or UK.

Q5) Explain the features of Deficiency of capital of underdeveloped countries.

A5) Another criterion of underdevelopment is the low ratio of capital availability per head of population. An underdeveloped economy is an economy in which the available stock of goods is not sufficient to employ the total available labour force on the basis of modern technique of production.

Not only the existing stock of capital is small but the current rate of capital formation is also very low. Because of shortage of capital, there is a tendency to invest the available capital in farming and labour-intensive consumer goods industries rather than in the heavier capital-intensive capital goods industries.

There are a number of reasons for capital deficiency: (i) shortage of savings, (ii) the tendency of the meagre savings to go into conspicuous consumption and (iii) speculative investment rather than productive investment.

Over the planning period both savings and investment rates have risen in India. In 1992-93, the rates of gross domestic saving and gross domestic capital formation were 13.5 and 16.0 per cent respectively.

Such rates of capital formation are generally considered enough to achieve a reasonably high rate of growth but in India this has not been the case. This appears to be due to the fact the capital-output ratio has become more unfavourable than was assumed by the planners.

Q6) Explain the features of High Rate of Population Growth of underdeveloped countries.

A6) Like all other underdeveloped countries, the population of India has been increasing at an alarmingly high rate. India’s population was 85 crores in 1991 as against 68 crores in 1980 and the country has the second largest population in the world next to China.

The country is passing through the second stage of demographic transition which is characterised by a falling death rate without a corresponding decline in birth rate. At present the rate of increase of population in India is 2.5 per cent per annum which comes to 15 million persons per annum.

This has resulted in population explosion which neutralises the small gains of development which the country has made during the period of economic planning. An increase in population raises the ratio of people to land and other sources of raw materials and as a result, production tends to decline per unit of variable cost in the concerned industries.

This trend is clearly visible in Indian agriculture. Over the years per head agricultural land has steadily declined due to rapid growth of population.

Underdeveloped countries have also a shorter life expectancy which means a smaller fraction of their population is available as effective labour force.

Life expectancy at birth is 59 years in India whereas in the USA it is 70 years. Low life expectancy means that there are more children to support and few adults to provide for them which inhibit the rate of economic growth.

Another feature of the demographic pattern in underdeveloped countries is that a much larger proportion of the total population is in the younger age group. In India, population below 15 years of age accounts for nearly 40 per cent of the total population while it ranges between 23 and 25 per cent in the USA and the UK.

Q7) Explain the features of Unemployment and Underemployment of underdeveloped countries.

A7) Widespread unemployment and underemployment are an important feature of the Indian economy. Owing to huge population, the supply of labour far exceeds the demand for labour. It is very difficult to provide gainful employment to all.

The main reason is that there is a shortage of capital. India does not have sufficient amount of capital to expand industries so that the entire labour force is absorbed.

The nature of unemployment in India is different from what it is in the developed countries. In a developed economy, unemployment is of a cyclical nature and occurs due to lack of effective demand. In contrast, unemployment in India is structural and has arisen due to lack of capital.

The Committee of Experts on unemployment pointed out that 30 million persons were unemployment in India in 1981.

What is more serious is that the number of unemployed is on the increase. In agricultural sector there is widespread disguised unemployment while in the urban areas there is open unemployment.

There are two reasons for urban unemployment. First, the failure of the industrial sector to expand at a fast enough rate has resulted in industrial unemployment. Secondly, expansion of education has created demand for white collar jobs which the country’s urban economy has failed to provide.

Q8) Explain the features of a Dualistic Economy of underdeveloped countries.

A8) All the underdeveloped countries including India have a dualistic economy. One is the market economy and the other is the subsistence economy.

One is in the urban areas and the other is in the rural areas. One is developed and the other is undeveloped. The modern or the developed part contains mainly the large-scale industry, mines and plantations.

It is well organised and highly monetised. It uses the modern techniques of production. Workers and employers in this sector are well organised. Monetary and fiscal measures of regulation are quite effective. This advanced sector of the economy accounts for a small part of the whole economy.

The primitive part mainly comprises agriculture and is confined to rural areas. This is very backward and money does not play an important part in this sector. There are a high degree of self-sufficiency and people do very little buying and selling as most of the transactions are of a barter type.

A large part of the credit is supplied by the traditional money-lenders. Monetary and fiscal measures of regulation are not very effective. Indian peasant is born in debt, lives in debt and dies in debt. Income of the people of this inorganized sector is very low. Thus, the Indian economy is characterised by economic dualism.

