Institutions and Economic Development Long Answer Type Questions Part 3

Institutions and Economic Development Long Answer Type Questions Part 3

Question 1.
Write about the Role of IMF in Economic Development.
The International Monetary Fund is a global organisation founded in 1944 m the post-war economic settlement which included the Bretton-Woods system of managed exchange rates. J.M.Keynes and Harry Dexter White both played an important role in its development.

Its primary aim is to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein, and Andorra.

Functions of IMF

  • International monetary cooperation.
  • Promote exchange rate stability.
  • To help deal with balance of payments adjustment
  • Help deal with economic crisis by providing international coordination – loans, plus advice.

Role of IMF
1. Economic surveillance and monitoring: IMF produces reports on member countries’ economies and suggests areas of weakness / possible danger (e.g. unbalanced economies with large current account deficit/excess debt levels., The idea is to work on crisis prevention by highlighting areas of economic imbalance. A list of IMF reports on member countries are available at IMF Countries

2. Loans to countries with a financial crisis: The IMF has $300 billion of loanable funds. This comes from member countries who deposit a certain amount on joining. In times of financial/economic crisis, the IMF may be willing to make available loans as part of a financial readjustment.

3. Conditional loans/structural adjustment: When giving loans, the IMF usually insist on certain criteria being met. These can include policies to reduce inflation (tightening of monetary policy)

  1. Reduce inflation (tightening of monetary policy)
  2. Deficit-reducing policies (higher tax)
  3. Supply-side policies, such as privatisation, deregulation and improved tax collection.
  4. Removing price controls
  5. Free trade – removing tariff barriers
  6. Devaluation of currency to reduce current account deficit.

4. Technical assistance and economic training: The IMF produce many reports and publications. They can also offer support for local economies.

Question 2.
Explain the role of Foreign Trade in Economic Development.
Foreign trade enlarges the market for a country’s output. Exports may lead to? increase in national output and may become an engine of growth. Expansion of a country’s foreign trade may energise an otherwise stagnant economy and may lead it onto the path of economic growth and prosperity. The role/need/importance of foreign trade can be judged by the following faces:

1. Foreign Trade and Economic Development: Foreign trade plays very important role in the economic development of any country. Pakistan also exports a lot of agricultural product to other countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade.

2. Foreign Exchange Earning: Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.

3. Market Expansion: The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Pakistan home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries.

4. Increase in Investment: Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases.

5. Foreign Investment: Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment.

6. Increase in National Income: Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases.

7. Decrease in Unemployment: With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world.

8. Price Stability: Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.

9. Specialization: There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade.

10. Remove Monopolies: Foreign trade also discourages the monopolies. Where every any monopolist increases the prices, government allows the import of goods to reduce the prices in the country.

11. Removal of Food Shortage: India is also facing the food shortage problem. To remove the food shortage India has imported the wheat many times. So due to foreign trade we are solving this problem for many years.

12. Agricultural Development: Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.

Question 3.
What are the different types of plans?
According to the nature and use of planning. Planning can be divided into four types. They are
1. Perspective plans: A perspective plan is a macro plan formulated for a period of 15 to 20 years, keeping in view the long term needs and long term objectives.

2. Five Year Plans: Five year plans are designed for a period of five years. A five year plan is an integral part of perspective plan. After the completion of five years, the achieved targets will be reviewed.

Institutions and Economic Development Long Answer Questions Part 3 1

3. Annual Plans: Annual plan is a part of a five year plan. The targets of five year plans are divided into annual targets and detailed plans will be prepared year wise.

4. Rolling Plans: This kind of plan does not have a fixed period of time. It has only duration and moves forward. As it moves forward, the completed year will be deleted and next year will be added. So the plan rolls continuously. This concept was introduced by Gunnar Myrdal and suggested to Government of India by Prof. Lakdawala in 1978 (During Janata Government Period). ,It was discontinued after 1979 due to collapse of the Government.

Question 4.
Economic Federalism.
The economics of federalism views the primary task of government as solving the failures of private markets to satisfy the demands of citizens for goods and services. These failures arise whenever cooperative action is needed to ensure the provision of goods or services at the lowest cost. Examples include all goods where sharing a fixed resource is efficient, as with the theory of public goods, or where one person’s actions generates external benefits or imposes costs on others. What is needed in both cases is a means of discovering citizens’ willingness to pay for each publicly provided good and service and a means to collect sufficient payments to cover production costs.

The economic task for federalism is to provide a means to solve these market failures. For goods and services for which congestion becomes evident within relatively small populations, and where the spatial reach of any externalities is modest, economic federalism recommends using small local governments.

Question 5.
Roles Performed by Financial Institution
Financial institutions play a pivotal role in every economy. They are regulated by a central government organization for banking and non-banking financial institutions. These institutions help in bridging the gap between idle savings and investment and its borrowers, i.e., from net savers to net borrowers.

Following are the list of roles performed by Financial Institutions
1. Regulation of Monetary Supply: Financial institutions like the central bank help in regulating the money supply in the economy. They do it to maintain stability and control inflation. The central bank applies various measures like increasing or decreasing repo rate, cash reserve ratio, open market operations, i.e., buying and selling government securities tb regulate liquidity in the economy.

2. Banking Services: Financial institutions, like commercial banks, help their customers by providing savings and deposit services. They provide credit facilities like overdraft facilities to the customers for catering to the need for short-term funds. Commercial banks also extend several kinds of loans like personal loans, education loans, mortgage or home loans to their customers.

3. Insurance Services: Financial institutions, like insurance companies, help to mobilize savings and investment in productive activities. In return, they provide assurance to investors against their life or some particular asset at the time of need. In other words, they transfer their customer’s risk of loss to themselves.

4. Capital Formation: Financial institutions help in capital formation, i.e., increase in capital stock like the plant, machinery, tools and equipment, buildings, means of transport and communication, etc. They do so by mobilizing the idle savings from individuals in the economy to the investor through various monetary services.

5. Investment Advice: There are a number of investment options available at the disposal of individuals as well as businesses. But in the current swift changing environment, it is very difficult to choose the best option. Almost all financial institutions (banking or non-banking) -have an investment advisory desk that helps customers, investors, businesses to choose the best investment option available in the market according to their risk appetite and other factors.

Question 6.
Role of Asian Development Bank (ADB) in economic development.
It was formed to foster economic growth and co-operation in the region of Asia and the Pacific and to contribute to the acceleration of economic development of the developing countries of the region. The basic objective of the Bank is to encourage economic and financial co-operation among the regional members. Members enjoy the right to construct projects supported by Bank loans.

In 28 years of operation, the Bank has become a major catalyst in promot-ing the development of the most populous and fastest-growing region in the world today. The Bank’s principal functions are:

  • To make loans and equity investments for the economic and social advancement of developing member countries;
  • To provide technical assistance for the preparation and execution of development projects and programmes and advisory services
  • To promote investment of public and private capital for development purposes; and
  • To respond to requests for assistance in coordinating development policies and plans of member countries.

In its operations, the Bank is also required to give special attention to the needs of the smaller or less-developed countries and give priority to regional, sub-regional and national projects and programs which will contribute to the harmonious economic growth of the region as a whole.

Question 7.
Role of FDI and FII in Economic Development.
New industrial policy 1991, has brought new dimensions to the Indian economy through Globalization. The basic motto like self-sustainability, domestic savings and infrastructure development were replaced by robust economic growth since a decade. Global trade vanished the cross borders and paved the way for international business. Indian economy was influenced by western countries through their investments in to the financial system. Thus, the sources of foreign capital like FDI, FII were become dominant players in capital formation as well as risky too. These investments were welcomed through direct participation in production areas or investing in stock exchanges.

Foreign Direct Investment:
Foreign Direct Investment may be of any of the form like long-term, short-term capital and equity. It does not include the purchase of shares. FDI enhance employment opportunities and skills, innovations, technology support to the company with their expertise. India become the favor most destination due to the following reasons:

  • Availability of abundant raw materials
  • High interest rates for investments
  • Tax regimes
  • Ease of transactions

The FDI may also affect due to the government trade barriers and policies for the foreign investments and leads to less or more effective towards contribution in economy as well as GDP of the economy.

Foreign institutional Investors:
FII is an institutional body situated in a foreign country and invest in domestic country through stock markets. FDI and FII activities are go hand by hand. FII provide liquidity and value based trading, price fixing of the shares that are issued by the company. FII plays a vital role in stock markets and causes market volatility. This embosses a larger effect on domestic financial markets like stock market, money markets and foreign exchange markets.

Institutions and Economic Development Long Answer Type Questions Part 2

Institutions and Economic Development Long Answer Type Questions Part 2

Question 1.
What are the main objects of planning in India?
Economic planning was envisaged to be an effective means of achieving the speedy economic development of a country. Though each plan has its own specific objectives, planning as a search has certain but the general objectives listed below.

1. Economic Development: The main objective of Indian planning is to achieve the goal of economic development. Economic development is necessary for underdeveloped countries because they can solve the problems of general poverty, unemployment, and backwardness through it. Economic development is concerned with the increase in per capita income and the causes behind this increase. Economic development refers to the raising of the people from inhuman elements like poverty, unemployment, ill-health, etc.

Institutions and Economic Development Long Answer Questions Part 2 1

2. Increase Employment: Another objective of the planning is better utilization of man power resource and increasing employment opportunities. Measures have been taken to provide employment to millions of people during plan.

3. Self-Sufficient: The country becomes self-sufficient regarding food grains and industrial raw material like iron and steel etc. Also, growth is to be self sustained for which rates of saving and investment are to be raised. With the completion of Third plan, Indian economy has reached the take off stage of development.

4. Economic Stability: Stability is as important as growth. It implies absence of frequent and excessive occurrence of inflation and deflation. If the price level rises very high or falls very low, many types of structural imbalances were are created in the economy. Economic stability has been one of the objectives of every Five year plan in India. Some rise in prices is inevitable as a result of economic development, but it should not be out of proportions.

5. Social Welfare and Services: The another objective of the five year plans has been to promote labour welfare, economic development of backward classes and social welfare of the poor people. Development of social services like, education, health, technical education, scientific advancement etc. has also been the objective of the plans.

6. Regional Development: Different regions of India are not economically equally developed. Some of the states like, Gujarat, Maharashtra, Tamil nadu etc. are relatively more developed but the states like Uttar Pradesh, Bihar, Orissa, etc. are economically backward. Rapid economic development of backward regions is one of the priorities of five year plans to achieve regional equality.

7. Comprehensive Development: Development of all economic activities i.e., agriculture, industry, transport, power etc. is sought to be simultaneously achieved. First plan laid emphasis on the development of agriculture. Second plan gave priority to the development of heavy industries. In the eight plan maximum stress was on the development of human resources.

8. To Reduce Economic Inequalities: Every plan has aimed at reducing economic inequalities. Economic inequalities are indicative of exploitation and injustice in the country. Several measures have been taken in the plans to achieve the objectives of economic equality specially by way of progressive taxation and reservation of jobs for the economically backward classes.

9. Social Justice: Social justice is possible in two ways, one is to reduce the poverty of the people in the country and the other is to reduce the inequalities of wealth and income.

10. Increase in Standards of Living: The other objective of the planning is to increase the standard of living of the people. Standard of living depends on many factors such as per capita income, price stability, equal distribution of income etc. During the period of plans, the per capita income at current prices has reached only up to Rs. 20,988.

Question 2.
Write about economic planning process?
Economic planning was accepted in India as a development tool on account of various reason. It is necessary for us to follow the planning practice in this country. The following was the process of Economic planning.

1) Planning body: The first condition for economic planning is the constitution of a planning body by the government. In India this planning body is known as the planning commission (presently replaced by NITI Ayog). The main functions of this body are to survey the resources. Spell out the broad objectives, lay down the priorities, formulate the strategy for releasing the objectives, determine macro-economic goals, finalise targets for different sectors and plan resource mobilization for the implementation of various programmes.

2) Survey of resources and collection of necessary data: Survey of resources and availability of data on other aspects of the economy are two important requisites of economic planning. The size of the plan is often limited by the availability of the resources. Therefore the planning body must know the volume of material, human and capital resources at its disposal while formulating plan.

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3) Planning objectives: Economic planning implies certain goals. These goals are often clearly defined and the efforts are directed under the plan to realize them. If the plan is not consistent with the national goals, it is a useless exercise or even a deceit.

4) Priorities: Economic planning requires that priorities are spelt out for the public investment programme. No country can ever meet all the investment requirements of its various sectors. Therefore, India always had well defined priorities under its plans. If these priorities are not mentioned, the resources of the country have been diffused and its impact on growth of the economy.

5) Development strategy: Economic planning implies a strategy for the realisation of the goals. In the absence of proper strategy the planning might lack direction and the realization of the potential may always be in doubt.

6) Balancing in the plan: Indian plans have always been consistent in the sense that proper balances were maintained between savings and investment, demand for goods and their supply, availability of human resources and man power requirements, imports and the availability of foreign exchange. Planner’s inability to ensure these balances can result in either shortages or excess supply of productive resources.

In India planners attempt to ensure two types of balances in a plan. The first is the monetary or financial balance which implies that planned spending at the macro level has to be equal to the disposable income. The second is the physical balance which implies inter-sectoral consistency between the demand and supply.

7) Resource mobilization: Indian plans lay down investment targets for both public and private sectors. Private sector is concerned the major responsibility for resource mobilization lies with the private business units. These units raise either equity capital or obtain loans from banks and other financial institutions. For public sector, funds are obtained from both domestic and external sources. Taxation, market borrowings and surpluses from public enterprises are the major sources of finance from domestic sources.

8) Administrative efficiency: Since a plan has to be implemented by the state machinery, its success greatly depends on the quality of administration which a country has. In India the administration is both inefficient and corrupt and this invariably provides ample scope for scuttling the plan at the various levels. For the success of a plan a necessary condition is that the administrative staff prepare good feasibility reports of the proposed projects, points out snags in them and suggests way and means to remove them.

Question 3.
Write about NITI Ayog?
On 1st January, 2015, the 65 years old planning commission was replaced with NITI Ayog (National Institution for Transforming India Ayog). In Hindi, it literally means ‘Policy Commission’. It is a policy think tank of Government of India that replaces planning commission and aims to involve the states in economic-policy making in India. Mr. Narendra Modi, the Prime Minister of India is the Chairman and Mr. Arvind Pagaria, a Us-based economist is appointed as Vice-chairman.

Apart from the chairman, it comprises of a Governing Council (All CM’s (29 States) and Lieutenant Governors (7 in number) of Union Territories), Regional Councils, experts. Specialists and a full time organizational body including vice-chairman.

Objective of NITI Ayog:
The following are the objectives of NITI Ayog.
1. To evolve a shared vision of national development priorities, sectors and strategies with the active involvement of states in the light of national objectives.
2. To develop mechanisms to formulate credible plans at the village level and aggregate these progressively at higher levels of government.
3. To focus on technology upgradation and capacity building for implementation of programmes and initiatives.
4. To actively monitor and evaluate the implementation of programmes and initiatives, including the identification of the needed resources so as to strengthen the probability of success and scope of delivery.
5. To offer a platform for resolution of inter-sectoral and inter-departmental issues in order to accelerate the implementation of the development agenda.
6. To create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and international experts, practitioners and other partners.
7. To design strategic and long term policy and programme frameworks and initiatives and monitor their progress and their efficacy.
8. To pay special attention to the sections of our society that may be at risk of not benefiting adequately from economic progress.

