Economics of development



Economics of development

Module 1:

Economic development: concept of development-definition-distinction between economic growth and development-sustainable development-characteristics of developing countries-measures of economic development: Gross national product(GNP)- per capita income, net economic welfare, physical quality of life index(PQLI), Human development index(HDI), Gender development Index(GDI), Gender empowerment measure(GEM), human poverty index(HPI).

Economics of development refers to the problems of the economic development of underdeveloped countries. The study of economic development has attracted the attention of economist’s right from the mercantilist sch0ol and Adam Smith to Marx and Keynes; they were mainly interested in the problems which were static in nature and largely related to a western European framework of social and cultural institutions.

It is however, in the forties of the present century and especially after the Second World War that economists started devoting their attention towards analyzing the problems of underdeveloped economies. Their interest in the economic development of underdeveloped countries has further stimulated by the wave of political resurgence that swept Asian and African countries after the Second World War. The desire on the part of the new leaders in these countries to promote rapid economic development coupled with the realization on the part of the developed nations that,” poverty anywhere is a threat to prosperity everywhere”, has aroused further interest in the subject. As Meir and Baldwin has remarked,” A study of the poverty of nation has even more urgency than a study of wealth of nations”.

But the interest of the wealthy nations in removing poverty of the under developed countries has not been aroused by any humanitarian motive. The most important reason for aiding the underdeveloped countries had been the cold war between former USSR and USA. Each tried to enlist the support and loyalty of underdeveloped countries by promoting larger aid than the other. Prof.Lyle.W.Shannon, observes,” the development of underdeveloped countries will be an area of intense competition between united states and USSR for many years, underdeveloped countries contains either vast natural resources needed by world power or having strategic locations from a military view point, will be of particular interest from a standpoint of their importance in world affairs.

Economic development has also an export value for both aid receiving and aid giving countries. In order to avoid secular stagnation rich countries need an ever increasing rate of development which must be accompanied by an outlet for the use of their growing capital stock. Poor countries need an accelerating rate of development to increase their export potential for avoiding deficit in balance of payments.

However, a study of poverty of nations and the methods of removing poverty cannot be based on the experience of the rich nations. According to Prof.Myrdal,” the underdeveloped countries should not accept our inherited economic theory uncritically but remould it to fit to their own problems and interest. So far economic theory has not concerned itself with the problems of underdeveloped countries. Nevertheless if it is uncritically applied to their problems it becomes wrong”.

Economic development and economic growth:

The term economic development is used in inter-changeably with such terms as economic growth. But certain economists like Schumpeter and Mrs. Ursula Hicks have made a distinction between the more commonly used terms economic development and economic growth. Economic development refers to the problems of underdeveloped economies; economic growth refers to the problems of advanced or developed countries. Development according to Schumpeter is a discontinuous change in the stationary state, which for ever alters and displaces the equilibrium state previously existing, while growth is a gradual and steady change in the long-run which comes about by a general increase in the rate of savings. Mrs. Ursula Hicks points out that the problems of underdeveloped countries are concerned with the development of unused resources, even though their uses are well-known, while those of advanced counties are related to growth, most of their resources being already known, and developed to a considerable extent.

According to Prof. Kindleberger, “Economic growth means more output, while economic development implies both more output and changes in the technical and institutional arrangements by it is produced and distributed. Growth may well involve not only more output, but also greater efficiency, that is, an increase in output per unit of input. Development goes beyond this, to apply changes in the composition of output and in the allocation of inputs by all the sectors of the economy.

Prof. Friedman defines growth,” as an expansion of the system in one or more dimensions without a change in its structure and development is, an innovative process leading to the structural transformation of social system”.

Thus economic growth is related to a quantitative sustained increase in the countries per capita output or income accompanied by expansion in its labour force, consumption, capital and volume of trade. On the other hand, economic development is a wider term; it is related to quantitative changes in economic wants, goods, incentives and institutions. It describes the underlying determinants of growth, such as technological and structural changes.

Despite these apparent differences, some economists use these terms as synonyms. W. Arthur Lewis, in his theory of economic growth writes that,” most often we shall refer only to growth but occasionally for the sake of variety, to progress or to development”.

Measures / definitions /indicators of economic development:

Economic development has defined in three ways:

One of the definitions is to measure economic development in terms of an increase in the economy’s real national income over a long period.

