Lesson 29 Institution in economic development

Structure:

29.1 Introduction

29.2 Education and economic development

29.3 Health and Economic Development

29.4 Market and Economic Development

29.5 State and Economic development

29.5.1 Creation of Social and Economic Overheads

29.5.2 Agriculture development

29.5.3 Industrial development

29.5.4 Reduction of Inequalities

29.5.5 Optimum allocation of Resources and Creation of Full Employment

29.6 Summary

29.7 check your progress

29.8 Key Concepts

29.9 Self Assessment Question

29.10 Answers to check your progress

20.11 Suggested Readings

Objectives:

After studying this lesson, you will be able to understand

 Relationship between Education and Economic Development

 Importance of Health and Economic Development

 Significance of Markets and Economic Development

29.1 Introduction:

One of the important measures of economic development is to bring about changes in the
social-cultural attitudes of the people in the LDCs. Such societies possess religious and
cultural traditions which are not conductive to economic development.

The institutional framework does not encourage rational individualistic behaviour, and
the spirit of competition and enterprise. If economic development into proceed, social
attitudes, values and institutions entrenched in the joint family, caste, kinship and in
religious beliefs must undergo change. These require social revolution. Social revolution
does not imply the rapid over throw of the existing institutions.
The process of change has to be evolutionary. Otherwise, violent social changes will lead
to discontentment, frustration, unrest and violence. These factors will, in turn, inhibit
economic growth.

Francis Hues points out that “it took Europe ten centuries or more to produce an
individualistic orientation of life which bore economic growth two hundred years ago,
and there does not seem to be any way in which a similar orientation could be generated
in a matter of years or even decades.” Any society attempting to institute it quickly will
result “either in apathy or revolt.” Thus “much depends upon the way in which the
process of growth and change it set in motion, the speed of the process and the extent to
which it permeates all sectors of the economy. Generally, a slow but steady development
is likely to create fewer political, social and economic tensions; and it is likely that an
attempt to force the pace too strenuously may also be economically wasteful because the
social and personal changes may not take place which are necessary to enable the
individual or then society to form the development necessary to enable individuals or the
society to profit and sustain it.”

Economic change is not brought about by institutional changes alone. Economic change
may take place due to increased capital formation or as a result of technological change
which may in turn cause institutional changes. Non economic factors like changes in
religious ideas or political framework may also bring about changes in institutions. Thus
there may be causal relationship between economic development and institutional
changes. If a change starts in social institutions people will seize new opportunities which
will it turn further change the institutions. Such new opportunities bring changes and
these changes are gradual and perceptible. They are initiated by innovators, the new men,
who endeavour to break with the fast and mould the old institutional framework into a
new setting.

Above all it is the government which plays a crucial role in influencing the institutional
framework.
29.2 Education and economic development:

Economic development is not possible without education. As Myrdal says,” to start on a

national development program while leaving the population largely illiterate seems to
met to be futile. For economic development, it is the quality of labour that is more
important.

Many quantitative studies of the source of economic growth in the west have amply
demonstrated that it was not the growth of physical capital but that of human capital
which was the principal source of economic progress in the developed countries. Even in
developing economies it was felt an immediate lead to build up human capital
infrastructure. Rapid expansion of education therefore appeared essential in the light of
substantial scarcities of manpower in 1950’s and 1960’s. Infact, expansion of educational
opportunities has contributed to economic development in four ways:

 it has created a more productive labour force by endowing it with increased

knowledge and skill

 it has provided widespread employment and income-earning opportunities to

teachers, school workers, text book and paper printers, school uniform
manufactures, builders etc.,

 It has created a class of educated leaders to fill vacancies left by departing

expatriates or otherwise vacant positions in government services, public
corporations, private business and the professionals.

 It has provided the kind of training and education that would promote literacy,
numeric and basic skills while encouraging modern attitudes on the part of diverse
segments of production.
Thus, it cannot be denied that educated and skilled manpower is a necessary condition for
sustained economic development. However, the role of education in the process of
economic growth should not be confined to the latter’s overall rate in a single dimension.
Rather, we should also consider the structure and pattern of growth and its distributional
implications in terms of reduction in inequality and poverty.

29.3 Health and Economic development:

To increase the efficiency and productivity of labor, the health of the people must be
progressively improved. Public health measures include the improvement of
environmental sanitation both in rural and urban areas, removal of stagnant and polluted
water, slum clearance, better housing, clean water supply, better sewage facilities, control
of communicable diseases, provision for medical and health services, especially in
maternal and child welfare, and health education and family planning, and above all, for
the training of health and medical personnel. All this necessitates planned efforts on the
part of the public authorities.

