DETERMINANTS OR REQUISITES OF ECONOMIC DEVELOPMENT

1. Factors in Economic Development Economic development is a complex process. It is influenced by a number of factors such as natural resources, capital, human resources, technology, social attitude of the people, political condition in the country. All the factors having strong bearing on economic growth are divided into two categories, economic and non-economic. We discuss these determinants or factors of economic development under separate heads now. (A) Economic Factors. Economic factors play a very important role in the development of a country. The aggregate output rises or falls mainly due in changes to them. The main economic determinants are (1) Natural Resources (2) Capital (3) Labour (4) Power (5) Transport and Communication (6) Human Capital. These economic factors are discussed in brief. (1) Natural Resources. The natural resources is the principal factor which affects the development of an economy. If a country is rich in natural resources, it is then able to make rapid progress in growth. In case a country is deficient in forest wealth, mineral resources, water supply, fertility of land etc., it is then normally not in a position to develop rapidly. The pity with the most of LDC's is that their natural resources are under-utilized, unutilized or misutilized. This is one of the reasons for their backwardness. It may here be noted that presence of rich resources is not a precondition for economic development. There are countries in the world which do not have abundant resources, yet they have made rapid progress in growth by superior technology, new researches and higher knowledge. Japan, Switzerland, South Korea are resource poor countries, yet they have made rapid progress in economic growth through advanced technology and new discoveries. (2) Capital Formation. Capital accumulation or capital formation is an important factor in the economic growth of a country. Capital formation refers to the process of adding to the stock of capital over time. The stock of capital can be built up and increased through three different resources which are as under:Sources of capital formation: (a) An act of saving. (b) Capital market. (c) An act of investment.

(a) An act of saving. An act saving involves the postponing of consumption whether voluntarily or involuntarily so that funds thus made available be used for investment. In developing countries the saving potential is low. A large majority of the people hardly keep their body and soul together with the meager income at their disposal. Saving is a luxury and far beyond their reach. The middle income group attracted by the superior levels of consumption of the developed world (demonstration effect). spends the resources on consumption items like fridges. VCR, colour television etc and so less saving is coming from them. The rich section of the society spends money mostly on luxury goods, foreign travels, real estates etc and therefore little saving is available for investment. The saving potential of under developed countries, therefore, normally does not exceed 13% to 10% of the national income which keeps their stock of capital low. (b) Capital market. The capital market consists of financial institutions, like development banks, stock exchanges and investment banks. In low income countries, the capital market is less developed. As such it is not able to mobilize saving to the desired extent. (c) An act of investment. In less developed countries, whatever meagre saving are available with households and with the businessmen, is not all channelized for investment in capital goods. The businessmen usually hesitate to invest their resources due to political and social instability in the country, fear of nationalization of industries, limited domestic market, poor roads, etc. How to increase capital formation In developing countries, the capital formation is around 5%. It should be raised to the level of atleast 20% by adopting the following measures: (1) Sine voluntary saving is not forth-coming in low income countries, the government should resort to forced saving. The various methods of forced saving are (a) taxation (b) deficit financing and (c) borrowing (2) Obtaining of external resources in the form of loans and grants for development progress. (3) In creasing exports and reducing imports can also provide funds for capital formation. 3. Human resources.. Human resources of a country is an important factor in economic development. If the population of a country is educated, efficient, patriot, skilled, healthy, it makes significant contribution to economic development. On the other hand, if a country is overpopulated, labour force is unemployed, uneducated, unskilled, unpatriotic, it can put serious hurdles on the path of economic development. 4. Power. Power resources are the foundation of economic development. They are derived mainly from two types of sources (1) Commercial and (2) Non-commercial Commercial resources of power are

(a) oil, gas, coal, hydel, thermal electricity and nuclear. Non- commercial sources include animal power, fuel, wood, cow dung The power resources are vital to economic growth of a country. Its importance has been changing with the passage of time. Before industrial Revolution, the energy for operating the machines was mainly supplied by animals, human power and wind. With the scientific advancement, coal, oil, gas, and water falls are used as the principal sources of energy. In developed countries of the world, the nuclear power and solar energy are being increasingly used for generating electricity. The various sources of energy are helpful in ; (a) giving an initial push to the raising of production in all sectors of the economy. (b) Quickly bridging the development gap. (c) providing economies of scale. (d) ensuring high quality standard. (e) reducing material wastages in all sectors of the economy. The high income oil exporting developing countries like Saudi Arabia, Bahrain etc. are producing energy according to their needs from their own cheap source i.e.,.oil. The other developing countries are giving highest priority to energy. Their main stress is on (a) accelerated exploitation of coal, hydel and nuclear power etc. (b) intensification of exploration for oil and gas (c) energy consideration. 5. The Means of Transport and Communication The means of transport and communication have an important bearing on the economic growth of a country. If a country is well connected with rail road, sea ports and has a developed means of communication including information technology, it then helps in improving the productive capacity of the various sectors of the economy. An efficient transport and communication network contributes to improving the quantity and quality of goods due to competition and reduction in production costs.

What is economic growth:

Economic growth, economic welfare, total welfare, and economic development were used to convey the same meanings in 1960's and 1970's. However, the terms `economic growth' and economic development have different meanings and importance in economic literature.

Meaning of Economic growth?

The meaning and importance of economic growth is a vital issue in economics. Economic growth is often defined as a continuous increase in the real value of the production of goods and services. According to Kuznets, economic growth may be defined as a long term process wherein the substantial and sustained rise in real national income, total population and real per capita income takes place. In the words of Michael Todaro, Economic growth is a steady process by which the productive capacity of the economy is increased overtime to bring about rising levels of national output and income.

Elements of economic growth.

The definitions of ''economic growth'' clearly bring out the following elements of economic growth. (1) Long term process. Economic growth is a long run process involving a period of decades. A short term increase in national income for a few years is not considered an economic growth. (2) Rise in real per capita income. Economic growth is accompanied by substantial rise in real per capita income. This can be possible only if the real per capita income is higher than the rate of growth of population over a long period of time. (3) Rise in productivity. Economic growth is always associated with substantial rise in productive capacity of the economy. The rise in real output can be achieved by proper utilization of natural and human resources and better techniques of production in all sectors of the economy. (4) Greater equality. There should be greater equality in the distribution of income and reduction of the unemployment in the country.

Sources of Economic growth:

Economic growth, as we have stated earlier, is the production of more goods and services over the years. Economic growth can be achieved through two main sources (1) Supply factors and (2) Demand factors. Supply factors relate to the physical ability of an economy to grow. Production can be increased by using more factors of production (land, labour, capital and enterprise) and by using existing resources more efficiently. The second source of economic growth is to create increased demand for goods and services. The aggregate demand can be increased if there is additional spending by households, by private firms for investment, by government purchaser of goods and services and exports minus imports.

Benefits of economic growth

The main benefits of economic growth are: (i) It helps in raising the material standard of living of the people. ii) It allows the economy to have more consumer and capital goods. iii) It increases employment opportunities. iv) It reduces government cost associated with unemployment benefits, medical aid etc.

Costs of economic growth:

The costs of economic growth are: (i) As more goods are manufactured, it produce, (a) air and water pollution (b) noise (c) traffic jams (d) rural and urban congestion (e) smoke (f) ugly landscapes (g) garbage etc. (ii) The pollution of water and air etc reduces the quality of life. (iii) The consumption of many goods and services reduces our scarce non-renewable resources such as gas, oil, minerals etc.