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Economic Growth and Development

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{draw:frame} Introduction The world has been divided into developing, under-developed and developed countries. And the race has been always to move from under-developed to developed counties. But the confusion lies herein in this process of movement from the under-developed/developing countries to developed countries. When should a country consider itself to be moving in the right direction i. e. towards its goal of being a developed country? Surveys are made and reports being churned out that state the economic growth of a nation.

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Does the rate of this economic growth a true indicator in this regard? If that is true why is it then that even in the 21st century decades after the industrialization and years after globalization the proportion of developed countries to under-developed countries is still wide enough? The answer lies in the economic development of these countries. If the gross domestic product or national income of the country is increasing then it implies that the country is experiencing an economic growth, which in fact is a positive symptom.

But can we equate this economic growth with the country’s development?

Does economic growth necessarily and obviously lead to economic development? The answer is ‘no’, because economic growth and economic development are not synonymous and economic growth does not automatically lead to economic development. That’s the reason why despite a growth in GDP in the under-developed or developing countries they have still not reached the level of developed ones in several aspects. The objective of this paper is to understand these two concepts and analyze their factors, the factors that are widening the gap between growth and development.

Also an attempt would be made to understand the strategies through which economic growth can be converted to economic development of a nation. Relevance of understanding The world first witnessed mercantilism, then industrialization and then colonization followed by liberalisation and globalisation. Countries became interdependent on one another and the market also became international. There is a tough competition among various nations to become the leading economic power. And the economic viability of nations are being frequently monitored and compared on basis of the economic growth of the nations i. . the Gross Domestic Output. But a nation can in the true sense become an economic power only if it has achieved economic development along with economic growth and not just increasing the production of output. So it is necessary to understand these two concepts in today’s time. Economic growth and development Economic growth and economic development are two different aspects that are often mistaken to be synonymous. But actually they are two different terms implying two different concepts and at the same are interrelated.

Economic growth is the measure of the value of output of goods and services within a time period. On the other hand, economic development is the measure of the welfare of humans in the society. So while economic growth is merely an economic phenomenon, economic development is a multi dimensional process involving reorganization and re-orientation of the entire economic and social system. To understand the differences better let’s look into both of these concepts in detail. Economic growth:

Continuing rapid economic growth enables advanced industrial countries to provide more of everything to their citizens- better food and bigger homes, more resources for medical care and pollution control, universal education for children, more resources for the military and public pensions for retirees. Because economic growth is so important for living standards, it is a central objective of policy. Countries that run fastest in the economic-growth race, such as Britain in the nineteenth century and the United States in the twentieth century, serve as role models for other countries seeking the path to affluence.

So what has been the factors that led to the economic growth of these countries? If we look back then we will observe that Britain in 1800s became the world economic leader by pioneering the Industrial Revolution. The US became economically prosperous due to laissez faire, while Japan came to economic-growth race later. It followed the policy of imitating foreign technologies and protecting domestic industries from imports and developing tremendous expertise in manufacturing and electronics. The four wheels of growth

Even though the paths of growth had been different for these countries they share certain common traits and they are even at work in developing countries like China and India. Economists have found the engine of economic progress must ride on the same four wheels no matter how rich or poor the country is. These four wheels or factors of growth are: Human resources (labour supply, education, discipline, motivation) Natural resources (land, minerals, fuels, environmental quality) Capital formation (machines, factories, roads)

Technology (science, engineering, management, entrepreneurship) The relationship between these factors and economic growth can be sum up as Q=AF (K, L, R) where, Q= output, K= productive series of capital, L= labour inputs, R= natural resource inputs, A= represents the level of technology in the economy, F= production function. Human resources: Labour inputs consist of quantity of workers and the skills of the workforce. Capital goods of a country can be effectively used and maintained only by skilled and trained workers.

Improvements in literacy, health, discipline and most recently the ability to use computers add greatly to the productivity of labour. Natural resources: Natural resources refer to resources that are naturally available to mankind like arable land, oil and gas, forests, water and mineral resources. Some high income countries like Norway and Canada has grown primarily on the basis of their large output in agriculture, fisheries and forestry. However in today’s modern world natural resources is not mandatory, though important, for economic growth.

Countries like Japan had virtually no natural resources but thrived by concentrating on sectors that depend more on capital and labour than indigenous resources, while New York City prospers mainly on its high-density service industries. Capital formation: Accumulating capital is a vital factor of economic growth because it requires a sacrifice of current consumption over a period of time. Countries that grow rapidly tend to invest more in new capital goods and infact 10 to 20% of output may go into net capital formation. By capital formation we not only mean factories and computers.

