These considerations of external economies and of available
market demand may be summarized by saying that investment should be directed to
“growing points” in the economy. In the initial stages of economic development
, it is highly useful to concentrate on certain focal points which seem to have
the promise of more rapid growth . From these local areas, a chain reaction
usually starts that gradually spreads chain to the remaining areas of the
economy. Thus even an unbalanced process of initial economic growth has every
possibility of ultimately merging into the broader requirement of balanced
growth.
Market
On the demand side, when considering particular industries,
one cannot assume that supply will create its own demand. There must be markets
for the commodities produced. Where are the potential markets in the poor
countries? Investment should be made in those industries which produce
commodities having a readily available demand. The demand for building and construction
is likely to be high, since poor countries are deficient in roads, railways,
houses and public utilities. Investment in export industries, for which there
is foreign demand , is another attractive area ,, and import competing
industries provide still another potential choice of investment
External Economies
It has generally come to be accepted that the basic consideration
in selecting industries for development in an under developed economy is the
prospect of external economies. Allyn Young drew attention to this important consideration
in 1928, and Rosenstein Rodan made out in 1943 a strong case of developing
those industries which would create conditions favorable to the growth of other
industries. For example, the development of transport or of sources of fuel and
power influences both the costs and the market possibilities of diverse
manufacturing industries. Similarly , iron and steel and engineering industries
increase the growth and potentiality of industry oil general . From the
standpoint of supply, it thus egress that one of the requirements of investments should be that it creates
additional external economies.
Relevant Constraints
These constraints are physical , legal , distributional
constraints and budgetary constraints. The most common physical constraint is
the production function which relates the physical inputs and outputs of a
project. This directly enters into the calculation of costs and benefits. One
of the inputs or some inputs may be in totally inelastic supply. Then the
investment must conform to the legal framework. The legal constraints a rise ,
for instance , from regulated pricing administrative constraints arise from
what can be administratively handled. The distributional constraints arise from
the fact that no section should be unfavorably affected in the matter of income
distribution. It is not always possible to make the gainers compensate the
losers.
Estimation of the Social Product
Here we repeat that, in the under developed countries, there
is likely ot be considerable divergence between the private and social product
, especially in the case of building up the necessary infrastructure or the
social and economic overheads. This divergence is due ultimately to external economies
which in practical life are not easy to define and calculate. An investment creates
external economies by increasing the demand for certain factors of production
and products and thus making it possible for the existing units of production
to turn out larger output. When completed, an investment helps to increase
productivity in existing units by either increasing the supply of inputs or
making possible new and more economical combinations of factors. Thus , there
is expansion of output, as a result of an investment . Sometimes this expansion
needs further investment . The divergence between the private and social
product of the initial investment will appear only to the extend that here induced investments are actually undertaken.
Rate of Discount
Now we come to the question of ascertaining the present
value of the future costs and benefits, discounting process. Which rate of
interest is to be used for the purpose?
There is a large number of interest rates prevailing in the private
sector and there seems to no ground for selecting any of them. It is not clear
whether any market determined rate would be sufficient for community investment
decision. It is said that social time preference rate attaches greater importance to the future than private time preference.
It seems best to use the government borrowing rate since it is easily
applicable and is also a risk free rate of interest. Usually the interest rate
is selected on the basis of observed rates ruling at the time for calculating
present values. Social cost of time has also to be determined. Projects differ
in their gestation period and in the durability of construction . On what basis
are we to impute social value of time? Take first the gestation period. The
social cost in gestation is the value of the output that could alternatively be
obtained in the meanwhile with the same resources, the maximum that could be
obtained with the shortest possible time. Projects with shorter gestation
period but with higher output have, of course, to be preferred.
Valuation of Cots and Benefits
As for the valuation of costs and benefits, if they are
expressed in terms of money , we have to make adjustments to the expected
prices of future inputs and outputs in order to make allowance for the
anticipated changes in the relative prices of the concerned items, but not for
expected changes in the general price level. The expected changes in the output
levels must also be taken into account. Notice has to be taken of monopolistic
elements or other market imperfections. In such cases, investment decisions
based on market prices will not be correct . Some corrections will be needed
for the distortions resulting from market imperfections. Account must also
create divergence between market price and social cost or benefit. Taxed inputs
should be measured at their factor cost instead of their market value. There is
still another cause of divergence between social cost and private cost unemployment.