The following are the functions NITI Ayog.
1. To evolve a standard vision of national Development priorities sectors and strategies with the active involvement of states in the light of national objectives.
2. To foster cooperative federalism through structured support initiatives and mechanisms with the state on a continuous basis, recognizing that strong states make a strong nation.
3. To ensure, on areas that are specifically referred to it, that the interests of national security are incorporated in economic strategy and policy.
4. To provide advice and encourage partnership between key stakeholders and national and internation like- minded. Think tanks, as well as educational and policy research institutions.
5. To maintain a state-of-the- art resource centre, be a repository of research on good governance and best practices in sustainable and equitable development as well as help their dissemination to stake holders.
6. To undertake other activities as may be necessary in order to further the execution of the national development agenda and the objectives mentioned above.

Question 4.
Explain the role of different financial institutions in Economic Development.
Financial institutions play a pivotal role in every economy. They are regulated by a central government organization for banking and non-banking financial institutions. These institutions help in bridging the gap between idle savings and investment and its borrowers, i.e., from net savers to net borrowers.

1. Industrial Finance Corporation of India (I.F.C.I.): The Industrial Finance Corporation of India was established in 1948 under IPC Act 1948. The main objective of the corporation has been industrial concerns in India.

The financial assistance of the corporation is available to limited companies or cooperative societies registered in India engaged or proposing to engage in:

  • Manufacture, preservation or processing of goods.
  • Mining Industry.
  • Shipping business.
  • Hotel industry.
  • Generation and distribution of electrical power.

2. National Industrial Development Corporation: The N.I.D.C. was established by the Central Government in 1954 which has been regarded as the instrument to achieve a balanced development of industries in the private as well as the public sector.

The NIDC plans and formulated projects for setting up new industries. The main objective of the corporation is promotion of industries rather than granting finance. It can also provide assistance for modernisation of industries.

3. Industrial Credit and Investment Corporation of India: The Industrial Credit and Investment Corporation of India (ICICI) was established in year 1955 under the Companies Act as public limited company.

Any industrial concern may approach ICICI for assistance in financing a sound proposal for the establishment, modernisation or expansion of the company.

In order to promote new industries to help in the expansion and modernisation of existing industries and to provide technical and managerial assistance, the ICICI grants long term and medium term loans subscribes debentures and shares and guarantees loans from private finance source.

4. Industrial Development Bank of India (I.D.B.I.): Industrial Development Bank of India was established by Govt, of India in 1964 under the IDBI Act as a wholly owned subsidiary of Reserve Bank of India to provide credit and other facilities for the development of industrial sector. It coordinates the activities of the other financial institutions and banks which provide term finance to industries.

It has also been assigned the responsibility of providing financial and technical assistance for the promotion of certain basic and key industries like pharmaceuticals fertilizers, mining, shipping power generation and~ setting up industrial estates etc.

5. Unit Trust of India (U.T.I.): The Unit Trust of India was set up in 1964 under the Unit Trust Act of 1963. The main objective of the UTI is to encourage and mobilize saving of the companies and to make diversified investment for the economic growth of the country.

It accumulates the saving of the community through the sale of units and invests the finance collected in various types of securities in such a way which may be advantageous to the individuals. The investible funds of UTI are usually invested in preference shares, debentures or bonds. The returns on these investments provides main source of income to U.T.I.

6. Life Insurance Corporation of India (L.I.C.): The L.I.C. of India was established under the Life Insurance Corporation Act 1956 under which the life insurance business was nationalized. The L.I.C. of India provides long term finance to industry.

The L.I.C. of India helps in mobilization and investment of individual on a diversified basis; it is primarily concerned with promotion of life insurance India business and the protection of the interests of the policy holders.

It provides financial assistance for the development of socially desirable sectors such as housing, water supply, electricity and private sector industries.

7. State Financial Corporation’s (S.F.C.): The government after independence realized the need of creating financial corporation at the state level for catering to the financial requirements of industrial entrepreneurs. In 1951 the Government of India passed “The State Financial Corporation Act”.

This act empowered the state Governments to establish separate State Financial Corporation in their respective states. These were established to meet the requirements of medium and small scale industrial sectors.

SFC provides financial assistance to limited companies, partnerships organizations, and cooperative societies. State proprietor ships and Hindu undivided families etc.

Question 5.
Write about the Role of IDBI in Economic Development.
Industrial Development Bank of India (IDBI) established under Industrial Development Bank of India Act, 1964, is the principal financial institution for providing credit and other facilities for developing industries and assisting development institutions.

Till 1976, IDBI was a subsidiary bank of RBI. In 1976 it was separated from RBI and the ownership was transferred to Government of India; IDBI is the tenth largest bank in the world in terms of development. The National Stock Exchange (NSE), the National Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL) are some of the Institutions which has been built by IDBI.

Objectives of IDBI

  • The main objectives of IDBI is to serve as the apex institution for term finance for industry in India. Its objectives include:
  • Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI, ICICI, UTI, LIC, Commercial Banks and SFCs.
  • Supplementing the resources of other financial institutions and there by widening the scope of their assistance.
  • Planning, promotion and development of key industries and diversification of industrial growth.
  • Devising and enforcing a system of industrial growth that conforms to national priorities.

Functions of IDBI

  • To provide financial assistance to industrial enterprises.
  • To promote institutions engaged in industrial development.
  • To provide technical and administrative assistance for promotion management or expansion of industry.
  • To undertake market and investment research and surveys in connection with development of industry.

IDBI Assistance
The IDBI provides financial assistance either directly or through some specified financial institutions:
1. Direct Assistance: The IDBI grants loans and advances to industrial concerns. There is no restriction on the upper or lower limits for assistance to any concern itself. The bank guarantees loans raised by industrial concerns in the open market from the State Co-operative Banks, the Scheduled Banks, the Industrial Finance Corporation of India (IFCI) and other ‘notified’ financial institutions.

2. Indirect Assistance: The IDBI can refinance term loans to industrial concerns’repayable within 3 to 25 years given by the IFCI, the State Financial Corporation and some other financial institutions and to SIDCs (State Industrial Development Corporations), Commercial banks and Co-operative banks which extend term loans not exceeding 10 years to industrial concerns. IDBI subscribes to the shares and bonds of the financial institutions and thereby provide supplementary resources.

Developmental Activities of IDBI
1. Promotional Activities: In fulfillment of its developmental role, the bank continues to perform a wide range of promotional activities relating to developmental programmes for new entrepreneurs, consultancy services for small and medium enterprises and programmes designed for accredited voluntary agencies for the economic upliftment of the underprivileged.

These include entrepreneurship development, self-employment and wage employment in the industrial sector for the weaker sections of society through voluntary agencies, support to Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing Centers for small industries.

2. Technical Consultancy Organizations: With a view to making available at a reasonable cost, consultancy and advisory services to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other All- India Financial Institutions, has set up a network of Technical Consultancy Organizations (TCOs) covering the entire country. TCOs offer diversified services to small and medium enterprises in the selection, formulation and appraisal of projects, their implementation and review.

3. Entrepreneurship Development Institute: Realising that entrepreneurship development’ is the key to industrial development; IDBI played a prime role in setting up of the Entrepreneurship Development Institute of India for fostering entrepreneurship in the country. It has also established similar institutes in Bihar, Orissa, Madhya Pradesh and Uttar Pradesh. IDBI also extends financial support to various organisations in conducting studies or surveys of relevance to industrial development.

Institutions and Economic Development Long Answer Type Questions Part 1

Institutions and Economic Development Long Answer Type Questions Part 1

Question 1.
Write about the Role of State in Economic Development.
The State plays an important role in the economic development of nations. Japan, after 1870 and soviet Russia after world war I are good examples. But the economic development of the U.K. and the U.S.A. took place under a system of market economy and laissez-faire policy.

For underdeveloped countries, laissez-faire policy is a luxury. The State has to play the role of an entrepreneur in underdeveloped countries. Nowadays, it is agreed that the governments in these countries have to play a dominant role in implementing plans for economic government. In fact, the government is regarded as a factor of production in poor countries. For example, India is a mixed economy with a public sector and private sector. Until recently, the public sector played a major role in economic planning.

Through Five Year Plans, the State has been making attempts to achieve the goals of increasing economic growth, rapid industrialization, expansion of employment opportunities and reduction of inequalities of income and wealth.

The government plays a very big role in the field of social services like education and health. Investment in education and health promote human capital formation, which is as important as physical capital formation. Education and health increase productivity of labour.

These are the days of globalization, liberalization, and privatization. We invite foreign investment on a large-scale. But they want good physical infrastructures like good transportation, postal and telecommunications, power facilities, and water supply. All these things are referred to as social overhead capital. The government has to make huge investment in these things. Not only that, there is shortage of entrepreneurs in these countries. So the government has to encourage them.

There is shortage of foreign exchange in UDCs. The government has to take steps such as promotion of exports, making investment attractive for foreigners through fiscal measures.

If development is left to market forces, there will be not be balanced regional development. So the government formulates policies and programmes in such a way that there is balanced regional development. And the State has to regulate and control monopolies. Thus, the State has to play a dominant role in economic development.

According to UN Study Group, “In addition to the functions, governments normally perform, there is a large borderland of functions which they ought to perform for the simple reason that they are important, and are not carried out sufficiently, by private effort. This borderland can exist in any country, but it is wider in under-developed countries, because private enterprise in the latter is more knowledgeable and more enterprising than in the former.”

In under-developed countries planning is not limited to intervention but is regarded as a necessary condition for economic development. Since sources are scarce in under-developed countries, it becomes necessary to plan their distribution among various projects as well as plan their utilization in these projects.

Thus the under-developed countries cannot escape planning if they want to develop themselves in a reasonably short span of time which implies that time factor is very important.

Question 2.
Explain the role of Markets in Economic Development.
Marketing has acquired an important place for the economic development of the whole country. It has also become a necessity for attaining the object of social welfare.

As a result of it, marketing is considered to be the most important activity in a business enterprise while at the early stage of development it was considered to be the last activity. For convenience, the importance of marketing may be explained as under:

1. Delivery of standard of living to the society: A society is a mixture of diverse people with diverse tastes and preferences. Modem marketing always aims for customer satisfaction. So, main liability of marketing is to produce goods and services for the society according to their needs and tastes at reasonable price.

Marketing discovers needs and wants of society, produces the goods and services according to these needs creates demand for these goods and services. They go ahead and promote the goods making people aware about them and creating a demand for the goods, encouraging customers to use them. Thus, it improves the standard of living of the society.

2. Decrease in distribution ‘cost: Second important liability of marketing is control the cost of distribution. Through effective marketing the companies can reduce their distribution costs to a great extent. Decrease in cost of distribution directly affects the prices of products because the cost of distribution is an important part of the total price of the product.

3. Increasing employment opportunities: Marketing comprises of advertising, sales, distribution, branding and many more activities. So the development of marketing automatically gives rise to a need for people to work in several areas of marketing. Thus the employment opportunities are born. Also successful operation marketing activities requires the services of different enterprises and organisation such as wholesalers, retailers, transportation, storage, finance, insurance and advertising. These services provide employment to a number of people.

4. Protection against business slump: Business slump cause unemployment, slackness in the success of business and great loss to economy. Marketing helps in protecting society against all these problems.

5. Increase in national income: Successful operation of marketing activities creates, maintains and increases the demand for goods and services in society. To meet this increased demand the companies need to increase the level of production in turn raising their income. This increase, in turn, increases the national income. Further effective marketing leads to exports adding to the national income. This is beneficial to the whole society.

Question 3.
Write about Market Failure and Regulation by State.
Market failure refers to the inefficient distribution of goods and services in the free market. In a typical free market, the prices of goods and services are determined by the forces of supply and demand, and any change in one of the forces results in a price change and a corresponding change in the other force. The changes lead to a price equilibrium.

Market failure occurs when there is a state of disequilibrium in the market due to market distortion. It fakes place when the quantity of goods or services supplied is not equal to the quantity of goods or services demanded. Some of the distortions that may affect the free market may include monopoly power, price limits, minimum wage requirements, and government regulations.

Causes of Market Failures
Market failure may occur in the market for several reasons, including:
1. Externality: An externality refers to a cost or benefit resulting from a transaction that affects a third party that did not decide to be associated with the benefit or cost. It can be positive or negative. A positive externality provides a positive effect on the third party. For example, providing good public education mainly benefits the students, but the benefits of this public good will spill over to the whole society.

On the other hand, a negative externality is a negative effect resulting from the consumption of a product, and that results in a negative impact on a third party. For example, even though cigarette smoking is primarily harmfill to a smoker, it also causes a negative health impact on people around the smoker.

2. Public goods: Public goods are goods that are consumed by a large number of the population, and their cost does not increase with the increase in the number of consumers. Public goods are both non-rivalrous as well as non-excludable. Non-rivalrous consumption means that the goods are allocated efficiently to the whole population if provided at zero cost, while non-excludable consumption means that the public goods cannot exclude non-payers from its consumption.

Public goods create market failures if a section of the population that consumes the goods fails to pay but continues using the good as actual payers. For example, police service is a public good that every citizen is entitled to enjoy, regardless of whether or not they pay taxes to the government.

3. Market control: Market control occurs when either the buyer or the seller possesses the power to determine the price of goods or services in a market. The power prevents the natural forces of demand and supply from setting the prices of goods in the market.

On the supply side, the sellers may control the prices of goods and services if there are only a few large sellers (oligopoly) or a single large seller (monopoly). The sellers may collude to set higher prices to maximize their returns. The sellers may also control the quantity of goods produced in the market and may collude to create scarcity and increase the prices of commodities.

4. Imperfect information in the market: Market failure may also result from the lack of appropriate information among the buyers or sellers. This means that the price of demand or supply does not reflect all the benefits or opportunity cost of a good. The lack of information on the buyer’s side may mean that the buyer may be willing to pay a higher or lower price for the product because they don’t know its actual benefits.

Solutions to Market Failures
In order to eliminate market failures, several remedies can be implemented. They include:
1. Use of legislation: One of the ways that governments can manage market failures is by implementing legislation that changes behavior. For example, the government can ban cars from operating in city centers, or impose high penalties to businesses that sell alcohol to underage children, since the measures control unwanted behaviors.

2. Price mechanism: Price mechanisms are designed to change the behavior of both the consumers and producers. For products that cause harm to consumers, the government can discourage their consumption by increasing taxes. For example, taxes on cigarettes and alcohol are periodically increased to discourage their consumption and reduce their harmful effects on unrelated third parties.

Question 4.
Explain the differences between Public Sector and Private Sector.
Public Sector: The sector, which is engaged in the activities of providing government goods and services to the general public is Public Sector. The enterprises, agencies, and bodies are fully owned, controlled and run by the Government whether it is central government, statement government or a local government.

Private Sector: The segment of a national economy that is owned, controlled and managed by private individuals or enterprises is known as Private Sector. The private sector companies are divided on the basis of sizes like small & medium enterprises and large enterprises which are either privately or publicly traded organizations. They can be created in two ways, i.e. either by the formation of a new enterprise or by the privatization of any Public Sector Enterprise.

Differences Between Public Sector and Private Sector
The following are the major differences between public sector and private sector:

  1. Public Sector is a part of the country’s economy where the control and maintenance are in the hands of Government. If we talk about Private Sector, it is owned and managed by the private individuals and corporations.
  2. The aim of the public sector is to serve people, but private sector enterprises are established with the profit motive.
  3. In the public sector, the government has full control over the organisations. Conversely, Private Sector companies enjoy less government interference.
  4. The employees of the public sector have the security of the job along with that they are given the benefits of allowances, perquisites, and retirement like gratuity, pension, superannuation fund, etc. which are absent in the case of the private sector.
  5. In the private sector working environment is quite
    competitive which is missing in the public sector because they are not established to meet commercial objectives. ,
  6. In general Public Sector uses Seniority for promoting employees, however, merit cum seniority is also taken as a base for promoting employees. Unlike -Private Sector, where performance is everything, and so merit is considered as a parameter to promote them

Question 5.
What is the meaning of planning? What are its features?
Planning or Economic planning is the main characteristic feature of socialistic and mixed economic systems. Which follow planned development strategy. In common usage planning can be understood as a technique of a conscious effort made to achieve certain predetermined objectives.

