development is fundamentally about enhancing a nation’s factors of productive
capacity, i.e., land, labour, capital, and technology, etc. By using its
resources and powers to reduce the risks and costs, which could prohibit
investment, the public sector often has been responsible for setting the stage
for employment-generating investment by the private sector. The public sector
generally seeks to increase incomes, the number of jobs, and the productivity of
resources in regions, states, counties, cities, towns, and neighbourhoods. Its
tools and strategies have often been effective in enhancing a community's:
labour force (workforce
preparation, accessibility, cost)
(accessibility, capacity, and service of basic utilities, as well as
transportation and telecommunications)
business and community
facilities (access, capacity, and service to business incubators,
industrial/technology/science parks, schools/community
colleges/universities, sports/tourist facilities)
psychological, cultural, and entrepreneurial)
(leadership, knowledge, skills) to support economic development and growth.
there can be trade-offs between economic development's goals of job creation and
wealth generation. Increasing productivity, for instance, may eliminate some
types of jobs in the short-run. Economic development encompasses a broad and
expansive set of activities and tools that assist communities in growth and
prosperity. The best economic development practitioners strive to bring quality
jobs, new businesses and increased services (along with numerous other benefits)
to communities through innovative approaches and outcome driven strategies.
Technology development has
added a new dimension to the role of economic development professionals. The
quest for increased technology can be confusing and challenging from many
perspectives. Communities must judge to what extent they should strive to
recruit and support the technology industry, how to determine the proper role of
advanced technology on the organization’s everyday activities and design ways
to help local businesses tap into technology opportunities. Many communities
have been able to incorporate technology into both their practices and programs
while others have struggled to understand the capabilities of this industry. As
the information age and technology sector maintain steady growth, the need for
more advanced economic development activity is expanding as well. Technology
development encompasses increased infrastructure capabilities, advanced
financing options, innovative marketing processes and start-up business
Development vs. Economic Growth
Development is a qualitative change, which entails changes in the structure of the
economy, including innovations in institutions, behaviour, and technology
Growth is a quantitative change in the scale of the economy - in terms of
investment, output, consumption, and income.
to this view, economic development and economic growth are not necessarily the
same thing. First, development is both a prerequisite to and a result of growth.
Development, moreover, is prior to growth in the sense that growth cannot
continue long without the sort of innovations and structural changes noted
above. But growth, in turn, will drive new changes in the economy, causing new
products and firms to be created as well as countless small incremental
innovations. Together, these advances allow an economy to increase its
productivity, thereby enabling the production of more outputs with fewer inputs
over the long haul. Environmental critics and sustainable development advocates,
furthermore, often point out that development does not have to imply some types
of growth. An economy, for instance, can be developing, but not growing by
certain indicators. Indeed, the measure of productivity should not be solely
monetary; it should also address the issues like how effectively scarce natural
resources are being used? How well pollution is being reduced or prevented? Etc.
W.W. Rustow has defined and analysed in his book ‘The stages of economic
growth’, the five stages of economic development:
The traditional society:
In the traditional long-lived social and economic system, the output per head is
very low and tends not to rise. There
are still few examples of traditional societies in this 21st century,
that is, Afghanistan, Somalia, Ethiopia, etc.
The pre-conditions for take-off:
sometimes also referred to ‘preparatory period’.
It covers a long period of a century or more during which the
preconditions for take-off are established.
These conditions mainly comprise fundamental changes in the social,
political and economic fields; for example, (i) a change in society’s
attitudes towards science, risk-taking and profit-earning, (ii) the adaptability
of the labour force; (iii) political sovereignty; (iv) development of a
centralised tax system and financial institutions; and (v) the construction of
certain economic and social overheads like rail roads and educational
The take-off stage: This is the crucial
stage which covers a relatively brief period of two or three decades in which
the economy transforms itself in such a way that economic growth subsequently
takes place more or less automatically. The
take-off is defined as the interval during which the rate of investment
increases in such a way that real output per capita rises and this initial
increase carries with it radical changes in the techniques of production and the
disposition of income flows which perpetuate the new scale of investment and
perpetuate thereby the rising trend in per capita output.
