Determinants of Economic Development

Determinants of Economic Development

The concept of factors of economic development is very wide and of diversified nature in the historical aspect of economic development. Different factors have played important role in the economic development of different countries The process of economic growth is determined by two types of factors i.e, economic and non-economic factors. We study these factors of economic development separately as under:

(A) ECONOMIC FACTORS / DETERMINANTS / PRE-REQUISITES

Some Important economic factors / determinants / Prerequisites are discussed below.

1. Natural Resources

The Principal factors affecting the development of an economy are natural resources or land. Natural resources are such as fertility of the land, its situation, forest wealth, minerals, climate, water resources, sea resources, etc. A country that is deficient in natural resources will not be in a position to develop rapidly.

In LDCst natural resources are either un-utilized, underutilized or is utilized. This is one of the reasons for their backwardness. Natural resources can be developed through improved technology and an increase in knowledge. For economic growth, the existence of abundant natural resources is not enough but their proper exploitation is essential so that there is little wastage and they could be utilized for a longer time.

2. Capital Accumulation

Capital means the stock of physical reproducible factors of production  and the capital accumulation means the increase in the stock of real capital in a country. It involves making more capital goods such, as machines tools, factories transport equipment, materials, etc which are used for further production of goods, The process of capital formation includes three inter-related stages.

(i) The existence of real savings and rise in them.

(ii) The existence of credit and financial institutions to mobilize savings and to divert them in productive channels.

(iii) To use these savings for investment in capital goods.

SOURCES OF CAPITAL FORMATION

There are two types of sources of capital formation.

(A) Domestic Sources

These sources are:-

(i) Individual savings.

(ii) Business savings.

(iii) Government savings in the shape of taxes and the profits of public sector.

(iv) Public borrowings.

(v) Deficit financing on which the government can fall back to obtain funds.

(B) Foreign Sources

The capital formation can also take place with the help of foreign capital which have the following forms.

(i) Direct private foreign investment.

(ii) Foreign loans.

(iii) Loans from international Agencies,

(iv) Foreign remittances.

These are the functions or roles of capital formation.

(a) To purchase machinery, tools, etc.

(b) Purchasing raw materials

(c) Payments of wages.

(d) Increase in per capita income.

(e) Provision of capital goods to industry and agriculture.

(f) Due to the bulk of capital formation, the supply of goods and services increases.

(g) Capital results in technological discoveries.

3. Human Capital                    

Labour is a human resource of production and human resources refer to the population of a country.

The population has its dual effect on economic growth i.e. its rapid growth rate is the main obstacle to economic development and on the other hand, more human capital increases the productivity of the economy. The productive qualities of human capital are education, training, health, skill, and efficiency of labour. The qualities can be increased due to providing health facilities, training, increase expenditure on education and vocational institutions, etc.

4. Organization

The organization is an important part of the growth process. It relates to the optimum use of factors of production in economic activities. The entrepreneur has been performing the task of an organizer and undertaking risks and uncertainties. The shortage of skilled personnel of various kinds such as workers, scientists, technicians, managers, administrators etc possess a serious problem in the success of entrepreneurship in underdeveloped countries.

5. Water and Power Resources

Water and power resources play an important role in shaping

the economy of a country. The execution of policies in Pakistan is assigned to an autonomous body called Water and Power Development Authority (WAPDA in 1958) and Karachi Electric Supply Corporation. The terms power refers to energy which makes a machine to operate, machines are used in agriculture, manufacturing, and other industries such as transport, construction etc. The machines improve quality, reduce the cost and speed up the operation.

6. Transport and Communication

One of the important factors in economic growth are the means of transport and communications. The transport means are railways, roads, air, sea while the means of communications are radio, T.V., newspapers, telephone, telegraph, or internet etc.

The growth process in LDCs can be accelerated by widening of the market through the adoption of modern means of transport and communication.

7. Technology

The technological changes are related to changes in the methods of production which are the result of some new techniques of research or innovation. Changes in technology lead to an increase in the productivity of labour, capital and other factors of production. The LDCs must import modern technology to accelerate its productive capacity. However, scientific and industrial technology to be useful in an underdeveloped country needs careful processing and adoption in accordance with its social, economic and technical absorption capacities and requirements.

8. Fiscal and Monetary Policy

The fiscal policy means the use of taxation, public borrowing and public expenditure by the government for purposes of development. The role of fiscal policy in developed countries is to stabilize the rate of growth which in underdeveloped countries, is to accelerate the rate capital formation.

The monetary policy refers to the control and regulation of cost, availability of money and credit.

It adjusts the money supply according to economic requirements which changes with the growth and expansion of the economy. Thus the fiscal and monetary policies are complementary in nature for the economic development of a country.

9. Structural Changes

The changes imply the transition from a traditional agricultural society to a modern industrial economy involving a radical transformation of existing institutions, social attitudes and motivations. Such structural changes lead to increased employment opportunities, higher labour productivity, stock of capital, exploitation of new resources and improvement in the technology. Those structural changes which affect technical skills, administrative and entrepreneurial activities and the supply of capital are more important.

(B) NON-ECONOMIC FACTORS OR DETERMINANTS

The non economic factors/determinants have also important rote in the process of economic development. These factors are discussed as:

(1) Social Factors

Social attitudes, values and institutions also influence economic growth. These inculcate the spirit of adventure which leads to new discoveries and innovations. The people cultivate the habits of saving, investment and undertake risks to earn profits. But in LDCs there are such social attitudes, values and institutions which are not conducive to economic development. Therefore, these should be changed or modified for economic development to take place. Social organizations like the joint family, caste system, kinship, nepotism, regionalism etc should be modified so that they may be more favourable to economic development.

(2) Political Factors

The political factors also help in economic growth. The weak political structure is a big obstacle to the economic development of LDCs. The behaviour of government plays an important role in stimulating or discouraging economic activity, peace, stability, legal protection and encouragement of entrepreneurship to investment. This can only be taken under clean and stable political conditions. A stable government can develop a means of transport and communications, successful plans, approved monetary and fiscal policies, for accelerating economic development. In LDCs there is political instability, the governments are being changed frequently by the imposition of dictatorship, There are frequent political changes in Pakistan since partition so the planning work done by the previous governments cannot help the developmental projects to be successful. Therefore, tho po!itical instability is the main cause of stow economic growth.

(3) Administrative Factors

Administrative factors can help economic growth effectively. The weak administrative structure is a big hindrance to the economic development of developing countries. Therefore, a strong, efficient and incorrupt administration is essential for economic growth. Technical progress, factor mobility and large size of markets can take place under clean administration.

The administrative evils i.e. red-tapism, corruption, bribery, nepotism, dacoity, theft, embezzlement etc, are also obstacles to economic development to eradicate the above evils, the members of the administration must be given a handsome pay and given due promotion, The officials must be held responsible for their negligence. They must not be allowed to misuse of their power and authority.

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