In view of planning commission “Economic plan is a symbol of independence and it provides a medium through which the society or its representatives can articulate a view of country’s economic situation.

Planning means, “the efforts taken to reach the already set goals during a particular time period or directing the economic activities in a systematic way to reach the goals”.

In India, five year plans are started in 1951. So far, we have completed eleven five year plans and six annual plans and now we are in the era of twelth five year plan (2012-2017).

Features of planning:
The following are the features of planning.

  • Determination of objectives keeping in view the socio-economic situation in the country.
  • Estimation of natural, human and capital resources available in the country.
  • Determination of priorities among the objectives.
  • Evolving a suitable developmental strategy for realization of the objectives^
  • Formulation of specific programmes to achieve the objectives and determine the plan outlay and investment.
  • Allocation of resources among different sectors in accordance with the priority of objectives.
  • Constitution of an institution or a central body to formulate, organize and review the plans.

Need for planning:
The following factors emphasise the need for economic planning in any country

  • To achieve steady economic development of the economy.
  • To find solutions for economic problems such as poverty, unemployment, economic inequalities, and regional imbalances.
  • To make provisions for the development of social infrastructures like power, water, transport, communication etc.
  • To ensure optimum and judicious allocation of resources to the present needs without affecting the need of the future generations.
  • To achieve balanced regional development.

Strategies of Economic Development Long Answer Type Questions Part 2

Strategies of Economic Development Long Answer Type Questions Part 2

Question 1.
Explain the differences between Capital Intensive and Labour Intensive Technology.
Under-developed and undeveloped countries are always faced with many serious problems in so far as industry and economy are concerned.

Capital Intensive: Capital intensive refers to the product that requires higher capital investment such as financial resources, sophisticated machinery, more automated machines, the latest equipment, etc. Capital-intensive industries pose higher barriers to entry as they require more investment in equipment and machinery to produce goods and services. An industry, firm, or business is considered to be capital intensive taking into consideration the amount of capital that is required in comparison to the amount of labor required. Good examples of capital-intensive industries include the oil refining industry, telecommunications industry, airline industry, and public transport authorities that maintain the roads, railways, trains, trams, etc.

Labour Intensive: Labor intensive refers to the production that requires a higher labor input to carry out production activities in comparison to the amount of capital required. Examples of labor intensive industries include agriculture, restaurants, hotel industry, mining and other industries that require much manpower to produce goods and services. Labor intensive industries depend mostly on the workers and employees of their firms and require higher investment and time to train and coach workers to produce goods and services according to specified standards. Labor intensive production also requires more time to complete one unit of production as production, generally, occurs on a small scale.

Capital Intensive vs Labour Intensive
Capital intensive production requires more machinery, equipment and sophisticated technological production systems in the production process. Capital intensive production requires a higher level of investment and larger amount of funds and financial resources. A capital intensive production process is mostly automated and able to generate a large output of goods and services. Since capital intensive production relies largely on machinery and equipment, such industries require long term investment, with a high cost involved in maintaining and depreciating equipment. In such a capital-intensive production process, it could be very costly to increase output levels as this would require higher investment in such machinery and equipment.

Labor intensive is where most of the production is carried by workers or employees. It means that the levels of output would be at a much smaller scale than a labor intensive industry. The costs involved in a labor intensive production unit would be the costs of training and educating employees. However in comparison to capital intensive, in labor intensive production, increasing the volume of output is easier as it does not require a large investment. Instead, hiring more workers,’ asking workers to work extra hours and hiring temporary staff can increase production in the short term.

Question 2.
Write about the Role of Infrastructure in Economic Development.
Economic infrastructure refers to the facilities, activities and services which support operation and development of other sectors of the economy. These facilities, activities and services help in increasing the overall productivity of the economy. They also play an essential role in facilitating the smooth running of all the sectors of the economy.

According to Dr V. K. R. V. Rao, “The link between infrastructure and development is not a once for all affair. It is a continuous process and progress in development has to be preceded, accompanied and followed by progress in infrastructure; if we are to fulfil our declared objectives of a self-accelerating process of economic development”.

Role of Infrastructure in Economic Development
1. The smooth functioning of the economy: Infrastructural facilities are very necessary and vital for the smooth functioning of the economy. They are like wheels of development without which the economy will not be able to function properly.

2. Development of agriculture: The development of agriculture, to a considerable extent, depends on the adequate expansion and development of irrigation, credit, transport, power, marketing, training and education. It also depends on the improvement of research and development and other such facilities.

3. Development of industry: Industrial production requires not only machinery and equipment but also requires the following. Energy, skilled manpower, management, banking, insurance and transportation services are crucial. These activities and facilities will directly lead to the development of the industrial sector of the economy.

4. Promotion of investment: Infrastructural development is definitely a pre-condition got increasing economic investments. Those areas with the sound infrastructural base may succeed in attracting all the more capital for investment.

5. Improvement in productivity: Infrastructural development such as transportation facilities and education increase the productivity. Development of science and technology is also important in improving the economic productivity. Moreover, research and development also play a critical role in economic improvement.

6. Employee generation: Infrastructures play a crucial role in the generation of employment opportunities. They improve mobility, efficiency and productivity of labour. Moreover, larger investment, development of industry and agriculture create all the more employment opportunities.

7. Development of backward regions: The development of backward regions and the removal of regional imbalances is yet another significant contribution of infrastructural facilities.
The lack of infrastructural facilities in the backward regions will act as a constraint on the development of those regions.

8. Social change: Infrastructural facilities will also act as an instrument of social changes. Development of industries, transport facilities and education will change the outlook of people. Apart from these, even science, technology and growth of towns and cities will lead to a changed economic outlook.

9. The growth of GDP: There exists a very close relationship between spending for infrastructure and GDP growth. Studies reveal that 1% growth in the stock of infrastructure often associates with 1% growth in per capita GDP.

10. All round development/Overall development: Infrastructural development is important not only for economic growth but also for the overall development. The all-round development of the country and economy is crucial. Infrastructural facilities are also necessary for technological innovation. Along with technological innovation, economic infrastructural facilities are also important for the eradicating poverty and enhancing globalization.

Question 3.
Strategies of Economic Development.
Development Strategies assists in the creation of economic development strategies that focus, first, on business retention and expansion (BR&E). The best foundation for economic growth is made up of the companies and workers already in the community. Knowing their needs for growth, change, and training can lead to programs that strengthen their presence and improve the overall business climate. But strategies should also include business attraction customized to local strengths and opportunities aimed at targeted companies and economic sectors, as well as labor force enhancements to assure that residents are adaptable to inevitable economic changes.

Economic development strategies also relate’ closely to planning and redevelopment strategies. Vibrant, clean, and safe places make the perfect environment for economic L growth. And strategies necessarily include an effective use of public incentives to catalyze growth and encourage business retention.

Question 4.
Advantages of the Unbalanced Growth Theory.
The doctrine of unbalanced growth represents a unique and splendid contribution in accelerating the rate of economic development in backward and underdeveloped countries. This theory has tried to touch the impulses of those countries who have the paucity of funds.

1. Skill Formation: The pivotal importance of the strategy of unbalanced growth is that it points out the rapid development through the expansion of investment in SOC. Therefore, investment should be made on basic facilities like education, roads railway, communications, dams, housing etc. which are pre-requisites for skill formation. This, in turn, helps to improve the qualities of man power.

2. Self-Reliance: The underdeveloped and less developed countries aspire the achieve self-reliance in the short-run period. For attaining this goal, the essential condition is the development of leading sectors which accelerate the high rate of capital investment. This is only possible through the strategy of unbalanced growth.

3. Economic Surplus: The technique of unbalanced growth aims at the establishment of capital goods industries which in turn help in the development erf subsidiary industries. Income, output, employment expands with the result higher economic surplus is generated. The reinvestment process of surplus creates ripples in the stream of economic growth in a country.

4. Better-Use of Resources: Another advantage of unbalanced growth is that there are more chances of better use of resources. There is less misallocation and less wastage of resources. Such a country makes use of its resources according to its needs and ability. In this regard, unbalanced growth is better to its counter partner i.e., balanced growth.

5. More important to Basic Industries: The unbalanced growth theory underlines the significance of basic industries in the process of growth. This will automatically press for the growth of consumer goods industries.

Question 5.
Types of Infrastructures.
There are 2 broad classifications of economic infrastructures. They are as follows:

1. Social infrastructure: They concern with the supply of such services as to meet the basic needs of a society. In simple words, social infrastructures refer those basic services such as education and training. It also includes health and sanitation, drinking water, housing, sewerage, etc. Social infrastructures are also termed as ‘social overheads’. These social overheads indirectly support the economic systems. They indirectly increase the productivity and the economy sees the impact after some time. Social infrastructures lead to growth in the long run.

2. Physical infrastructure: Physical infrastructure is those infrastructures which directly concern themselves with the needs of such production sectors as agriculture, industry, trade, etc. In simple words, physical infrastructure directly supports the economic production. They also directly support the process of production and distribution in the economy. A few such examples are energy, irrigation, transportation, telecommunication, banking, insurance, technology, finance, etc. Physical infrastructures, however, directly increase the productivity and the economy sees the impact immediately. They also lead to an immediate growth in the short run.

Question 6.
Importance of Economic Infrastructure.
Economic infrastructure is the nerve centre of the economic system. It plays an important role in the development of not only the economy but of the civilization as well. It is a public utility service which gives place and time utility to goods and services. They link production, distribution centres and the end consumers as well. Therefore, infrastructures bring together the elements of the economic system.

  • They help in the development of the market and all the elements within.
  • It also facilitates large-scale production for the purpose of smooth functioning of the economy.
  • They result in the territorial division of labour which is great.
  • They also ensure price stability in the market.
  • Economic infrastructure definitely ensures the mobility of labour and capital within/from the economy.
  • It results in the overall growth of towns and cities.
  • Infrastructures provide for a lot of employment generation and employment opportunities.
  • They also play a crucial role in national defence activities.
  • Infrastructures in the economy directly result in the unity of various economic components.
  • The economy and the nation will be able to meet any emergencies that arise.

Question 7.
Capital Intensive Technology.
Capital intensive refers to a productive process that requires a high percentage of investment in fixed assets (machines, capital, plant) to produce.

A capital-intensive production process will have a relatively low ratio of labour inputs and will have higher labour productivity (output per worker). A capital intensive production process will tend to have a high ratio of fixed costs to variable costs. As a result, the productive process will have economies of scale (increased output leads to lower average costs)

Question 8.
labour Intensive Technology.
In simple words labour intensive technique is that which uses comparatively larger amount of labour and small doses of capital. It is that technique by which more of labour and less of capital is required for the process of production. However, it can be defined as one in which a large amount of labour is combined with a smaller amount of capital. According to Prof. Myint, “labour intensive methods of production are those that require a large quantity of labour with a given unit of capital.” With this method of production, it is possible to raise output by using the same amount of capital but greater amount of labour.

Strategies of Economic Development Long Answer Type Questions Part 1

Strategies of Economic Development Long Answer Type Questions Part 1

Question 1.
Write about the Big Push Theory of Economic Development.
The theory of ‘big push’ first put forward by P.N. Rosenstein-Rodan is actually a stringent variant of the theory of ‘balanced growth’. The crux of this theory is that the obstacles of development are formidable and pervasive. The development process by its very nature is not a smooth and uninterrupted process. It involves a series of discontinuous ‘jumps’. The factors affecting economic growth, though functionally related to each other, are marked by a number of “discontinuities” and “hump.”

Therefore, any strategy of economic development that relies basically upon the philosophy of economic “gradualism” is bound to be frustrated. What is needed is a “big push” to undo the initial inertia of the stagnant economy. It is only then that a smooth journey of the economy towards higher levels of productivity and income can be ensured.

The rationale for the Big Push:
The basic rationale of the ‘Big Push’ like the ‘Balanced Growth’ theory is based upon the idea of ‘external economies’. In the theory of welfare economics, external economies are defined as those unpaid benefits which go to third parties. The private costs and prices of products fail to reflect these. And the market prices have to be corrected if an account of these external economies is to be taken. However, the concept of external economies has a different connotation in growth theory. Here, they are pecuniary in nature and get transmitted through the price system.

Requirements for Big Push:
The hallmark of the ‘big-push’ approach lies in the reaping of external economies through the simultaneous installation of a host of technically interdependent industries. But before that could become possible, we have to overcome the economic indivisibilities by moving forward by a certain “minimum indivisible step”. This can be realized through the injection of an initial big dose of a certain size of investment.

Prof. Rodan distinguishes three kinds of indivisibilities and externalities with a view to specifying the areas where a big push needs to be applied. They are:

1. Indivisibilities in the Production Function: Prof. Rodan argues that it is possible to generate enormous pecuniary external economies by overcoming the ‘indivisibilities of inputs, processes, and outputs.’ The emergence of such externalities would bring about a wide range of increasing returns. To corroborate his contention he cites the case of United States. He feels that the fall in the capital-output ratio in U.S.A. from 4:1 to 3:1 over the last eighty years was chiefly due to the increasing returns made possible by the levelling down of production indivisibilities.

2. Indivisibility of Demand: This refers to the complementarity of demand arising from the diversity of human wants. The very’ fact that there is an indivisibility of complementarity of demand requires simultaneous setting up of interrelated industries in countries to initiate and accelerate the process of development.

Indivisibility of demand generates interdependencies in investment decisions. As such, if each investment project was undertaken independently, it is in most cases likely to flop down. This is because individual investment projects generally have “high risks because of uncertainty as to whether their products will find a market,” This point can be clarified with the help of the following well known example given by Rosenstein-Rodan for a closed economy.

3. Indivisibility in the Supply of Savings: A high minimum package of investment cannot be undertaken without an adequate supply of savings. But it is not possible to have such high volume of savings in underdeveloped countries due to an extremely low price and high income elasticities of the supply of savings. The savings are low primarily because incomes are low. This, thus, constitutes the third indivisibility. “The way out of the vicious circle,” remarks Rosenstein- Rodan, “is to have first an increase in income and to provide mechanisms which assure that in every second stage the marginal rate of savings will be very much higher than the average rate of savings.” The Smithian advice that ‘frugality is a virtue and prodigality a vice’ has to be adapted to a situation of growing income.” But in the ultimate analysis, the initial big increase in income has got to be provided through an initial big increase in investment.

Question 2.
Write about the Balanced Growth Theory of Economic Development.
Balanced growth is a dynamic process and as such the meaning of balanced growth continues changing.

The concept of balanced growth is subject to various interpretations by various authors. It was Fredrick List who for the first time put forward the theory of balanced growth.

According to Fredrick List the theory of balanced growth is of great significance by which a balance could be established between agriculture, industry and trade.

(A) Views of Rosenstein Rodan:
In 1943 article, Rosenstein Rodan propounded this theory but without using the term balanced growth. He stated that the Social Marginal Product (SMP) of an investment is different from its Private Marginal Product (PMP). If different industries are planned accordingly to their SMP, the growth of the economy would be much more than it the industries had been planned according to their PMP. SMP is greater than PMP because of the complementarity of different industries which leads to the most profitable investment from the social point of view.

He illustrates it with a popular example to shoe factory. If a large shoe factory is started in the region where 20,000 unemployed workers are employed. Now in case, the workers spend their entire wages on shoes, it would create market for shoes. If series of industries are started, in that case the demand of different industries would increase via multiplier process. This would lead to planned industrialization. Ragnar Nurkse has also developed his thesis on these lines.

