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.