When at the prevailing price there is excess supply of any input or factor of
production . the price exaggerates the social cost of a project using that input. The utilization of unemployed labor
in investment projects involves no social cost since it does not reduce output
anywhere, because the unemployed labor
us not supposed to make any contribution to output. In this case, the
society as a whole does not forego anything
What Costs and Benefits
Costs and benefits are to be included in the cost benefit
analysis. As mentioned earlier, the cost – benefit analysis of a project, we
should not merely confine ourselves to the consideration of direct costs and
benefits analysis nit we should also
consider the external or side effects and secondary benefits. That is the costs
and benefits have to be taken in a wider sense which means that we must take
into account cost and benefits which accrue to the bodies other than the one sponsoring
the project. This is necessary because investment in a particular project
alters the physical production possibilities
of the other producers or the consumption possibilities of the other producers
or the consumption possibilities of the other producers or the consumption
possibilities of other consumers thus affection their satisfaction from given resources.
For instance, construction of a reservoir upstream will necessitate more
dredging by thee downstream authority , or improvement of a certain road increases the incomes of garages
and restaurants on that road. But it has to be offset by the losses incurred by
those on the other roads owing to diversion of traffic.
Limitations
The critical minimum effort thesis seems to be plausible but
suffers from serious limitations from the point of view of its practical
significance:
1) Dependence on foreign capital so precarious emigration
may be ruled out in view of stringent immigration laws of the countries where
it would be worthwhile migrating to and technological innovations cannot be
made to order. In the absence of these the initial rise in income can be
secured by lowering consumption and thus
increasing the rate of savings and investment.
2) The Under-developed countries lack reliable statistics on
the basis of which it is possible to know the exact population , its rate of
growth, the size of the capital stock, the level of income, the rates of saving
and investment and the extent o which investment should increase to produce a
much higher increase in income, and so on.
2) The level of investment which can have perceptible
influence on population growth and produce the required increase in income is
beyond the capacity of most of the under-developed countries.
Critical Minimum Effort Thesis
The economic, political and social conditions in under- developed countries are
such as to make their growing population inimical to economic growth . Most of
the economists are of the view that many under developed countries. Especially
of the South East Asian countries, are over populated and the population
pressure is a great barrier is the way of their economic development and unless
this barrier is broken all efforts at accelerating economic growth will prove
futile. However a way out of this population barrier has been suffused in the
form of a critical minimum effort the critical minimum effort thesis has been
put forward by Prof. Harvey According to him, the under-developed over
populated countries are in a Malthusian Under employment Equilibrium position
based on a subsistence structure. He
quotes DuPont’s capillarity thesis according to which when a community realizes
that there are greater chances to rise socially with a fewer children than with
a larger family, there is change in social attitudes and strong motivation for
restricting the family as per capita income rises.
Relation Between Population Growth and Economic Growth
For effecting a
significant improvement in living standards , the rate of capital formation and
the consequent rate of growth of output must be viewed in relation to the rate
of population growth. It may be that the population may be increasing so fast
as to offset even a quick rate of capital formation and the resultant increase
in output . It is therefore, necessary to ensure that rates of population
growth and of capital formation must be
such as to yield a high per capita output . Conflicting opinions have been expressed
by economists as to whether population growth it a stimulant to economic growth
or an obstacle in way. Owing to inadequate response to agricultural production to meet the requirements
of a growing population. Malthus and
Ricardo dreaded a rapid increase in population and thought it would spell
misery and starvation. But with the remarkable growth of industry. World trade and revolution in
agricultural techniques the bogey of over population was laid at rest and
the western economists veered round to the view that growth of population
stimulated economic growth.
Social and Cultural Factors
Are no
less important and are very extensive in scope. In a work like this we can at
best just mention a few of them. Each society has certain social institutions
which have a strong bearing on economic development. In India, for example, the
institution of caste, joint families, non- materialistic arritude of the people
, and their fatalism based on the philosophy of karma have been some of the
serious impediments to economic development. Any attempt at accelerating
development must aim at changing
Non-economic or Institutional Factors
Thus far we have dwelt on the economic factors but perhaps
equally powerful are the various non economic forces like the social and
political factors . In kaldor’s words, “ A study of the dynamics of economic
growth leads beyond the analysis of economic factors to a study of the
psychological and sociological determinates of these factors.” Karl Marx also
emphasized the inter relationship between institutional factors and economic
change Let first take the political factors, which include political
sovereignty of the country. The complexion of its government whether it is
development conscious or is completely laissez faire in its outlook or is
dominated by vested interests who would oppose bitterly any departure from the
status quo the quality of administration, and the political ideology of the
government, particularly in relation to problems of development.
Population Growth
The
size and the rate of population growth has an important bearing on the economic
development of a country. If the population is too small , it does not afford
full scope for specialization or division of labor nor a sufficient market for
the goods produced in the country If , on the other hand population is too
large, then also it is a great impediment to economic growth. It is a serious
hindrance to capital formation. The feeding of a huge population leaves little scope for saving , and saving
is very essential for economic growth, because capital formation is the very
crux of the process of economic growth
,because capital formation is the very crux of the process of economic
growth. Hence population should be of a
proper or optimum size. A part from the proper size of the population , it is
also essential that the rate of population growth should boot be too rapid,
otherwise it will swallow up whatever little economic progress may have been
made and the country may only mark time.