B) Views of Ragnar Nurkse:
Prof. Nurkse has given a. proper explanation of the theory of balanced growth. He holds that the major obstacle to the development of the underdeveloped countries is the vicious circle of poverty. This vicious circle of poverty shows that income in underdeveloped countries is low. Low income leads to low savings. Low savings will naturally result in low investment, which will result in less production. Low production will generate low income. Low income will create low demand for goods. In other words, it will result in smaller markets (limited extent of markets). Thus, there will be no inducement to invest.

According to Nurkse “The inducement to invest may be low because of the small buying power of the people, which is due to their small real income, which again is due to low productivity. The low level of productivity however is a result of the small amount of capital used in production which in turn may be caused, at last partly, by inducement to invest.” So, in order to break the vicious circle of poverty in the under-developed countries, it is essential to have a balance between demand and supply.

Ranger Nurkse is of the view that economic development is adversely affected by vicious circle of poverty. The economic development can take place only if vicious circle of poverty is broken. The vicious circle of poverty operates both on the demand and supply side.

(C) Views of W.A. Lewis:
Firstly, in the absence of balanced growth, prices in one sector may be higher than the prices in the other sector. On account of unfavourable terms of trade in the domestic market, they might suffer heavy losses. As a result no investment will be made there in and their growth will be halted. Because of balanced growth equality in comparative prices in all the sectors will be made and thereby all the sectors will continue to grow.

Secondly, when the economy grows, then several bottlenecks appear in different sectors. As a result of economic development, income of the people also increases. Due to increase in income, demand of those goods rises whose demand is income-elastic. If the production of these goods does not increase, there may appear several bottlenecks. However, in case of balanced growth, it is possible to increase production of those goods whose income elasticity of demand is more. Thereby, chances of bottlenecks in different sectors will be quite remote.

In case it is not possible to increase production simultaneously in agricultural and industrial sectors, then Prof. Lewis suggested that the strategy of balance between domestic and foreign trade should be adopted. If industrial sector is not developing, then the agricultural produce should be exported and industrial products should be imported. On the other hand if agricultural sector is not developing, then the industrial goods should be exported and agricultural products should be imported.

Question 3.
Explain the Unbalance Theory of Economic Development.
Unbalanced growth is a natural path of economic development. Situations that countries are in at any one point in time reflect their previous investment decisions and development. Accordingly, at any point in time desirable investment programs that are not balanced investment packages may still advance welfare. Unbalanced investment can complement or correct existing imbalances.

Albert O. Hirschman in his strategy of economic development goes a step further from Singer when he says that for accelerating the pace of economic development in the underdeveloped countries, it is advisable to create imbalances deliberately. He also recognized the inter-relatedness of different economic activities as done by Ragnar Nurkse. But he asserts that investment in selected industries or sectors would accelerate the pace of economic development.

He regarded, “Development is a chain disequilibria that must keep alive rather than eliminate the disequilibria, of which profits and losses are symptoms in a competitive economy”. There would be ‘seasaw advancement’ as we move from one disequilibrium to another new disequilibrium situation.

Thus Hirschman argued that, “To create deliberate imbalances in the economy, according to a pre-designed strategy, is the best way to accelerate economic development.” Hirschman is of the confirmed view that underdeveloped countries should not develop all the sectors simultaneously rather one or two strategic sectors or industries should be developed by making huge investment. In other words, capital goods industries should be preferred over consumer goods industries.

It is because capital goods industries accelerate the development of the economy, where development of consumer goods industries is the natural outcome. Hirschman has stated that, “If the economy is to be kept moving ahead, the task of development policy is to maintain tensions, disproportions and disequilibria.”

Process of Unbalanced Growth;
The strategy of unbalanced growth is most suitable in breaking the vicious circle of poverty in underdeveloped countries. The poor countries are. in a state of equilibrium at a low level of income. Production, consumption, saving and investment are so adjusted to each other at an extremely low level that-the state of equilibrium itself becomes an obstacle to growth. The only strategy of economic development in such a country is to break this low level equilibrium by deliberately planned unbalanced growth.

Prof. Hirschman is of the opinion that shortages created by unbalanced growth offer considerable incentives for inventions and innovations. Imbalances give incentive for intense economic activity and push economic progress.

Question 4.
Write about the Mahalanobis Model of Economic Development.
At the time of the formulation of the Second Five Year Plan, Rrof. P.C. Mahalanobis who was friend and adviser to Late Prime Minister Jawaharlal Nehru and who was one time member of Planning Commission, prepared a growth model with which he showed that to achieve a rapid long- term rate of growth it would be essential to devote a major part of the investment outlay to build-ing of basic heavy industries.

It will be useful to explain first Mahalanobis model of growth which provided a rationale for the heavy industry biased development strategy. An important point to note is that Mahalanobis identifies the rate of growth of investment in the economy not with rate of growth of savings as is usually considered by the economists but with rate of growth of output in the capital goods sector within the economy.

The growth of capital goods sector in turn depends upon the proportions of total investment allocated to the capital goods sector and output-capital ratio in the capital goods sector. Given the output-capital ratio in capital goods sector (i.e. heavy industries), he proves that if the proportion of total investment allocated to the capital goods is relatively greater, the rate of growth of output of capital goods will be greater and hence, given the Mahalanobis assumption, the future rate of growth of investment in the economy will be greater.

Now, the greater the rate of investment, the greater will be the long-term rate of growth. We thus see that with the rate of growth of output of capital goods industries. Mahalanobis shows that the proportion of total in-vestment resources allocated to the capital goods industries for each year is the most important factor determining the long-term rate of growth of national income. Let us represent his two- sector model in the mathematical form.

In his basic two-sector model Mahalanobis divides the economy into two sectors—the sector C produces consumer goods and sector K produces capital goods.
t0 = Initial rate of investment.
λk and λc = Proportions of total investment allocated to capital goods and consumer goods sectors respectively.
Therefore λk + λc = 1
βk and βc = Marginal output-capital ratio in the capital goods and consumer goods sectors respectively. In other words, they represent ratio of increment of income to investment in the sector K and sector C respectively.

Yo, C0, I0 = The national income, consumption and investment in the base period.

Yt Ct It = The national income, consumption and investment respectively in period t.

In Mahalanobis model, the net investment in any period can be divided into, two components; the one tab, going to capital goods sector K and λcIt going to consumer goods sector C. Therefore it follows that,

It = λkIt+ λcIt

Let Δ It stands for increase in investment (i.e. addition to the stock of capital goods) and Δ Ct for increase in consumer goods in nay period t depend on the net investment in the previous period t-1. Now, given the output-capital ratios, βk and βc of the capital goods and consumer goods sectors respectively, the relationship between investment and the resultant increment in output in capital goods can be worked out as follows:
Δ It= βk λk It-1 Or It — It-1 = βk λk It-1 ……. (i)

This implies that the increase in investment in period t is equal to the increment in output of capital goods. The increase in output of capital goods (βk λk It-1) in period t is given by investment in period It-1 multiplied by the proportion of it going to capital-goods sector (λk) and the output-capital ratio (βk) in the capital goods sector.

It is clear from above that Mahalanobis takes into account only the physical aspect of invest-ment and makes it dependent on the proportion of investment allocated to capital goods sector λk and output-capital ratio βk in the capital goods sector.

Similar to equation (i) we can also write:
Δ Ct= βc λc It-1
Ct – Ct-1 = βc λc It-1
and also
Δ It-1 = βk λk It-2
Now, income in a period t is the sum of consumption and investment, therefore
Y1 = It+Ct
Y2 = βk λk It-1 + βc λc It-1
By further manipulation. Mahalanobis derives the following formula:
Y1 = Y0\(\left[1-\alpha_{0} \frac{\beta_{C} \lambda_{c}+\beta_{k} \lambda_{k}}{\lambda_{k}+\beta_{k}}\left(1+\lambda_{k} \beta_{k}\right)^{t-1}\right]\)
Where ao is the intial rate of investment expressed as percentage of income, that is
α0 = \(\frac{I_{0}}{Y_{0}}\)

Question 5.
Write about the differences between the role of Agriculture and Industry in Economic Development.
Different countries have different approaches to economic development; some focus on economic development through industrialisation while others focus on high-value agricultural production. Several factors determine which model a country should focus on in order to foster economic growth. However, to achieve growth in both urban and rural areas, it is necessary that growth-promoting strategies be emphasized in both models as development of the agricultural sector is a necessary precursor for industrialisation, and the development of the industrial sector may lead to agricultural development.

Focusing solely on industrial development and neglecting the agricultural sector may lead to increasing income inequalities, particularly in countries with large rural sectors that depend on basic agrarianism. As the overwhelming success of the Green Revolution in Asian countries has shown, an emphasis on rural agricultural development can prove to be an integral precondition for urban industrialisation while creating viable opportunities to increase the lives of the poor and promote overall economic development.

Because most of the citizens ift a developing economy live in the rural areas and participate in agriculture, it has been proved that the development of this sector enhances economic development. An emphasis on the agricultural sector leads to increases in income for the lowest percentile, while supplying food and other commodities for other domestic sectors and, if possible, the international economy.

As seen in the Green Revolution of several Asian economies, an emphasis on high value agriculture spurred economic development. With the backing of the government and numerous research institutions, the development of high yielding crop technology led to increased efficiency in the agricultural sector and consequently raised the economic well-being of not only the rural sector, but the entire economy. In the case of India, there was far-reaching government commitment to the rural areas and the technological advancement of the agricultural sector, while particular emphasis was placed on the research and development of genetically engineered, high yielding crops. This political commitment entailed subsidized electricity, guarantees of minimum prices, incentives for farmers to adopt modem methods, public investment in roads and farming infrastructure, which resulted in greater market integration, as well as the availability of advanced technological inputs such as seeds and fertilizers. This led to an overall dramatic increase in per capita agricultural production along with an overall reduction in agriculture expenditure due to efficiency gains.

These technological and efficiency increases resulted in an overhaul of the agricultural sector and led to productivity gains in high value agriculture such as dairy products, seafood, and meat, among others, that were mainly utilized to boost agricultural exports. In addition, the improvements in supply chain-driven agricultural development along with the introduction of large-supply industrial-scale contract farming (made available through foreign direct investment in agriculture) led to increased employment and incomes for the poorest in the rural sector. It also led to an overall increase in high value food exports and export income. Therefore, the development of the agricultural sector will lead to reductions in income inequality and overall economic growth because the rural poor will be fully involved in the development process.

Another important sector of the economy, the industrial sector, takes into account the modernized manufacturing urban sector of an economy that creates large scale goods and services through an emphasis on technological prowess. As stated previously, it is necessary the development through the industrial sector is also emphasized as developing economies, in particular are largely sectoral. The rural-agricultural and the urban-industrial sectors are separated in terms of goals, relative incomes, and economic outcomes. The process of industrialization has become increasingly important within economies due to globalization and the high world-wide demand for modem products and services.

The development of industry globally has increased due to the liberalization of trade, available capital, efficient services, and technology flows. These have facilitated the integration of multi-national product systems, and have led to high economic growth and export competitiveness in developing countries. Globalization and cooperation between countries has encouraged development through the transfer of technology, resources, and expertise from major industrialized economies to developing economies.

Most economists have posited that an economic focus on industrialization is the road toward economic development, given the past experiences of modernized economies during the Industrial Revolution, as well as the recent export-oriented growth of Asian economies. Productivity is higher in the industrial sector than the agricultural sector due to technological advances. The economies of scale in large, integrated supply chains have resulted in gains and concentrated manufacturing results in opportunities for capital accumulation.

The agricultural and industrial sectors comprise the dual economy within a country, hence displaying several disparities as well as similarities in terms of policy emphasis. However, it is necessary that both sectors be targeted and promoted in cohesion for comprehensive development. This fact is emphasized due to the aforementioned notions from Arthur Lewis that the agricultural sector acts as a supplier of labor to the industrial sector, as well as the fact that the agricultural sector provides food and other commodities that facilitate the maintenance of the industrial sector. Foreign direct investment, government intervention, credit market development, and access to various forms of capital are all vital components in order to transform both sectors into economic development opportunities. In terms of government intervention, it is necessary that the public sector intervenes in both sectors in order to prevent market failures, and promote the advancement of the sectors by creating opportunities fo. the participants and mitigating risks of failure and underperformance. From’ an agricultural standpoint it is necessary that the government utilizes policy to assist in abridging the inefficiencies which afflict the rural sector such as the lack of availability of credit due to the unwillingness of the private sector to assist due to risk factors, as well as assist with infrastructure development and the provision of needed capital for development. Further improvements may be achieved by promoting research and development opportunities, reducing information asymmetries in order to increase access to credit and capital, improve health, as well as nutrition and agricultural education to bring about improvements in the human capital stock.

Theories of Development and Underdevelopment Long Answer Type Questions Part 3

Theories of Development and Underdevelopment Long Answer Type Questions Part 3

Question 1.
Write about the Robinson’s Golden Age Growth Model.
Mrs. Joan Robinson has given her model of growth in her classic book. ‘The Accumulation of Capital’ in 1956. Joan Robinson’s model clearly takes the problem of population growth in a developing economy and analyses the influence of population on the role of capital accumulation and growth of output. In the words of Prof. Mathew, The relation between distribution and growth in this model arises partly from the mutual interdependence of the rate of profit and the pace of capital accumulation and partly from the effect of the distribution of income on the proportion of income saved.

Open Model:
In an open economy, the conditions for steady growth and conditions for the rising rate of capital accumulation will be discussed. According to Mrs. Joan Robinson, national income is the sum of the total wage bill and total profit. The total wage bill is the real wage multiplied by the number of workers and total profits are equal to the profit rate multiplied by the amount of capital.

This relationship can be expressed as under:

PY = WN + πPK

Where P — Average Price level.
Y— Net national income.
W — Net money wage rate.
N— Amount of labour employed.
K— Amount of capital invested.
π —Rare of profit.

To convert the expression into real terms, divide both sides of equation by p (average price level), we get
PY = WN + πPK
Y = \(\frac{W N}{P}\) + πK
πK = \(\mathrm{Y}-\frac{\mathrm{W}}{\mathrm{P}} \mathrm{N}\)
π = \(\frac{\mathbf{Y}-\frac{W}{P} N}{K}\)
Dividing both sides by N, we get
π = \(\frac{\frac{\mathbf{Y}}{\mathbf{N}}-\frac{\mathbf{W}}{\mathbf{P}}}{\mathrm{K}_{\mathrm{N}}}\)

π = \(\frac{\rho-\frac{w}{P}}{\theta}\)

Where ρ Y/N i. e Labour/ Productivity, W/P real wage rate θ = K/N i.e., Capital Labour Ratio

The above equation indicates that the profit rate is a function of labour productivity (p) and real wage rate (W/P) and capital labour ratio. In other words, the profit rate is shown as capable of varying directly with the rate of net return to capital and inversely with the coefficient of capital intensity. The necessary condition for maximization is that the first derivative must be zero.

Theories of Development and Underdevelopment Long Answer Questions Part 3 1

Closed Model:
In a closed economy, the concepts of Golden age and Platinum age are to be discussed. In simple words, Golden age is a situation of smooth steady growth with full employment arising out of the equality of the ‘Desired’ and ‘Possible’ rates of accumulation and has been designed by Mrs. Joan Robinson as the Golden age equilibrium.

However, if an increase in labour supply is not accompanied by proportionate increase in the capital supply, then it will cause unemployment in the economy. To achieve full employment of labour the growth fate of population must be equal to growth rate of capital i.e.

∆N/N = ∆K/K

When the rate of growth of labour and capital are equal to each other, then there is full utilisation of capital in the economy. Such a switch on is called Golden age. The existence of Golden age is the indicator of full employment level.

The concept of Golden age implies that there must be equality in actual, warranted and natural growth rates.

