Chapter 1 Class 2

Development and Underdevelopment

The concept "development" refers to the structural changes towards betterment. The traditional approach defines
development strictly in economic terms. The increase in GNP is accompanied by decline in share of agriculture
in output and employment while those of manufacturing and service sectors increase. It emphasizes the
importance of industrialization.
During 1970s, economic development was redefined in terms of reduction of poverty, ‘inequality’ and
unemployment within the context of a growing economy. In this phase, ‘Redistribution with Growth’ became the
popular slogan.
To quote Michael P. Todaro, “Development must, therefore, be conceived as a multidimensional process
involving major changes in social structures, popular attitudes and national institutions as well as the acceleration
of growth, the reduction of inequality and the eradication of absolute poverty”.
On the contrary underdeveloped countries (The UDCs) are characterized by predominance of primary sector i.e.
agriculture, low per capita income, widespread poverty, wide inequality in distribution of income and wealth,
over population, low rate of capital formation, high rate of unemployment, technological backwardness, dualism
etc.
The term underdevelopment refers to that state of an economy where levels of living of masses are extremely low
due to very low levels of Per capita income, resulting from low levels of productivity and high growth rate of
population.
Determinants of Economic Development
Economic development is not determined by any single factor. Economic development depends on Economic and
non-economic factors.
1. Economic Factors
1. Natural Resource: The principal factor affecting the development of an economy is the availability of natural
resources. The existence of natural resources in abundance is essential for development. A country deficient in
natural resources may not be in a position to develop rapidly. But a country like Japan lacking natural resources
imports them and achieve faster rate of economic development with the help of technology.
2. Capital Formation: Capital formation is the main key to economic growth. Capital formation refers to the net
addition to the existing stock of capital goods which are either tangible like plants and machinery or intangible
like health, education and research. Capital formation helps to increase productivity of labour and thereby
production and income. It facilitates adoption of advanced techniques of production. It leads to better utilization
of natural resources, industrialization and expansion of markets which are essential for economic progress.
3. Size of the Market: Large size of the market would stimulate production, increase employment and raise the
National per capita income. That is why developed countries expand their market to other countries through WTO.
4. Structural Change: Structural change refers to change in the occupational structure of the economy. Any
economy of the country is generally divided into three basic sectors: Primary sector such as agricultural, animal
husbandry, forestry, etc; Secondary sector such as industrial production, constructions and Tertiary sector such
as trade, banking and commerce. Any economy which is predominantly agricultural tends to remain backward.
5. Financial System: Financial system implies the existence of an efficient and organized banking system in the
country. There should be an organized money market to facilitate easy availability of capital.
6. Marketable Surplus: Marketable surplus refers to the total amount of farm output cultivated by farmers over
and above their family consumption needs. This is a surplus that can be sold in the market for earning income. It
raises the purchasing power, employment and output in other sectors of the economy. The country as a result will
develop because of increase in national income.
7. Foreign Trade: The country which enjoys favorable balance of trade and terms of trade is always developed.
It has huge forex reserves and stable exchange rate.
8. Economic System: The countries which adopt free market mechanism (laissez faire) enjoy better growth rate
compared to controlled economies. It may be true for some countries, but not for every country.

2. Non- Economic Factors

‘Economic Development has much to do with human endowments, social attitudes, political conditions and
historical accidents. Capital is a necessary but not a sufficient condition of progress.
1. Human Resources: Human resource is named as human capital because of its power to increase productivity
and thereby national income. There is a circular relationship between human development and economic growth.
A healthy, educated and skilled labour force is the most important productive asset. Human capital formation is
the process of increasing knowledge, skills and the productive capacity of people. It includes expenditure on
health, education and social services. If labour is efficient and skilled, its capacity to contribute to growth will be
high.
2. Technical Know-how: As the scientific and technological knowledge advances, more and more sophisticated
techniques steadily raise the productivity levels in all sectors. Schumpeter attributed the cause for economic
development to innovation.
3. Social Organization: People show interest in the development activity only when they feel that the fruits of
development will be fairly distributed. Mass participation in development programs is a pre-condition
for accelerating the development process. Whenever the defective social organization allows some groups to
appropriate the benefits of growth. majority of the poor people do not participate in the process of development.
This is called crony capitalism.
4. Corruption free administration: Corruption is a negative factor in the growth process. Unless the countries
root-out corruption in their administrative system, the crony capitalists and traders will continue to exploit national
resources. The tax evasion tends to breed corruption and hamper economic progress.
5. Desire for development: The pace of economic growth in any country depends to a great extent on people’s
desire for development. If in some country, the level of consciousness is low and the general mass of people has
accepted poverty as its fate, then there will be little scope for development.
6. Moral, ethical and social values: These determine the efficiency of the market. If people are not honest,
market cannot function.
7. Patrimonial Capitalism: If the assets are simply passed on to children from their parents, the children would
not work hard, because the children do not know the value of the assets. Hence productivity will be low.

Causes Responsible for Economic Backwardness:

(i) Capital Deficiency:
Capital is of crucial importance for economic growth, but this is what the under-developed countries lack.
With the low level of national output much saving is not possible but whatever there is, it is frittered away in
conspicuous consumption and extravagance in social ceremonies or is invested in real estate or jewellery.
Lack of sufficient capital handicaps all productive enterprise and inhibits economic growth. Such countries are
caught up in a vicious circle of poverty explained below.
(ii) Lack of Entrepreneurial and Managerial Talent:
It is the bold and prudent entrepreneur and a wise manager who makes success of a business enterprise. Lack of
this talent is responsible for missing available opportunities of profitable investment. Hence such countries remain
economically backward.
(iii) Lack of Skilled Personnel and Technical Know-how:
Another very important bottleneck in the way of economic growth is the scarcity of technical know-how and
skilled personnel. These elements of productive power take long in building up and foreign technicians are very
costly. Hence, the underdeveloped countries remain under-developed.
(iv) Limited Size of the Market:
The purchasing power of the people is very low on account of their proverbial poverty. Hence the productive
enterprises are handicapped in the sale of goods. Only an expanding market can provide a fruitful field for
profitable investment and result in economic development of the country.
(v) Weak Infrastructure:
The backward countries lack an adequate and efficient means of transport and communications, a well-organised
and developed banking system and adequate facilities for technical education. Without these no country can
develop economically. Lack of adequate infrastructure is a big abstracted to economic growth.
(vi) Social and Institutional Set-up:
Social customs and attitudes of the people of backward countries are a great bar to economic progress. Conserva-
tism, superstition, lack of ambition, undue regard for custom and status are a drag on economic progress.
(vii) Growing Population:
The explosive rate of population growth in the backward countries undoubtedly retards their economic growth.
Whatever development fakes place is swallowed up by the rising tide of population.