Dynamic Entrepreneurship
According to the classical economists, an entrepreneur or an
organizer acts merely as an agency for bringing together the various agents of
production and undertaking to remunerate them for the work Done. But the modern
economists recognize the dynamic role that an entrepreneur plays in promoting
the economic growth of the country. This was specially underlined by
|Schumpeter who thought that the entrepreneur played a key role in economic
development. Even Karl Marx had
emphasized the fact that in trying to widen the profit margin by adopting new
technology and improved methods of production, the entrepreneur in fact makes
an important contribution to economic growth. The entrepreneur earns profit by
ensuring that the value of the final product exceeds the sum of the remuneration
of the factors of production, the value of the means of production.
Technological progress
Adam Smith , the father of political economy, pointed out
the great importance of technological progress in economic development. Ricardo
visualized the development of capitalist economies as a race between technological
progress and growth of population. The great importance of technological
progress in capitalist development was recognized by Karl Marx too. There is no
doubt that technological progress is a
very important factor in determining the rate of economic growth. In fact, even capital accumulation is not possible
without technical progress. A country may be adding it its means of
transportation and communications, its power resources and its factors . According
to modern technique. It is called widening of capital The use of improved
techniques in production and technological progress bring about a significant
increase in per capita income.
Limitations
It
may, however, be pointed out that the concept of capital output ratio suffers
from certain limitations. Its precise calculation presents some formidable difficulties.
Hence , the quantitative relationship between capital output ratio suggests,
may prove to be misleading. It would, therefore, be hazardous to base the
estimates of capital requirements of an industry or economy of such ratios
neither can the capital stock be assessed with any exactitude none is the other
side of the ratio output capable of any precise measurement besides the index number problems. A
clear distinction cannot be often made between capital goods and non capital
goods. Returns to social overheads . In particular, cannot be calculated
accurately.
Why High in Under- developed Countries
It is agreed that capital output ratio in under – developed
countries is generally higher, the capital is less productive in them than in
developed countries. This is so because there is a relative inefficiency of the
industries which produce capital goods. There is the greater wastage of capital
in the process of production due to low level of technical knowledge and there
is the scarcity of economic overheads. Besides, owing to indivisibilities,
certain kinds of investment are bound to be initially underutilized. As
development proceeds, naturally the pattern of demand will shift towards the
more capital intensive industries.
Factors Determining Capital output Ratio
It is difficult to estimate the capital output ratio for an
economy. The productivity of capital depends upon many factors such as the
degree of technological development associated with capital investment , the
efficiency of handling new types of equipment , the quality of managerial and
organizational skill, the existence and the extend of the utilization of
economic overheads and the pattern and rate of investment. For instance, the
higher the proportion of investment devoted to the production of direct
commodities, the lower the capital output ratio, and higher the proportion of investment devoted to public utilities, economic and social overheads. The
higher shall be the capital output ratio, and higher the proportion of investment
devoted to public utilities, economic and social overheads.
Capital output Ratio
Apart from the ratio of capital formation to the aggregate
national income , the growth of output depends upon the capital –output
ratio’s. The capital -output depends
upon the capital output ratio. The capital output ratio may be defined a the
relationship of investment in a given economy or industry for a given time
period to the output of that economy or industry for a similar time period. The
capital output ratio thus determines the rate at which output grows as a result
of a given volume of capital investment than a higher capital output ratio.
Process of Capital Formation
The process of building up the necessary stock of capital
equipment requires huge resources for financing it. Either a part of national
income must be saved for the production of capital goods or the necessary
funds for the purpose must be borrowed
from abroad. The various methods of financing economic development, will be
discussed in detail in a separate section . Here we may only emphasize that
domestic saving is a sine qua non of
capital formation. In fact, professor Arthur Lewis has defined the process of
economic growth as one of transforming a country from a 5 percent to a 15
percent saver. But savings though necessary are not sufficient for the purpose
of capital formation, which involves the following three independent
activities:
a) an increase in the volume of real savings so that
resources that would have been used for consumption purposes may be released
for the purpose may be released for the
purpose of capital formation.
b) a finance and credit mechanism, so that the available
resources may be availed of by private of by private investors or government
for capital formation and
c) the act of investment itself , so that
resources are used for the production of capital goodsNeed for Capital Formation
We have already discussed capital formation in a previous
chapter and also the measures for promoting it to break the vicious circle of
poverty. Here we discuss it from the point of view of economic growth. Capital formation is the very core of
economic development. It may be a predominantly private enterprise system like
the American or a communist economy like the soviet . Economic development
cannot take place without capital accumulation. No economic development is
possible without the construction of irrigation works the production of
agricultural tools and implements, land
reclamation, building of dams, bridges and factories with machines
installed in them , roads, railways and airports, ships and harbors all the
produced means of further production associated with high levels of
productivity. It seems unquestionable that the insufficiency of capital
accumulation is the most serious limiting factor in under developed countries.
