Guest lecture on What Explains Development?

A guest lecture on ‘What Explains Development?’ was organized by the Department of Economics, The IIS University, on 28^th February, 2018 in the AV Hall. Dr. Pranab Banerji, Retired Professor, Indian Institute of Public Administration, presided over as the guest speaker. He was welcomed with floral greetings by Prof. C.R. Bishnoi, Head, Department of Economics. Dr. Banerji began the lecture by addressing all the students and faculty members. 

In 1776, in his book ‘The Wealth of Nations’, Adam Smith tried to explain the reasons and guidelines working behind the developed or rich countries. He tried to find answer to the question- Why do nations succeed? In today’s world, the question has changed to- Why do nations fail? This question arises from the need to fix the problems faced by the underdeveloped and developing countries.

One of the most important parameters to check the level of growth or development of a country is Per Capita Income (GDP per capita). According to World GDP per capita ranking (2014), the top 50 countries with highest per capita income cover the Northern hemisphere along with Australia and New Zealand in southern hemisphere only. The rest of the countries in the southern hemisphere are below the rank 50. Thus, in terms of development, this wide geographical gap between countries is often called as “The Great North-South Divide”.

During last 3 centuries, there has become a big change in the ratio of share of world GDP by different countries all around the world. In the earlier 18^th century, India and China enjoyed the greatest share in world GDP, with around 40% and 30% GDP respectively. Till the mid 19^th century, China shared around 35% of the total world GDP which was the greatest among all the leading countries. After A.D. 1820, the coin turned around by pulling USA at the first place with around 30% GDP while China shared only 25%. India shares only 8% of the world GDP. This change in positions of leading countries is often called as “the Reversal of Fortunes”. Between years 1500 to 1950, the per capita GDP of Britain rose from $700 to $7000 and that of France rose from $700 to $5200 while that of India increased from $700 to $1000 only. This phenomenon is called as “the Great Divergence”.

It is observed that even after being similar in terms of resources, the nations do not implement similar policies and hence suffer a difference in rate of growth. This contradiction gives rise to an important question i.e. why poor countries do not save enough, invest enough, don’t innovate or apply technology, have poor markets and policies?

When the traditional explanations failed to prove the significance of their parameters, some other explanations were given. These include:

• Geography: The Southern hemisphere has a hot climate and is more prone to diseases as compared to the Northern hemisphere. This leads to a lower working capacity of labour and hence a low productivity. Thus, the rate of development is slowed down.
• Culture: Different cultures have different limitations that work as a resistance towards the growth of these nations.
• Institution: Growth of capitalism is often resisted by protestant ethics and evil practices. Institutions must be established to keep a check on such negativities in the society.

The central concept is of institutions. Institutions are critical for economic performance. They work as a safety guard to the developmental activities in the country and act as incentive systems. Economic institutions must be set up to fulfill following needs:

• Property rights: Property rights is a set of rights to take permissible action to use, transfer or otherwise exploit or enjoy property, enforced by law. Thus, property rights must be clarified in all fields such as capital, intellectual, labour and natural resources.
• Economic institutions must be vulnerable to opportunity predation.
• Institutions internalize externalities to provide incentives so that these do not harm the productivity of any sector in the economy.

The speaker thus summarized the various aspects of development in a very apprehensible manner.

The lecture concluded with a formal vote of thanks to the speaker. The lecture proved to be a very knowledgeable experience for the students.