The drive to maturity:
It is the stage of increasing sophistication of the economy.
Against the background of steady growth, new industries are developed,
there is less reliance on imports and more exporting activity.
The economy demonstrate its capacity to move beyond the original
industries which powered its takeoff, and to absorb and to apply efficiently the
most advanced fruits of modern technology.
The stage of mass production and mass consumption: The fourth stage ends in the attainment of fifth stage, which is the
period of mass production and consumption. The
economy is characterised by affluent population, availability of durable and
sophisticated consumer goods, hi-tech industries, and production of diversified
goods and services. USA, UK, Canada,
France, Germany, Japan, Spain, Italy, etc are the examples.
Characteristics of Developing
A developing country is one
with real per capita income that is low relative to that in industrialised
countries like US, Japan and those in Western Europe.
Developing countries typically have population with poor health, low
levels of literacy, inadequate dwellings, and meagre diets.
Life expectancy is low and there is a low level of investment in human
1. Deficiency of capital: One indication of the capital deficiency is the low amount of capital
per head of population. Shortage of
capital is reflected in the very low capital-labour ratio.
Not only is the capital stock extremely small, but the current rate of
capital formation is also very low, which is due to low inducement to invest and
to the low propensity to save. Thus
low level of per capita income limits the market size.
2. Excessive dependence on agriculture: Most of the less-developed countries are agrarians.
In Pakistan, most of the people are engaged in agriculture.
Whereas in developed countries 15% of the population is engaged in
agriculture. The excessive
dependence on agriculture in less developed countries is due to the fact that
non-agricultural occupations have not grown in proportion with the growth in
population. Hence, the surplus
labour is to be absorbed in agriculture.
3. Inequalities in the distribution of income and
wealth: In under-developed countries, there is a
concentration of income in a few hands. In
other terms, the income is insufficient to meet the requirements of the whole
economy. Such income is diverted to
non-productive investments such as jewellery and real-estates, and unproductive
4. Dualistic economy: Dualistic economy refers to the existence of two extreme classes in an
economy, particularly less-developed economy.
There are old and new production methods, educated and illiterate
population, rich and poor, modern and backward, capitalists and socialists,
donkey carts and motor cars existing side by side.
This situation creates an atmosphere of great conflict and contradiction,
and hampers the economic development in the long-run.
Lack of dynamic entrepreneurial abilities and highly skilled labour
6. Inadequate infrastructure: like airports, rail roads, highways, overheads, bridges,
telecommunication facilities, sewerage and drainage, power generation,
Rapid population growth and disguised unemployment
Under-utilisation of natural resources
9. Poor consumption pattern: In less-developed countries, most of the people’s income is spent on
basic necessities of life. They are
too poor to spend on other industrial goods and services.
Determinants of Economic Growth
(Factors of Economic Development in UDCs / Reasons of
Failure of Under-Developed Countries)
process of economic development is a highly complex phenomenon and is influenced
by numerous and varied factors, such as political, social and cultural factors.
The supply of natural resources and the growth of scientific and
technological knowledge also have a strong bearing on the process of economic
development. From the standpoint of
economic analysis, the most important factors determining the rate of economic
Availability of natural resources:
The availability and use of natural resources within a country play a vital role
in the economic development. Many
poor countries have enormous amount of natural resources, but they are failed to
explore them. The reason is that the
government has not provided necessary incentives to the farmers and landowners
to invest in capital and technologies that will increase their land’s yield.
In natural resources, minerals, oil and gas, forests, oceans and seas,
livestock, land’s fertility, and mountains are generally included.
It must be noted here that the existence of natural resources is not a
sufficient condition of economic growth. Many
poor and under-developed countries are rich with natural resources but there is
a problem of availability of capital required for their extraction.
