Factor Used For Determining the Rate of Economic Development

Some of the most important economic factors which used for determining the rate of economic development are as follows:

(a) The rate of capital formation (b) capital-output ratio (c) The rate of growth of population.

(a) Capital Formation:

The crux of the problem of economic development in an under-developed economy lies in a rapid expansion of the rate of its capital investment. It should attain a rate of growth of output which exceeds the rate of growth of population by a significant margin. Only with such a rate of capital investment wall the living standards margin to improve in a developing country.

No economic development is possible without the instruction of irrigation works, the production of agricultural tools and implements, land reclamation, building of dams, bridges and factories with machines installed in them, roads, railways, and airports, ships and harbours—all the “produced means of further production” associated with high levels of productivity.

Insufficiency of capital accumulation is the most serious limiting factor in under-developed countries. In the view of many economists, capital occupies the central and strategic position in the process of economic development. But the process of building up the necessary stock of capital equipment requires huge resource for financing it.

Either a sizable proportion of national income must be saved Tor the production of capital goods, or the necessary funds for the purpose must be borrowed from abroad. But domestic saving is a sine qua non of capital formation. In fact professor Arthur Lewis has defined the process of economic growth as one of transforming a country from a 5 per cent saver to a 15 per cent saver.

Savings though necessary are not sufficient for the purpose of capital formation, which involves the following three independent activities:

(a) An increase in the volume of real savings so that resources that would have been used for consumption purposes may be released for the purpose’ of capital formation;

(b) A finance and credit mechanism, so that the available resources are mobilised and may be availed of by private investors or government for capital formation; and

(c) The act of investment itself, so that resources are used for the production of capital goods.

(b) Capital-Output Ratio:

Apart from the ratio of capital formation to the aggregate national income, the growth of output also depends upon the capital-output ratio. The capital-output ratio determines the rate at which output grows as a result of a given volume of capital investment. A lower capital-output ratio tends to lead to a comparatively higher rate of growth of output as a result of a given volume of capital investment than a higher capital-output ratio.

For example, a capital-output ratio of 3:1 would mean, in Indian rupees, that a capital investment of Rs. 3, results in the addition of output worth Re. 1. Hence, given the output, smaller capital investment would be needed if the capital-output ratio is lower than when it is higher.

It is difficult to estimate the capital-output ratio for an economy. The productivity of capital depends upon many factors such as the degree of technological development associated with capital investment, the efficiency of handling new types of equipment, the quality of managerial and organizational skills, the pattern of investment, and the existence and the extent of the utilization of economic overheads.

It is maintained that capital-output ratio in under-developed countries is generally higher. According to the United Nations experts, it ranges from 2:1 to 5:1. This means that capital is less productive in them than in developed countries. This is so because there is a relative inefficiency of the industries which produce capital goods.

There is a great wastage of capital in the process of production due to low level of technical knowledge; and there is the scarcity of economic overheads. Besides, owing to indivisibilities, certain kinds of invest­ment are bound to be initially under-utilized.

Thus, the rate of growth depends not only on the amount of capital accumulated, but also on how much capital is required per unit increase in output (i.e., capital-output ratio). A low capital-output ratio is thus as significant as capital accumulation. But it must also be pointed out that a low ratio requires technological and organizational progress, so that capital becomes more productive.

Growth of Population:

For effecting a significant improvement in living standards, the rate of capital formation and the consequent rate of growth of output must be seen in relation to the rate of-population growth. It may be that the population may be increasing so fast as to offset even a quick rate of capital formation and the resultant increase in output.

It is, therefore, necessary to ensure that the rate of capital formation is high enough to yield a high per capita output. This would necessitate putting curbs on rapid increase of population by family planning. The non-economic factors may be political or social.

(c) Non-economic Factors:

Political Factors:

The non economic factors provide as much motivation for economic growth as the economic factors do. In fact, the differences in the growth rates of developed and under-developed countries are explained mainly on the basis of non-economic factors.

Let us first take the political factors, which include political sovereignty of the country, the complexion of its govern­ment—whether it is development conscious or is completely laissez faire in its outlook, or is dominated by vested interests, who would oppose bitterly any departure from the status quo, the quality of administration, and the political ideology of the government, particularly in relation to the problems of development. Compare in this connation the faith of the Indian Government in democratic planning with the authoritarian planning being pursued in China.

Social and Cultural factors:

Social and Cultural factors are no less important and are very extensive in scope. In an elementary book like this, we can at best just mention a few of them. Each society has certain social institutions which have a strong bearing on economic development.

In India, for example, the institutions of caste, joint families, non-materialistic attitude of the people, and their fatalism based on the philosophy, of Karma have been some of the serious impediments to development. Any attempt at accelerating development must aim at removing or improving these age-long institutions and a fundamental change in the outlook and attitudes of the people must be brought about.

Similarly, the prevalence of customs as against contract and the religious taboo among large sections f the population against usury are still other examples of social factors that inhibit the growth of the economy. Likewise, the rampant illiteracy and ignorance among the people in most under-developed countries and,’ by and large, their apathy towards the multiplication of their numbers, are other cultural factors which hinder economic development. Naturally, the various-relevant social and cultural factors will have to be suitably adapted before the tempo of economic development can be expected to quicken.