“Real national income” refers to the country’s total output of final goods and services in real terms rather than in money terms. Thus price changes will have to be ruled out, while calculating real national income. But this is unrealistic in a developing economy, where variations in price are inevitable. In this definition, the phrase,” over a long-period of time” implies a sustained increase in real income. A short period rise in national income which occurs during the upswing of the business cycle does not constitute economic development.

This definition fails to take into consideration changes in the growth population, if a rise in the national income is accompanied by a faster growth in population.

2. The second definition relates to an increase in the percapita real income of the economy over a long period. Economists are one in defining economic development in terms of an increase in per capita real income.

Prof.Meier defines economic development.” As the process of a country increases over a long period of time.

Prof. Baran opines,” let economic development be defined as an increase over time in per capita output of material goods”.

According to Buchanan and Ellis,” development means developing the real income potentialities of the underdeveloped areas by using investment to effect those changes and to augment those productive resources which promise to raise real income per person”.

These definitions emphasize that, for economic development the rate of increase in real income should be higher than the growth rate of population. But there are some difficulties or criticisms.

An increase in per capita income may not raise the real standard of living of the masses. It is possible that while per capita real income is increasing per capita consumption might be falling. People might be increasing the rate of saving or the government might itself be using up the increased income for military or other purposes.

The masses can also remain poor despite an increase in the per capita income, if the increased income goes to a few rich instead of going to the many poor.

Moreover, such a definition subordinates other questions regarding, the structure of the society. The size and composition of its population, its institutions and culture, the resource patterns and even distribution of output among the members of the society.

3. Economic development is also defined from the point of view of economic welfare. Economic development is regarded as a process whereby the real per capita income increases accompanied by reduction in inequalities of income and the satisfaction of the preferences of the masses. In the words of Richardson, economic development is,” a sustained secular improvement in material well-being, which we may consider to be reflected in an increasing flow of goods and services.

This definition is also not free from limitations:

1. Sustained growth in real national income does not necessarily mean an improvement in economic welfare. It is possible that with the increase in real per capita or national income, the rich may become richer and the poor poorer. Thus a mere increase in economic welfare does not lead to economic development unless the resultant distribution of national income is also considered just.

2. In measuring economic welfare, caution has to be exercised with regard to the composition of the total output. The increased total output may be composed of capital goods. It may be at the cost of a reduced output of consumer gods.

3. From the welfare point of view, we must also consider not only what is produced but how it is produced. The expansion of real national output might have raised the real costs (pain, sacrifice) and several costs in the economy.

Lastly, we cannot equate an increase in output per head with an increase in economic welfare, let alone social welfare, without additional considerations. To specify an optimum rate of development, we must make value judgments, regarding income distribution, composition of output, tastes, real costs and other particular changes that are associated with the overall increase in the real income. Therefore, in order to avoid value judgments and for the sale of simplicity economists use the per capita income as the measure of economic development.

Measures of economic development:

NEW, PQLI, HDI, GDI, GEM:

Net economic welfare (NEW):

There is also a tendency to measure economic development from the point of view of economic welfare. James Tobin and Paul Samuelson have popularized the concept of Net Economic Welfare (NEW).

NEW is arrived at by modifying GNP, by adding to it certain items like the value of leisure and housewives services and from subtracting from GNP such items like unmet costs of population and other disamenities of modern urbanization. Adjustments for increased leisure may not increase percapita, NEW is beyond percapita GNP growth. But disamenities of urbanization such as growing pollution would slow down NEW.

In overall development planning, the important question would be to decide how much of GNP growth the community would be willing to sacrifice to enhance the quality of life and net economic welfare. For instance, as a country becomes highly affluent, people prefer to work fewer hours in order to enjoy greater leisure, then the measured rate of growth of GNP may fall, but net economic welfare will shoe an increase, that is, people would have sacrificed to some extent certain quantity of goods and services for experiencing better quality of life.

The concept of NEW is more meaningful than GNP as a basis for development planning, because the aim of development planning is to improve the quality of life and net economic welfare helps to achieve this goal.

Gender related development (GDI):

Gender related development index was introduced in human development report (HDR) 1995. It measures achievements in the same dimensions and variables as HDI does, but takes account of inequality between women and men. Thus GDI attempts to capture achievements through the same set of basic capabilities as included in the human development index, such as, life expectancy, educational attainment and income but adjusts the HDI for gender inequality. The greater the gender disparity in basic human development, the lower a country’s GDI compared with its HDI.