There are investments undertaken by the government that lay the framework for a thriving private sector which are called ‘social overhead capital’, and consist of large-scale projects that precede trade and commerce. Roads, irrigation and water projects, and public health measures are such important examples. All these involve large investments that tend to be indivisible and sometimes have increasing returns to scale. These projects generally involve external economies or spillovers that private firms cannot capture and so the government has to step in to ensure that these social overhead or investments are effectively undertaken.

In general we can understand capital formation as the transfer of savings from households and governments to the business sector, resulting in increased output and economic expansion. Technological change and innovation: Technological change denotes changes in the processes of production or introduction of new products or services. We are today witnessing an explosion of technologies, particularly in computation, communication and the life sciences. Because of its importance in raising living standards, economists have long pondered how to ensure technological progress and innovation.

As technology improves through new innovations or adoption of technologies from abroad, this advance allows a country to produce more output with the same level of inputs. Economic development: “Fifty years ago the term “development” was used largely in the context of economic change. Economic growth may be defined as the increase in production or consumption of a nation or a region, while economic development is the increase of such production or consumption by each person, putting growth on a per capita basis.

Economic growth may increase the weight of a nation in world affairs, but it may fail to make life any easier for its inhabitants. Economic development provides this increase in goods and services which may be felt by the population. ” (Morris in “Geography and Development”, 1998. ). The growth of national income, as has been amply proved by the experience of several developing countries, does not automatically trickle down to the people at the bottom rung of the economic-ladder.

Empirical data has shown that while the national per capita income in these countries has increased, the per capita income of the poor did not rise. In fact it fell in some countries so that the rich become richer and poor poorer. Amartya Sen defines economic development in terms of personal freedom, freedom to choose from a range of options. While economic growth may lead to an increase in the purchasing power of people, if the country has a repressed economy, there is lack of choice and hence personal freedom in restricted. Hence once again growth has taken place without any development.

Obstacles to economic development and growth: The following are the economic factors that are impeding economic growth and development of the developing countries like India: Foreign domination: Most of the countries of Asia and Africa, which are underdeveloped, have been at one time or another under an alien rule. The most important cause of poverty and its underdevelopment is its subjection to the British rule. The colonial rule in these countries witnessed exploitation of their natural and human resources that completely broke down their economic backbone.

This resulted in unbalanced economic distribution of wealth, disguised unemployment and poverty. Misuse of resources due to market imperfections: By market imperfection it is meant to refer to the immobility of the factors of production, price rigidities, ignorance regarding market trends, static social structure, lack of specialization, etc. These market imperfections are great obstacles in the way of economic growth. It is due to market imperfections that productive efficiency in these countries is low, the resources are either unutilized or under-utilized and the resources are misallocated.

Low rate of saving and investment: Another main reason of poverty and under-development of the developing countries is that the rate of saving and investment in these countries is very low. In these countries only around 8% of the national income goes into savings, whereas the rate is 15-20% and even more in the developed countries. When the rate of saving in a country is low, the rate of investment is bound to be low and the rate of capital formation is low too. Since capital per man is low, the productivity is also low. Productivity being low, the per capita income and the national income too are low.

That is the reason why it is said that the under-developed countries are caught up in a ‘vicious cycle of poverty’. Rapidly growing population: In developing countries, especially in over-populated countries of Asia, population increases rapidly. As a result, though there has been substantial gradual increase in GDP and national income in India, but the per-capita-income has not increased much. Rapid population growth also slows down the rate of capital formation. Growth in population means growth in number of consumers in the country and hence consumption expenditure.

Thus it becomes difficult to increase the rate of saving and investment which is very important for economic growth. Unemployment is another problem that arises due to population growth. Economic growth and development is also impeded by social and political factors. Some of these factors are discussed below in brief. Inefficient agrarian system: In developing countries like India agriculture had been carried on in a very inefficient manner due to unbalanced distribution of land owing to the colonial rule if the British, inadequate irrigation facilities and fertilizers, poverty of peasant, outmoded systems of tenure, uneconomic holdings etc. t lacks industrialization that Britain had long before adopted with the advent of scientific and industrial revolution. Shortage of entrepreneurial ability: People are more oriented towards getting employed in a service and lack the spirit of experimentation and innovation that is important for new entrepreneurs to emerge. Most people are oriented towards the traditional way of livelihood Scarcity of skilled labour: Lack of proper vocational and educational knowledge due to poverty renders a majority of the population unskilled to work and utilize the resources of the nation efficiently.