Q9) Explain the features of Technical Backwardness of underdeveloped countries.

A9) The state of technology in the underdeveloped countries is backward. On account of the absence of technological development, India has continued to use old, outdated and primitive methods of production which were discarded by the developed countries long ago.

Deficiency of capital hinders the process of scrapping the old techniques and equipment and its replacement with modern techniques, etc. Illiteracy and absence of skilled labour are the other major hurdles in the spread of techniques in the backward economy.

However, it is gratifying to note that the level of technology is rapidly increasing in the country and India has the largest number of technically qualified personnel in the third world countries.

Q10) Explain the sustainable Industrial factors.

A10) Industry has traditionally been considered the main contributor to environmental pollution and, therefore, it was among the first sectors to draw government intervention. Israeli legislation enabled the environmental administration to require plants to introduce pollution prevention facilities, to treat wastes, to transfer hazardous wastes to the central site at Ramat Hovav, and to abate noise nuisances.

More than 19,000 industrial plants, employing more than 370,000 people, operate in Israel. The environmental impacts generated by this scale of industrial production are considerable. According to statistics provided by the Central Bureau of Statistics, Israeli industry is responsible for some 30% of Sox emissions, 6% of NOx emissions and 25% of all particulate emissions. Most of Israel's hazardous waste and, of course, its industrial wastes, are produced by the industrial sector.

Industry as Polluter

Damages to the environment as a result of industrial processes decrease in raw materials, land deterioration, extinction of species, damage to human health and climate change make it clear that industrial development as it is practiced today is not sustainable. Future development and the ability of future generations to supply their own needs are being undermined by the misuse or contamination of land, water, air, marine and natural resources.

The central concept behind sustainable development is to enable the biosphere to supply "environmental services" to the population by means of renewable processes, without investment in non-renewable materials. In the natural environment, nutrients are transferred from organism to organism and materials and energy are circulated and transferred. Industrial ecology seeks to replicate this state by minimizing waste and maximizing the cycling of materials and energy. Reuse and recycling are become more prevalent both within the framework of industrial processes and as industries in their own right.

The following developments are expected to have a positive impact on industry in the future:

1. Increased industrial responsibility for "clean" production processes and for environment-friendly products.

2.Comprehensive supervision and treatment of all industrial plants, not only individual plants.

3. Increased investments in pollution prevention and waste treatment in the first stage.

4. Introduction of changes in production processes and in material use in the second stage.

5. Growing opposition by the government and the public to increased environmental risks.

6. Increased influence of powerful environmental bodies (such as Green Peace) on industrial decision making.

7. Increased insurance costs to cover environmental damages.

As environmental considerations are increasingly incorporated in industrial planning and construction processes, it is anticipated that future industrial development in Israel will take the following directions:

Industrial production which is based on local materials such as those derived from mining and quarrying will decrease. The increased cost of raw materials for construction will facilitate the introduction of new materials (e.g., plastics, aluminium, glass) and the recycling of construction material.

Effluent treatment facilities will be established in all industrial plants thus enabling these plants to be connected to municipal sewage systems. As water prices rise, new technologies for industrial water conservation and reuse will be introduced. Improved treatment of domestic wastewater will generate large quantities of effluents at a quality which will enable industrial reuse. The allocation of high-quality water for industries such as the food industry will continue.

Industrial plants which emit gases or particulate matter will be equipped with the necessary facilities and suitable production processes to assure compliance with strict emission standards. Energy conservation and use of less polluting fuels such as gas and electricity will be promoted. As a result of the rise in raw material costs in Israel and the world, new technologies for reducing material use and increasing recycling will be developed. Increased costs of waste disposal will bring about significant changes in production processes so as to reduce wastes.

Future industrial development in Israel will focus on hi-tech industries, which are based on expertise and new technologies, rather than raw material use.

Strategies for Sustainable Industrial Development

The following guidelines have been formulated for sustainable industrial development:

1. Reduce to a minimum the amount of material used to manufacture a product. The quantity of aluminium now used in beverage cans is one-third less than a decade ago, while the quantity of steel in motor vehicles has been significantly reduced over the past two decades.

2. Reduce to a minimum energy use in the production process. Use materials which are less energy-intensive, improve production processes and switch to alternative or renewable energy sources.

