Economic development can be defined as the process of improving a nation's, community's, or region's economic well-being and quality of life in accordance with predetermined goals and objectives. Economic development is a result of a combination of market productivity and national welfare values. For example, enhanced productivity, greater literacy rates, and improved public education are all effects of economic development in a nation. “Economic Development” is one of the important concepts in the UPSC/IAS 2023 Economy syllabus which is discussed in this article in detail.

What is Economic Development?

• Economic development means the sustained improvement in society's material well-being.
• In other words, economic development refers to programs, policies, or initiatives aimed at enhancing a community's economic health and quality of life.
• Economic development includes a broader range of concepts than economic growth.
• Apart from national income growth, it includes social, cultural, political, and economic changes that contribute to material progress.
• It includes changes in resource supplies, capital formation rates, population size, and composition, technology, skills, and efficiency, as well as institutional and organisational structure.
• These changes contribute to the larger goals of ensuring more equitable income distribution, increased employment, and poverty alleviation.
• It is a long chain of interconnected changes in fundamental supply factors and demand structure that leads to an increase in a country's net national product in the long run.

Features of Economic Development

• Economic development includes changes in income, savings, and investment, as well as gradual changes in the country's socioeconomic structure (institutional and technological changes).
• Development here is related to human capital growth, a reduction in inequality numbers, and structural changes that improve the population's quality of life.
• To assess economic development, qualitative indicators such as the HDI (Human Development Index), gender-related indexes, Human Poverty Index (HPI), infant mortality, literacy rate, and so on are used.
• Economic development results in both qualitative and quantitative changes in the economy.
• Economic development reflects progress in a country's quality of life.

Factors Affecting Economic Development

1) Infrastructural Development

• Infrastructural development generally improves people's quality of life.
• As a result, an increase in the rate of infrastructural development will result in a nation's economic development.

2) Education

• Improving literacy and technical knowledge will result in a better understanding of how to use various pieces of equipment.
• This will increase labor productivity and, as a result, a country's economic development.

3) Increase in Capital Formation

• An increase in capital formation will result in more productive output in an economy, which will have a positive impact on economic development.

Measurement of Economic Development

1) National Income and Per Capita Income

• This is the traditional method of assessing economic development.
• The World Bank employs the concept of per-capita Gross National Income (GNI) as a means of comparing and categorizing countries based on their economic development stage.
• The World Bank divides the world's economies into four income categories:
  • Low-income – Less than $1036
  • Lower-middle income – $1036 - $4045
  • Upper-middle – $4046 - $12535
  • High income – More than $12535
• According to this classification, India, with a per-capita GNI of US $ 1900 (as of 2020 figures), belongs to the Lower-middle income countries.

2) Purchasing Power Parity (PPP)

• Gustav Casell, an economist, proposed the PPP approach in 1918.
• The concept is based on the law of one price, which states that in the absence of trade and non-trade barriers, identical goods in different countries will have the same price when expressed in the same currency.
• The PPP is defined as the number of units of a country's currency required to purchase the same amount of goods and services in the domestic market as one dollar would in the US.
• For example, if we have to spend ₹30 to buy the same amount of goods and services as are purchased in spending $1 in United States, then the exchange rate in the PPP approach is $1 = ₹30.

3) Green GDP

• Green GDP is a term that refers to GDP after accounting for environmental degradation.
• Green GDP is an attempt to measure an economy's growth by deducting the costs of environmental damage and ecological degradation from GDP.
• The concept was first introduced as part of a System of National Accounts (SNA).
• The System of National Accounts (SNA) is an accounting framework for measuring an economy's economic activities of production, consumption, and wealth accumulation over time.
• When data on the economy's use of the natural environment is integrated into the national accounting system, it is referred to as green national accounts or environmental accounting.
• The environmental accounting process consists of three steps: physical accounting, monetary valuation, and integration with national income/wealth accounts.
  • Physical accounting determines the state, types, and extent (qualitative and quantitative) of resources in spatial and temporal terms.
  • Monetary valuation is used to determine the tangible and intangible components of a business.
  • Following that, the net change in natural resources in monetary terms is incorporated into the Gross Domestic Product to arrive at the Green GDP value.

4) Human Development Index (HDI)

• The Human Development Index (HDI) is a statistical tool used to assess a country's overall performance in social and economic dimensions.
• The social and economic dimensions of a country are determined by people's health, educational attainment, and standard of living.
• In 1990, Pakistani economist Mahbub ul Haq developed the HDI, which was later used by the United Nations Development Program (UNDP) to assess the country's development.
• The index is calculated by combining four major indicators:
  • life expectancy for health,
  • expected years of schooling,
  • mean years of schooling for education, and
  • Gross National Income per capita for a standard of living.
• Currently, India ranks 132 out of 191 countries in the United Nations Human Development Index.

Importance of Economic Development

• It is very important to make informed decisions and efforts to increase our economic development just as the conscious efforts to increase our income and growth.
• Development has not been possible anywhere in the world without a conscious public policy.
• Similarly, we can say that there can be no development without growth.
• If economic growth is used properly for development, it will re-accelerate growth and eventually bring a larger population into the development arena.
• Similarly, high growth with low development leads to a decline in growth.
• Economic development is a more relevant indicator of progress and quality of life in developing countries such as India, where inequality in wealth distribution is prevalent.

Conclusion

Thus, economic development is the process through which basic, underdeveloped national economies are upgraded to modern industrial economies. Each community has its own set of opportunities, challenges, and priorities. People who live and work in the community must be included in the economic development planning.