Process of Economic Development: 5 Contributing Factors

This article throws light upon the five factors that contributes to the process of economic development.

Factor # 1. Natural Resources:

Resources created not through human effort but available from nature and transformed into productive resources have been playing an important role in the development process of a country.

In other words, natural resources, such as land, soil, mineral deposits (like iron ore, fossil fuel) are three main factors of production, the other two being labour and capital. The critical element here is the availability of such resources.

Other things remaining the same, the growth and prosperity of a nation may be associated with the kind and size of the resources possessed by it.

There is a presumption that natural resources are ‘finite’. In fact, no one should ignore the possibility of adding more resources through discovery. Through discovery, opening up and by utilising new resources, many countries in the past had made a higher contribution in output.

However, that does not mean natural resources are ‘infinite’. Economic processes impact on the of environment. For instance, perils of resource depletion— both renewable and non-renewable— Trough uses generate insurmountable problems on growth and development of a nation. This then suggests conservation of resources so as to have a sustainable development.

Anyway, an abundant supply of natural resources conduces to both agricultural and industrial development. Just as availability of fertile land and abundant supply of water for irrigation purposes are the two essential prerequisites for achieving faster agricultural growth, minerals like coal, bauxite, iron ore, crude oil, copper, tin, etc., if available in plenty, can help the process of industrialisation. Shortage of natural resources often acts as a constraint on output expansion and is often considered as an obstacle to economic development. For example, some poor countries of Asia and Africa have limited natural resources such as land and minerals. And whatever little is available is to be shared by the large population.

However, one also sees an inverse association between natural resource abundance and economic growth. There is enough evidence to support that many resource-poor economies have outperformed many resource-rich economies in terms of economic growth! In other words, such an adverse association between resource abundance and growth at least demonstrates that the possession of natural resource is just a necessary’ condition- but not a sufficient condition—for economic development.

Above all, resources that we have may be fixed and exhaustible. Growing exploitation of such natural resources to fulfil man’s insatiable demands has now raised the issue of environmental damage that adversely affects economic development. The poor people of poor countries are dependent on their natural environment. Thus the greatest victims to the damage of natural environment are, obviously, the poor people. Herein lies the importance of protecting natural environment so as to have a sustainable develop­ment.

Factor # 2. Human Resources:

Labour is a basic input for virtually all production. It is not possible to make the best possible utilisation of existing natural resources unless there is sufficient manpower. If a country is able to utilise its man­power properly, it will certainly prove to be an important factor in development.

The supply of manpower—called human resources—depends, among other things, on population growth. Thus the size of the population is an important factor of economic development. More labour should, therefore, mean greater potential output. In an under-populated (relative to resources) country, population increases do indeed mean economic growth—as more land can be cultivated or more workers may be employed in industry and services.

It is to be remembered that not only the size of population but also the quality of laboure force is also an important determinant of an economy’s capacity. There is a feeling among some economists that the quality of labour input—human capital— is the single-most important factor of economic development. Modern economists consider resources devoted to education and training as investment in human capital.

The effective use of capital and the application of modem technology depend on the availability of skilled manpower Educated, skilled workers are generally more productive than uneducated, unskilled workers. At the same time workers are also consumers. So, with population growth, there is an expansion in the size of the market and there is greater scope for division of labour and specialisation. Healthy people can work harder and longer than sick people.

Anyway, the stock of educated and healthy labour force in any economy contributes to growth and development by (a) creating a more productive and healthy labour force endowed with skills and knowledge, (b) opening up employment oppor­tunities in various sectors of the economy, (c) Indeed, an educated and skilled labour force is a necessary condition for sustained economic growth. Further, there is ample evidence that health and nutrition of a nation affects employment, productivity, and wages favourably. A healthy population is a pre-requisite for economic development.

However, the relationship between population growth and economic development is a complex one. Experiences of many countries suggest that ‘rapid’ rates of population growth acts as constraint on development. It reduces per capita income of a nation. It creates environmental problems and overcrowded cities and towns.

It reduces savings and capital formation. Thus economic growth is hampered. This means that we have landed in a two-way problem because of two-way relation between population growth and economic develop­ment. Even then, the quality of human capital is an important element in the progress of a nation.

Factor # 3. Capital Resources:

Increases in labour and land productivity, in their turn, depend greatly upon new technology and increased capital resources. The amount of output that workers can produce depends largely on the availability of complementary resources like capital. It is argued that lack of capital is the principal obstacle to growth and no plan for economic development will succeed unless adequate capital is forth­coming. No country can achieve higher growth if certain minimum rate of capital formation is not realised.

