The process of economic growth is determined by two sets of factors. They are economic and non-economic factors:
Economic Factors
1. Natural Resources:
The main factor influencing economic development is the natural resources available in the country, particularly ‘Land’.
‘Land’ includes all natural resources, including fertility of land, its situation and composition and forest wealth etc.
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Existence of natural resources alone cannot initiate economic development, unless the resources are properly harnessed. In underdeveloped countries, the resources are either unutilized or underutilized. This is one of the reasons of their backwardness.
2. The means of transport and communications:
This will initiate economic development. More facilities of transport would reduce the cost of transport and thereby increase the external and internal trade of the country. Transport and communications ensure easy mobility of the factors of production.
3. The Rate of Capital Formation:
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Capital Formation or accumulation is the crux of the problem of economic development and no economy can grow without having produced ‘means of production’. Construction of buildings, dams, factories, extension of roads, railways, waterways and harbors, more irrigation facilities, reclamation of land, and improved methods of agriculture, etc., are essential for capital formation.
Capital formation can take place under private enterprise, as in capitalist economies, or under public enterprise, as in socialistic economies.
But the core of the problem in underdeveloped economies will be caught in the vicious circle of poverty and they will continue to remain poor simply because they are poor. According to Arthur Lewis, economic growth is a process of transforming a country from a 5% saver to a 15% saver.
4. Capital output Ratio:
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Another determinant of economic development and growth is the capital output ratio. The term capital output ratio refers to the requirements of capital for a definite output in units.
Generally, in the underdeveloped countries, the capital output ratio is higher, i.e., more capital is required for lesser output due to wastage in the process of production, low level of technology and inefficiency of factors, and inadequate infrastructure. The capital-output ratio will vary in different economies and it will also change over a period of time.
5. Technological Progress:
Technological changes are the most important factors in the process of economic growth. Technological changes are related to production, processing, marketing and distribution. Changes in technology lead to increase in productivity of labour, capital and other factors of production.
The technological changes not only reduce the cost of production, but also increase the quality of the product. Japan stands a typical example to prove that vast economic development could be achieved through improved technology.
Non-economic factors
Non-economic factors are much more powerful than economic factors in influencing the extent of economic development and growth. Non-economic factors may be social, cultural, political and climatic which would either accelerate or impede economic development and growth. According to Nurkse, “Economic development has much to do with human endowments, social attitude, political conditions and historical accidents.”
1. Social Factors:
Social and cultural factors have been responsible for economic development and growth. The traditional values like morality, truthfulness, contentment, simple living and non-materialistic attitude, etc., would not be conducive to economic development. If economic development is to take place, social attitudes, values and institutions will have to be changed.
2. Human Factors:
Rate of growth of population has an important factor in modern economic growth. Mere growth in the size of the population would not lead to economic development. It depends on the efficiency of the people.
According to Kuznets, the population of Europe increased more than four-fold within a period of two centuries. But in backward economies, increase in population is a great hindrance to the economic development. Hence, family planning and control of population should form part and parcel of economic development and planning in developing countries.
3. Political Factors:
Political and administrative factors also help in modern economic growth. Weak political structure, instability, corrupt politicians, officials, and inefficient administration would be a hindrance to economic development.
4. Climate Factors:
Among the non-economic factors, climatic ‘conditions stand foremost in determining economic development.
If we make a study of the geographical and climate conditions of the countries of the world in relation to development, we may find that most of the countries in the North and South Temperate Zones of the world had succeeded in becoming rich or nearly rich with per capita GNP over 1,000 or ranging from 300 to 1,000 whereas most of the tropical countries were poor or very poor with per capita GNP under 100. The climatic factors severely hamper development through their impact on man and agriculture.
Climatic conditions affect human beings but also agriculture, soil, food supply, etc. Research is urgently needed to combat the climatic obstacles of the tropics.
Obstacles to economic development
Features of underdevelopment and determinants of development are not common to all underdeveloped countries. But in most cases, there are some characteristic features that are both cause and consequence of poverty that is the basic cause for underdevelopment.
