Economic development – need, factors, constraints and way forward

Economic growth – Economic development- inclusive development – sustainable development

Economic growth is a phenomenon of market productivity and resultant rise in GDP. Whereas economic development is a policy intervention tool for improving the economic and social well-being of people.

Economist Amartya Sen – economic growth is one aspect of the process of economic development”.

Sustainable development- development that lasts. Development that meet the needs of present generation without compromising the need of future generation.

What is development

Economic development is the process by which a nation improves the economic, political, and social well-being of its people in terms of quality of human life. Economic Development is the process of collective upliftment enabled by multiple factors which includes political stability, technological know how, resource availabilty and skilled human resource which result in purchasing power capacity of the citizens. It is result of interplay between physical, human and technical resources in a politically stable environment.

It can be measured in terms of culture, wealth, education, healthcare, opportunities and can be measured by HDI- human development index a UN standardised method based on 3 factors ie life expectancy, literacy/education, and standard of living.

GDP per capita – Gross domestic product is the total value of goods and services produced divided by the number of people in the country.

A ‘development continuum’ – means that there is not a gap seperating rich from poor countries, North from South. All countries are at different stages of development. Development is a complex and it is difficult to define term that requires unpicking and deconstructing, not simply taking for granted its meaning at face value.

“Economic Development deals with the problem of underdeveloped countries whereas ‘Economic Growth’ deals with the problem of developed countries. In underdeveloped countries the problems are that of initiating and accelerating development.”

The processes of economic development should not only generate increased or enhanced means of production but it should also make room for equitable distribution of such resources. Thus by the term economic development we mean a process so as to raise the per capita output with a scope for equitable distribution.

Changes arising on the demand side are mostly related to consumers, tastes and preferences, distribution of income, size and composition of country’s population, and other organisational and institutional changes.

On the other hand, changes arising on the factor supply are also related to—capital accumulation, discovery of new resources, introduction of new and more efficient production techniques, increase in size of population and organisational changes. Cause and consequences of economic development are mostly determined by the time path and velocity of these aforesaid changes.

Economic development, being a dynamic concept refers to the continuous increase in production over the changing time path. Secondly, attainment of economic development indicates increase in real per capita income over time. Here the real per capita income of a country simply indicates total money income adjusted to price level changes over time.

Thirdly, by the term economic development we mean continuous increase in the level of real national income over longer time period, covering a period, not less than 25 to 30 years.

“Economic growth means more output and economic development implies both more output and changes in the technical and institutional arrangements, by which it is produced.

Economic development of a country thus depends on both economic and non-economic factors.

Economic Factors:

Population and Manpower Resources:

Stimulant as well as hurdles to economic growth.

Firstly, population provides labour and entrepreneurship as an important factor service.

Higher rate of population growth can put serious hurdles on the path of economic development

Growing population in a country practically retards economic growth or contributes to it that solely depends on the prevailing situation and balance of various other factors determining the growth in an economy.

Natural Resources and its Utilization:

the countries are rich in natural resources and adopted modern technology for its utilization, then they can attain higher level of development at a quicker pace.

Mere possession of natural resources cannot work as a determinant of economic development.

Capital Formation and Capital Accumulation:

capital means the stock of physical reproducible factors required for production. The increase in the volume of capital formation leads to capital accumulation.

Thus it is quite important to raise the rate of capital formation so as to accumulate a large stock of machines, tools and equipment by the community for gearing up production.

There are three stages in the process of capital formation, i.e.,

(a) Generation of saving, (b) Mobilisation of savings and (c) Raising the volume of investment.

Capital-Output Ratio:

capital-output ratio we mean number of units of capital required to produce per unit of output. It also refers to productivity of capital of different sectors at a definite point of time.

To achieve a higher rate of growth of national income, the country will have to take the following two steps:

(a) to raise the rate of investment and

(b) to generate necessary forces for reducing capital-output ratio.

Favourable Investment Pattern:

Occupational Structure:

Increasing pressure of working population on agriculture and other primary occupations must be shifted gradually to the secondary and tertiary or services sector through gradual development of these sectors.

Extent of the Market:

Expansion of the scale of production and its diversification depend very much on the size of the market prevailing in the country. Moreover, market created in the foreign country is also working as a useful stimulant for the expansion of both primary, secondary and tertiary sector of the country leading to its economic development.