In short, in Mrs. Robinson Joan’s words, when technical progress is neutral and proceeding steady, without any change in the time pattern of production, the competitive mechanism works freely, population grows (if at all) at a steady rate and accumulation goes on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages rises with output per head.

Then there are no internal contradictions in the system, we may describe these conditions as a Golden age (thus indicating that it represents a mythical state of affairs not likely to obtain in any actual economy). This is explained with the help of a diagram.

Theories of Development and Underdevelopment Long Answer Questions Part 3 1

In the figure , capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

Tangent NT touches the curve OP at A and intersects Y- axis at W. At point A capital labour ratio is OC, the productivity of labour is OD and out of which OW is the wage rate. The surplus DW is rate of return to capital.

The point A shows the position of equilibrium because the slope of tangent NT and the slope of production curve OP is the same. It can also be said that at A, the growth rate of capital ∆K/K is equal to growth rate of labour ∆N/N.
Growth rate of capital = \(\frac{\Delta K}{K}\)

Theories of Development and Underdevelopment Long Answer Questions Part 3 2
But DW = AB and OC = WB
\(\frac{\Delta \mathrm{K}}{\mathrm{K}}\) = \(\frac{\mathrm{AB}}{\mathrm{WB} \times \mathrm{OW}}\) ………. (1)
In ∆AWB and ∆ONW,
∠AWB = ∠WNO    ∠ABW = ∠WON
∴∆AWB is similar to ∆ONW.
Since the triangle are similar so the sides are in same proportion.
\(\frac{\mathrm{AB}}{\mathrm{OW}}\) = \(\frac{\mathrm{WB}}{\mathrm{ON}}\) or \(\frac{\mathrm{AB}}{\mathrm{WB}}\) = \(\frac{\mathrm{OW}}{\mathrm{ON}}\)
Putting the value of AB/BW in(1), we get
\(\frac{\Delta K}{K}\) = \(\frac{\mathrm{AB}}{\mathrm{WB} \times \mathrm{OW}}\) = \(\frac{\mathrm{OW}}{\mathrm{ON}} \times \frac{1}{\mathrm{OW}}\) = \(\frac{1}{\mathrm{ON}}\)
= Growth rate of labour = \(\frac{\Delta \mathrm{N}}{\mathrm{N}}\)
(i) ∆N/N > ∆K/K
(ii) ∆K/K > ∆K/A

Question 2.
Criticism of Adam Smith Theory of Economic Development.
Smith’s model has the great merit of pointing out ‘how economic growth came about and what factors and policies impede it’. In particular, he pointed out the importance of parsimony in saving and capital accumulation; of improved technology, division of labour and expansion of market in production; and of the process of balanced growth in the interdependence of farmers, traders and producers. Despite these merits, it has certain weaknesses.

1. Rigid division of Society: Smith’s theory is based on the socio-economic environment prevailing is Great Britain and certain parts of Europe. It assumes the existence of a rigid division of society between capitalists (Including land lords) and labourers. But the middle class occupies an important place in modem society. Thus, this theory neglects the role of middle class.

2. One sided saving base: According to Smith, Capitalists, landlords and money lenders save. This is, however, a one-sided base of saving because it did not occur to him that the major source of savings in our advance society was the income receivers and not the capitalists and landlords.

3. Unrealistic assumption of perfect competition: Smith’s whole model is based upon the unrealistic assumption of perfect competition. The laissez-faire policy of perfect competition is not to be found in any economy. Rather, a number of restrictions are imposed on the private sector, and on internal and international trade in every country of the world.

4. Neglect of Entrepreneur: Smith neglects the role of entrepreneur is development. This is a serious defect as his theory. The entrepreneur is the focal point of development, as pointed out by Schumpeter. It is the entrepreneur’ who organizes and brings about innovations there by leading to capital formation.

5. Unrealistic Assumption of Stationery State: Smith is of the view that the end result of a capitalist economy is the stationery state. It implies that there is change in such an economy but around a point of equilibrium. There is progress but it is steady, uniform and regular like a tree. But this explanation of the process of development is not satisfactory because dev. takes place by ‘fits and starts’ and is not uniform and steady. Thus the assumption of stationary state is unrealistic.

Question 3.
Criticism of Ricardo Theory of Economic Development.
Despite this the theory has certain weaknesses also.
1. Neglects the impact of technology: Ricardo pointed out that improved technology in industrial field leads to the displacement of labour and other adverse consequences. But Ricardo failed to visualize the impact that science and technology had on the rapid economic development of the new developed nation.

2. Wrong Notion of Stationary State: The Ricardian view that the system reaches the stationary state automatically is baseless because no economy attains the stationary state is which profits are increasing, production is rising and capital accumulation is taking place.

3. Baseless Notion of Population: The Ricardian view that wage rate can (does) not rise above. The subsistence level is wrong. In western countries there has been rise in wage rate but population has decreased.

4. Unnecessary Importance to the law of Diminishing Returns: Ricardian theory is primarily based on the law of diminishing returns but the rapid increase of farm produce in advanced nations has proved that Ricardo under-estimated the potentialities of technological progress is counteracting diminishing returns to land.

5. Impracticable laissez-faire Policy: According to this theory there should be no government interference and the economy will operate automatically through perfect competition. In reality no economy is free from government interference and in which perfect competition prevails.

6. Neglects Institutional factors and Interest-rate: Institutional factors have been assumed as given but they are crucial in Economic Development and cannot be overlooked. It neglects rate of interest also the does not regard the interest rate as an independent reward of capital but includes it in profits. He does not distinguish between capitalist and entrepreneur.

Question 4.
Marxian Philosophy.
Before going into the Marxian theory of development, it is essential to know about Marxian philosophy. Marx’s philosophy is known as Dialectical Materialism. According to his philosophy, matter is the driving force of all historical changes. By matter, he meant man’s relationship to nature as characterized by the mode of production. Thus, Marx gave an economic interpretation of history which can be summarized in two propositions:

1. The basic factor in the historical evolution of society is the mode of production. It is the mode of production that explains the whole superstructure of ideas and institutions.

2. Society develops in accordance with the dialectical principle inherent in its structure. Marx maintained that, historically, social change takes place in a regular pattern.

Question 5.
Criticisms of Harrod-Domar Model.
Criticisms of Harrod-Domar Model is as follows:
1. Developing countries find it difficult to increase saving. Increasing savings ratios may be inappropriate when you are struggling to get enough food to eat.

2. Harrod based his model on looking at industrialised countries post-depression years. He later came to repudiate his model because he felt it did not provide a model for long-term growth rates.

3. The model ignores factors such as labour productivity, technological innovation and levels of corruption. The Harrod-Domar is at best an oversimplification of complex factors which go into economic growth.

4. There are examples of countries who have experienced rapid growth rates despite a lack of savings, such as Thailand.

5. It assumes the existences of a reliable finance and transport system. Often the problem for developing countries is a lack of investment in these areas.

6. Increasing capital stock can lead to diminishing returns. Domar was writing during the aftermath of the Great Depression where he. could assume there would always be surplus labour willing to use the machines, but, in practice, this is not the case.

7. The Model explains boom and bust cycles through the . importance of capital, (see accelerator theory) However, in practice businesses are influenced by many things other than capital such as expectations.

8. Harrod assumed there was no reason for the actual growth to equal natural growth and that an economy had no tendency to full employment. However, this was based on the assumption of wages being fixed.

Question 6.
Assumptions of Robinson’s Golden age Growth Model.

  • Labour and capital are the only productive factors. It implies that the national output is the result of combined efforts of these two factors of production.
  • The economy is assumed to be closed i.e., there is no foreign trade.
  • Total wage bill is the product of real wage rate and number of workers.
  • Total income is divided between capital and labour as these are the two factors of production.
  • The production is not affected by the technological changes i.e. there is no progress in technology.
  • Total profit is the product of profit rate and amount of capital invested.
  • There is constancy in price level.
  • Wage earners spend all of’ their wage income on consumption, while profit takers save and invest all of their profit income.
  • Capital and labor are combined in a fixed proportion for a given output.
  • The national income is the sum of wage bill and total profits.
  • There is no scarcity of labor and entrepreneurs can employ as much labor as they wish.
  • Entrepreneurs consume nothing but save and invest their entire income for capital formation. If they have no profits, there is no accumulation and if they do not accumulate, they have no profits.

Theories of Development and Underdevelopment Long Answer Type Questions Part 2

Theories of Development and Underdevelopment Long Answer Type Questions Part 2

Question 1.
Write about Karl Marx’s Theory of Economic Development.
Karl; Marx, the father of scientific socialism, is considered a great thinker of history. He is held in high esteem and is respected as a real prophet by millions of people.

Prof. Schumpeter wrote, “Marxism is a religion. To an orthodox Marxist, an opponent is not merely in error but in sin”.

He is regarded as the father of history who prophesied the decline of capitalism and the advent of socialism.

The Marxian analysis is the greatest and the most penetrating examination of the process of economic development. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capital economy.

Assumptions of the Theory:
Marxian economic theory of growth is based on certain assumptions:

  • There are two principal classes in the society. (1) Bourgeoisie and (2) Proletatiat.
  • Wages of the workers are determined at subsistence level of living.
  • Labour theory of value holds good. Thus labour is the main source of value generation.
  • Factors of production are owned by the capitalists.
  • Capital is of two types: constant capital and variable capital.
  • Capitalists exploit the workers.
  • Labour is homogenous and perfectly mobile.
  • Perfect competition in the economy.
  • National income is distributed in terms of wages and profits.

Marxian Concept of Economic Development:
In Marxian theory, production means the generation of value. Thus economic development is the process of more value generating, labour generates value. But high level of production is possible through more and more capital accumulation and technological improvement.

At the start, growth under capitalism, generation of value and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with falling rate of profit. In turn, it reduces the rate of investment and as such rate of economic growth. Unemployment increases. Class conflicts increase. Labour conflicts start and there is class revolts. Ultimately, there is a downfall of capitalism and rise of socialism.

Question 2.
Explain about Schumpeter’s Theory of Economic Development.
Schumpeter’s theory of development assigns paramount role to the entrepreneur and innovations introduced by him in the process of economic development. According to Schumpeter, the process of production is marked by a combination of material and immaterial productive forces. The material productive forces arise from the original factors of production, viz., land and labour, etc., while the immaterial set of productive forces are conditioned by the ‘technical facts’ and ‘facts of social organization’. The Schumpeterian production function can, therefore, be written as –
Q = [k, r, I, u,v) …(1)

Where, Q stands for the output, k for the Schumpeterian concept of “produced means of production”, r for natural resources, 1 for the employed labour force. The symbol u represents the society’s fund of technical knowledge and v represents the facts of social organization, i.e., the socio-cultural milieu within which the economy operates.

1. Circular Flow:
Schumpeter starts his analysis of development process with the concept of circular flow. It implies a condition where economic activity produces itself continuously at constant rate through time. Thus, it means a continuous activity and no destruction. It is the characteristic of an economy in stationary state.

The circular flow is similar to circulation in blood in an animal organism. Circular flow is based upon a state of perfect competitive equilibrium in which coasts are equal to receipts and prices to average costs.

2. Role of the Entrepreneur:
Entrepreneur or innovator is the key figure in Schumpeter analysis of the process of development. He occupies the central place in the development process because he initiates development in a society and carries it forward. Entrepreneurship is different from managerial activity.

A manager simply directs production under existing techniques but entrepreneurship, requires the introduction of something new. An entrepreneur is also different from a capitalist. The capitalist simply furnishes the funds while the entrepreneur directs the use of these funds.

3. Business Cycle or Cyclical Process:
The next component of development according 10 Schumpeter is the business cycle. Schumpeter’s approach to business cycle or crisis is historical, statistical and analytical. He believes that business cycle or crisis is not merely the result of economic factors but also of non-economic factors Schumpeter concludes that crisis is the “process by which economic life adapts itself to the new economic conditions”.

After explaining Schumpeter’s approach to business cycle or crisis, we shall now proceed to discuss the working of business cycle. How booms and depression appear and collapse? Bank credit is an essential element of Schumpeter’s model. According to Schumpeter, the creation of bank credit is assumed to accelerate money incomes and prices in the economy.

It creates a cumulative expansion throughout the economy. With the increase in the purchasing power of the consumers, the demand for the products increases in relation to supply. The rising prices and the high rates of profits stimulate producers to raise investments by borrowing from the banks.

4. The Decay of Capitalism:
The. continuous technical progress results in an unbounded increase in total and per capita output. As long as technological progress takes place, the rate of profit is positive. Hence, there can be no drying up of sources of investible funds nor any vanishing of investment opportunities.

“There is, therefore, no prior ceiling to the level of per capita income in a capitalist society. Nevertheless, the economic success of capitalism will eventually lead to its decay”. The very success of capitalism undermines the social institutions which protect it and inevitably creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.

Capitalism can maintain itself only so long as entrepreneurs behave like knights and pioneers. Schumpeter holds a very pessimistic view about the survival of capitalism. He advocated capitalist system of production yet he was not unaware of the weakness of this system.

Question 3.
Write about RoStow ‘s Stages of economic development?
The concept of modernization theories have their beginnings in the classical evolutionary explanation of social change. Emile Durkheim, Karl Marx and Max Weber try to theorise the transformations initiated by the industrial revolution. Two characteristics of early modernization theories continue to influence current modernization discourse. One is the idea of ‘frequent social change’ and the other is the ‘idea of development’.

One of the theories which identifies both of these above mentioned characteristics is Walter Rostow’s (1960) concept of Economic Growth. He outlines his concept in his book “The Stages of Economic Growth”’. He argues that within a society sequential economic steps of modernization can be identified. These steps are linear and towards an evolutional higher development.

Theories of Development and Underdevelopment Long Answer Questions Part 2 1

1. The Traditional Society: The economic system is stationary and dominated by agriculture with traditional cultivating forms. Productivity by man – hour work is lower, compared to the following growth stages. The society characterizes a hierarchical structure and so there is low vertical as well as social mobility. An historical instance of Rostow’s “Traditional Society” can be founded during the time of Newton.

2. The Preconditions for Take-off: During this stage the rates of investment are getting higher and they initiative a dynamic development. This kind of economical development is a result of the industrial revolution. As a consequence of this transformation. Which includes development of the agriculture too. Work forces of the primary sector become redundant. A prerequisite for “The precondition for take off’ is industrial revolution, which lasted for a century years.

3. Take Off: This stage is characterized by dynamic economic growth. The main characteristic of this economic growth is self sustained growth which requires no exogenous inputs. Like the textile industry in England, a few leading industries can support development. Generally “Take off ’ lasts for two to three decades.

Ex: In England it took place by the middle of the 17th century or in Germany by the end of the 17th century.

4. The Drive to Maturity: It is characterized by continual investments by 40 to 60 percent. Economic and technical progress dominate this stage. New forms of industries like neo-technical industries emerge.

Ex: Electrical industry, chemical industry (or) mechanical engineering.

Neo-technical industries supplement the paleo.-technical industries. As a consequence of this transformation social and economic prosperity, especially the later, increase. Generally – “The Drive to Maturity” starts about 60 years after “Take off’. In Europe this happened by 1900.

5. The Age of high mass consumption: This is the final step in Rostow’s five stage model of development. Here, most parts of society lives in prosperity and persons living in this society are offered both abundance and a multiplicity of choices. According to his the west or the north belongs today in this category.


  • This theory has a strong bias towards a western model of modernization.
  • It assumes that all countries follow the same route of development.
  • It does not look variations with in a country.
  • It assumes that each country is economically and politically free.
  • Traditional society is not a prerequisite qualification for development. Countries like the USA, Canada, Australia and New Zealand were not traditional when they were born.
  • Stages tend to overlap countries such as New Zealand and Denmark experienced take off as a result of agricultural development.
  • The drive to maturity is confusing. The stage contains all the features of the take off.
  • Chronological order is not maintained in the stage of high mass consumption.