Public health measures assume great importance in LDC’s mainly for two reasons:

 they help in the development process by augmenting labor productivity and

efficiency

 By reducing the mortality rate they tend to increase the rate of population growth,
thus making it imperative for the state to adopt family planning and speedy
development programmes. But all development efforts will be futile if the growth
in numbers is not checked. Since, the death rate is already on the decline in
LDC’s the remedy is to bring down the birth rate from 40 per thousand prevailing
in such countries to 20 per thousand.
 No doubt there is greater need for accelerating development, but to increase per
capita income and improve the standard of living, the rate of population increase
must be checked and family planning programs be given top priority. Dr. Stephen
Enke has calculated that the value of a new-born baby’s life-time net consumption
in an LDC is approximately 125 dollars after discounting his lifetime future
production. 125 dollars is a negative value and an economic burden on
overpopulated LDC’s.

29.4 Market and Economic Development:

An important economic requirement of development is well-functioning market

system. This requires special institutional, legal and cultural preconditions. Nathan
Keyfitz and Robert Dorfman have listed the following 14 institutional and cultural
requirements of the operation of effective markets.

• Trust in banks, insurance companies, suppliers.

• Law and order (enforcement of contracts)
• Security of persons and of property
• Balancing competition with cooperation
• Division of responsibility and diffusion of power
• Community altruism
• Social mobility, legitimation of ambition, and toleration of competitiveness
• Materialistic values as a stimulus to greater production
• Deferring gratification to generate private saving
• Rationality unconstrained by tradition
• Honesty in government
• Efficient forms of competition as opposed to monopolistic control
• Freedom of formation
• Flows of information without restrictions
Given the existence of these institutional and cultural preconditions, a well functioning
market system requires at least the flowing eleven market-facilitating legal and economic
policies.

 Property rights clearly established and demarcated, procedures for establishing

property rights and transferring them

 Commercial law and courts to enforce it, especially contract and bankruptcy laws

 Freedom to establish huiness in all sectors except those with significant

externalities, without excessive licensing requirements analogous freedom to
enter trades and professions to attain government offices

 A stable currency and a reliable and efficient system for making transfers

 Public supervision or operation of natural monopolies as occurs in industries

where technological efficiency requires that a firm be large enough to supply 10%
to 15% of the national markets

 Provision of adequate information in every market about the characteristics of the

products offered and the state of supply and demand, to both buyers and sellers

 Autonomous tastes-protections of consumers preferences from influence by

producers and purveyors

 Public management of externalities and provision of public goods

 Instruments for executing, stabilizing monetary and fiscal policies

  Safety nets-provisions for maintaining adequate consumption for individuals
affected by certain economic misfortunes, especially involuntary unemployment
industrial injuries and work disabilities

 Encouragements to innovations, in particular, issuance and enforcement of patents

and copyrights.

So the market reforms involve much than eliminating price distortion, privatizing public
enterprises and declaring markets free. All these essential requirements are present in an
economy for a speedy development. The slow pace of development in many African and
Asian countries is attributable to the absence of some or many of the institutional
preconditions and market practices.

29.5 State and Economic Development:

The contribution of State in economic development may be discussed under the following
heads:

29.5.1 Creation of Social and Economic Overheads:

The overheads such as means of communications and transportations, ports, generation of

energy, irrigation, etc are important for rapid development of an economy. The private
enterprise is not interested to invest therefore, the provision of these economic overheads
have to be undertaken by the State.

Development of infrastructure is a sine qua non of economic development. All economic

activities require infrastructural facilities. Thus the State must take upon itself the
responsibility for the construction of economic overheads in the under developed
economies so as to achieve over all economic development.
29.5.2 Agricultural development:

The State must play an active role in the re-organization and revitalization of agriculture.
Consolidation of holdings, organization of agriculture on co-operative lines, provision of
irrigation and credit facilities, adoption of new high yielding varieties of seeds, increased
use of fertilizers, pesticides and insecticides, agricultural research and training,
remunerative prices of agriculture products, reform of tenancy laws, establishment of
subsidiary and agro-based industries etc., must form part of an agrarian policy of the
government.

29.5.3 Industrial development:

Another function of the state is to develop the economy industrially. It is the duty of the
state to formulate and implement a judicious industrial policy so that necessary
encouragement should be given to the development of cottage, small and large-scale
industries. A policy of decentralization of industries should be followed so that industries
should be spread over all areas in accordance with their factor endowments. E even the
adoption of a policy in establishing focal points of industries in and around small towns
can go a long way in developing local resources and providing larger employment
opportunities.