3. Switch from toxic to non-toxic materials, including lead-free gasoline and degradable pesticides.

4. Switch from coal and oil use to gas and solar energy use.

5. Utilize waste materials from one industry or one stage of manufacturing as raw material in another.

6. Use materials which consume less energy, such as bulbs or refrigerators which use less electricity.

7. Design products which may be reused or upgraded rather than thrown away as waste, such as modular computers.

8. Manufacture products from recyclable materials, such as aluminium beverage cans or recycled plastic cans.

9. Create products which are degradable and whose by-products are non-toxic.

10. Design products which will have a minimal impact on the environment during their life cycle and which will be recyclable at the completion of their life cycle.

11. Shift from the manufacture of products to the supply of services. For example, the pesticide industry should provide integrated services for biological and chemical control; public transport services should be substituted for private vehicles, etc.

12.Prepare and publish the inventory of materials which enter and exit the production process. Publish emission data so as to catalyse both the community and the industrial plant to take steps for emission reduction. Publicize the "environment-friendliness" of different products so as to enable consumers to choose products with minimal environmental impact.

An analysis of the current state in Israel reveals the following:

Awareness of water conservation is high. As a result of increased environmental enforcement, industrial water recycling is on the rise and cases of domestic effluent recycling have begun to emerge as well.

Awareness of energy conservation is not sufficiently high. Studies reveal that it is possible to attain savings of up to 15-20% in industrial energy use in Israel.

While industries are becoming more aware of technologies for reduced resource consumption and increased material recycling, the relatively low cost of waste disposal in Israel has precluded significant improvements in this direction. It is anticipated that the increased costs of industrial waste collection, transportation and disposal will influence industry to increase its efforts in this direction.

Production of recyclable products, and especially packaging material, will be largely impacted by legislation.

At this stage of industrial development in Israel, it is unlikely that industry will independently adopt such new concepts as a shift from production to services, design of products with minimal adverse environmental impact or production of long-life or recyclable products. With the introduction of natural gas into the Israeli energy market, industrial plants which are large consumers of energy should switch to gas use.

The industrial sectors which will be most affected by sustainable industrial policy are plants using water and local materials, chemical and petrochemical industries, and the packaging industry.

As a result of environmental and planning restrictions, most industrial development will be concentrated in the south of the country while the Jerusalem, Tel Aviv, Central and Haifa districts will be almost totally closed to new industrial development, especially plants which consume raw materials, water and energy. Industrial development in the northern region will be largely restricted to hi-tech industries and to industries which do not consume water.

As economic links with neighbouring countries deepen, some industries, especially labour and energy intensive industries, may be relocated. New industrial areas will largely be established in the south and north of the country and will be managed by site administrations which will be responsible for establishing infrastructure and supplying such services as sewage and solid waste disposal and nuisance prevention.

Administrative Measures

Alongside technological innovations, industrial ecology requires changes in the attitudes of planners, production personnel and industrialists. In Israel, industrialists initially opposed the introduction of environmental laws and regulations. As enforcement increased, they did the bare minimum to comply with the law, mainly through end-of-pipe treatment. Today, a change in perspective is slowly emerging. And industry itself is beginning to introduce new steps to make itself more efficient, less expensive and more environment-friendly. Industry has begun to realize that reduced emissions may actually save money in production expenses, in payments for waste disposal and in insurance costs. Moreover, an environmental perspective also prevents the intervention of government in the construction and operation of plants. The "polluter prevention pays principle" is slowly gaining entry into industrial thinking worldwide. With further growth in population and industrial production, the adoption of strategies such as Waste Reduction Always Pays (WRAP), which was adopted by large corporations such as 3M and Dow, will become more acceptable.

Legal Measures

In addition to statutory requirements for end-of-pipe treatment, legislation now requires environmental impact assessment for new industrial plants, review of the cumulative effect of the individual plant and the industrial zone on the environment, and measures for reducing cumulative impact. In addition, industry is being pressured to take responsibility for the product itself and not only for the waste it produces, and governments are beginning to transfer responsibility for environmental clean-up to the plants themselves.

In Israel, new industrial plants or new industrial zones cannot be established without the preparation of Environmental Impact Statements or environmental reports. The "polluter pays" principle is being implemented largely as a result of legislative requirements, such as administrative levies on industrial facilities for the purpose of establishing monitoring systems or fees on disposable beverage containers in order to finance clean-ups and promote education on cleanliness. It is expected that fines, levies and fees will continue to be imposed on industrial plants in order to increase the income available for environmental protection activities and to provide incentives for pollution reduction.