Question 4.
Write about Harrod-Domar two sector model.
The Harrod Domar Model suggests that the rate of economic growth depends on two things:

Level of Savings (higher savings enable higher investment) Capital-Output Ratio. A lower capital-output ratio means investment is more efficient and the growth rate will be higher.

A simplified model of Harrod-Domar:
Rate of economic growth (g) = \(\frac{\text { Level of savings (s) }}{\text { Capital output ratio (k) }}\)

Harrod-Domar in more detail .

  • Level of savings (s) = Average propensity to save (APS) – which is the ratio of national savings to national income.
  • The capital-output ratio = 1/marginal product of capital.
  • The capital-output ratio is the amount of capital needed to increase output.
  • A high capital-output ratio means investment is inefficient.
  • The capital-output ratio also needs to take into account the depreciation of existing capital.

Main factors affecting economic growth

  • Level of savings. Higher savings enable greater investment in capital stock
  • The marginal efficiency of capital. This refers to the productivity of investment, e.g. if machines costing £30 million increase output by £10 million. The capital- output ratio is 3
  • Depreciation – old capital wearing Out.

Warranted Growth Rate
Roy Harrod introduced a concept known as the warranted growth rate.

  • This is the growth rate at which all saving is absorbed into investment, (e.g. Rs. 800 of saving = Rs. 800of investment.
  • Let us assume, the saving rate is 10% and the capital- output ratio is 4. In other words, Rs.10 of investment increases output by Rs. 2.5.
  • In this case, the economy’s warranted growth rate is 2.5 percent (ten divided by four).
  • This is the growth rate at which the ratio of capital to output would stay constant at four.

The Natural Growth Rate

  • The natural growth rate is the rate of economic growth required to maintain full employment.
  • If the labour force grows at 3 percent per year, then to maintain full employment, the economy’s annual growth rate must be 3 percent.
  • This assumes no change in labour productivity which is unrealistic.

Importance of Harrod-Domar
It is argued that in developing countries low rates of economic growth and development are linked to low saving rates.

This creates a vicious cycle of low investment, low output and low savings. To boost economic growth rates, it is necessary to increase savings either domestically or from abroad. Higher savings create a virtuous circle of self- sustaining economic growth.

Impact of increasing capital
The transfer of capital to developing economies should enable higher growth, which in turn will lead to higher savings and growth will become more self-sustaining.

Question 5.
Write about Solow Growth model.
The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

The Solow Growth Model, developed by Nobel Prize-winning economist Robert Solow, was the first neoclassical growth model and was built upon the Keynesian Harrod- Domar model. The Solow model is the basis for the modem theory of economic growth.

1. The population grows at a constant rate g. Therefore, the current population (represented by N) and future population (represented by N’) are linked through the population growth equation N’ = N(l+g). If the current population is 10,0 and its growth rate is 2%, the future population is 102.

2. All consumers in the economy save a constant proportion, ‘s’, of their incomes and consume the rest. Therefore, consumption (represented by C) and output (represented by Y) are linked through the consumption equation C= (l-s)Y. If a consumer earns 100 units of output as income and the savings rate is 40%, then the consumer consumes 60 units and saves 40 units.

3. All firms in the economy produce output using the same production technology that takes in capital and labor as inputs. Therefore, the level of output (represented by Y), the level of capital (represented by K), and the level of labor (represented by L) are all linked through the production function equation Y = aF(K,L).

4. The Solow Growth Model assumes that the production function exhibits constant-returns-to-scale (CRS). Under such an assumption, if we double the level of capital stock and double the level of labor, we exactly double the level of output. As a result, much of the mathematical analysis of the Solow model focuses on output per worker and capital per worker instead of aggregate output and aggregate capital stock.

5. Present capital stock (represented by K), future capital stock (represented by K’), the rate of capital depreciation (represented by d), and level of capital investment (represented by I) are linked through the capital accumulation equation K’= K(l-d) + I.

Solving the Solow Growth Model
1. In our analysis, we assume that the production function takes the following form: Y = aKbL1-b where 0 < b < 1. The production function is known as the Cobb-Douglas Production function, which is the most widely used neoclassical production function. Together with the assumption that firms are competitive, i.e., they are price-taking firms, the coefficient b is the capital share (the share of income that capital receives).

2. Therefore, output per worker is given through the following equation: y = aKb where y = Y/L (output per worker and k = K/L (capital stock per worker)

3. Under the assumption of competitive equilibrium, we get the following:

  • The income-expenditure identity holds as an equilibrium condition: Y = C +1
  • Consumer’s budget constraint: Y = C + S
  • Therefore, in equilibrium: I = S = sY.

4. The capital accumulation equation becomes: K’ = (1- d)K + sY. The capital accumulation equation in per worker times is given through the following equation: (1 + g)k’ = (1 – d)k + sy = (1 – d)k + saf(k) = (1 – d)k + sakb

5. The solution concept used is that of a steady state. The steady state is a state where the level of capital per worker does not change. Consider the graph below:

Theories of Development and Underdevelopment Long Answer Questions Part 2 2

6. The steady state is found by solving the following equation: k’ = k => (1 + g)k = (1 – d)k + sakb

7. Therefore, the steady state value of capital per worker and the steady state value of output per worker are the following:

Theories of Development and Underdevelopment Long Answer Questions Part 2 3

Implications of the Solow Growth Model
There is no growth in the long term. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady-state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence.’ Along this convergence path, a poorer country grows faster.

Countries with different saving rates have different steady states, and they will not converge, i.e. the Solow Growth Model does not predict absolute convergence. When saving rates are different, growth is not always higher in a country with lower initial capital stock.

Theories of Development and Underdevelopment Long Answer Type Questions Part 1

Theories of Development and Underdevelopment Long Answer Type Questions Part 1

Question 1.
Write about the Adam Smith Theory of Development in Economics.
Adam Smith is considered to be the father of economics. It is not so because he was the first explorer in the field of economics, also not because he revolutionized economic planning by his maiden ideas, but because he abbreviated what he had received from his predecessors and handed it down as a guide to the coming generations.

Adam Smith contained all his ideas in his “Wealth of Nations”. The most important aspect of this book was the Theory of Economic Development.

The main points of the theory are as under:

Natural Law:
Adam Smith proposes natural law in economic affairs. He advocated the philosophy of free and independent action. If every individual member of society is left to peruse his economic activity, he will maximize the output to the best of his ability. Freedom of action brings out the best of an individual which increases society wealth and progress. Adam Smith opposed any government intervention in industry and commerce.

Laissez Faire:
Adam Smith’s theory is based on the principle of ‘Laissez-Faire’ which requires that state should not impose any restriction on freedom of an individual. The theory of economic development rests on the pillars of saving, division of labour and wide extent of market. ‘Saving or capital accumulation is the starting point of this theory. He believed that “there is a set of rules or rights of justice and perhaps even of morality in general which are, or may be known by all men by hello either or reason or of a moral sense, and which possesses an authority superior to that of such commands of human sovereigns and such customary legal and moral regulations as may contravene them”.

Production Function:
Adam Smith recognized three factors of production namely labour, capital and land i.e.
Y = f(K, L, N)
K = Stock of Capital
L = Labour force
N = Land

He emphasized labour as an important factor of production along with other factors and observed, “The annual labour of nation is the fund which originally supplies it with all necessaries and conveniences of life which it annually consumes and which consists always either in immediate produce from other nations”. Since the growth is a function of capital, labour, land and technology and land being passive element is least important.

Division of Labour:
The rate of economic growth is determined by the size of productive labour and productivity of labour. The productivity of labour depends upon technological progress of a country and which, in turn, depends upon the division of labour. This division of labour becomes the true dynamic force in Adam Smith’s theory of growth.

Division of labour increases the productivity of labour through specialization of tasks. When a work is sub-divided into various parts and the worker is asked to perform small parts of whole job, his efficiency increases as now he can focus his attention more carefully. Thus, the concept of division of labour means the transference of a complex production process into number of simpler process in order to facilitate the introduction of various methods of production.

Capital Accumulation:
It is the pivot around which the theory of economic development revolves. The growth is functionally related to rate of investment. According to Smith, “any increase in capital stock in a country generally leads to more than proportionate increase in output on account of continually growing division of labour”.

Agents of Growth:
Smith has observed that farmers, producers and businessmen are the important agents of economic growth. It was the free trade, enterprise and competition that led farmers, producers and businessmen to expand the market and which, in turn, made the economic development inter-related. The development of agriculture leads to increase in construction works and commerce. When agricultural surplus arises as a result of economic development, the demand for commercial services and manufactured articles arises.

It can be concluded that Prof. Adam Smith did not propound any specific growth theory. His views relating to economic development are part of general economic principle propounded by him. R. Lekachaman says, “A good deal o‘‘ Smith’s analysis reads as though written with todays UDC’s in mind”. In a very important aspect then this book (Wealth of Nations) was the theory of economic development.

Question 2.
Explain the Ricardian Theory of Economic Development.
Ricardo presented his view on Economic Development in an unsystematic manner in his book The Principles of Political Economy and Taxation. Like Smith, Ricardo never propounded any theory of development; he simply discusser, the theory of distribution. However, Smith’s model of growth remained the predominant model of Classical Growth. David Ricardo (1817) modified it by including diminishing returns to land.

The assumptions of his model included:

  • all land is used for production of com,
  • law of diminishing returns operates,
  • supply of land is fixed,
  • demand for com is perfectly is elastic.
  • labour and capital are variable inputs.
  • state of technical knowledge is given,
  • all workers are paid a subsistence wage,
  • supply price and labour is given and constant,
  • demand for labour depends upon accumulations.
  • capital accumulation results from profit and
  • there is perfect competition.

Main Features
The Ricardian model is based on the interrelation of three groups in the economy. They are landlords, capitalists and labourers among whom the entire produce of land is distributed.

1. Rent, Profit and Wages: Rent is that portion of the produce of earth which is paid to the landlord for the use of original and indestructible powers of the soil. It is the difference between average and marginal product. If all the land had the same properties of unlimited in supply and uniform in quality, no charge would make for its use. The wage rate is determined by wage fund divided by number of workers employed at the subsistence level. According to the model, out of the total com produced rent has the first right and the residual is distributed between wage and profit while interest is included in profit.

2. Capital Accumulation: According to Ricardo capital accumulation is the outcome of profit because profit leads to saving of wealth which is used for capital formations. Capital formation depends upon will to save and capacity to save which is more important. The larger the surplus i.e. profit, the larger will be capacity to save.

i) The Profit Rate: The rate of profit is equal to the ratio of profit to capital employed. But since capital consists of only working capital, it is equal to the wage bill. So long as the rate of profit is positive, capital accumulation will take place. In reality, profits depend upon wages, wages on price of com and the price of com depends upon the fertility of the marginal land. So there is an inverse relation between wages and profits. When due to improvement in agriculture, production increases, the price of com falls and subsistence wages also fall and profits will increase leading to capital accumulation. This will raise demand for labourers raising wage rate and reducing profits.

ii) Increase in Wages: The wage rate increases when the prices of commodities forming the subsistence of the workers increase. As the demand for food increases, less fertile land is brought under control and more labourers are needed raising wage rate. Thus wages would rise with the increase in the price of com. In a situation rent also increases, with the decline of capitalists’ profit capital accumulation also declines.

iii) Declining profits in other industries: The profits of the farmer regulate the profits of all other trades. Therefore the money rate of profit earned on capital must be equal both in agriculture and industry. If profit rate declines in the agricultural sector it will also decline is the manufacturing industry.

Other Sources of Capital Accumulation: According to Ricardo economic development depends upon difference between production and consumption. Capital may be increased by an increased production or by a diminished unproductive consumption. However, the productivity of labour may be increased through technological changes and better organisation. It is in this way that capital accumulation can be increased. But the use of more machines employs less workers leading to unemployment. So Ricardo regards technological conditions as given and constant.

a) Taxes: Taxes are a source of capital accumulation in the hands of government. According to Ricardo, taxes are to be levied to reduce conspicuous consumption. Otherwise the imposition of taxes on capitalists land lords and labourers will transfer resources from these groups to the government, adversely effecting investment. So he does not favour the imposition of taxes.

b) Free Trade: Ricardo is in favour of free trade. The profit rate can be saved from declining by importing com. The capital accumulation therefore continues to be high. In this way the resources of the world can be used more efficiently through trade. ’

Stationary State: According to Ricardo there is natural tendency for the rate of profit to fall in the economy so that the country ultimately reaches the stationary state. When capital accumulation rises, with increase in profits, production increases which raises the wage fund, population increases, which raise the demand for com and its price. Inferior grades of land are cultivated. Rents on superior land increase and reduce the share of the capitalists and labourers.

Theories of Development and Underdevelopment Long Answer Questions Part 1 1
Profits decline and wages fall to subsistence. The process of rising rents and falling profits continues till the output from the marginal land just covers the wages of labour employed and profits are zero. There is no accumulation of capital, no increase in population and wage rate but rent is extremely high and there is economic stagnation. In figure, AP and MPrepresents average product and marginal wage bill is OWLM at the subsistence level.

Total profits are WPTL. Product OM labour is employed OQRM com is produced. Share of rent is PQRT and Total output increases with economic development. This leads to increase in wage fund leading to increase in amount of labour. Demand for com goes up raising price of com. OM1 labour is employed, total output is OABM1, and there are no profits. Share of rent has increased.

Question 3.
Write about the Malthus Theory of Economic Development.
T.R. Malthus formed the trinity of pessimistic economists. He pioneered the theory of population which was more precise and significant than his views on growth.

In his opinion, no enquiry could be more important than that which traced the causes of any difference between potential and actual outputs of a country.

According to him, population growth is an end product of the whole process of economic development but the increase in population cannot take place without proportionate increase in wealth. Mere increase in population cannot provide a stimulus to economic expansion. Population growth encourages development only if it brings an increase in effective demand.

Concept of Development:
Malthus contends that the process of growth is not automatic but it needs a deliberate effort on the pan of the people. He did not conceive any movement towards stationary state but he emphasized that the economy reaches slump many a times before attaining the optimum level of development. Thus, the process of development consists of many ups and downs and it is not smooth.

Malthus was concerned with the progress of wealth and the wealth of a country depends partly on the quantity of production obtained by its labour and partly on the valuation of the produce. But “the wealth of country does not always increase in proportion to increase in value because increase in value may sometimes take place under an actual diminution of commodities.

Population Growth and Economic Development:
Prof. Malthus was first to introduce a new branch of study in economics and to give an impulse to the serious study of that branch. His principle of population states that population grows more rapidly than food supply. Malthusian theory of population is based on the theory of differential rent in. which he emphasized the law of diminishing returns in agriculture. Population growth increases wealth only if it increases effective demand and it is the increase in effective demand which leads to increase in wealth.

Role of Production and Distribution:
Malthus regards production and distribution as two major elements of wealth. If they are combined in an appropriate proportion, the wealth of a country can be increased in a very short time. But if they are taken separately, it may take thousands of years to increase the wealth. Thus, the potentialities of economic development in a country should be raised by large production and fairer distribution.

Factors in Economic Development:
He defines the problem of development as explaining the difference between potential gross national product and actual gross national product. Malthus does not believe in any long run theory, he is concerned with the short period fluctuations of wealth. But the principal problem is one of attaining a high level of potential gross product.

Capital Accumulation:
The accumulation of capital is the most important determinant of economic growth. He regards capital as indispensable to development. According to him, “No permanent and continued increase of wealth can take place without its increase of capital”. The main source of capital accumulation is higher profits and they come from the savings of the capitalists because workers are too poor to save. If the capitalists save more and spend less on consumer goods in order to have higher profits, economic growth will be retarded. Malthus suggested the concept of optimum propensity to save.