The state can also help in the growth of private industries by importing raw materials,
capital equipment, machinery and technical know-how. The state can also help private
enterprises in establishing and provide facilities like cheap finance, tax rebate, etc…It is
the state which can help the development of backward areas by giving various facilities
and concessions.

29.5.4 Reduction of inequalities:

As the pace of economic development proceeds, there takes place wide disparities in the
distribution of income and wealth. Thus to secure equitable distribution of wealth, this
can be done through public finance operations. The government should impose steeply
progressive taxes on income and wealth and on luxury goods and benefit the poor
through wise public expenditure. The reform of inheritance laws, regulation of
competition and control of monopolies will ensure equal opportunities for all and pave
way for economic development.

29.5.5 Optimum allocation of Resources and Creation of Full

Employment:

The government must see that the economic resources of the country are used for social
desirable projects and it must discourage the flow of investible resources into
unproductive and speculative channel and for that appropriate fiscal and monetary
policies must be followed vigorously. The government should not allow waste full
exploitation of natural resources and there should properly conserve. Besides, the
economic policies of the government must aim at the proper balance in the rate of
development of different sectors and in the rate of development of different industries in
each sector.

The ultimate objective of economic development is to create conditions of full

employment of labor and other resources in the economy. The state must provide justice,
economic, social and political; internal law and order and diffence against external
aggression. Without these no progress is possible. Besides the state must make substantial
structure changes to attain the objective of national development based on equity and
growth.

29.6 Summary:
From the above, discussion it is clear that the state has to play a vital role in the economic
development of under developed countries. Without active state intervention and
participation, the poor countries cannot develop themselves, emphasizing the role of state
the economic development, Rostow observes, “the central government, in a period of pre-
conditions, must capable of organizing the nation, so that untited commercial markets
develop. It must create and maintain a tax and fiscal system which diverts resources into
modern use. In particular the state has an inescapable responsibility for ensuring that the
stock of social capital required for takeoff is built; and, it is also likely that only rigorous
central leadership can bring about these traditional changes in productivity, in agriculture
and industry whose quick achievement may also constitute a pre-condition for takeoff”.
The present economic development of Japan is largely due to the initiative and active
entrepreneurial role played by the government after 1870. It is now everywhere
recognized that the primary responsibility of the government is to plan, initiate, regulate
and sustain economic development of under developed courtiers. We may sum up the
role of the state as initiator of development, as accelerator of growth, as custodian of
economic justice, and as promoter of the welfare of the people.

29.7 Check your Progress

State whether the following statements are True or False:

1. Economic change brought about by only institutional changes

2 There is a causal relation between economic development and institutional changes
3. According to Myrdal ’Quality of Labor is more important for Economic development
4. Education creates more un-productive labor
5. State duty is optimum allocation of resources

29.8 Key Concepts

Economic development: It implies the development of all the sectors in an economy. It

means that the development of Primary, Secondary and Tertiary sector.
Economic growth : The growth in a particular sector. For instance, the highest growth
may be found in primary sector but not in secondary sector.

Social and overhead capital : Capital which is invested on infrastructural development

of an economy

Social infrastructure : The development of infrastructure in social sector such as Health

and Education.

Economic infrastructure; The development of economic infrastructure like construction

of school builidings, Roads and bridges etc.,

Market imperfections : It explains the imperfections in a market. For instance the non-
availability of sufficient information about market and its activities.

Educational policy ; It meant for the development of education in an economy. The

policy which is related to educational infrastructure, enrollment of students, conduction
of exams etc.,

Take-off ; It is one of the important stages stated by Prof Rostow. This is the stage where
economy reaches the highest stage of economic development

Fiscal policy: It is a part of overall economic policy. It consists of taxation, public

expenditure and public debt

Monetary policy : It is also a part of economic policy. Monetary authority evoloves

monetary policy to control money supply in an economy

Optimum allocation ; It implies allocation of scarce resources either financial or

physical resources in an optimum position.
factor endowments

29.9 Self-Assessment Questions

Long Answer Questions

1. Examine critically the role of Institutions on Economic development.

2. Discuss the Significance of Education in Economic development

3 How do you assess the role of State in Economic development

Short Answer Questions

4 Write Note on Markets and development

5. What is meant by social and economic overheads

6. Explain the contribution of health for economic development

7 Enlist the different Institutions and their importance in development

29.10 Answers to check your progress

1. False 2. True 3. True 4. False 5. True

29.11 Suggested Readings

1. Todaro,M.P., Economic Development in the Third World,1978

2. Meier,G.M.(ed), Leading Issues in Economic Development,1984
3. Jhingin M.L. The Economics of Development and Planning,2002
4. Taneja,Myer Economics of Development and Planning,2007