However economic growth has various costs. Firstly if economic growth is unsustainable and is higher than the long run trend rate inflation is likely to occur. Furthermore, this temporary boom in output is unlikely to continue and may be followed by an economic downturn or recession. Thus, it can be very damaging to increase the rate of economic growth above the sustainable rate. This boom and bust cycle happened in the UK in the late s and early s.
Also, an increase in economic growth could lead to a balance of payments problem. If increased consumer spending, like in the UK, causes the growth then there will be an increase in imports. Is imports rise faster than exports there will be a deficit. However, growth could be export-led e. However, if growth is increased by increasing the productive capacity and increasing the long run trend rate then inflation will not occur and the growth will be sustainable.
However, even an increase in the long run trend rate can have undesirable effects. In some cases, economic growth can have unintended costs to living standards. Higher output will lead to increased pollution and congestion which can reduce living standards e. Also, growth will lead to the consumption of non-renewable resources which may place costs on future generations. Economic growth often leads to increased inequality because growth benefits the richer most because they own assets and have the best-paid jobs.
Thomas Piketty observed that, without sufficient policies of redistribution, the wealthy tend to increase their wealth at a faster rate than economic growth — because they can reinvest their dividends. Economic growth has many obvious benefits however the desirability depends upon many factors such as; the nature of growth, is growth sustainable?
Does it harm the environment? However, rather than trying to stop economic growth, it is better to concentrate on improving the nature of economic growth. These include Firstly, higher GDP implies the economy is producing more goods and services and therefore consumers can enjoy more goods and services. This includes Environmental costs. Similarly, Britain has developed its industrial sector by importing some minerals and raw materials from abroad. However, an economy having deficiency in natural resources is forced to depend on foreign country for the supply of minerals and other raw materials in order to run its industry.
Thus in conclusion it can be observed that availability of natural resources and its proper utilization is still working as an important determinant of economic growth. Capital formation and capital accumulation are playing an important role in the process of economic development of the country. Here capital means the stock of physical reproducible factors required for production.
The increase in the volume of capital formation leads to capital accumulation. Thus it is quite important to raise the rate of capital formation so as to accumulate a large stock of machines, tools and equipment by the community for gearing up production. Moreover, capital formation requires the suitable skill formation so as to utilise physical apparatus or equipment for raising the productivity level.
In an economy, capital accumulation can help to attain faster economic development in the following manner: Various developed countries like Japan have been able to attain higher rate of capital formation to trigger rapid economic growth. Normally, the rate of capital formation in underdeveloped countries is very poor. Therefore, they must take proper steps, viz. In order to attain a rapid economic growth, the rate of domestic savings and investment must be raised to 20 per cent.
Naturally, in the initial period, it is not possible to step up the rate of capital formation at the required rate by domestic savings alone. Initially, to step up the rate of investment in the economy, inflow of foreign capital to some extent is important. But with the gradual growth of domestic savings in the subsequent years of development, the dependence on foreign capital must gradually be diminished.
Being a technologically backward country, India has decided to permit foreign direct investment in order to imbibe advanced technology for attaining international competitiveness under the present world trade and industrial scenario. Capital-output ratio is also considered as an important determinant of economic development in a country.
By capital-output ratio we mean number of units of capital required to produce per unit of output. It also refers to productivity of capital of different sectors at a definite point of time. But the capital output ratio in a country is also determined by stage of economic development reached and the judicial mix of investment pattern. Moreover, capital-output ratio along with national savings ratio can determine the rate of growth of national income.
This is a simplified version of Harrod-Domar Model. This equation shows that rate of growth of GNP is directly related to savings ratio and inversely related to capital-outlet ratio. Thus to achieve a higher rate of growth of national income, the country will have to take the following two steps: Favourable investment pattern is an important determinant of economic development in a country.
This requires proper selection of industries as per investment priorities and choice of production techniques so as to realise a low capital-output ratio and also for achieving maximum productivity. Thus in order to attain economic development at a suitable rate, the Government of the country should make a choice of suitable investment criteria for the betterment of the economy.
The suitable investment criteria should maximise the social marginal productivity and also make a balance between labour intensive and capital intensive techniques.
Another determinant of economic development is the occupational structure of the working population of the country. Too much dependence on agricultural sector is not an encouraging situation for economic development.
Increasing pressure of working population on agriculture and other primary occupations must be shifted gradually to the secondary and tertiary or services sector through gradual development of these sectors. In India, as per census, about As per World Development Report, , whereas about 45 to 66 per cent of the work force of developed countries was employed in the tertiary sector but India could absorb only 18 per cent of the total work force in this sector.
The rate of economic development and the level of per capita income increase as more and more work force shift from primary sector to secondary and tertiary sector. Thus to attain a high rate of economic development, inter-sectoral transfer of work force is very much necessary. The extent and pace of inter-sectoral transfer of work force depend very much on the rate of increase in productivity in the primary sector in relation to other sectors.
Extent of the market is also considered as an important determinant of economic development. Expansion of the scale of production and its diversification depend very much on the size of the market prevailing in the country.