In the view of many economists, capital occupies the central and strategic
position in the process of economic development. Capital formation indeed plays
a decisive role in determining the level and growth of national income , hence
economic development. This is due to the fact that of all factors of production
capital has unlimited expansibility. It is man made and is capable of
increasing in quantity and improving in quality. There us no doubt that
productive capacity of an economy can be increased only by increasing the
quantity and improving the quality of its capital equipment.
Process of Capital Formation
The process of building up the necessary stock of capital
equipment requires huge resources for financing it. Either a part of national
income must be saved for the production of capital goods or the necessary funds
for the purpose must be borrowed from abroad. The various methods of financing
economic development. Will be discussed in detail in a separate section. A here
we may only emphasize that domestic saving is a sine qua non of capital
formation. In fact, prof Arthur Lewis has defined the process of economic
growth as one of transforming a country from a 5 percent to a 15 per cent save.
But savings though necessary are not sufficient for the purpose of capital
formation , which involves the flowing three independent activities
1) An increase in the
volume of real savings esthete resources that would have been used for
consumption purposes may be released for the purpose of capital formation
2) A finance and credit mechanism , so the the available
resources may be availed of by private investors or government for capital
formation and
3) The act of investment itself , so that resources are used
for the production of capital goods.
Capital Formation
According to classical economists, the main factor which
helped capital formation was the accumulation of capital . Profits made by the
business community constituted the major part of the savings of the community
and what was saved was assumed to be invested. Adam smith too emphasized the
virtues of savings. He said “ Capital
are increased by parsimony and diminished by prodigality and misconduct.” Kynes
also described the economic development of Europe to the accumulation of
capital . He said “ Europe was so organized socially and economically as to
secure the maximum accumulation of capital”. Thus the crux of the problem of economic
development in and under developed economy lies ina rapid expansion of the rate
of its capital investment so that it attains a rate of growth of population by
a significant margin. Only with such a f=rate of capital investment will the
living standards begin to improve in a developing country.
Availability of Natural Resources
The quantity and quality of natural resources vitally affect
the economic growth of a country. Among the natural resources, We generally
include the land area and the quality of the soil, forest wealth, good river
system , minerals and oil resources, good and bracing climate, etc. A country’s
productive capacity largely depends on the natural resources available. Without
a minimum availability of natural resources it is idle to expect any sisal
economic growth. But it may be noted that the existence of natural resources is
not a sufficient condition of economic growth. For instance , idea is blessed
by nature with good and sufficient resources, yet it is poor and under-
developed. This is due to the fact that the natural resources have not been
properly harnessed and fully exploited.
Determinants of Economic Growth
The economic
development means the transformation from low income to high income society.
Let us see now the conditions which facilitate this transformation and maintain
a sustained and steady rate of growth . The process of economic development is
a highly complex phenomenon and in influenced by numerous and varied factors,
such as political , social and cultural factors. As such, economic analysis can
provide only a partial explanation of this process. To repeat here the remark
of Prof, Ragnar Nurkse in this condition .” Economic development has much to do
with human endowments, social attitudes, political condition and historical
accidents. Capital is necessary but not a sufficient condition of progress. The
most important factors determining the rate of economic development are:1) Availability of
natural resources
2) The rate of capital formation
3) Capital output ratio
4) Technological progress
5) Dynamic Entrepreneurship
6) Rate of growth of Population
7) Social overheads
like education and health.
8) Non- economic factors.
Solution of the problem of Disguised Unemployment
In the under developed countries there is disguised unemployment not only in the agricultural
sector, but there is also large scale unemployment is hidden and disguise but
in the urban area it is open , full and visible . Now the question is whether
employment should be provided to those who are totally unemployed or to the
partially employed or disguisedly unemployed people. When there is not much
scope of saving potential in agriculture
for capital formation,, the best thing would be to create employment
opportunities in the urban areas for people who have no jobs. The wise cause
seems to be first to put the altogether unemployed persons on the job and then
solve the problem of disguised unemployment is to raise agricultural
productivity through agricultural improvements.
Disguised Unemployment as a Potential Source of Capital Formation
Nurks recognized disguised unemployment as a saving
potential. That is in Nurkse’s view there is a hidden saving in disguised
unemployment which can be used for capital formation in the under- developed
countries. According to Nurksd surplus labor can be withdrawn from agriculture
and utilized for capital formation activities like road building , irrigation
projects, railway construction, building of houses , factories etc. The
question is Wherefrom should the finance be obtained for such projects? How are the workers transferred
from agriculture to these projects of capital formation to be fed? In Nurkse’s
view , the best solution to this problem is that the surplus labor transferred
from agriculture to capital formation projects should be given their own food
that they left behind in the farm families. It is assumed that when surplus
labor is withdrawn from agriculture there is surplus food which saws being
consumed by the people who have not been withdrawn from agriculture. In a a
nutshell , the work of capital formation should be carried on by the people
transferred from agriculture supported by the very food that they were
consuming before when they were attached to agriculture. That is capital
formation effected by the surplus labor transferred from agriculture is the
result of saving not from agriculture is the result of saving not from any
other sector or of foreign aid but their own saving concealed in disguised
unemployment in agriculture.