Such countries include Pakistan, India, Afghanistan, and several African
and Latin American countries.
Rate of capital formation:
The second important factor of economic development is the rate of capital
formation. Keynes also ascribed the
economic development of Europe to the accumulation of capital.
According to him, Europe was so organised socially and economically as to
secure the maximum accumulation of capital.
The crux of the problem of economic development in any under-developed
country lies in a rapid expansion of the rate of its capital investment so that
it attains a rate of growth of output which exceeds the rate of growth of
population by a significant margin. Only
with such a rate of capital investment will the living standards begin to
improve in a developing country.
formation or inducement to invest depends on the propensity to save.
In less-developed countries, there is a very low saving tendency because
of low income. Developed countries
managed to save 20% of their output in capital formation.
Whereas only 5% of the national income is saved in UDCs.
Much of the savings goes to housing and basic needs and, therefore, a
very small amount is left over for development.
formation is the basic tool for economic development.
It may take decades to invest in building up a country’s
infrastructure, information technologies, power-generating plants, and other
capital goods industries. Developing
countries must have to build up their infrastructure, or social overhead capital
in order to set path for economic glory.
are so many obstacles in finding domestic savings for capital formation, then
the country depends on foreign sources of funds.
Less-developed countries have to welcomed the flow of foreign capital or
foreign borrowings. As long as the
exports of these countries grew at the same rate as borrowings, it is a
favourable condition. But several
poor countries needed all their earnings simply to pay interest on their foreign
debts. This is an adverse situation.
Such countries need to boost up their production in order to cope with
their current indebtedness.
Apart from the ratio of capital formation to the aggregate national income, the
growth of output depends upon the capital-output ratio.
The capital-output ratio may be defined as 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 productivity of capital depends on 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 organisation
skill, the existence and the extent of the utilisation 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, i.e., economic and social
overheads, the higher shall be the capital-output ratio, and vice versa.
Higher the investment devoted to heavy industry, the higher will be the
capital-output ratio, and vice versa. Higher
the rate of investment and greater the technological progress, the lower will be
the capital-output ratio. The
capital-output ratio also varies with the prices of inputs.
The key to economic development for any country is the technological progress.
Greater the technological progress, the higher will be the economic
progress. The great importance of
technological progress in the economic progress of Western European countries
was recognised by Karl Marx himself. The
technological progress of a country includes development in research and
development, means of transportation, telecommunication, energy-generation, oil
and gas exploration, information technologies, integrated circuits
manufacturing, etc. Again, without
capital formation, the technological progress is impossible, because building
huge hi-tech industries requires a huge investment and a favourable economic
The modern economists recognise the dynamic role of entrepreneurs in promoting
the economic growth of the country. The
efficient utilisation of entrepreneurial skills can only be ensured when there
is presence of considerable profit motive. The
entrepreneur maximises his profit by making innovations, i.e., by bringing out a
new product, new technologies, new product lines, new market, new sources of raw
materials and by adopting an optimum combination of factors of production.
Thus he is making the most significant contribution in the national
income and in the technological progress.
private enterprises in UDCs like India and Pakistan, has not taken them any far
on the road of economic development. There
is a lacking of entrepreneurial skills in under-developed countries.
There is a lack of innovation. Entrepreneurs
are more attracted by commerce than by industries.
So it becomes the government’s duty to ensure the supply of required
type of entrepreneurship.
entrepreneurs, the economic development of a country depends on the supply of
skilled and semi-skilled labour, and requires government’s greatest
contribution to the development of human resources.
The development of human resources depends on the availability of
hygienic food; quantity and quality of education centres and health centres;
clean water; means of transportation and communication; entertainment;
counselling services; loan facilities; scholarship; job security and old age
countries GDP rises but at the same time the population also grows.
Several developing countries are facing high birth rates with stagnant
national income per head. It is hard
for poor countries to overcome poverty with birth rates so high.
