Determinants of economic development

Economic Factors, Non-Economic Factors

1. Prof. Mahendra Kumar Ghadoliya www.ghadoliyaseconomics-mahendra.blogspot.in Determinants of Economic Development

2. 1. CAPITAL FORMATION Growth rate of national income is determined, to the large extent , by the rate of capital formation. The higher the rate of capital formation, the greater is the addition to productive capacity of a nation, i.e., a greater flow of goods & services and higher national income. Capital Formation depends on income, desire to save and Investment Investment increases income more due to multiplier To make use of the natural wealth, a necessary amount of capital is needed so that they can be used to their fullest . If the level of income is low the savings will also be low. In such a case a country may use foreign capital. The actual requirement of capital depends upon growth target and capital output ratio.

3. Capital Formation & Labour efficiency: Increase in stock of capital enables labour to work with greater efficiency, because efficiency to the large extent depends on the nature and type of the equipment they are working with. SUPPLY AND DEMAND FOR GOODS & SERVICES: Capital formation increases productive capacity and expands volume of goods and services produced, and on the other hand it increases the rate of investment, which in turn creates income for the workers and increased income creates additional demand for goods produced . 

4. 2. NATURAL RESOURCES Availability of natural resources in abundance is an important factor in a country’s economic development. Some developed countries like the USA, Canada, Australia, New Zealand, etc. have abundance of natural resources. However, it does not mean that all these countries that have natural resources in abundance, are among the advanced nations. Countries which intend to initiate the process of economic growth must direct their efforts to make fuller use of their existing resources and exploration of new resources. Renewable and non-renewable Resources Natural Resources Increase income Natural Resources Supply & Demand affect development Per Capita Employment, Income & Efficiency .

5. 3 . Marketable Surplus of Agriculture: The term ‘marketable surplus’ refers to the excess of output in the agri­cultural sector over and above what is required to allow the rural population to subsist. Food for urban population depends on it In case marketable Surplus is not sufficient a country has to import food grains to feed its population. It give rise to Balance of payment crisis. India has become a self sufficient country after the success in green revolution. Now we have sufficient marketable surplus and sometimes export our surplus production.

6. 4. Conditions in Foreign Trade: Trade is considered beneficial for both the countries as suggested by the theory of comparative advantages. Less developed countries should specialize in production of primary products as they have comparative cost advantage in their production. The developed countries, on the contrary, have a comparative cost advantage in manufactures including machines and equipment and should accordingly specialize in them. Developing countries should not totally rely on the import substitution policy but should also develop it manufacturing sector

7. Economic System: The economic system and the historical setting of a country also decide the development prospects to a great extent. The policy of leissez faire (i.e. leave free) was favoured by the earlier classical economists. Capitalist system Centrally planned economic system Mixed system with efficient market and rational interventionist role of the State Restrictive or import substitution policy Liberalization policy

8. Non-economic Factors in Economic Development: 1. Human Resources - Growth of population is not always a curse for the society but sometimes it can be a boon as well, increasing population provides opportunity for expanding market base in the terms of demand and supply of goods and services, and more work force for producing such output. Demand for goods Working age population Education and skilled manpower Health and Nutrition Demographic Dividend of Human Capital .

9. 1. Human Capital- Contd. HRD or Human Capital formation means creation of capabilities and capacities in people to work efficiently and competently in various economic activities. Investment on human beings in the form of education, training and health facilities that contribute to increased productivity is called ‘human capital formation’. In developed nations the health and education levels are much higher, and with better health and education, these countries produced larger output and higher incomes. The role of human capital formation in economic development can be stated in the terms of increase in output, in productive capacity, improved quality of life and increase in inventions and innovations.

10. 2. Technical Know-how: As the scientific and technological knowledge advances, man discovers more and more sophisticated techniques of production which steadily raise the productivity levels. Labour intensive vs Capital incentive Output= f (LKT) It means development and application of new techniques of production. To incorporate new technology in the production process or in order to modify the existing plants, a larger investment to procure or produce new equipment is required, hence a higher rate of capital formation is necessary to support technological progress . Since technology has now become highly sophisticated, still greater attention has to be given to Research and Development for further advancement. 

11. Education Improves levels of health – improving education (particularly literacy) improves the health of society. Vaccines. HIV, Sanitary habits, Water filtering Balanced Diet Education Higher expenditure is required Disparities between urban and rural area Child labour Social Taboos Dropout ratio is very high

12. Institutional factors affecting development There are a number of non-economic factors that act as sources of economic development and barriers to development What do we mean the institutional framework? Organisations, structures, rules The main institutional factors are Education Healthcare Infrastructure Political Stability and corruption Legal system Financial system, credit and micro finance Taxation The use of appropriate technology The empowerment of women Income distribution

13. Availability of Infrastructure Rail-road network Public transport Metro Airports, Seaports Gas Electricity

14. Political stability Political instability can lead to civil war and complete economic breakdown Political stability leads to growth When there is a political freedom citizen are more likely to have a say in the development process. Countrioes that have political stability attract more FDI and foreign aid which helps in improving technology and innovations.

15. Corruption Bribes increase the costs of business leading to higher prices Officials divert funds to projects that are not in the public interest Dishonest exploitation of power for personal gain Freedom of speech is lacking Corruption leads to an unfair allocation of resources – contracts don’t go to most efficient bidder. Governments are not accountable to the people Constant paying of small bribes reduces economic well being of ordinary citizens Legal structure is weak Corruption leads to reduction in effectiveness of legal system