The economy will be caught in the vicious circle of poverty and it will continue to remain poor, simply because, it is poor. This means there will be circular relationship between cause and consequence, which will perpetuate poverty and inhibit development. In other words, the economy will be in the ‘Poverty trap’
1.(a) Vicious Circle of Poverty:
According of Prof. Nurkse, vicious circle of poverty implies, “A circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. A country is poor because it is poor. A poor man may not have adequate food to eat and consequently he will be undernourished and weak. Consequently, on his physical weakness, his capacity to work will be very low, which means poor earning power.
This poor earning power perpetuates his poverty, inadequate food, leading to poor health and productivity, etc. This concept holds good for a poor country. The basic cause of underdeveloped country is its low productivity due to capital deficiency.”
Let us take the demand side first. In a poor country, the level of productivity will be very low and consequently the income of the people will also be very low, and they may not have adequate purchasing power even to fulfill basic necessities of life. Hence, scope for business and industries are practically absent.
Since the rate of investment is very low or nil, the productivity will also be very low, leading to very low income and thus the vicious circle will get completed. Let us take the supply side. Poor investment and low capital formation will result in low productivity of the economy and low income of the people, thus completing the vicious circle.
(b) Vicious Circle of Backwardness:
Apart from these two vicious circles of poverty, there is also a third vicious circle, according to Meier and Baldwin. This relates to natural resources and human resources. Economic development of a country depends upon the exploitation of natural resources and developing them for human betterment.
But development of natural resources depends upon the productive capacity and efficiency of the people of the country. If the people are illiterate, ignorant and inert, lacking technical knowledge and skill with very little entrepreneurial activity, the natural resources of the country will remain either dormant or underutilized or even misutilised. On the other hand, the people in an economy will remain backward if they do not develop the natural resources.
2. Market Imperfections:
Another important obstacle to economic development is market imperfections. According to Meier and Baldwin, market imperfections relate to immobility of factors, price rigidity, and ignorance of market conditions, rigid social structure and lack of specialization.
Due to these market imperfections, the efficiency of production in the economy becomes very low and the country’s natural resources may remain unutilized or underutilized, the employment will get misdirected. The country’s resources will remain unutilised and sectoral expansion becomes impossibility.
3. Low-rate of capital Formation:
We have come to know that in backward economies there will be deficiency of capital and poor capital formation. This low-rate of capital formation results in of the vicious circle of poverty. This poverty is the cause and consequence of a couritry’s low capital formation. Even the available capital will not be utilised for productive purposes. They will be invested in gold, jewellery, real estate and commodity hoards.
The expenditure pattern in underdeveloped countries will be mostly on ‘value-retaining’ objects and durable consumer goods with conspicuous consumption, during the time of festivities.
Lack of well-developed capital market, stock market, credit institutions and banking system, particularly in rural areas, will pose a formidable problem in mobilising savings for capital formation. The State will confine itself to elementary functions of maintaining law and order.
4. Socio-cultural obstacles:
In backward economies, there will be obstacles due to social and cultural attitudes. The existing social
institutions would create maximum resistance to economic development and social change. Hence, a radical change in the minds and attitudes of the people is indispensable in the process of economic development.
5. International trade:
Apart from the above skated local obstacles, exposure of underdeveloped economies to world trade has resulted in destabilising factors due to disequalising forces. According to these economists, the gains of international trade have become much impoverished. These backward economies have seriously exposed themselves to international fluctuations and suffer due depression or the boom period.
The backward economies could not remove imperfections; provide adequate overhead capital and change structural defects. Foreign investments have adversely affected the backward countries. In backward economies incomes and living standards of primary sector of these countries have not increased proportionately due to foreign investment.
6. Administrative incompetence and corruption:
In many of the underdeveloped countries, administrative incompetence and appalling, corruption have become the major obstacle to economic development. A well-trained and honest and dedicated administrative set up is very essential for proper economic development of the country.