In its 6 point plan of action to eradicate poverty, the human development report 1997 urges nations to commit themselves to gender equality, in order to unleash the energy and productive capabilities of women around the world. The report says there is much work to be done. In developing countries, the report illustrates women outnumber men by 60%, women earn only 3/4th of what men earn , meanwhile women bear a disproportionately large share of chores and child rearing responsibilities. They also have less access to land, credit and employment opportunities. In industrialized countries, unemployment rate among women is higher that among men. Globally women still hold 13% of parliamentary seats and 6% of cabinet posts.

To help nations monitor their progress in closing the gender gap, recent editions of the Human Development Report (HDR) have presented two measures of the disparities in opportunities for men and women in countries around the world. The findings of the report include:

a. The GDI measure 146 countries achievements in life expectancy, educational attainment and income and compares the status of women and men. Canada tops the GDI rankings, Norway is second and Sweden followed by Iceland and United States of America.

b. Several developing countries do well in GDI. Barbados 17, Uruguay 13, Trinidad and Tobago32, Korea 35, Cost Rica 36, Thailand 39. These countries have succeeded at enhancing the basic human capabilities of both men and women.

c. Sierra Leone falls at the bottom of the GDI, Nigeria ranks next to last and Burkina Faso third from the bottom. These countries also rank near the bottom in overall human development.

d. No society treats its women as well as its men. In every country, GDI values are lower than values on a HDI which measures people’s well-being.

e. Gender inequality often accompanies human poverty which reflects limited choices and opportunities. Sierra Leone, Nigeria, Burkina Faso, for example is at the bottom of the GDI rankings. They also report the worst human poverty, measured by a ‘human poverty index’(HPI), a new indicator of human deprivation featured in the HDR of 1997.

3. Gender Empowerment Measure (GEM)

Gender empowerment measure examines women’s access to professional, economic and political opportunities. This measure was also introduced by the Human development Report, 1995. It indicates whether women are able to actively participate in economic and political life. It focuses on participation, measuring gender inequality in key areas of economic and political participation, and decision making. It thus, differs from the GDI which is an indicator of Gender inequality in basic capabilities.

Human development report of 2004, presented GEM for 94 countries. The top four rankings are occupied by Norway, Sweden, Australia, and Canada. These countries are not only good at strengthening the basic capabilities of women but they have also opened many opportunities for them to participate in economic and political fields.

Some developing countries outperform many richer industrial countries in gender equality in political, economic, and professional activities. For example, Barbados outranks Italy and Belgium. Bahamas leads Japan, Philippines leaves behind Venezuela and Korea. In some countries there is a strong association between extent of poverty and opportunities for women.

However, the link between income, poverty and opportunities for women is not always positive. There are some countries which are quite highly placed in the GEM rankings, but have a high incidence of poverty by $1 a day poverty line. In some other countries GEM ranks are quite low but income poverty is also low.

The GEM results show that only 8 countries have a GEM value exceeding 0.800 only 27 countries have a GEM value of more than 0.600. And 31 countries have a Gem value less than 0.500. The latter group of countries has much further to travel in extending broad economic and political opportunities to women.

4. Human Development Index (HDI):

A more sensible index and the most recent one is HDI. In use since 1990, it was prepared by the United Nations under UN development programme. It is based on the three aspects of human living:

1. Income for decent living

2. Educational attainment and

3. Life expectancy

Elements and index:

Of the three components of the index, percapita income is the economic indicator. It is taken because it can well serve as a proxy measure fro the satisfaction derived from a bundle of basic goods and services. For this reason, the nominal GDP is adjusted for price changes, so that it reflects the real purchasing power. It is assumed also to reflect employment level of people. The other two are social indicators. The educational attainment is indicated by a combination of two measures. One is the adult literacy ratio. The second is the combined enrolment ratio at primary, secondary and tertiary levels which shows the stock of literacy for the young. This is in recognition of the importance of high levels of skill-formation for modern development. This also greatly helps in differentiating countries which are near the top of the ladder, particularly by the industrialized countries. Life expectancy or longevity, a much desired objective of human beings, reflects the progress made in such fields of health as infant and child mortality and nutrition. Thus one economic and two social components are brought together in the index. It reflects progress in the availability of material goods and services, employment adult literacy and the education for the young, infant and child mortality and nutrition. The improvements in these get reflected in the 3 indicators which together from one composite index of human development.