Removal of market imperfections will make provision for flow of resources from less productive to more productive occupations which is very much important for the development of an underdeveloped economy.

Technological Advancement:

technological advancement we mean improved technical know-how and its broad- based applications.

It includes:

(a) Use of technological progress far economic gains,

(b) Application of applied sciences resulting in innovations and inventions and

“High Invention Nation” normally attains growth at a quicker pace than “High Investment Nation”.

Development Planning:

Planning is essential for mobilisation of resources, capital formation and also to raise the volume of investment required for accelerating the pace of development.

External Factors:

The external factors which are playing important role in sustaining the economic development include:

(a) Growing export earnings for financing increasing import bills required for development,

(b) Increasing flow of foreign capital in the form of direct foreign investment and participation in equity capital and

(c) international economic co-operation in the form of increasing flow of foreign aid from advanced countries like U.S.A., Japan etc. and also increased volume of concessional aid from international institutions like I.M.F., I.B.R.D. (World Bank) and other regional bodies on economic co-operation like ASEAN, OPEC, E.E.C. etc.

Non-Economic Factors:

Economic factors alone are not sufficient for determining the process of economic development in a country. In order to attain economic development proper social and political climate must be provided.

“Economic Progress will not occur unless the atmosphere is favourable to it. The people of a country must desire progress and their social, economic, legal and political situations must be favourable to it.”

Urge for Development:

It is the mental urge for development of the people in general that is playing an important determinant for initiating and accelerating the process of economic development. In order to attain economic progress, people must be ready to bear both the sufferings and convenience. Experimental outlook, necessary for economic development must grow with the spread of education.

Spread of Education:

education as an engine for economic development. “Investment in education is not only highly productive but also yields increasing returns. So, education plays pioneer role for the creation of human capital and social progress which in turn determines the progress of the country.”

Changes in Social and Institutional Factors:

Conservative and rigid social and institutional set up like joint family system, caste system, traditional values of life, irrational behaviour etc. put severe obstacle on the path of economic development and also retards its pace.

Thus to bring social and institutional change as per changing environment and to realise the modern values

Proper Maintenance of Law and Order:

Stability, peace, protection from external aggression and legal protection generally raises morality, initiative and entrepreneurship.

Formulation of proper monetary and fiscal policy by an efficient government can provide necessary climate

economic development the government must make necessary arrangement for the maintenance of law and order, defence, justice, security in enjoyment in property, testamentary rights, assurance to continue business covenants and contracts, provision for standard weights and measures, currency and formulation

Administrative Efficiency:

a strong, honest, efficient and competent administrative machinery for the successful implementation of government policies and programmes for development. The existence of a weak corrupt and inefficient administrative machinery leads the country into chaos and disorder.

Obstacles or Constraints on Economic Development:

These Constraints on the path of economic development are of two types:

(a) Short-term constraints – over concentration and stagnation in agricultural sector, unemployment and under-employment, low productivity of capital, the growing deficit in its balance of payment position etc.

(b) long-term constraints- bottlenecks, financial constraints etc.

(i) Colonial Exploitation:

(ii) Market Imperfections: immobility of factors, price rigidity, ignorance of market conditions, rigid social structure etc. have resulted serious obstacles in the path of economic development of underdeveloped countries

(iii) Poor Rate of Savings and Investment:

(iv) Vicious Circle of Poverty: Vicious circle in the underdeveloped countries represented by low productivity is resulted from capital deficiency, market imperfections, economic backwardness and poor development. Low productivity results in low level of income and low rate of savings leading to low rate of investment, which is again responsible for low rate of productivity. Thus the vicious circle of poverty is resulted from various vicious circles related to demand side and supply side of capital. These vicious circles of poverty are mutually aggravating and it is really difficult to break such circles.

(v) Demonstration Effect: The consumption level of individual is very much influenced by the standard of living or consumption habits of his neighbours, friends and relatives but not by its income alone. ‘International Demonstration Effect’ reduces the savings potential of the underdeveloped countries and thereby creates severe constraints on the path of their growth process.

(vi) Unsuitability in Adopting Modern Technology:

Due to abundant labour supply and scarcity of capital, such technologies become unsuitable for these countries.