Moreover, market created in the foreign country is also working as a useful stimulant for the expansion of both primary, secondary and tertiary sector of the country leading to its economic development. Japan and England are among those countries which have successfully extended market for its product to different foreign countries. Moreover, removal of market imperfections is also an important determinant of economic development of underdeveloped countries. Accordingly, market in those countries must be free from all sorts of imperfections retarding the economic development of the country.
Removal of market imperfections will make provision for flow of resources from less productive to more productive occupations which is very much important for the development of an underdeveloped economy. Technological advancement is considered as an important determinant of economic growth.
By technological advancement we mean improved technical know-how and its broad- based applications. With the advancement of technology, capital goods became more productive. The following conditions must be satisfied for attaining technological advancement in a country: As underdeveloped countries have failed to fulfill these conditions thus their development process is neither self-sustaining nor cumulative.
Thus in order to attain a higher rate of development, the underdeveloped countries should adapt only that type of technology which can suit their requirements. Developing countries like Mexico, Brazil and India have been applying technologies developed by advanced countries as per their own conditions and requirements. Thus to attain a high level of economic development, the under-developed countries should try to achieve technological progress at a quicker pace.
In recent years, economic planning has been playing an important role in accelerating the pace of economic development in different countries. Economic development is considered as an important strategy for building various social and economic overhead infrastructural facilities along with the development of both agricultural, industrial and services sectors in a balanced manner. Planning is also essential for mobilisation of resources, capital formation and also to raise the volume of investment required for accelerating the pace of development.
Countries like former U. The present situation in the world economy necessitates active support of external factors for sustaining a satisfactory rate of economic growth in underdeveloped economies.
Moreover, domestic resources alone cannot meet the entire requirement of resources necessary for economic development. Therefore, at certain levels, availability of foreign resources broadly determines the level of economic development in a country. The external factors which are playing important role in sustaining the economic development include: Economic factors alone are not sufficient for determining the process of economic development in a country.
In order to attain economic development proper social and political climate must be provided. The people of a country must desire progress and their social, economic, legal and political situations must be favourable to it. Emphasising the role of non-economic factors, Prof.
It is spirit itself that builds the body. Underdevelopment countries are facing various socio-political hurdles in the path of economic development. Thus in order to attain economic growth, raising the level of investment alone is not sufficient rather it is also equally important to gradually transform outdated social, religious and political institution which put hindrances in the path of economic progress.
Thus following are some of the important non-economic factors determining the pace of economic development in a country: It is the mental urge for development of the people in general that is playing an important determinant for initiating and accelerating the process of economic development. In order to attain economic progress, people must be ready to bear both the sufferings and convenience. Experimental outlook, necessary for economic development must grow with the spread of education. Economic progress is very much associated with the spread of education.
Thus education is working as an engine for economic development. In this connection, Prof. So, education plays pioneer role for the creation of human capital and social progress which in turn determines the progress of the country. Conservative and rigid social and institutional set up like joint family system, caste system, traditional values of life, irrational behaviour etc.
Thus to bring social and institutional change as per changing environment and to realise the modern values of life are very much important for accelerating the pace of economic development in a country.
Maintenance of law and order in a proper manner also helps the country to attain economic development at a quicker pace. Stability, peace, protection from external aggression and legal protection generally raises morality, initiative and entrepreneurship. Formulation of proper monetary and fiscal policy by an efficient government can provide necessary climate for increased investment and also can stimulate capital formation in the country.
Thus in order to accelerate the pace of economic development the government must make necessary arrangement for the maintenance of law and order, defence, justice, security in enjoyment in property, testamentary rights, assurance to continue business covenants and contracts, provision for standard weights and measures, currency and formulation of appropriate monetary and fiscal policies of the country.
But the economy of underdeveloped countries is now facing serious threat from large scale disorder, terrorism, disturbances in the international border etc. All these have led to diversion of resources and initiatives from developmental to non-developmental ends.
Moreover, under such a chaotic situation, capital formation process, business initiatives and enterprise of private firms are seriously suffered and distorted leading to a stagnation of economy in these countries. Economic development of a country also demands existence of a strong, honest, efficient and competent administrative machinery for the successful implementation of government policies and programmes for development. The existence of a weak corrupt and inefficient administrative machinery leads the country into chaos and disorder.
The development process of an underdeveloped or developing economy is not an easy task rather it is a complicated one as these countries are not having any common characteristics. Thus the underdeveloped or developing countries are facing several constraints or obstacles to its path n economic development. These short-term constraints are related to over concentration and stagnation in agricultural sector, unemployment and under-employment, low productivity of capital, the growing deficit in its balance of payment position etc.
Again, the long-term constraints include infrastructural bottlenecks, financial constraints etc. The following are some of the important obstacles or constraints on the path of economic development of underdeveloped countries: In the initial part of their development process, most of the underdeveloped countries were under foreign domination which had led to the huge colonial exploitation by the foreign rulers.
Foreign rulers converted these economies as primary producing countries engaged in the production of raw materials only to be supplied to the ruler country at cheaper prices and also a potent market for the sale of the manufacturing products produced by the ruler country. Foreign capitalists mostly invested their capital on mining, oil drilling and plantation industries where they exploited the domestic workers to the maximum extent and remitted their profit to their parent country.