Ranking of countries:

The composite index, formed by combining 3 indices of income, educational attainment and life expectancy, does not measure absolute levels of human development. It ranks countries in relation to certain defined goals. The ranking of countries is dome according to how far they have progressed from the lowest levels of achievement and how far they will have to travel towards the present highest level of achievement on each of the three indicators. To prepare one composite index or to rank countries on a uniform scale, a common denominator has been prepared. Since income, educational attainment and life expectancy are all expressed in different units, the problem of common denominator was solved by choosing the distance which each country travels from the minimum towards the maximum for this, the current minimum value and the maximum desirable value are taken note of from the relevant data in respect of each of the three components of the index. For example, with respect to the life expectancy, the minimum value is given by the figure of a country with the lowest life expectancy. The maximum desirable value is given by the figure of a country with the highest life expectancy. The index traveled from the minimum towards the maximum and is expressed in percentage terms. The same exercise is repeated with respect to other two components. The distance traveled in each case is then the common basis which has been used for combining the three indices.

Diminishing importance of income:

An additional point in respect of HDI is the weight assigned to income while calculating HDI, the weight to income tapers off sharply beyond the threshold income, regarded as sufficient for human survival. This means that as the income goes higher than the cut-off point, it becomes increasingly less important. This is based on the valid assumption that the rich in income after a point is subject to diminishing returns. The consequences become more influential in determining the index.

Significance:

This index is much better, for the simple reason that it includes income which is the single most important factor in determining the well-being of the poor in the less-developed countries. Equally important is taking account of the social progress as indicated by an improvement in educational attainment and life expectancy, the HDI stresses the importance of the quality of life. This index also sharply illustrates the wide disparities that exist in the levels of human development between countries. This should spur action, both at the national and international levels, to undertake remedial measures.

By itself the index is important and a novel one. It is obvious that human development involves the growth of per capita income as the first and the foremost objective for the less developed countries at their present stage of development. It is also important to improve the social services both through increase in income and change in the pattern of public expenditure. It is all these together that will raise the quality of life.

Physical Quality Life Index:

Recent deterioration in the economic conditions of the bulk of population in less developed countries, despite some growth, has led to the formulation of non-income, one important index development. Among them, one important index is the PQLI.

Morris D. Morris constructed a composite PQLI in 1979 relating to 23 developing countries for a comparative study. He combines three component indicators of infant mortality, life expectancy at age one, and basic literacy at age 15 to measure performance in meeting the most basic needs of the people. This index represents a wide range of indicators such as health, education, drinking water, nutrition and sanitation.

Each indicator of the three components is placed on a scale of zero to 100 where zero represents an absolutely defined worst performance and 100 represents an absolutely defined best performance. The PQLI is calculated by averaging the three indicators giving equal weight to each and the index is also scaled from zero to 100.

According to Morris, each of the three indicators measures results and not inputs such as income. Each is sensitive to distribution effects. It means that an improvement in these indicators signifies an increase in the proportion of people benefiting from them. But none of the indicators depends on any particular level of development. Each indicator lends itself to international comparison.

Morris regards life expectancy at age one and infant mortality as very good indicators of the physical quality of life. So are literacy and life expectancy.

Limitations:

Morris admits that PQLI is a limited measure of basic needs. It supplements but does not supplant the GNP. It does not measure economic growth. Further, it does not explain the changing structure of economic and social organization. It, therefore, does not measure economic development. Similarly, it does not measure total welfare. However, it measures the qualities of life which are essential for the poor.

Morris has been criticized for using arbitrary weights for the three variables of his PQLI.

According to Meier,” non-income factors captured by the PQLI are important but so are income and consumption statistics and distribution sensitive methods of aggregation by which to obtain an overall poverty index.

Conclusion:

Despite these limitations, the PQLI can be used to identify particular regions of underdevelopment and groups of society suffering from the neglect of failure of social policy. It points towards that indicator where immediate action is required. The state can take up such policies which increase the PQLI rapidly along with economic growth.

Human poverty index:

The human development report 1997 introduced the concept of a human poverty index (HPI) in an attempt to bring together in a composite index the different features of deprivation in the equality of life, to arrive at an aggregate judgment on the extent of poverty in a community. It measures deprivation in basic human development in the same dimension as the HDI; Human Development Report 2004 uses the following variables for calculating HPI for developing countries, probability at birth of not surviving to age 40; adult literacy rate and percentage of population without sustainable access to an improved water source and children underweight for age.