Capital accumulation or investment refers to the creation of additional capital like plant, equipment, machinery, structures, etc. (physical capital), and social and economic structures like roads, electricity, water, sanitation, etc., to aug­ment output and income. An increasing amount of capital per worker a rising capital/labour ratio is clearly a major source of productivity or output per man-hour.

In other words, by increasing the amount of capital per worker, it is possible to increase labour productivity. Capital formation enables a country to enjoy the advantages of large scale production and specialisation. It is indis­pensable not only for augmenting output but also for providing employment to the people. Further, capital accumulation provides a growing labour force with an increased supply of tools and machinery per worker. This then raises efficiency of the workers.

Often, poor countries are handicapped by low volume of capital accumulation because of low income and low savings. If domestic capital is not sufficient to meet the investment needs, a poor country may be required to import capital from abroad. However, there is a question mark on the use of foreign capital in the poor developing countries.

Modem economists like T. W. Schultz, Jan Tinbergen, Gary S. Becker, etc., have pointed out that human capital formation (investment in training and investment) is as important as physical capital formation, if not more. They have emphasised the contribution of investment in human beings for economic development.

Factor # 4. Technology:

Technological progress is considered as the most important source of development by many economists. It is said that technology has been revolutionising our lives since the dawn of human history. Modem day technological progress that is going on is something unique as far as its depth and rapidity are concerned. Technology refers to our knowledge of how to convert resources into goods and services. Technical progress refers to an improvement in the art of production. Technological progress leads to an improvement in productivity of existing resources.

It is the result of research, invention, development, and innovation. With the advance­ment of scientific and technological knowledge, people discover more and more sophisticated techniques of production which steadily raise the productivity levels.

It is thus dear that technological progress in a country depends on both pure and applied science. And science depends on the resources allocated towards research and development. Thus education is of crucial importance in any economy in furthering technological improvement. Besides education, entrepreneurial ability is another impor­tant determinant of technical progress. Joseph A. Schumpeter assigned a very important role to the entrepreneur in the economic development of a country. In his view, one of the most important functions of the entrepreneur is innovation getting new methods adopted in effective ways.

Thus, through new techniques and methods of production, a country can increase its productive capacity. To an economist, this implies that new technology is a sufficient condition for economic growth. However, technological progress is also a necessary condition for sustained growth. Without it, there would not be enough new capital formation to allow continued increases in labour productivity.

It may be noted that a continued increase in labour productivity requires both increased capital and new or modem technology. Continual capital formation will occur only if there is a continual flow of new technology. Thus there is a close rela­tion between technological change and capital and capital formation. These two not only complement but also depend upon each other. New method may require new machinery. Or, when a firm decides to build a new factory, this may lead to discovery of new and better methods of production.

Factor # 5. Institutional Environment:

Further progress of present day market economies is now largely influenced by the institutional environment. In other words, market economies can flourish provided an appropriate institutional environment prevails. Development requires effective state participation. In today’s changing world, state should complement market.

However, benefits of development must he widespread and inclusive so that poor people can harvest benefit from the market-oriented growth. It is observed that the state, because of poor governance and ineffective institutional framework, fail to protect property rights, law and order, freedom of individuals, human rights, and so on. Even it fails to protect the poor, vulnerable people. An effective economic institution can ensure public services to the poor and give economic incentives through opening better opportunities and empowering the excluded and vulnerable.

Often it is found that institutional environment gets vitiated by the rich powerful of the society and ultimately institutions serve their purposes. Under the circumstance, market, as an institution, marginalises poor people. Protecting poor people from insecurity requires participation and empowerment of these people so that public action is designed by them according to their priorities.

Institutional failure results in bad and poor governance and corruption. And corruption definitely hampers progress of majority of the countries. If the institutional environment is made effective the prospect for good investment is likely to brighten. It is the experience of the people that poor governance and corruption has been choking off and disturbing investment at the cost of the poor people. It is said that good institu­tions encourage people to invest, accumulate, and develop new technologies. All these are elements of economic progress of a nation.

The role of the government as the builder and provider of effective institutions is undeniable. It has to bring institutional reform ‘in the fields of land tenure, taxation, asset ownership and distributions, educational and health delivery systems; credit allocation; labour relations; pricing policies; …, and the machinery of government itself.’ (M.P. Todaro and S.C. Smith).