In under-developed countries, the economic planners emphasise the
following specific programmes:
Control disease and improve
health and nutrition,
Improve education, reduce
illiteracy and train workers, and
Ensure that the labour force
is well-equipped with necessary and competing skills.
Rate of growth of population:
The size and rate of population growth has an important bearing on the economic
development of a country. A rapidly
growing population aggravates the food problem, worsens the unemployment
situation, adds to the number of unproductive consumers, keeps down per capita
income and labour efficiency, and militates against capital formation.
A rapid rate of population growth acts like a drag on economic
development and slows down the pace of economic growth.
Price Mechanism: In under-developed
economies, a very little emphasis is placed on price mechanism.
The disequilibrium of prices has severe consequences on the efficiency of
the economy. The resource
utilisation becomes lack of optimality. The
productive machinery of the community is hampered.
There is no guarantee as regard to the quantity and quality of the
to speed up the economic development, price mechanism must go or confined to
unimportant sectors of the economy like the purchase and sale of consumer goods.
Non-economic factors include social factors, demographical factors,
institutional factors and political factors.
The economic development depends on the political sovereignty, the
complexion and competence of government, quality of administration, and
political ideology of government.
Cycle of Poverty
developing countries are caught up in vicious cycle of poverty.
Low level of income prevents savings, retards capital growth, hinders
productivity growth, and keeps income low. Successful
development may require taking steps to break up the chain at many points.
Other points in poverty are also self-reinforcing.
Poverty is accompanied by low levels of education, literacy and skill;
these in turn prevent the adaptation to new and improved technologies and lead
to rapid population growth. The
vicious cycle of poverty is depicted as below:
the barriers of poverty often requires a concentrated effort on many fronts and
a ‘big-push’ is required to break the ‘vicious cycle’ into ‘virtuous
circle’. If the country has
stepped to invest more, improve health and education, develop labour skills, and
curb population growth, she can break vicious cycle of poverty and stimulate a
virtuous circle of rapid economic growth.
to Economic Development
following approaches are developed in recent years to explain the economic
development and answer the question how countries break out of the vicious cycle
of poverty to virtuous circle of economic development:
The Take-off Approach:
Take-off is one of the stages of economic growth.
Different economies have been benefited from ‘take-off’ approach in
different periods, including England at the beginning of eighteenth century, the
United States at the mid of nineteenth century, and Japan in early twentieth
century. The take-off is impelled by
leading sectors such as a rapid growing export market or an industry displaying
large economies of scale. Once these
leading sectors begin to flourish, a process of self-sustained growth (i.e.
take-off) occurs. Growth leads to
profits, profit are reinvested, capital, productivity and per capita income spur
ahead. The virtuous cycle of
economic development is under way.
The Backwardness Hypothesis and Convergence: The second approach emphasises the global context of economic
development. Poor countries have
important advantages that the pioneers of industrialisation had not.
Developing nations can draw upon the capital, skills and technologies of
advanced countries. Developing
countries can buy modern textile machinery, efficient pumps, miracle seeds,
chemical fertilisers and medical supplies. Because
they can lean on the technologies of advanced countries.
Today’s developing nations can grow more rapidly than Great Britain,
Western European Countries and United States in past.
By drawing upon more productive technologies of the leaders, the
developing countries would expect to see convergence towards the technological
Some writers suggest
that growth is a balanced process with countries progressing steadily ahead.
In their view, economic development resembles the tortoise making
continual progress, rather than the hare, who runs in spurts and then rats when
Kuznets examined the history of thirteen advanced countries and
conceived that the balanced growth model is most consistent with the countries
he studied. He noticed no
significant rise or fall in economic growth as development progressed.
further important difference between these approaches.
The ‘take-off’ theory suggests that there will be increasing
divergence among countries (some flying rapidly, while others are unable to
leave the ground). The
‘backward’ hypothesis suggests ‘convergence’, while the
‘balanced-growth’ model suggests roughly ‘constant’ differentials.