Human Development Report 2004 has presented HPI for 95 developing countries having adequate data. At the top of the rankings are Barbados, Uruguay, Chile, Costa Rica, Cuba, Singapore, Jordon, Trinidad and Tobago and Panama, these countries have reduced human poverty to an HPI value of less than 8%. In other words, these countries have reduced human poverty to the point at which it affects less than 8% of the population. At the bottom are six countries whose HPI exceeds 50%-Zambia, Zimbabwe, Ethiopia, Mali, Niger, and Burkina Faso. In 40 countries out of the 95 countries covered, the HPI exceeds 34%, implying that about a third of their population suffer human poverty. India has an HPI value of 31.4% indicating that a little less than 1/3rd of its people suffer human poverty.

Sustainable development:

The concept of sustainable development is of recent origin. The term sustainable development was first used by the world conservation strategy presented by the international union for the conservation of nature and natural resources in 1980. It was commonly used and defined for the first time by the Brundtland report entitled our common future, of the world commission on environment and development in 1987.

Meaning:

There are many definitions of sustainable development. But the most popular definition is by the Brundtland Report. It defined sustainable development as,” meeting the needs of the present generation without compromising the needs of future generations”.

Sustainable development means that development should, ‘keep going’, it emphasis the creation of sustainable improvements in the quality of life of all people through increases in real income per capita, improvements in education, health and general quality of natural environmental resources. Thus sustainable development is closely linked to economic development. It is a situation in which economic development does not decrease over time. Sustainable development is development that is everlasting and contributes to the quality of life through improvements in natural environments. Natural environments in turn, supply utility to individuals, inputs to the economic process and services that support life. As pointed out by Pearce and Warford,”sustainable development describes a process in which natural resources base is not allowed to deteriorate. It emphasizes the hitherto unappreciated role of environmental quality and environmental inputs in the process of raising real income and the quality of life”.

Features of sustainable development:

Sustainable development, the real economic development which every country strives to achieve, has certain special features. The special features of sustainable economic development are:

1. Sustainable economic development increases not only the production but also the productivity of the economy.

2. Sustainable economic development is not just restricted to money value of goods and services. It results in increase in real goods and services.

3. Sustainable economic development makes the economy self-sufficient and self-reliant.

4. Sustainable development builds sound and healthy economic and social infrastructure in the fields of transport, communication, finance, insurance, health, education, civic amenities etc.

5. It generates increasing employment opportunities.

6. Sustainable development improves the standard of living of the people particularly, the poor masses. That is, it adds to the welfare, that is, sense of well-being or feeling of better off among people.

7. Eradication of poverty, illiteracy, malnutrition, inequality, disease, infant mortality etc is the main targets of sustainable development.

8. Improving the quality of life of the people by increasing the longevity of life, adult literacy rate, gross enrolment ratio and the real GDP per capita is also one of the special features of sustainable economic development.

9. It emphasizes on the cost of development, particularly the cost of environmental loss, should be taken care off.

10. It ensures that the stock of natural resources both renewable and non-renewable resources is maintained or increased along with the preservation of human capital and physical capital like machinery.

11. It ensures that the options of future generation are not compromised by the path taken by the present generation.

Thus sustainable development is that development which attempts to strike a balance between the quality of life of the present generation and the future generation. It strikes a balance between the demands of economic development and the need for the protection of the ecology and environment.

Characteristics of an underdeveloped economy:

Prof. Hoffman portrays a vivid picture of an underdeveloped country in the following words,” everyone knows an underdeveloped country, when he sees one. It is a country characterized by poverty, with beggars in the cities and villages living on bare subsistence in the rural areas. It is a country lacking in factories of its own, usually with inadequate supplies of power and light. It usually has insufficient roads and railways, insufficient government services, poor communication system. It has few hospitals and few institutions of higher learning. Most of its people cannot read and write. Inspite of the generally prevailing poverty of the people, it may have isolated islands of wealth with a few persons living in luxury.”