(vii) Rapidly Growing Population:

Rapidly growing population slows down the rate and process of capital formation. Growing population increases the volume of consumption expenditure and thereby fails to increase the rate of savings and investment, so important for attaining higher level of economic growth.

rapidly rising population necessitates a higher rate of investment to maintain old standard of living and per capita income. Growing population also results food problem, unemployment problem which forced the country to divert its scarce resources to meet such crisis.

Thus, over-population results poverty, inefficiency, poor quality of population, lower productivity, low per capita income, unemployment and under-employment and finally leads the country toward under development.

(viii) Inefficient Agricultural Sector:

primitive agricultural practices, lack of adequate inputs like fertilisers, HYV seeds and irrigation facilities, uneconomic holdings, defective land tenure and excessive dependence on agriculture.

(ix) Inefficient Human Resources:

surplus labour force but shortage of critical skills. Due to lack of adequate number of trained and skilled personnel, the production system remains thoroughly backward.

(x) Shortage of Entrepreneurial Ability, Modern Enterprise and Innovation:

lack of adequate number of entrepreneurial ability. Naturally there is absence of modern enterprise and proper managerial talent, Due to poor socio-cultural climate and weak environment, the managerial talent in these countries fails to reach its desirable level. due to the lack of spirit of experimentation and proper Research and Development (R&D) facilities, these underdeveloped countries fail to transform their production system to the desired level.

(xi) Inadequate Infrastructural Facilities:

lack of adequate transportation and communication facilities, shortage of power supply, inadequate banking and financial facilities and other social overheads which are considered very important for attaining economic development.

(xii) Adverse International Forces:

International trade has forced the underdeveloped countries to become primary producing countries where the terms of trade as well as the gains from trade have always gone against these underdeveloped countries.

“Theory of exploitation of poor countries”- during the last 150 years or so, the working of international forces through the media of trade and capital movement.” produced backwash effects on underdeveloped economies. There were certain disequalising forces operating in the world economy which made the gains from trade go mainly to developed countries.

(xiii) Political Instability:

uncertainty, flight of capital in considerable proportion takes place from these countries to advanced countries and also retards the chances of flow of foreign capital to these countries through foreign direct investment. weak and corrupt public administration in these countries has been resulting a huge leakage of public fund meant for investment in developmental activities.

(xiv) Inappropriate Social Structure:

backward social factors include prevalence of caste system, creating divergence between aptitudes, joint family system, peculiar law of inheritance, outdated religious beliefs, irrational attitudes towards number of children in a family etc.

Pre-Requisites or Need for Economic Development:

Following are some of the important pre-requisites for economic development of underdeveloped countries.

(i) Peoples’ Desire for Economic Progress:

(ii) Economic Organisation:

(iii) Removing Market Imperfections: Prof. Schultz has rightly observed, “To achieve economic growth of major importance in such countries, it is necessary to allocate effort and capital to do three things: increase the quantity of reproducible goods, improve the quality of the people as productive agents and raise the level of productive arts.”

(iv) Reasonable Equality of Income:

generate adequate enthusiasm among, the general masses toward economic development of the country as well as for the successful working of the economic plan.

Growing concentration of income and wealth in the hands of few and political influence generally protects the richer section from higher rates of taxation and thereby the tax burden ultimately falls much on the middle class and poorer sections of the society.

(v) Attaining Administrative Efficiency:

(vi) Indigenous Base:

(vii) Capital Formation: In order to attain economic development in an underdeveloped economy, capital formation is considered as an important pre-requisite for development. In these countries, the rate of savings is low due to low per capita income and higher marginal propensity to consume. Thus immediate steps be taken to raise the rate of capital formation of the country.

These require:

(a) An increase in the volume of real savings,

(b) Establishment of proper credit and financial institutions for mobilising and channelising these savings into investible fund and

(viii) Determining suitable Investment Criterion:

(ix) Absorption of Capital:

(x) Maintaining Stability:

(xi) People’s Participation and Co-Operation: “Popular enthusiasm is both the lubricating oil of planning and the petrol of economic development—a dynamic force that makes all things possible.”

Structural Changes during Economic Development:

Following are some of the important structural changes arising out of economic development:

(i) Shift in Economic Activities:

(ii) Changes in Sectoral Distribution of Labour Force:

(iii) Changes in Sectoral Share in GDP:

(iv) Changes in Social Structure: