CHAPTER
6 Factor s of Economic Gr owth: actors Growth: Economic and Non-Economic
The process of economic growth is determined by two types of factors, economic and noneconomic. Economic growth is dependent upon its natural resources, human resources, capital, enterprise, technology, etc. These are economic factors. But economic growth is not possible so long as social institutions, political conditions and moral values in a nation do not encourage development. These are non-economic factors. We study these economic and non-economic determinants of economic growth separately.
ECONOMIC FACTORS Economists regard factors of production as the main economic forces that determine growth. The growth rate of the economy rises or falls as a consequence of changes in them. Some of the economic factors are discussed below: 1. Natural Resources. The principal factor affecting the development of an economy is the natural resources or land. “Land” as used in economics includes natural resources such as the fertility of land, its situation and composition, forest wealth, minerals, climate, water resources, sea resources etc. For economic growth, the existence of natural resources in abundance is essential. A country which is deficient in natural resources will not be in a position to develop
rapidly. As pointed out by Lewis, “Other things being equal, men can make better use of rich resources than they can of poor.”1 In LDCs, natural resources are either unutilised, underutilised or misutilised. This is one of the reasons for their backwardness. The presence of abundant resources is not sufficient for economic growth. What is required is their proper exploitation. If the existing resources are not being properly exploited and utilised, the country cannot develop. J.L. Fisher has rightly said, “There is little reason to expect natural resource development if people are indifferent to the products or services which such resources can contribute.”2 This is due to economic backwardness and lack of technological factors. Therefore, natural resources can be developed through improved technology and increase in knowledge. In reality, as pointed out by Lewis, “the value of a resource depends upon its usefulness, and its usefulness is changing all the time through changes in taste, changes in technique or new discovery.”3 When such changes are taking place, any nation can develop itself economically through fuller utilisation of its natural resources: For example, Britain underwent agricultural revolution by adopting the method of rotation to crops between 1740-60. Similarly, France was able to revolutionise its agriculture on the British pattern despite shortage of land. On the other hand, the countries of Asia and Africa have not been able to develop their agriculture because they have been using old methods of production. It is often said that economic growth is possible even when an economy is deficient in natural resources. As pointed out by Lewis, “A country which is considered to be poor in resources today may be considered very rich in resources at some later time, not merely because unknown resources are discovered, but equally because new uses are discovered for the known resources.” Japan is one such country which is deficient in natural resources but it is one of the advanced countries of the world because it has been able to discover new uses for limited resources. Moreover, by importing certain raw materials and minerals from other countries, it has been successful in overcoming the deficiency of its natural resources through superior technology, new researches, and higher knowledge. Similarly, Britain has developed without non-ferrous metals. The means of transport and communication have an important bearing on economic growth. Their development reduces the transport costs, and increases the external and internal trade of the country. As a result, the economy progresses. In countries where road, rail, canals or rivers are inter connected with each other, economic growth is encouraged, as has been the case in Britain, France, Germany and the Netherlands. Thus, for economic growth the existence of abundant natural resources is not enough. What is essential is their proper exploitation through improved techniques so that there is little wastage and they could be utilised for a longer time. 2. Capital Accumulation. The second important economic factor in growth is capital accumulation. Capital means the stock of physical reproducible factors of production. When the capital stock increases with the passage of time, this is called capital accumulation (or capital formation). The process of capital formation is cumulative and self-feeding and includes three inter-related stages: (a) the existence of real savings and rise in them; (b) the existence of credit and financial institutions to mobilise savings and to divert them in desired channels; and (c) to use these savings for investment in capital goods. 1. W.A. Lewis, Economic Development with Unlimited Supply of Labour, The Manchesler School., p. 52. 2. J.L. Fisher in Williamson and Buttrick, op. cit.. p. 34. 3. W.A. Lewis, op. cit., p. 52.