Extent of Disguised Unemployment
The magnitude of disguised unemployment in the under
developed countries has been roughly
estimated at about 25% a study by the Royal institute of International Affairs
in 1943 estimated disguised unemployment for the Eastern European regions as
the lowest at 20 to 25%. Doreen Warriner placed the surplus labor in Egypt in
1937 at about one half of the farm population . According to a body of U.N
experts , for many regions of india and Pakistan, and for parts of Philippines
and Indonesia the surplus cannot be less
than the pre-war average for the East European region.
Characteristics of Disguised Unemployment
Nurkse mentions the following characteristics of disguised
unemployment
1) The marginal productivity of labor in disguised
unemployment is zero.
2) It is usually associated with family employment or self
employed labor and not wage labor
3) It is not possible to identify personally disguisedly unemployed
labor.
4) It is to be distinguished from seasonal unemployment
caused by climate factors.
5) The disguised unemployment in under developed countries
is to be distinguished form industrial
under employment in the developed countries.
Difference between Disguised Unemployment and open industrial Unemployment
The disguised unemployment of under developed countries in
agriculture is different from the open
industrial unemployment to be found in the developed countries the cause of
open unemployment in the industrial countries is the deficiency of effective
demand during depression . owing to a reduction in aggregate demand. Output is
reduced in some factories and other factories are altogether closed on account
of lack of demand . output is reduced in
some factories and other factories are altogether closed on account of lack of
demand, of their goods. As a result, labor in spite of the availability of
capital. The cause of this unemployment , as we have said just said now is the
reduction in aggregate demand.
Meaning of Disguised Unemployment
Joan Robinson was perhaps the first economist who used the
term disguised unemployment But she used this tem for the people taking to
occupations with comparatively low productivity and income instead of
occupations of high productivity and large income during periods of depression
in the developed and advanced countries. But the tem disguised unemployment is use in a different sense in
the under developed countries. In the under- developed countries disguised
unemployment refers to a situation where too many people are engaged in
agriculture. A common characteristic of the over populated under developed
countries is that a large majority of population draw their livelihood from
agriculture . In Nurkse’s words “ There is disguised unemployment in the sense
that even with unchanged techniques of agriculture could be removed without
reducing agricultural output the same farm output could be got with a smaller labor force.”
Role in Economic Development
The objective of foreign aid is the achievement of sustained
economic growth by the recipient country achieving a given target rate of
growth which can be sustained without further external assistance. We may
notice three basic approaches to foreign aid requirements for a developing country 1) The savings
investment gap approach2) foreign exchange earnings and expenditure gap and 3)
the capital absorption approach. The first two approaches the savings
investment gap and foreign exchange earnings and expenditure gap yield
identical results. Foreign aid is equal to both the gap between imports and exports
and the gap between domestic investment expenditure and domestic savings. The
third approach the capital absorption approach assesses the capital
requirements ofa developing country on the basis of the ability of an economy
to utilize both domestic and foreign capital efficiently it should yield a minimum rate of return.
The Concept of Foreign Aid
The term foreign aid is generally used in the sense of flow
of resources from the rich countries to the poor under developed countries. But
it has been variously defined. According to the United Nations, economic aid
means outright grants and long term loans for non military purposes by
Governments and various international organizations. An appropriate definition
of foreign aid is given by R. F Mikesall
according to whom foreign aid is a Transfer of real resources or immediate
claim on resources form one country to another which would not have taken place
as a consequence of the operation of market forces or in the absence of
specific official action designed to promote the transfer by the donor country.
Thus foreign aid so defined includes both direct government transfers and those
promoted by special official action such as government guarantees.
Strategy of Balanced Growth
Again, to break the vicious circle of poverty on the demand
side of capital formation. Nurkse recommends the strategy of balanced growth.
According to him, if investment is made in one particular industry. But Nurkse
says if investment is made in several industries simultaneously, then the
persons employed in different industries become consumers of the foods produced
by one another since they have all acquired more purchasing power. That is the
industries in which investment has been made create demand for one another. In
this way, balanced growth, in which investment is made simultaneously in a
number of industries, creates its own demand. This is how , in Nurks’s opinion,
the vicious circle of poverty can be broken on the demand side by means of
balanced growth.