However India is gradually developing in this area which is a positive symptom. Inadequacy of infrastructure: For a country to develop it must have sound infrastructure in the form of means of transport and communication to facilitate trade and industry and an efficient banking system to assist it financially. India has a long way to go in developing its rail, road and waterways. Social structure: The social structure of the country is also responsible for its economic backwardness.

India particularly is facing obstacle in the form of caste system and unproductive social attitudes, joint family system, law of inheritance, outmoded religious beliefs etc. these factors neglect economic endeavour in the present life, encourage austere living. Superstitions and costly rituals eat up the savings of many years and create shortage of capital resulting wastage of resources. Political factor: Favouritism, nepotism and corruption in politics benefits only a section of the society while majority of the population has to suffer.

It results in lack of sense of duty and devotion towards the country due to absence of clean and efficient administration that could direct the nation towards economic prosperity. Adverse international factors: Due to globalisation foreign trade has a very limited ‘spread-effect’ on developing economies. Developing countries are often exposed to the cyclic effects of foreign trade which inevitably results in economic instability and thus impedes economic growth.

During prosperity, most of the earnings of these countries are frittered away on consumption goods which are mainly imported and the excess spending creates inflation. Even during deflation developing countries are worse affected because it creates unemployment. So these are the factors in brief that have widened the gap between economic growth and development. So in order to reduce this gap and convert the economic growth of a nation steps have to be taken to make changes the above mentioned areas. Economic planning can be a possible answer to this. Strategy of economic development:

Under the ‘Five year Plans’ the government of India has been able to bring in development in several areas through Green Revolution, Sarvashikshya Aviyan (education for all), National Rural Employment, Family Planning and several other schemes. Regarding the ways through which a nation can attain economic development and growth different economists have argued different strategies. The most prominent among them are: Big Push Strategy. Balanced vs. Unbalanced Strategy. Balanced, Unbalanced, Big Push (BUB) Strategy. 1) Big Push Strategy: It was propogated by Rosenstein-Rodan and Henry Leibenstein.

For countries whose level of technological competence lags behind that of more technologically advanced countries, the process of technological development primarily involves imitation. The replacement of existing technologies by labor-saving technologies, usually imported, spawns increased demand for a variety of products, which in turn encourages further technological upgrading as investment is undertaken to meet the additional demand. The self-reinforcing nature of this process is generally known as the “Big Push”. This strategy contends that a big push is needed to overcome the initial inertia in a stagnant economy. ) Balanced vs. Unbalanced: Economists like Ragnar Nurske are of the view that the pattern of investment should be so designed as to ensure a balanced development on the various sectors of the economy. They therefore, advocate simultaneous investment in a number of industries so that there is a balanced growth of different industries. According to Nurske the vicious cycle of poverty is an impediment in the economic development of a country. It can be broken by investing at the same time in large number of industries on a wider scale that would result in employment and increased output at the same time.

While economists like H. W. Singer and A. O. Hirschman propogates the planned unbalanced strategy and believe that rapid economic growth follows concentration of investment in certain strategic industries rather than an even distribution of investment among the various industries. As an under developed country is financially incapable of managing such a huge investment on a number of industries simultaneously, focus should be given on a particular industry at a time. Hirschman points out that the developed nations of today did not attain today’s stature through ‘balanced growth’. ) Balanced, Unbalanced, Big Push (BUB) Strategy: The advocates of this strategy suggest that no single strategy can lead a nation to the goal of economic development. Not only has the strategy to be changed from time to time as the situation may require, but it is sometimes necessary to strike a balance between the alternative strategies. In the initial stages a nation may follow the planned unbalanced strategy and invest only on a few selected necessary industries and after a stage of stability is achieved by a fair dose of big push, the strategy of balanced growth may be applied to further planning.

Thus we see three different strategies that have been put forward to achieve economic development. And developing countries like India seem to have embarked upon the strategy of planned unbalanced growth. This is indicated by varying emphasis on a single aspect in successive economic plans, as for eg, self-sufficiency in food in the First Plan, rapid industrialization in the Second Plan, self-sustaining growth in the Third plan and growth with stability in the Fourth Plan etc. References: ‘Modern Economic Theory’ by K. K. Dewett ‘Economics’ by Samuelson and Nordhaus Internet

Cite this Economic Growth and Development

Economic Growth and Development. (2018, Feb 17). Retrieved from https://graduateway.com/economic-growth-and-development/

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