The main characteristics of an underdeveloped country are:

1. General poverty:

An underdeveloped country is poverty ridden. Poverty is reflected in low percapita income. According to the world development report, 50% of the population of the world had GNP of less than 300 dollars. Low per capita income is further reflected in low living standards of the people. In such countries, food is the major item of consumption and about 75% of the income is spent on it as compared to 20% in advanced countries. The average calorie intake hardly exceeds 2000 in underdeveloped economy, as compared with more than 3000 calories in advanced countries. Thus the vast majority of the people in underdeveloped countries are ill-fed, ill-clothed, ill-housed and ill-educated. Poverty, is, therefore, is the basic malady of an under developed country. Prof. A.K. Caircross, is justified in saying that the underdeveloped countries are the “slums of the world economy”

2. Agriculture – the main occupation:

In underdeveloped countries 2/3rds of the people live in rural areas and their main occupation is agriculture. The primary sector supplies raw-materials and food has occupied an important role in the production and occupation structure of the underdeveloped countries.

In an underdeveloped country a large part of the labour force is working in the primary sector and large part of their national income consist of primary products. Though a large part of the labour force is engaged in agriculture, yet agricultural productivity is at a low level on account of the existence of traditional methods of cultivation.

3. Backwardness of agriculture:

Although agriculture has occupied the pride of place in an underdeveloped country, considered from modern agricultural standards there are many defects and deficiencies. Old methods are used for tilling, sowing, harvesting, storing, etc. As a result, the yield from land is lower than the developed countries.

4. Low per-capita income and standard of living:

A country having per-capita income, which is below the average per capita income of the world or having less than 1/5th of the per capita income of USA is an overall indicator of underdevelopment. A small part of the income is utilized for defending the country and another small part is saved. The remaining income which can be spent on consumption permits only a very low standard of living for the people. If we compare the standards of living of people in underdeveloped countries with the standard of living of the people in developed countries the problem of poverty existing in underdeveloped counties becomes very clear. Though it is difficult to compare the standard of living of different nations, yet economists with the help of modern sophisticated statistical techniques have made attempts in this direction.

There is a close relationship between low per capita income and low standards of education of the people in under developed countries. The economic history of developed countries has shown that the standard of education rises with economic development, which in turn promotes further economic development.

Thus an underdeveloped country is characterized by several features of poor standard of living, malnutrition, unbalanced diet, lack of housing facilities, illiteracy etc.

5. Under developed countries are dual economies:

Under developed countries are not countries without any sign of modern development. There are atleast a few industries, mines and big plantations in underdeveloped counties. All these have adopted modern techniques of production. However, this kind of modern sector forms only a small part of the economy. Most of the economic activities are carried on with old techniques and processes of production. It means that underdeveloped economies are dual economies having a small modern sector and a large traditional sector. They are also economies having technological dualism. Development process in this context may be viewed as the course of transformation of the traditional sector to the modernized sector.

6. Pressure of population:

Under developed countries have a very high birth rate. Chiefly due to the advancement made by the medical sciences, their has been a fall in the death rate, during the 20th century, especially after the World War II. This has resulted in very high rate of growth of population in underdeveloped countries. An important consequence of high birth rate is that a large proportion of the total population is in younger age groups. A large percentage

Of children in the population who do not produce anything but consume entails a heavy burden on the economy. The life expectancy is very low in underdeveloped countries a small part of population is productively engaged and a large part of the population consist of dependent population. This also inhibits the rate of growth of population produces undesirable effects, is applicable to these under developed countries. In a situation devoid of growth generating forces, population pressures make the problem of poverty and unemployment severe.

7. Unemployment:

The problem of unemployment in underdeveloped countries can be said to be more serious than the problem of unemployment in the developed countries. Underemployment in the underveloped countries is a chronic problem. Pre-dominance of agriculture in these countries indicate imbalances in the economic structure. The number of persons working in the field of agriculture is more than the number of jobs available in agriculture. The lack of job opportunities outside agriculture has made the problem of rural unemployment chronic. Disguised unemployment is common in the villages where farmers and their families have insufficient land and equipment, to keep all of them fully engaged. Disguised unemployment is an important feature and a problem of underdeveloped countries.

Along with rural under employment, unemployment among the urban labour force and educated unemployment are also common in under developed countries. Since the level of income is low, the effective demand is also low, therefore, entrepreneurs in underdeveloped countries, are not in a position to provide employment to a large number of workers. On the whole, it can be said that the slow growth of the economy and the rapid rate of population are the causes of unemployment existing in underdeveloped countries.