Productive Employment of surplus Labor in Disguised Unemployment
In the under developed countries , there is lot of surplus
labor to be found in the form of disguised unemployment . In view of its importance
as a potential source of capital
formation we discuss it more fully in the nest chapter. Here it may
suffice to say that in the agricultural sector, in the under developed but over
populated countries more people are apparently employed than there is need for them . This surplus labor
can be withdrawn from agricultural output and they can be employed elsewhere
more productively in road making , irrigation works which are labor intensive.
But the full effect of capital contribution from the transfer of surplus labor
from agriculture would follow only if their consumption level does not rise.
Optimum Use of Labor Resources
There is no doubt that labor in the advanced countries works
harder and works more willingly than is the case in the under-developed
countries, where labor is generally a shirker and in disciplined. Germany and
Japan have built up their war devastated economies rapidly manly with the help
of efficient labor force . Generally in the under- developed countries, labor
is abundant and cheap and there is vast scope for increasing the national
output by a fuller and better utilization of their manpower.
Improvement of Technology
The low level of production prevailing in the under
developed countries and hence the level of national income , can be raised by
improving techniques. Modern technology is capital saving and helps in
achieving larger output with relatively smaller use of real resources.
Productivity in the U.S.A and Western
European countries was substantially increased by automation and
rationalization. There is undoubtedly great scope for the underdeveloped
countries like india to adopt the advance technology of the west to their own requirements
and factor endowments
Better Utilization of Existing Capital Equipment
It
is generally seen that in the under developed countries factories are working
below their installed capacity either for the lack of raw materials or of
shortage of power or on account of inadequacy of complementary resources such
as skilled and trained personnel or due to defective management . By removing
these handicaps, fuller use can be made
of the existing capital equipment. By raising the level of productivity in the
country, the level of per capita income, and hence the capacity to save, can be
increased. Since the under developed countries suffer from scarcity of capital,
it is only prudent that maximum possible use should be made of the existing
capacity. In this way , the aggregate output in the country can be increased
without increasing the stock of capital Japan provides a classical example of
how a country can accelerate its economic growth and lif itself by its
bootstraps
Controlling Consumption
The savings margin can be widened by putting curbs on
domestic consumption by means of physical controls and fiscal measures . Russia
and Japan were able to raise the level of their investment to 30 percent of
their national income to achieve a high level of economic development by
adopting austerity measures and cutting consumption to the minimum . But in the
under developed countries, the standard of living is already very low and their
governments are committed to the raising of living standard of living is
already very low and their governments are committed to the raising of living
standards and improving economic
welfare. This coupled with democratic form of government rules out the
large scale adoption of such restrictive measures However the consumption of
luxury or semi luxury goods can be controlled. But there is a way out . Without
cutting down the level of consumption, it is possible to raise the rate of
savings and investment, it there is a relatively higher rate of savings from
the increase in incomes.
Use of Foreign Capital
The vicious circle of poverty can be broken and economic
development accelerated by raising foreign capital also to supplement domestic
resources. The developed countries of today were once poor and they developed
themselves with the help of foreign capital in one form or another . The under developed
countries too can make up the deficiency of domestic savings by getting capital
from abroad. It is gratifying that the rich countries of the world like the
U.S.A , Canada, the U,K western Germany, France and Japan are generously
helping the under developed countries to promote their economic development .
There is a regular aid helping the poor peoples of those countries. The under
developed countries take this aid as loan but they cannot use it properly. It
is much better, therefore for the under developed countries to rely as much as
possible on their own resources and avoid being burdened with heavy repayments
abroad and thus retain their independent policy and action.
Raising the Rate of Savings
The Government can raise the rate of savings in the country
by taxation, deficit financing and by borrowing from the banks and the public.
In this way the low level of voluntary savings , which is due to low per capita
income , can be raised by forced savings. The increased savings can be used for
capital formation. It is wrong to say as is implied in the supply side of
vicious circle , that since the under- developed countries are poor, it is not
at all possible to increase their savings. In spite of low level of per capita
incomes in such countries, there is still a great scope for increasing the rate
of savings. There are extreme inequalities in the distribution of income and
wealth. Per capita income is only an average income of the country. Actually there
are many people whose incomes are far higher. For instance the capita income.
But it is seen that in the under –developed countries. The rich people , who
can make lot of savings, actually do not do so. They indulge in unproductive
investments like jeweler, house building dissipate their resources in costly
social ceremonies like marriages or other forms of conscious consumption. That
is why the rate of productive investment in such countries is low. Arthur Lewis, a specialist in economic developments,
is of the opinion that the under developed countries are not so poor that they
cannot save even 10 to 12 per cent of their income Financial resources can be
mobilized by taxing the high income groups and the rate of investment can be
raised thereby.