Malthus underlined the importance of foreign trade in speeding up economic growth. It provides incentive for investing since it leads to the extension of the market for goods produced and for greater division of labour resulting in increased output.

Role of Effective Demand:
Malthus regarded the role of effective demand in economic growth. He refuted the Say’s Law of Market and over-ruled the concept that there can’t be general over production. Malthus was of the opinion that the law of demand and. supply determines the value of a commodity, though he continues to regard labour commanded by commodity as the best measure of its value. Productive labour creates economic surplus over and above the labour costs.

It produces commodities which command greater labour than is embodied in their production. Production of labour brings profits into existence but these profits can only be realized if there is an effective demand. Thus, production depends upon effective demand and over production is the result of deficiency of effective demand.

The employment of productive labour is the source of insufficiency of effective demand which, in turn, results in general over production and unemployment in the economy. Since productive labour produces commodities which command greater labour than is required to produce them, labourers will receive less than the value of commodities they produce and wages will form only a part of total price of produce. Thus, the workers are unable to purchase all commodities in the market.

On the other hand, capitalist being parsimonious in nature prefer to save rather to spend. Thus, unsold stock of commodities tends to increase in the market which can be purchased neither by productive labourers nor by capitalists. This is how the deficiency of effective demand creates the situation of overproduction and it leads to fall in prices, profits, savings, investment and capital accumulation.

Economic Stagnation:
Malthus believed that supply of labour is inelastic in short run. He wrote “From the nature of population, and increase of labourers can’t be brought into market, in consequence of a particular demand, till after the lapse of sixteen or eighteen years”. The supply of capital can be increased faster than the increase in population.

As capitalist invests on productive labour to increase supply of capital hence wages rise due to competition. Rise in wages does not increase effective demand because workers prefer leisure to increased consumption. As a result, prices fall, profits decline, investment falls and both the power of accumulation and the motive to accumulate are strongly checked. Thus, gluts and under consumption leads to economic stagnation.

Modern Economic Growth Long Answer Type Questions Part 2

Modern Economic Growth Long Answer Type Questions Part 2

Question 1.
Write about the Vicious Circle of Poverty
Different economists have different opinions about the vicious circle of poverty.

According to Prof. Nurkse, “The main reason for the vicious circle of poverty is the lack of capital formation.”

Similarly, Kindleberger opined that a vicious circle of poverty takes place due to the small size of the market. However, the reasons for the vicious circle of poverty can be classified into three groups:

1. Supply Side of Vicious Circle:
Supply-side of the vicious circle indicates that in underdeveloped countries, productivity is so low that it is not enough for capital formation. According to Samuelson, “The backward nations cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which their standard of living could be raised.”

In the words of Prof. Nurkse on the supply side there is small capacity to save resulting from low level of national income. The low real income is a reflection of low productivity, which in turn is due largely to the lack of capital. The lack of capital is a result of the small capacity to save and so the circle is complete.

Low Income —> Low Saving —> Low Investment —> Low Production —> Low Income
The supply side of vicious circle can tx illustrated with the help of a fig

Modern Economic Growth Long Answer Questions Part 2 1

Reflects the UDCs are poor. In these countries poverty refers to low real income .Real income remains low due to low level of capital and capital is low because of low level of saving. The reason of low saving is low level of income. Those, it becomes clear from the above analysis, that the main reason of low level of poverty and income is the low level of saving. Consequently, investment is not possible in production channels. A man can save only when his real income exceeds consumption. Generally, in UDC, society is divided into two groups viz.; rich and poor.

2. Demand Side of Vicious Circle:
According to Prof. Nurkse, “On the demand side, the inducement of invest may he low because of the small purchasing power of the people, which is due to the small real income, which is again due to loco productivity. The level of productivity however, is the result of the small amount of capital used in production which in turn may be caused or at least partly caused by small inducement to invest.
Low Income —> Low Demand Low Investment —> Low Productivity —> Low Income

Modern Economic Growth Long Answer Questions Part 2 2

Fig. shows that low income leads to low demand which in turn results in low investment and so the low level of capital which again leads to low productivity and low income. The main reason of the poverty in these countries is the low level of demand. Consequently, the size of market remain low. The small size of the market becomes a hurdle in the path of inducement to invest.

Thus, the investors do not establish industries on large scale and productivity remains low and so the income. In order to prove this, Prof. Nurkse has cited many examples. For instance, an entrepreneur will not establish a modem shoe factory in a country where the people are poverty ridden and unable to purchase shoes. Similarly, iron and steel industry in Chile will produce so much iron and steel in three hours that the entire demand of the country can be fulfilled. Thus, according to Nurkse, “In underdeveloped countries, on demand side, low purchasing power of the people results in low productivity.”

3. Vicious Circle of Market Imperfections:
Meier and Baldwin have described a third vicious circle based on capital deficiency due to market imperfections. In underdeveloped countries, resources are underdeveloped and people are economically backward. Existence of market imperfections prevents optimum allocation and utilization of natural resources and the result is underdevelopment and this, in turn, leads to economic backwardness.

Modern Economic Growth Long Answer Questions Part 2 3

The development of natural resources depends upon the character of human resources. But due to lack of skill and low level of knowledge, natural resources will remain unutilized, under-utilized and misutilised. In the words of Meier and Baldwin, “Underdeveloped resources are, therefore, both a consequence and cause of the backward people… The more economically backward are the people, the less developed will be natural resources, lesser the development of natural resources more the people are economically backward.” The vicious circle caused by Market Imperfections is shown as under.

The vicious circle of poverty is a result of the various vicious circles which were on the sides of supply of and demand for capital. As a result capital formation remains low productivity and low real incomes. Thus, the country is caught in vicious circles of poverty which are mutually aggravating and it is very difficult to break them.

Question 2.
Write about the factors of Economic Growth.
There are mainly two types of determinants (factors) which influence the economic growth of a country.

A. Economic Factors
In a country’s economic development the role of economic factors is decisive. The stock of capital and the rate of capital accumulation in most cases settle the question whether at a juven point of time a country will grow or not. There are a few other economic factors which also have some bearing on development but their importance is hardly comparable to that of capital formation. The surplus of foodgrains output available to support urban population, foreign trade conditions and the nature of economic system are some such factors whose role in economic development has to be analyzed:

1. Capital Formation: The strategic role of capital in raising the level of production has traditionally been acknowledged in economics. It is now universally admitted that a country which wants to accelerate the pace of growth, has m choice but to save a high ratio-of its income, with the objective of raising the level of investment. Great reliance on foreign aid is highly risky, and thus has to be avoided. Economists rightly assert that lack of capital is the principal i obstacle to growth and no developmental plan will succeed unless adequate supply of capital is forthcoming.

2. Natural Resources: The principal factor affecting the development of an economy is the natural resources. Among the natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of natural resources in abundance is essential. A country deficient in natural resources may not be in a position to develop rapidly. In fact, natural resources are a necessary condition for economic growth but not a sufficient one. Japan and India are the two contradictory examples.

3. Marketable Surplus of Agriculture: Increase in agricultural production accompanied by a rise in productivity is important from the point of view of the development of a country. But what is more important is that the marketable surplus of agriculture increases. The term ‘marketable surplus’ refers to the excess of output in the agri-cultural sector over and above what is required to. allow the rural population to subsist.

4. Conditions in Foreign Trade: The classical theory of trade has been used by economists for a long time to argue that trade between nations is always beneficial to them. In the existing context, the theory suggests that the presently less developed countries should specialize in production of primary products as they have comparative cost advantage in their production. The developed countries, on the contrary, have a comparative cost advantage in manufactures including machines and equipment and should accordingly specialize in them.

5. Economic System: The economic system and the historical setting of a country also decide the development prospects to a great extent. There was a time when a country could have a laissez faire economy and yet face no difficulty in making economic progress. In today’s entirely different world situation, a country would find it difficult to grow along the England’s path of development.

Non-Economic Factors:
From the available historical evidence, it is now obvious that non- economic factors are as much important in development as economic factors. Here we attempt to explain how they exercise influence on the process of economic development:

1. Human Resources: Human resources are an important factor in economic development. Man provides labour power for production and if in a country labour is efficient and skilled, its capacity to contribute to growth will decidedly be high. The productivity of illiterate, unskilled, disease ridden and superstitious people is gener-ally low and they do not provide any hope to developmental work in a country. But in case human resources remain either unutilized or the manpower management remains defective, the same people who could have made a positive contribution to growth activity prove to be a burden on the economy.

2. Technical Know-How and General Education: It has never been, doubted that the level of technical know-how has a direct bearing on the pace of development. As the scientific and technological knowledge advances, man discovers more and more sophisticated techniques of production which steadily raise the productivity levels.

3. Political Freedom: Looking to the world history of modem times one learns that the processes of development and under-development are interlinked and it is wrong to view j them in isolation. We all know that the under-development of India, Pakistan, Bangladesh, Sri Lanka, Malaysia, Kenya and a few other countries, which were in the past British colonies, was linked with the development of England. England recklessly exploited them and appropriated a large portion of their economic surplus.

4. Social Organisation: Mass participation in development programs is a pre-condition for accelerating the growth process. However, people show interest in the development activity only when they feel that the fruits of growth will be fairly distributed. Experiences from a number of countries suggest that whenever the defective social organisation allows some elite groups to appropriate the benefits of growth, the general mass of people develop apathy towards State’s development programs. Under the circumstances, it is futile to hope that masses will participate in the development projects undertaken by the State.

5. Corruption: Corruption is rampant in developing countries at various levels and it operates as a negative factor in their growth process. Until and unless these countries root- out corruption in their administrative system, it is most natural that the capitalists, traders and other powerful economic D classes will continue to exploit national resources in their personal interests.

6. Desire to Develop: Development activity is not a mechanical process. The pace of economic growth in any country depends to a great extent on people’s desire to develop. If in some country level of consciousness is low and the general mass of people has accepted poverty as its fate, then there will be little hope for development. According to Richard T. Gill, “The point is that economic development is not a mechanical process; it is not’ a simple adding- up of assorted factors. Ultimately, it is a human enterprise. And like all human enterprises, its outcome will depend finally on the skill, quality and attitudes of the men who undertake”.

Question 3.
Write about Disinvestment
Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is alsa referred to as ‘divestment’ or ‘divestiture.’

In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a government-owned enterprise.

A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.

Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very negative rate of return on capital employed. Inefficient PSUs had become and were continuing to be a drag on the Government’s resources turning to be more of liabilities to the Government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. The national gross domestic product and gross national savings were also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross domestic savings were getting reduced on account of low savings from PSUs. In relation to the capital employed, the levels of profits were too low. Of the various factors responsible for low profits in the PSUs, the following were identified as particularly important:

  • Price policy of public sector undertakings
  • Under-utilisation of capacity
  • Problems related to planning and construction of projects
  • Problems of labour, personnel and management
  • Lack of autonomy

Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation of funds for:

  • Financing the increasing fiscal deficit
  • Financing large-scale infrastructure development
  • For investing in the economy to encourage spending
  • For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards repaying public debt/interest
  • For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of value of the public assets making it critical to disinvest early to realize a high value.

Question 4.
Write about the role of Foreign Capital in Economic Growth.
Everywhere in the world, including the developed countries, governments are vying with each other to attract foreign capital. The belief that foreign capital plays a constructive role in a country’s economic development, it has become even stronger since mid-1980.

The experience of South East Asian Countries (1986¬1995) has especially confirmed this belief and has led to a progressive reduction in regulations and restraints that could have inhibited the inflow of foreign capital.

Need for Foreign Capital:
The need, for foreign capital arises because of the following reasons. In most developing countries like India, domestic capital is inadequate for the purpose of economic growth. Foreign capital is typically seen as a way of filling in gaps between the domestically available supplies of savings, foreign exchange, government revenue and the planned investment necessary to achieve developmental targets. To give an example of this ‘ savings-investment’ gap, let us suppose that planned rate of growth output per annum is 7 percent and the capital-output ratio is 3 percent, then the rate of saving required is 21 percent.

If the saving that can be domestically mobilized is 16 percent, there is a shortfall or a savings gap of 5 percent. Thus the foremost contribution of foreign capital to national development is its role in filling the resource gap between targeted investment and locally mobilized savings. Foreign capital is needed to fill the gap between the targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. This is generally called the foreign exchange or trade gap.

An inflow of private foreign capital helps in removing deficit in the balance of payments over time if the foreign – ow ied enterprise can generate a net positive flow of export earnings.

The third gap that the foreign capital and specifically, foreign investment helps to fill is that between governmental tax revenue and the locally raised taxes. By taxing the profits of the foreign enterprises the governments of developing countries are able to mobilize funds for projects (like energy, infrastructure) that are badly needed for economic development.

Foreign investment meets the gap in management, entrepreneurship, technology and skill. The package of these much-needed resources is transferred to the local country through training programmes and the process of learning by doing’. Further foreign companies bring with them sophisticated technological knowledge about production processes while transferring modem machinery equipment to the capital-poor developing countries.

In fact, in this era of globalization, there is a great belief that foreign capital transforms the productive structures of the developing economics leading to high rates of growth. Besides the above, foreign capital, by creating new productive assets, contributes to the generation of employment a prime need of a country like India.

Question 5.
World Bank’s Country Classification Systems.
The classification tables include all World Bank
members, plus all other economies with populations of more than 30,000. The World Bank’s classification of the world’s economies is based on estimates of gross national income (GNI) per capita. Previous World Bank publications might have referred to this as gross national product, or GNP. The GNI is gross national income converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GNI as a U.S, dollar has in the United States. The GNI per capital is also used as input to the Bank’s operational classification of economies, which determines their lending eligibility. The most current World Bank Income classifications by GNI per capita (updated July 1 of every year) are as follows:

  • Low income: $1,025 or less
  • Lower middle income: $1,026 to $4,035
  • Upper middle income: $4,036 to $12,475
  • High income: $12,476 or more

Low- and middle-income economies are usually referred to as developing economies, and the Upper Middle Income and the High Income are referred to as Developed Countries.

The World Bank adds that the term is used for convenience; ‘it is not intended to imply that all economies in the developing group are experiencing similar development or that other economies in the developed group have reached a preferred or final stage of development’.

Question 6.
Cumulative causation.
Cumulative causation refers to a self-reinforcing process during which an impulse to a system triggers further changes in the same direction as the original impulse, thus taking the system further away from its initial position in virtuous or vicious circles of change that may result in a continuing increase in advantages (to some people or activities) and disadvantages (to others).

Circular cumulative causation is a theory developed by Swedish economist Gunnar Myrdal in the year 1956. It is a multi-causal approach where the core variables and their linkages are delineated. The idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. These changes are circular in that they continue in a cycle, many times in a negative way, in which there is no end, and cumulative in that they persist in each round. The change does not occur all at once as that would lead to chaos, rather the changes occur gradually.

Question 7.
Kuznets’ Six Characteristics.
Kuznets identified six characteristics of modern economic growth.

  • There is rapid growth in income per capita and population.
  • There is rapid growth in productivity.
  • There is structural change such as the shift from agriculture to manufacturing to services, the shift of production from individuals to companies and the shift of labor from self-employed to employee.
  • The structure of society changes as a result of education, secularization and urbanization.
  • The world becomes more interdependent.
  • Economic growth has been limited to a minority of the world’s population.

Question 8.
Capital Formation.
The strategic role of capital in raising the level of production has traditionally been acknowledged in economics. It is now universally admitted that a country which wants to accelerate the pace of growth, has m choice but to save a high ratio-of its income, with the objective of raising the level of investment. Great reliance on foreign aid is highly risky, and thus has to be avoided. Economists rightly assert that lack of capital is the principal obstacle to growth and no developmental plan will succeed unless adequate supply of capital is forthcoming.