Economic Measures

While environmental policy has traditionally been implemented through legislation and enforcement (e.g., the command-and-control approach), new methods are now being introduced and developed to promote pollution prevention. One of the most effective is the use of economic measures, especially taxes and levies, to make pollution economically unfeasible. Sufficiently high emission taxes are expected to bring about changes in production processes, to reduce emissions and to promote recycling and reuse. Taxes can also encourage the purchase of environment-friendly materials such as lead-free fuel and recyclable beverage containers while reducing the use of certain pollutants. In Europe, the possibility of imposing "pollution taxes" is being reviewed concomitantly with the reduction of income and housing taxes. The International Standards Organization is preparing international standards for environmentally-sound industrial policy, such as ISO 14000, whose main objective is to prevent pollution and promote environmental management in industrial plants.

Industry-Government Cooperation

In the future, greater responsibility for sustainable industrial development will be imposed on industrialists themselves since they are best equipped to change industrial processes while keeping costs down. However, industrialists need guidelines on the scope of improvements required and on government policy. In the Netherlands, a model for such cooperation has been developing whereby government and industry sign joint covenants to achieve specific objectives in each industrial sector. Covenants are voluntary agreements with the status of binding contracts in civil law. The aim of the covenant is to guarantee that the environmental goals which are formulated in local and national legislation and in international agreements will be implemented according to an agreed timetable.

Sustainable Industrial Development Policy

To promote sustainable industrial development, the following steps should be taken:

1. All economic decisions must be based on sustainable development principles.

2. Decision makers should be motivated to base their decisions on criteria of sustainable development and not only on the promise of short-term gains for immediate improvement in quality of life.

3. The activities which contribute to sustainable development as well as those which counteract it should be defined, including data transfer and goal setting.

4. A political "give and take" process should be initiated, especially with regard to present versus future needs.

5. A clear policy which sets goals and promotes the necessary measures to achieve these goals at all levels of society should be prepared.

A sustainable development policy should include the following components:

1. Setting of goals in a government declaration of intent on the need to implement sustainable development for industry.

2. Defining implementation strategies for goal achievement in industry.

3. Quantifying the measures for the monitoring of progress.

4. Establishing quantitative and administrative goals.

5. Identifying the bodies which will be responsible for goal achievement.

6. Establishing criteria and guidelines for reviewing accumulated data.

Organizational Structure

As stated, the Netherlands was one of the first nations to implement steps for sustainable development in the industrial sector. Its National Environmental Policy Plan includes a sophisticated target group management system to analyse and implement policies together with target groups like industry, agriculture, energy, etc. The process included the setting of specific targets for emission reductions, the definition of the sectors to be accorded priority, preparation of joint declarations between government and industrial sectors which specify policy, functions, goals and implementation measures, preparation of information campaigns, preparation of covenants or guidelines for goal achievement, and introduction of pollution prevention measures in each plant along with systems for progress monitoring.

Other organizational means which may be undertaken include:

1. Environmental auditing - an external auditor may be used to conduct an environmental audit of each plant.

2. Green label - eco-labelling enables consumers to choose the preferred product.

3. Publication of emission data - public pressure is created when plants are required to publish, on an annual basis, the exact quantities of chemicals which they emit to the environment.

4. Education and information - these are especially important since the concept of sustainable development is still in its infancy. Means of Achieving Sustainable Industrial Development In order to achieve sustainable industrial development in the future, activities in a number of realms have to be undertaken now:

1) Research: Basic and practical research are vital in order to better understand industry's contribution to environmental pollution and the means which should be used to overcome environmental problems by means of sophisticated technologies.

2) Information: Environmental data should be transferred to all decision makers in the industrial sector at all levels.

3) Environmental problem analysis: better use should be made of such tools as economic instruments, life cycle analysis of products, and technologies for pollution prevention and material recycling.

4) Environmental policy: A clear environmental policy with specific goals and detailed timetables is required to attain the objectives. Such policy must take account of international constraints and of new economic thinking while integrating environmental policy with social, economic and political policy as it relates to industrial development.

Q11) Explain Industry as Polluter.

A11) Damages to the environment as a result of industrial processes decrease in raw materials, land deterioration, extinction of species, damage to human health and climate change make it clear that industrial development as it is practiced today is not sustainable. Future development and the ability of future generations to supply their own needs are being undermined by the misuse or contamination of land, water, air, marine and natural resources.