Measures to Break the Vicious circle: Measures to promote Capital Formation
We have seen above how the under- developed countries are
caught up in the vicious circle of poverty and how this vicious circle is a
great obstacle in the way o their economic development. Now we have to see
whether the vicious circle of poverty can be broken and if so how. Modern
economists are of the view that the vicious circle can be broken if an economic
effort is made in such countries. The developed and rich countries of today
were also poor at one time and reached their present stage of development and
propensity buy somehow breaking the vicious circle of poverty. From the study
of their economic history, we learn that the poor countries of today can also
remove their poverty and reach the goal of a developed state through economic
endeavor. We can , therefore break the vicious circle by stepping up capital
formation the following measures.
Vicious Circle of Poverty
The vicious circle of poverty on the supply side of capital
operates in this manner poverty in the under – developed countries means that
the per capital income in such countries is low. Since per capital income is
low , their capacity to save is low . When people cannot make even the two ends
meet with their low income the question of saving does not arise. That is why
the rate of savings in the under- developed countries is extremely low. The
rate of savings being low. The rate of , investment in turn is bound to be
low. Since the rate of investment is low,
the rate of capital formation is low and hence there is great shortage of
capital in the under-developed countries. Since the amount of capital per man
is of vital importance in determining productivity, the level of productivity
per worker is extremely low in the under-developed countries. The productivity
per worker being low, the real income per capita is low and there is poverty. This
is how the vicious circle is complete on the supply side. Owing to poverty or low per capita income saving is less and
when saving is less the rate of investment
is low. The rate of investment being low, t he amount of capital per worker is small
and when capital per worker is small, productivity per worker is small .Since
productivity is low , the income per capita is low which means that the country
is poor. In this way , we see that the cause of a country’s poverty is poverty
itself and as Nurkse says “Under- developed countries are poor because they are
poor”
Obstacles to Economic Growth
Economic Factors
Impeding Growth:
Most of the countries
of Asia and Africa, which are under developed, have been at one time or another
under an alien rule. The most important cause of poverty in India and its
under- development is its subjection to the British rule. The foreign rulers, naturally,
exploited the dependent countries and used their resources to promote their own
interest. These countries were made to supply raw material at low prices. The
foreign industrialist also made investments in primary industries such as
mining, drilling of oil wells, tea , coffee etc. Thus the foreign masters used
these countries as suppliers of raw materials to their industries and markets
for their manufactured goods. They did not take any interest I their economic
development.
Misuse of Resources due
to Market Imperfections: Another important reason for the economic back wardens
of the under developed countries is the misuse of resources owing to market
imperfections by the market imperfections we mean the immobility of the factors
of production , price rigidities, ignorance regarding market , trends static
social structure , lack of specialization etc. This market imperfections are
great obstacles in the way of economic growth . It is due to market
imperfections that productive efficiency in these countries is low, the
resources are either unutilized or underutilized and the resources are
misallocated. When the resources are perfectly mobile and there is perfect
competition among them, they can easily move from one sector to another in
search of a better return and in this way they make an optimum contribution to
the national output.
Low Rate of Saving
and investment: Another main reason of the poverty and under development of
the under – developed countries is that the rate of saving and investment in
these countries is very low. In these countries only5-8 percent of the national
income goes into savings , whereas the rate is 15-20 percent and even more in
the developed countries. When the rat of saving in a country is low the rate of
investment is bound to be low and the rate of capital formation is low too.
Since capital per man is low, the productivity is also low productivity being
low, the per capita income and the national income too are low.
Demonstration Effect: The under development of the economically
backward countries is also due to what has been called the demonstration effect
the demonstration effect increases
propensity to consume which reduces the rate of savings and investment . A very
important principle has been propounded regarding consumption. That an individual’s
consumption does not merely depend on individuals own income but it is very
much influenced by the standard of living or consumption of his friends and
relations. When a man sees that some of his friends and relatives have
refrigerator , scooter, radio or TV set. Thus , consumption does not depend
upon absolute real income but on relative level of real income the is
consumption expenditure does not depend on our own purchasing power but on what
in being spent by other son the purchase of luxury articles.
Rapidly Growing
Population: In the under – developed countries , especially in the over
populated countries of Asia, population increases very rapidly. this has very
adversely affected their rate of economic growth . In fact rapid population
growth is the greatest obstacle to economic growth. Whatever increase takes
place in the national output and income in such countries as a result of development is devoured by the ever pouring torrent of
babies. It is like writing on the sand. That is why their standard of living
and income per capita cannot rise. For example the major part of increase in
national income that has accrued in India during the five year plans has been
nullified by the rapid population growth.
Dualism and economic under development
Dualism is a major characteristic of an underdeveloped
economy. Dualism refers to that condition of a country when two sectors
advanced of modern sector and the backward or traditional exist side by side .