Whatever be the economic system, a country cannot hope to achieve economic progress unless a certain minimum rate of capital accumulation is realized. However, if some country wishes to make spectacular strides, it will have to raise its rate of capital formation still higher.

Question 9.
Forms of Foreign Capital
Foreign Capital can be obtained in the form of foreign investment or non-concessional assistance or concessional assistance.
1. Foreign Investment includes Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FP1 includes the amounts raised by Indian corporate through Euro Equities, Global Depository Receipts (GDR’s), and American Depository Receipts (ADR’s).

2. Non-Concessional Assistance mainly includes External Commercial Borrowings (ECB’s), loans from governments of other countries/multilateral agencies on market terms and deposits obtained from Non-Resident Indians (NRIs).

3. Concessional Assistance includes grants and loans obtained -at low rates of interest with long maturity periods. Such’ assistance is generally provided on a bilateral basis or through multilateral agencies like the World Bank, International Monetary Fund (IMF), and International Development Association (IDA) etc. Loans have to be repaid generally in terms of foreign currency but in certain cases the donor may allow the recipient country to repay in terms of its own currency.

Modern Economic Growth Long Answer Type Questions Part 1

Modern Economic Growth Long Answer Type Questions Part 1

Question 1.
What is Economic Growth? What are the determinants of Economic Growth?
The term economic growth refers to the increase in the real output of goods and services in an economy. It is measured as the percent rate of increase in real GDP. Economic growth occurs when the growth rate of real output is more than the growth rate of the population.

Determinants of Economic Growth: Determinants of economic growth are inter-related factors that directly influence the rate of economic growth i.e., increase in real GDP of an economy. There are six major determinants of growth. Four of these are typically grouped under supply factors which include natural resources, human resources, capital goods and technology. The other two are demand and efficiency factors.

1. Supply Factors:
These factors affect the value of goods and services supplied in an economy.

a) Natural Resources: Natural resources include anything that exists in nature and which has exploitable economic value. Rate of economic growth increases on increase in quantity and quality’ of natural resources. Examples of natural resources which can have major effect on rate of economic growth include fossil fuels, valuable metals, oceans and wild life.

b) Human Resources: Human resources include both skilled and unskilled work force. Increase in the quantity and quality of the work force increases rate of economic growth. Here, increase in quality refers to improvement of skills the worker posses. When more people work, more goods and services are produced and when more skilled workers do a job, they produce high value goods and services.

c) Capital Goods: Capital goods are tangible assets such as plant and machinery that can carry out processes which result in the production of other goods and services. Capital goods require big investments initially but they increase production and growth rate in future periods.

d) Technology: Technology includes methods and procedures used to produce various goods and services. New technology may be invented or current technology may be improved gradually by investing in research. Better techniques once devised allow faster production and increase rate of economic growth.

2. Demand Factor:
The increased supply of goods and services caused by the supply factors must be sustained by increased demand for goods and services in the economy.

Efficiency Factor: Achieving high output to input ratio is the result of efficiency. Efficiency includes both productive and allocative efficiency. High efficiency increases growth rate when it is coupled with full employment. To achieve maximum growth rate, an economy must use its available resources in the least costly way to produce the optimum mix of goods and services and it must use its resources to the maximum extent possible.

Question 2.
Explain the Features of Developing Countries with Special Reference to India?
According to United Nations
“The countries which have real per capita income less than a quarter of the per capita income of the United States are developing economies”.

According to the Planning Commission of India
“An under developed economy is characterized by the existence, in greater or lesser degree, of un-utilized or under utilized man power on the one hand and of unexploited natural resources on the other”.

On the basis of per capita income the developing countries are separated from the developed countries. The developing countries have different characteristic features when compared to developed countries.

The World Bank in its World Development Report (2014) classified the countries on the basis of Gross National Income (GNI) per capita, countries are divided into

a) Low Income Countries: With GNI per capita of $ 1,045 and below.
b) Middle Income Countries: With GNI per capita ranging between $1,046 and $12,746. The middle income countries are again divided into
i) Lower Middle Income Countries: With GNI per capita ranging between $1,046 and $4,125
ii) Upper Middle Income countries: With GNI per capita ranging between $4,126 and $ 12,476.

Features or Characteristics:
1. Low Per Capita Income: Low per capita income is the main feature of developing countries. The per capita income of India and China which are considered as fast growing economies is also very less compared to the per capita income of developed countries.

The per capita GNI (Exchange Rate basis) of India has increased from $1,070 (2008) to $1,530 (2011), and on purchasing power parity basis it increased from the $2,960 to $3,840 in the same period, but it still remains in the category of low middle income countries.

2. Scarcity of Capital: The insufficient amount of capital is characteristic feature of the developing countries. They are often called as “Capital Poor” economies. The rate of capital formation which is an important determinant of economic development is very low in these economies. It ranges between 15 and 20 percent of their GDP.

In India the gross domestic saving rate has 23 percent of GDP in 1990 and it increased to 27.9 percent in 2012. In the same period the gross capital formation rate was 24 percent of GDP and it increased to 35.6 percent. It reflects the pace of development in the Indian economy.

3. Demographic Characteristics: The developing countries are facing the problem of heavy population. Many of these countries have recorded the growth rate of population around 2 percent. They are successful in reducing the mortality rates by improving the medical facilities but failed to control the birth rates in the same manner. This has led to population explosion.

India’s population was 1,210 million in 2011 and it increased to 1,278 million in 2015 which is 17.5 percent of world population.

4. Unemployment: Wide spread unemployment is one of the serious problem faced by the developing countries. The unemployment in these countries is open and it is several times higher than that of developed countries. The rural urban migration is adding to the problem of open unemployment in the urban areas. As the slow growing industrial sector fails to absorb the increasing labor force the pressure on the agriculture sector increases, this result in the disguised unemployment in the agriculture sector.

In India the planning commission estimated that there was a back log of 37 million unemployed at the beginning of eleventh plan and it was expected that 45 million would add up and the total unemployed would be 82 million by the end of the plan.

5. Predominance of Agriculture: The developing economies are essentially agrarian in their character. About 30 to 70 percent of the population depends on agriculture in these economies. The agriculture sector in these economies is labor intensive and lags behind in making use of available technology. So the productivity of the agriculture sector is lower. Its contribution to GDP ranges between 20 and 30 percent.

According to Indian Economic Survey, 2013-14, 54.6 percent of the working population is engaged in the agriculture sector and it contributes 13.9 percent of the GDP.

6. High Incidence of Poverty: The most important feature of developing countries is the presence of mass poverty. Which means a certain percentage of population is not able to fulfill the basic needs of life. The people in these countries suffer from low level of income, malnutrition, ill health and illiteracy. At relatively lower levels of per capita income, large income inequalities have resulted in wide spread poverty in the developing economies. The percentage of population living below the poverty line was 29,8 percent in 2009-10.

7. Income Inequalities: Another distinguishing characteristic of the developing economies is the disparities in income and wealth enjoyed by the rich and poor sections of the society. Income inequalities are more in developing countries when compared to developed countries.

8. Low Quality of Life: The quality of life in the developing countries is very low in comparison with the developed countries. Three basic indices of real income, health and educational attainments are used to measure the quality of life of the people. The people in the developing countries suffer from malnutrition, high levels of pollution, lack of sanitation and safe drinking water.

The life expectancy at birth in developing countries is below 65 years where as it is more than 75 years in the developed countries. In the case of infant mortality rate, it is 61 per thousand live births in the developing countries and 6 in the developed countries.

9. Technological Backwardness: In the developing countries the production techniques are backward due to lack of focus on the research and development. These countries used labor intensive techniques because adoption of modem technology requires huge capital which is deficient.

Indian Economy is also technically backward, Modem and Traditional techniques are seen side by side in different sectors of the economy. It has affected the productivity in the economy.

10. High Density of Population: The number of persons living per is called as density of population. It is very high in the developing countries due to the large size of the population. The density of population of the world was 50 per in 2011. High density of population puts pressure on the available natural resources in the given area of land. The density of population in India was 382 per in 2011. Where as it was 14 in China, 33 in USA, 4 in Canada and 3 in Australia.

11. Dual Economy: It refers to that1 condition of an economy where two sectors i.e., modem and tradition sector exist side by side. They are different types of dualism. They are: (a) Technological Dualism (b) Social Dualism (c) Financial Dualism.

Indian Economy is also characterized by dualism, the industrial sector uses the modem technology and the agriculture sector skill follows old methods of production.

12. Price Instability: The price stability is also a basic feature of the developing countries. In almost all developing countries like India there is continuous price instability because of shortage of essential commodities and gap between consumption and production. Rising inflations passes a problem to maintain the standard of living of the common people as their incomes hardly increase regularly.

Question 3.
Write about the IMF Classification of Countries.
The International Monetary Fund (IMF) is an organization of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s. 44 founding member countries sought to build a framework for international economic cooperation. Today, its membership embraces 190 countries, with staff drawn from 150 nations.

The IMF is governed by and accountable to those 190 countries that make up its near-global membership.

At the top of its organizational structure is the Board of Governors. The day-to-day work of the IMF is overseen by its 24-member Executive Board, which represents the entire membership and supported by IMF staff. The Managing Director is the head of the IMF staff and Chair of the Executive Board. S/he is assisted by four Deputy Managing Directors.

the main criteria used by the IMF in country classification are i) per capita income level ii) export diversification iii) degree of integration into the global financial system. The IMF uses either sums or weighted averages of data for individual countries.

However, the IMF’s statistical Appendix explains that this is not a strict criterion, and other factors are considered in deciding the classification of countries.

The IMF refers to the classification of countries as Advanced and Emerging and Developing Economies. Advanced Economies are sub-catergorised into Euro Area, Major Advanced Economies (G7), Newly Industrialized Asian Economies, Other Advanced Economies (Advanced Economies excluding G7 and Euro Area), and the European Union. The Emerging and Developing Economies are sub categorised into Central and Eastern Europe, Commonwealth of Independent States, Developing Asia, ASEAN-5, Latin America and the Caribbean, Middle East and North Africa, Sub-Saharan Africa.

Advanced Economies
Advanced economy is a term used by the International Monetary Fund (IMF) to describe the most developed countries in the world. While there is no established numerical convention to determine whether an economy is advanced or not, they are usually defined as having a high level of per capita income, a very significant degree of industrialization, a varied export base, and a financial sector that’s integrated into the global financial system.

Advanced Economies Criteria
The IMF uses three main criteria to classify countries as advanced economies.
1. Gross domestic product (GDP) per capita: Which tallies up all the goods and services produced in a country in one year and divides this number by its population.

2. Export diversification: Countries with high GDP are not considered advanced economies if their exports consist mostly of a few commodities.

3. Integration into the global financial system: This includes both a country’s volume of international trade and its adoption of and participation in international financial institutions.

Question 4.
Write about the Kuznets six characteristics of modern economic growth.
Simon Kuznets (1973) viewed economic growth as “a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands.”

Kuznets was a leading figure in developing national income accounting in the United States. He also investigated economic development and growth using quantitative data to supplement the traditional qualitative analysis.

Kuznets’ Six Characteristics
Kuznets identified six characteristics of modem economic growth.

  • There is rapid growth in income per capita and population.
  • There is rapid growth in productivity.
  • There is structural change such as the shift from agriculture to manufacturing to services, the shift of production from individuals to companies and the shift Of labor from self-employed to employee.
  • The structure of society changes as a result of education, secularization and urbanization.
  • The world becomes more interdependent.
  • Economic growth has been limited to a minority of the world’s population.

The fact that only some countries have achieved growth shows that growth is not automatic. Kuznets argued that conditions necessary to allow growth include a flexible social and political framework, and incomes above some floor level. The central feature of growth, once it starts, is productivity growth. In turn, productivity growth results from innovation. Kuznets places the driving force behind innovation in science.

Kuznets also was concerned with income distribution. Economic growth brings about a decline in the relative position of some groups – farmers, small scale producers and landowners – and an increase in the position of other groups – owners of produced capital, managers and entrepreneurs. Kuznets looked at the evolution of income distribution and postulated what has become known as the Kuznets curve – as growth proceeds the inequality of income distribution at first increases and then, as average incomes continue to increase, begins to decrease.

Kuznets attributed economic growth to continuing technological advance. In turn, technological advance was based on science. Scientific knowledge is available to all so presumably the answer to the question of why only some countries move into economic growth is that the social structure, personal skills and attitudes in some countries are permissive of growth whereas in others they work to prevent growth.

However, Kuznets did not link his arguments into a consistent theory of growth. It was too easy just to attribute growth to science. What gives rise to scientific advance? Is scientific advance the cause of growth or the result of growth? What causes scientific advance to be translated into technological advance? Why do people behave in a way that generates growth? What are the practical mechanisms of growth? Kuznets did not create a practical view of the growth process. But, Kuznets greatly advanced the measurement of growth, and clarified the social characteristics and social effects of economic growth.

Question 5.
What are the Obstacles to Economic Growth.
The following points highlight the five major obstacles to economic growth

1. Interlocking Various Circle: Rapid economic growth is an historical abnormality. Therefore, any overall approach to development must take note of the reality, i.e., the various obstacles to growth as also the persistence of secular stagnation emphasised by A.H. Hansen.

The most fashionable concept here is the vicious circle of poverty, a concept introduced by Nurkse and others. The essence of the concept is that a country is poor because it is poor. The implication is clear. A country’s poverty is itself a major obstacle to growth and development. Because a country is poor, it cannot develop.

2. Population Problems: Rapid population growth creates serious prob-lems for poor countries in which the rate of capital formation is low. This scarce capital simply goes into spreading a larger quantity of tools over a larger number of people without raising per capita productivity.

Moreover, the increase in population creates serious problems in those countries where population is already dense in relation to land and other resources. Due to scarcity of capital goods, the growing labour force cannot find jobs in the urban areas and just adds to the existing labour force in rural areas. The consequence: open and disguised unemployment as a percentage of labour force increases with the passage of time the reverse of successful develop-ment.

3. The Difficult of Adapting Western Technology: The LDCs of the world often face certain difficulties in adapting western technology. It is so because such technology is not ideally suited to their own conditions. Such technology is mainly of capital-using type. But LDCs are basically capital-scarce.

So, they cannot utilise this technology effectively due to the use of such technology is also not possible due to shortage of entrepreneurs and skilled personnel which characterise most LDCs. At the same time, their own technology is out-dated.

So, they need an intermediate technology which consists of an adaptation of modem methods to their own special condi-tions. In the absence of such technology the latest western methods may be imported. The consequence: coexistence of shortage of certain factors (capital and skilled .personnel) and surpluses of others (large numbers of unemployed and unskilled workers).

4. Lack of Preparation for an Industrial Revolution: For industrial development to take place the social and economic groundwork must be laid first. But, in today’s LDCs attempts are being made to accomplish simultaneously both the industrial revolution and the preparations for such a revolution.

In fact, in such countries agricultural and commercial sectors have not sufficiently developed so as to sustain rapid industrial progress. Moreover, the existing institutions and value systems are hardly conducive to material progress.

5. The International Context: Most developed countries of today grew with the help of foreign capital in the past. But now the climate for investment in LDCs is not encouraging due to colonial abuses and a strong upsurge of nationalistic feeling and various restrictions imposed by capital-importing countries on the kinds and the terms of foreign investment.

Added to these are the dangers of nationalisation and expropriation. This is why, today the flow of private capital from rich to poor countries is insufficient compared to needs. This hampers the process of growth inasmuch as economic depends on capital and investment. However, the recent trends toward globalisation has led to greater informer of financial capital to LDCs.