They have also destroyed the cottage and small industries by adopting unfair competition which has put a huge pressure on agriculture, disguised unemployment and poverty. After independence, these underdeveloped countries like India had to face serious obstacles to break this deep rooted impasse of low level equilibrium traps.
Market imperfections in the form of immobility of factors, price rigidity, ignorance of market conditions, rigid social structure etc. All these imperfections have resulted low level of output and low rate of productivity per worker. This has forced the gross output of these countries for less than the potential output. Suppose the country is producing only two commodities A and B.
The production possibility curve AB represents the production frontier which shows the various combinations of commodity A and B that may be produced by the country to its maximum extent through its fuller and best possible allocation of resources. Thus AB represents the potential production curve. But the actual production curve of the underdeveloped country denoted by AB lies much below the potential production curve AB due to market imperfections resulting in misallocation and under-utilisation of resources in the country.
Thus due to market imperfections, the underdeveloped countries fail to reach the optimum production function due to lack of optimum allocation of resources. Another important obstacle or constraint faced by the underdeveloped countries in their path of economic development is its poor rate of savings and investment.
Inspite of their best attempt, the rate of savings of these underdeveloped countries remained very low, varying between 5 to 9 per cent only of their national income as compared to that of 15 to 22 per cent in the developed countries. Under such a situation, the rate of investment in these countries is very low leading to low level of capital formation and low level of income.
Vicious circle of poverty is considered as one of the major constraints or obstacles to the path of economic development of the underdeveloped countries. Vicious circle in the underdeveloped countries represented by low productivity is resulted from capital deficiency, market imperfections, economic backwardness and poor development. Low productivity results in low level of income and low rate of savings leading to low rate of investment, which is again responsible for low rate of productivity.
Thus the vicious circle of poverty is resulted from various vicious circles related to demand side and supply side of capital. These vicious circles of poverty are mutually aggravating and it is really difficult to break such circles. Demonstration effect on consumption level works as another major obstacles or constraints on the path of economic development of underdeveloped countries as it increases propensity to consume and thereby reduces the rate of savings and investment.
Here the consumption level of individual is very much influenced by the standard of living or consumption habits of his neighbours, friends and relatives but not by its income alone. Their knowledge is extended, their imagination is stimulated, new desires are aroused, the propensity to consume is shifted upward. Thus this international demonstration effect reduces the savings potential of the underdeveloped countries and thereby creates severe constraints on the path of their growth process.
Underdeveloped countries are facing peculiar problem in respect of adopting modern and latest technology. Due to abundant labour supply and scarcity of capital, such technologies become unsuitable for these countries. At the same time the existing poor technology of these underdeveloped countries fails to raise the rate of productivity and also to bring them out of the vicious circle of poverty and thereby makes it uncompetitive.
Most of the underdeveloped countries are facing the problem of rapidly growing population which hinders its path of economic development. In most of the over-populated countries of Asia and Africa, the rate of growth of population varies between 2 to 3 per cent which adversely affects their rate of economic growth and it is considered as the greatest obstacles to their path of economic development.
Rapidly growing population slows down the rate and process of capital formation. Growing population increases the volume of consumption expenditure and thereby fails to increase the rate of savings and investment, so important for attaining higher level of economic growth. Instead it diminishes the rate of accumulation, raises costs in extractive industries, increases the amount of disguised unemployment and in large parts simply diverts capital to maintaining children who die before reaching a productive age.
In short, resources go to the formation of population not capital. Moreover, rapidly rising population necessitates a higher rate of investment to maintain old standard of living and per capita income.
Growing population also results food problem, unemployment problem which forced the country to divert its scarce resources to meet such crisis. Thus, over-population results poverty, inefficiency, poor quality of population, lower productivity, low per capita income, unemployment and under-employment and finally leads the country toward under development. Another important obstacles or constraints to the path of development of underdeveloped countries are its inefficient agricultural structure.
Agriculture dominates the economy of most of the underdeveloped countries like India as it is contributing the major share of their GDP. Agricultural sector in these countries are suffering from primitive agricultural practices, lack of adequate inputs like fertilisers, HYV seeds and irrigation facilities, uneconomic holdings, defective land tenure and excessive dependence on agriculture.
Under such a poor structure, the agricultural productivity in these countries is very poor. Thus this poor performance of agricultural sector is another major obstacle in the path of economic development of these underdeveloped countries.
Inefficient and underdeveloped human resources are also considered another major obstacle towards economic development of underdeveloped countries. These countries suffer from surplus labour force but shortage of critical skills. Due to lack of adequate number of trained and skilled personnel, the production system remains thoroughly backward. Thus this dearth of critical skills and knowledge in these countries has resulted under-utilisation and mis-utilisation of physical capital leading to lower productivity and higher cost structure of the production system.
Due to lack of adoption of modern technique in agriculture, industry and trade, these underdeveloped countries fail to stand in the competition with developed countries. Underdeveloped countries are also suffering from lack of adequate number of entrepreneurial ability.
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