For instance we have modern industries and the old cottage industries medieval
farming being practiced at the same time . In other words k, in an under
developed country. There is the bullock cart economy and modern transport
operating at the same time.
Characteristics of under-Developed Economies
The
general nature of an under- developed economy may be gathered from the common
economic characteristics of such an economy. It may be too much to talk of
common economic characteristics of under developed countries in view of the
wide diversity among under- developed countries
1) Deficiency of capital:
The low level of capital formation in an under developed
country is due both to the weakness of the inducement to invest and to the low
propensity and capacity to save. In such an economy, the low level of per
capita income limits the size of the market demand for manufactured output,
which weakness the inducement to invest . The low level of investment also
arises as a result of the lack of dynamic entrepreneurship, which was regarded
by Schumpeter as the focal point in the process of economic development.
2) Excessive
Dependence on Agriculture: Under – developed countries are predominantly
agricultural they are nonetheless much less efficient in agriculture than are
the industrial countries As prof. J,K Galbraith has put it a purely
agricultural country is likely to be unprogressive even in its agriculture.
Prof. Gunnar Myrdal explains this paradox thus “industrialization creates
technology which can then be applied to agriculture, but not vice versa.”
3) Inequalities of
Income and Wealth: Another distinguishing characteristic of the under
–developed economies is the disparities in income and wealth enjoyed by the
rich and poor sections of society. The lower national income of the
economically backward countries is more inequitably distributed than in the
advanced countries. According to Colin Clark’s estimates, labor’s share of net
income in the rich countries.
4) Dualistic Economy:
The under developed countries present sharp contrast in all walks of life.
There is the old and new, developed and under developed the educated and the
illiterate , the rich and poor existing side by side. It is both a bullock cart
and motor car economy. There are pockets of extra rich and ultra modern people
and vast masses steeped in abject poverty. There are efficient modern
industries and the languishing indigenous handicrafts, and son.
5) Lack of Entrepreneurial
Ability and Skilled Technicians: In the under – developed countries
generally , there are very few people , who can be described as daring and
dynamic entrepreneurs. There is also woeful lack of technical know-how.
6) Inadequate
infrastructure: The under-developed countries are also characterized by the
lack of sufficient economic and social overheads. The means of transport and communication,
irrigation and power, the banking system, the educational and medical
facilities’ are all imperfectly developed and they are utterly inadequate to
serve the existing population.
7) Foreign Trade
Orientation: An under- developed economy is generally foreign trade oriented.
Traditionally under- developed countries have exported raw material and
imported consumer goods and machinery The ratio of export production to total
output is normally high.
8) Rapid Population
Growth and Disguised Unemployment: The diversity among under- developed
economies is perhaps nowhere so much in evidence as in respect of the facts of
their population as regards its size, density and growth . While we have
examples of India and China with their teeming millions and galloping rates of
growth.
9) Under- utilization
of Natural Resources: The natural resources in and under –developed economy
are either unutilized or under- utilize. Generally speaking, under- developed
countries are not deficient tin land, water, minerals, forest or power
resources though they are untapped.
10) Economic Backwardness
of the People: The people in under – developed countries are economically backward,
that is , the quality of the people as productive agents is low. Instead of
acquiring the greatest possible control over their physical environment, the
people have struck a balance with nature at an elementary level. They have been
relatively unsuccessful in solving the economic problem of man’s conquest of
his material environment.
11) Poor Consumption
Pattern: The low level of earnings in the under- developed countries is reflected
in their low level of living. The bulk of their income is spent on necessaries
of life, particularly food consisting mostly of cereals and devoid of
nourishing items like fruits, meat, eggs, milk etc. They are too poor to afford
comfort and luxuries. The proportion of expenditure on housing and clothing is
also very small.
12) Peculiar
Demographic and Social Characteristics: There are certain demographic and
social characteristics typical of the under developed countries. Leaving a few
under populated and unde developed countries, the density of population is very
high considering the resources and employment opportunities available. There is
a very high proportion of the population in the age group 0-15 and a lower
proportion in the working group 20-60 years.
Characteristics of under-Developed Economies
The general nature of an under- developed economy may be
gathered from the common economic characteristics of such an economy. It may be
too much to talk of common economic characteristics of under developed
countries in view of the wide diversity among under- developed countries.
Definition of an Under Developed Economy:
According to prof . Ragnar Nurkse, “ under- developed
countries are those which compared with the advanced countries are under
equipped with capital in relation to their population and natural resources” As
Nurkse himself points out “ Economic development has much to do with human
endowments , social attitudes, political conditions and historical accidents.
Capital is necessary but not a sufficient condition of progress. Hence an economy will be
considered under-developed:
a) If its per capita income is low.
b) If the natural resources and manpower in the country
remain unutilized or underutilized on account of lack of economic development
and
c) If it is possible to raise its level of national income
and per capita income by properly utilizing its natural resources and manpower.
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