In the following diagrams, advanced countries are represented by curve A,
middle income countries by curve B and low-income countries by curve C.
The curves show per capita income:
of Economic Development
Following are the strategies
commonly applied in economic planning:
vs. Unbalanced Growth: Currently there are two major schools of thoughts
regarding the process of growth, i.e., balanced growth strategy and unbalanced
Balanced Growth Strategy:
Economists like Ragnar Nurkse and Rosenstsein-Rodan strongly advocate balanced
growth strategy. According to them,
the pattern of investment should be so designed as to ensure a balanced
development of the various sectors of the economy.
They advocate simultaneous investment in a number of industries so that
there is a balanced growth of different industries.
Unbalanced Growth Strategy:
Economists like H.W. Singer and A.O. Hirschman, on the other side, believe that
rapid economic growth follows ‘concentration’ of investment in certain
strategic industries rather than an even distribution of investment among the
various industries. In the view of
these economists, unbalanced growth is more conducive in economic development
than a balanced one.
The big-push strategy is associated with the name of Rosenstein-Roden and Harvey
Leibenstein. It is contended that a
big-push is needed to overcome the initial inertia of a stranger economy.
Rosenstein-Roden observes that there is a minimum level of resources that
must be devoted to a development programme if it is to have any chance of
success. Launching a country into
self-sustaining growth is like getting an airplane off the ground.
There is critical ground speed which must be passed before the craft can
Unbalanced and Big-Push (BUB) Strategy:
The advocates of this strategy suggest that no single strategy will take us to
the goal of economic development. Not
only has the strategy to be changed from time to time as the situation may
require, but it may be necessary sometimes to strike a balance between the
alternative strategies. In the
initial stage, which is characterised by unbalances, counter-unbalance strategy
is to be adopted. But once an
appropriate balance is attained by a fair dose of big-push, the strategy of
balanced growth may be applied to further planning.
are the important issues in under developed countries:
Industrialisation vs. Agriculture:
In most countries, incomes in urban areas are almost more than double in rural
areas. Many nations jump to the
conclusion that industrialisation is the cause rather than effect of affluence.
To accelerate industrialisation at the expense of agriculture has led
many analysis to rethink the role of farming.
Industrialisation tends to be capital intensive, attract workers into
crowded cities, and often produces high level of unemployment.
Rising productivity on farms may require less capital, while providing
productive for surplus labour.
Inward vs. Outward Orientation:
This is a fundamental issue of economic development towards international trade.
Should the developing countries be self-sufficient?
If yes, the country has to replace imported goods and services with
domestic production. This strategy
is known as ‘import substitution’
or ‘inward orientation’.
country decides to pay for imports it needs by improving efficiency and
competitiveness, developing foreign markets, and giving incentives for
exporters. This is called ‘outward orientation’ strategy.
It is generally observed that by subsidising import substitution,
competition is limited, innovation is dampened, productivity growth is slow down
and country’s real income falls to a lower level.
Whereas, the outward orientation sets up a system of incentives that
stimulates exports. This approach
maintains a competitive FOREX rate, encourages exports, and minimises
unnecessary government regulation of businesses esp. small and medium sized
State vs. Market: The cultures of many
developing countries are hostile to the operation of markets.
Often competition among firms or profit seeking behaviour is contrary to
traditional practices, religious beliefs, or vested interest.
Yet decades of experience suggest that extensive reliance on markets
provides the most effective way of managing an economy and promoting rapid
government has a vital role in establishing and maintaining a healthy economic
environment. It must ensure law and
order, enforce contracts, and orient its regulations towards competition and
innovation. The government plays a
leading role in investment in human capital through education, health and
transportation, but the government should minimise its intervention or control
in sectors where it has no comparative advantage.
Government, should focus its efforts on areas where there are clear signs
of market failure.