6 Limiting Factors of Acceleration in Underdeveloped Countries

Read this article to learn about the six limiting factors of acceleration in underdeveloped countries.

(i) In a predominantly handicraft backward economy where the production of consumer goods calls for no capital deepening or roundabout methods of production, the acceleration effect is bound to be zero. The capital needed per unit of output is very little.

Moreover, in such underdeveloped economies small scale and cottage industries play more important role, excess capacity is not only maintained but also is a most common feature of such economies.

Hence, the value of the accelerator is not only low but also it does not work at all.

(ii) Moreover, the capital outlay in such economies is incurred for political and welfare reasons and for other non-economic considerations, regardless of the changes in the level of income.

Long- term investment in public utilities and social overheads is done by the governments of such economies, much ahead of increase in consumption and induced purely by welfare motives.

There are always some ‘exogenous’ factors in operation in these economies to affect investment decisions independently of the level of income or the economic system proper. Under such circumstances, the working of the accelerator is bound to be impaired in these low income countries.

(iii) Elastic supply of bank credit, followed by dishoarding and release of idle balances and other resources are all essential elements for the smooth working and high value of the accelerator. These conditions are obviously not fulfilled in such backward economies; either the bank credit is not available or is available at a high rate of interest combined with the imperfections of money market as also the non-availability of other resources of production or very high prices of industrial inputs all make for slow rate of growth and hence low value of accelerator, which has limited scope in conditions enumerated above in such economies.

(iv) How the volume of investment demand reacts to the changes in the volume of consumer demand and money income depends upon a large number of factors both in advanced and underdeveloped economies and nothing definite can be laid down about its relationship. The greater the unutilized capacity in consumer goods industries, the less will be the stimulus on investment demand as a result of rising consumption expenditure.

One view is that capacity in consumer goods industries in such economies already being meagre, is likely to get exhausted rather soon and acceleration effects should be greater. But the magnitude of induced investment demand also depends upon the, labour-capital ratio or capital intensity of production.

In a low income country the capital technological base is narrow and a given rise in consumer demand, on this account, will be met by a smaller rise in the level of investment spending than in the case of developed economies. On the whole, it could be said that though the investment function in such economies is fairly income elastic, yet the fact that capital equipment is less durable makes for a relatively smaller degree of the acceleration effects.

(v) Again, the acceleration effects have been dampened on account of many leakages abroad, because of the dependence of such economies of foreign trade. Not only are terms of trade unfavourable but also profits flow outside, interest goes to lending countries. Poor countries have to import machinery associated with any rise in induced investment that may occur as its exports rise. The high marginal propensity to import and high income elasticity of demand for imports have also operated in the direction of dampening a rise in income and acceleration effects.

(vi) However, in the agricultural sector of such economies the position may be slightly different. In these predominantly agricultural countries, the unemployment problem of industrial countries is not likely to arise. Additional labour may be employed without difficulty on family size agricultural units by utilizing the given supply of land and existing capital goods more intensively. Although output tends to expand as employment rises, per capita income tends to fall in accordance with the principle of variable proportions. At the same time more intensive use of the capital stock increases marginal productivity of capital and thereby the demand for investment goods causing favourable acceleration effects.