Growth and Development Economics – Quiz 1B

Lahore School of Economics

Spring Semester, 2013

Development and Growth Economics

BSc IV – Section C

Quiz 1A – Total Points: 50 – Suggested Solutions

Instructions: Answer all questions in the spaces provided. For full marks, make sure you write
all relevant points and formulate coherent and concrete answers. Pencils, pens, rulers, etc.
cannot be shared and cell phones cannot be used during the session.

Question 1

Are the structural change models of Rostow and Harrod-Domer important and relevant in explaining
the underdevelopment in countries like Pakistan? Critically analyze. (15 points)

Yes because they focus on how can countries get out of underdevelopment trap by changing the
structure of economy, i.e. by transforming the economies from traditional/agricultural sectors to
modern industrial sectors

Rostow said that preconditions and take-off stages are necessary to achieve this change. They include
necessity of external funding for revolutionizing the agricultural sector and thereby increasing local
investment and savings  local savings are then used for expanding the industrial sector and
diversifying it  this ultimately leads to higher savings and growth locally, lowering dependency on
foreign funding and ‘drive to maturity’ stage

On the other hand, H-D Model which says that GDP growth rate depends on high savings and low
capital-output ratios: GDP growth rate = s/c. If local saving ratio is too low, external funding can solve
the problem.

Although the models explain how structural change can help the developing economy, both initiate
development process through productive use of external funding. External funding is not free of cost; it
comes at high rate of interest and is subject to exchange rate fluctuations (depreciation can lead to
higher loan amount in local currency terms). Secondly, productive use of money needs productive minds
and attitudes coupled with appropriate physical and financial infrastructure. With these crucial variables
missing, external funding alone cannot solve underdevelopment in Pakistan. Hence, Pakistan couldn’t
pass the ‘take-off’ stage and could not translate higher foreign inflows into lower capital ratios and
sound investment decisions.

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 Growth and Development Economics – Quiz 1B

Question 2

Using the NHDI and GNI per capita values for selected developed and underdeveloped
nations in the following table, analyze if higher income levels are correlated with higher
human development index. (20 points)

For this problem, students should focus on second-last column, ‘GNI per capita Rank – NHDI Rank’. For a
positive value, Income growth > Development growth; for a negative value, Income growth <
development growth

This shows that higher incomes don’t necessarily mean higher human development. Tajikistan is an
example of such country. In contrast to this, Botswana and South Africa have higher NHDI ranks as
compared to GNI per capita ranks respectively. We can also see the countries with high income and very
high NHDI and also, on the other hand, countries with low income and low NHDI ranks.

Higher income is a necessary but not a sufficient condition for development. Hence, there is no evidence
of strong positive or negative correlation between NHDI and Income per capita levels. Higher income
can lead to lower or higher human development index depending on local education and health
conditions (such as regional disparities, development priorities of political parties, etc.)

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 Growth and Development Economics – Quiz 1B

Question 3

If you wanted to investigate whether a country was successfully developing, what information would
you look for? Why? Explain in detail. (15 points)

The key variables would be higher per capita GDP, changes in the structure of output, reduction of
poverty, and increasing life expectancy and levels of education. The limitations of the GDP data should
be noted as well as the general problem of reliable data from governments with limited data-gathering
capabilities.

Any other relevant variable can be written. Students are expected to explain the reason behind the
variables chosen.

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