Economic Factors in Economic Development

In a country’s economic development, the role of economic factors is decisive. The stock of capital and the rate of capital accumulation in most cases settle the question whether at a given point of time a country will grow or not. There are a few other economic factors which also have some bearing on development but their importance is hardly comparable to that of capital formation. The surplus of food grains output available to support urban population, foreign trade conditions and the nature of economic system are some such factors whose role in economic development has to be analysed:

1) Capital Formation:

The strategic role of capital in raising the level of production has traditionally been acknowledged in economics. It is now universally admitted that a country which wants to accelerate the pace of growth, has m choice but to save a high ratio-of its income, with the objective of raising the level of investment. Great reliance on foreign aid is highly risky, and thus has to be avoided. Economists rightly assert that lack of capital is the principal obstacle to growth and no developmental plan will succeed unless adequate supply of capital is forthcoming.

Whatever be the economic system, a country cannot hope to achieve economic progress unless a certain minimum rate of capital accumulation is realized. However, if some country wishes to make spectacular strides, it will have to raise its rate of capital formation still higher.

2) Natural Resources:

The principal factor affecting the development of an economy is the natural resources. Among the natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of natural resources in abundance is essential. A country deficient in natural resources may not be in a position to develop rapidly. In fact, natural resources are a necessary condition for economic growth but not a sufficient one. Japan and India are the two contradictory examples.

According to Lewis, “Other things being equal man can make better use of rich resources than they can of poor”. In less developed countries, natural resources are unutilized, under-utilized or mis- utilized. This is one of the reasons of their backwardness. This is due to economic backwardness and lack of technological factors.

According to Professor Lewis, “A country which is considered to be poor in resources may be considered very rich in resources some later time, not merely because unknown resources are discovered, but equally because new methods are discovered for the known resources”. Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because it has been able to discover new use for limited resources.

3) Marketable Surplus of Agriculture:

Increase in agricultural production accompanied by a rise in productivity is important from the point of view of the development of a country. But what is more important is that the marketable surplus of agriculture increases. 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.

The importance of the marketable surplus in a developing economy emanates from the fact that the urban industrial population subsists on it. With the development of an economy, the ratio of the urban population increases and increasing demands are made on agriculture for food grains. These demands must be met adequately; otherwise the consequent scarcity of food in urban areas will arrest growth.

In case a country fails to produce a sufficient marketable surplus, it will be left with no choice except to import food grains which may cause a balance of payments problem. Until 1976-77, India was faced with this problem precisely. In most of the years during the earlier planning period, market arrivals of food grains were not adequate to support the urban population.

If some country wants to step-up the tempo of industrialization, it must not allow its agriculture to lag behind. The supply of the farm products particularly foodgrains, must increase, as the setting-up of industries in cities attracts a steady flow of population from the countryside.

4) Conditions in Foreign Trade:

The classical theory of trade has been used by economists for a long time to argue that trade between nations is always beneficial to them. In the existing context, the theory suggests that the presently 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.

In the recent years, a powerful school has emerged under the leadership of Raul Prebisch which questions the merits of unrestricted trade between developed and under-developed countries on both theoretical and empirical grounds.

Foreign trade has proved to be beneficial to countries which have been able to set-up industries in a relatively short period. These countries sooner or later captured international markets for their industrial products. Therefore, a developing country should not only try to become self-reliant in capital equipment as well as other industrial products as early as possible, but it should also attempt to push the development of its industries to such a high level that in course of time manufactured goods replace the primary products as the country’s principal exports.

In countries like India the macro-economic interconnections are crucial and the solutions of the problems of these economies cannot be found merely through the foreign trade sector or simple recipes associated with it.

5) Economic System:

The economic system and the historical setting of a country also decide the development prospects to a great extent. There was a time when a country could have a laissez faire economy and yet face no difficulty in making economic progress. In today’s entirely different world situation, a country would find it difficult to grow along the England’s path of development.

The Third World countries of the present times will have to find their own path of development. They cannot hope to make much progress by adopting a laissez faire economy. Further, these countries cannot raise necessary resources required for development either through colonial exploitation or by foreign trade. They now have only two choices before them:

i) They can follow a capitalist path of development which will require an efficient market system supported by a rational interventionist role of the State.

ii) The other course open to them is that of economic planning.

The latest experiments in economic planning in China have shown impressive results. Therefore, from the failure of economic planning in the former Soviet Union and the erstwhile East European socialist countries it would be wrong to conclude that a planned economy has built-in inefficiencies which are bound to arrest economic growth.