8. Absence of enterprise:

Lack of enterprise is one of the features of under developed countries. The role of entrepreneurs in economic development is very significant. But the underdeveloped countries have only a small number of industrial leaders. The social climate and the absence of infrastructural facilities are not conducive to the growth of entrepreneurial class. Lack of power, capital, inadequate supply of water, lack of transport facilities, small size of the market etc hamper enterprise. Thus under developed countries lack entrepreneurs, who play a very important role in the economic development of a country.

9. Quality of people and social forces:

Though underdeveloped countries have vast population it is to be noted that this population does not possess the qualities needed for achieving economic development. They are wedded to traditional modes of production associated with only subsistence levels. The efficiency of labour is underdeveloped countries are at a low level. Caste system, joint family and other social factors prevent workers from moving to more attractive occupations. These social institutions and social forces are in some respects obstacles to economic development. The status of an individual is determined by birth, competition, which is the main cause of economic efficiency has very little place in the economic efficiency has very little place in the economic organization of underdeveloped countries. Economic relationship and activities are guided by custom and status rather than competition and contract.

In many underdeveloped countries, there is no single sociological pattern for the entire country. They have two or more social groups, each having its own customs and practices. The existence of this kind of sociological dualism is a feature of under developed countries. The social diversity and problems arising from this should be considered in the studies relating to economic development. As Prof. Myrdal has said overcoming this social diversity and creating suitable psychological, social and political conditions for economic development are important tasks in the economic development of underdeveloped countries.

10. Deficiency of capital:

Low level of savings and capital formation is another important feature of underdeveloped countries. These countries are in the grip of vicious circle of low income, low savings, low investment, which further decreases income, low level of income, savings and investment are the causes of underdevelopment. The excess income over consumption is very little on account of the low level of income of the people in under developed countries.

In these countries propensity to consume is very high due to “demonstration effect”. These countries have a rich class, which usually indulges in “conspicuous consumption” the poor people imitate the consumption standards of the rich, therefore only a small part of the national income can be saved and invested.

The deficiency of capital in under developed countries is also due to poor organization of saving institutions like banks, insurance companies etc. Private capitalists lend their money for unproductive purposes and engage themselves in unproductive activities.

Thus low income, saving and investment, demonstration effect, conspicuous consumption, poor organization of financial institutions combined together to create deficiency of capital in under developed countries.

11. Natural resources:

Under utilization of resources is another characteristic feature of under developed countries, in these countries, the hidden natural resources have not been adequately explored. Even the known natural resources remain unutilized on account of inaccessibility of natural resources, lack of capital and technological backwardness.

12. Foreign economic relation:

Although underdeveloped countries are economically backward, yet, their foreign trade has grown significantly. Most of the underdeveloped countries were under the political control of industrial super powers. This gave rise to a special form of trade structure. These under developed countries were the chief suppliers of raw materials to industrial nations. Primary products are prominent in the export trade of each under developed country. Exports of these countries consist of coffee, tea, raw-jute, cotton, oil-seeds, rice, copper and other metals, rubber and other products. Since these countries export one or two products on a large-scale, depression or prosperity in other countries affects these countries severely. This produces variations in their foreign exchange earnings. To overcome these problems the underdeveloped countries have to diversify their exports and stabilize their export earnings.

The expansion of exports of under developed countries even from the last century is related to foreign investment. Foreigners employ their capital and enterprise in these countries to develop chiefly plantations, mines and some trading companies. This led to the growth of exports oriented industries in these countries. However, foreign investment and foreign trade have not stimulated nation wide economic development in these backward countries. In fact, many economists argue that foreign economic relation has led to the exploitation of these under developed countries. Prof. Singer, Myrdal and others have also argued that the terms of trade have generally been against the countries producing primary products.

13. Technological backwardness:

Most of the under developed countries are characterized by low level of technological development. This is reflected in high cost of production, high labour-output ratios, and existence of inefficient workers. Productive activities in agricultural and industrial sectors are carried on through outdated implements or tools.

14. Income-disparities:

Existence of income-disparities is one of the problems of under developed countries. The under developed countries consist of rich and poor people. A considerable proportion of income is concentrated in the hands of rich, were as majority live below the poverty line. Developed countries constitute less than 1/8th of the human race but produce and consume. 2/3rds of the world’s output. On the contrary, nearly 2/3rds of the world’s population live in the economically backward regions of Africa, Asia, and Latin America per capita income in such countries us very low as compared with that of the rich countries.

Conclusion:

The above descriptions of the common characteristics of under developed countries help us to understand the difficult nature of the problem of economic development of these countries.

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