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There are various possibilities of increasing the rate of capital accumulation. Since the propensity to save is low in an LDC, voluntary savings will not be forthcoming in sufficient quantities. Therefore, the obvious way is to resort to forced savings. Forced savings reduce consumption and thereby release resources for capital formation. The various methods of forced savings are taxation, deficit financing and borrowing. Nurkse also suggests mobilisation of the disguised unemployed in rural areas for construction works as an important means for capital formation in LDCs. Besides, there are external resources in the form of loans, grants and larger exports that can help in capital formation. Capital formation is the main key to economic growth. On the one hand, it reflects effective demand and, on the other it creates productive efficiency for future production. Capital formation possesses special importance for LDCs. The process of capital formation leads to increase in national output in a number of ways. Capital formation is essential to meet the requirements of an increasing population in such economies. Investment in capital goods not only raises production but also employment opportunities. It is capital formation that leads to technological progress. Technological progress in turn leads to specialisation and the economies of largescale production. Capital formation helps in providing machines, tools and equipment for the rising labour force. The provision for social and economic overheads like transport, power, education, etc., in the country is possible through capital formation. It is also capital formation that leads to the exploitation of natural resources, industrialization and expansion of markets which are essential for economic progress. According to Lewis, the rate of capital formation in LDCs is 5 per cent or less which should be raised to the level of 12 to 15 per cent. The estimates of Kuznets reveal that during modern economic growth gross capital formation in developed countries was from 11-13 per cent to 20 per cent and above while net capital formation was from 6 per cent to 12-14 per cent. Again, according to Kuznets, the incremental capital-output ratio (ICOR) has played an important role in modern economic growth. The (ICOR) reflects productivity of capital. It refers to the additional amount of capital required to produce an additional unit of output. In LDCs, the ICOR is high because large investments are made in social overhead projects requiring long gestation period. Moreover, the rate of unused capacity in capital-intensive manufacturing industries is high due to non-availability of the complementary factors of production. Therefore, efforts should be made to remove such constraints so as to lower the ICOR. 3. Organisation. Organisation is an important part of the growth process. It relates to the optimum use of factors of production in economic activities. Organisation is complement to capital and labour and helps in increasing their productivities. In modern economic growth, the entrepreneur has been performing the task of an organiser and undertaking risks and uncertainties. The entrepreneur is not a man of ordinary ability. He is an economic leader who possesses the ability to recognise opportunities for successful introduction of new commodities, new techniques, and new sources of supply, and to assemble the necessary plant and equipment, management and labour force and organise them into a running concern. He is the kingpin of any business enterprise for without him the wheels of industry cannot move. So entrepreneurship is an indispensable ingredient in economic development. For instance, the credit for the industrial revolution in England goes to the entrepreneurs, and of the economic growth of the United States in the 19th century and the mid 20th century to the improvement in the quality of management. But LDCs lack in entrepreneurial activity. Such factors as the small size of the market, capital deficiency, technological backwardness, absence of private property and contract, lack of skilled
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and trained labour, non-availability of adequate raw materials and infrastructural facilities like transport, power, etc., increase risks and uncertainties. That is why such countries lack entrepreneurs. According to Myrdal, the Asian countries lack entrepreneurship not because they are deficient in capital or raw materials but because they are deficient in persons with right attitude for entrepreneurship. The Japanese possess such attitude in abundance. This is the reason for Japan’s rapid economic growth and inclusion among the developed countries. LDCs should create a climate for encouraging entrepreneurship. To remove market, imperfections, the existing institutions should be improved. Monopolistic institutions should be controlled and curbed. The knowledge of market opportunities should be increased. Laws should be passed and strictly enforced for the protection of property rights .efficiently and the maintenance of law and order within the country. Besides, it requires the establishment of financial institutions which collect savings and canalise them for entrepreneurial activities. To facilitate this process, such financial institutions like the savings banks, investment banks, and the complex of brokers, dealers and commercial banks that comprise the capital and money markets are required. The government should adopt such monetary and fiscal policies which encourage the growth of entrepreneurship. The shortage of skilled personnel of various kinds such as workers, scientists, technicians, managers, administrators etc., poses a serious problem in the success of entrepreneurship in underdeveloped countries. It necessitates the setting up of scientific, technological, managerial, research and training institutes. Though management and entrepreneurship are two different things in both the private and public sectors, yet scientific, technical and managerial personnel are very important for the success of entrepreneurship. Apart from providing economic overhead capital, the state should also help in importing machinery and capital equipment and in evolving appropriate technologies in various fields which may be in keeping with the factor endowments of the country. Facilities to finance such techniques and the supply of raw materials, and wider markets will help in increasing the supply of entrepreneurs. The provision of all the above noted social, economic and technological institutions will push even the latent entrepreneurship in the right direction. Moreover, the state can itself assume the role of an entrepreneur in key, basic and heavy industries, and also in certain consumer goods industries and service sector in public interest. 4. Technological Progress. Technological changes are regarded as the most important factor in the process of economic growth. They are related to changes in the methods of production which are the result of some new techniques of research or innovation. Changes in technology lead to increase in the productivity of labour, capital and other factors of production. Kuznets traces five distinct patterns in the growth of technology in modern economic growth. They are: a scientific discovery or an addition to technical knowledge; an invention; an innovation; an improvement; and the spread of invention usually accompanied by improvements. Like Schumpeter, he regards innovation as the most important technological factor in economic growth. In modern economic growth the five factors, mentioned by Kuznets, have helped in the development of technology. Kuznets points out that LDCs must import modern technology to accelerate their productive capacity in the short run because they cannot wait until they themselves invent or modify the technology of advanced countries. But as they adopt imported technology, they must develop their indigenous technical skills. It is a misnomer that all modern technology is capital-intensive. Advanced countries have also
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low-cost capital-saving, labour-intensive productivity-raising technology which can be transferred to developing countries. LDCs should, therefore, benefit from the vast fund of technical knowledge of the advanced countries. However, scientific and industrial technology to be useful in an LDC needs careful processing and adaptation in accordance with its social, economic and technical absorption capacities and requirements. Above all, imported technology requires strong backing of R and D studies of problems arising in assimilation, adaptation and improvement in keeping with the factor endowments of the country. One of the principal causes in modern economic growth has been the spending of high percentages of their national income on R and D by the advanced countries. 5. Division of Labour and Scale of Production. Specialisation and division of labour lead to increase in productivity. They lead to economies of large-scale production which further help in industrial development. They increase the rate of economic development. Adam Smith gave much importance to the division of labour in economic development. Division of labour leads to improvement in the productive capacities of labour. Every labourer becomes more efficient than before. He saves time. He is capable of inventing new machines and processes in production. Ultimately, production increases manifold. But division of labour depends upon the size of the market. The size of the market, in turn, depends upon economic progress, that is, the extent to which the size of demand, the general level of production, the means of transport, etc., are developed. When the scale of production is large there is greater specialisation and division of labour. As a result, production increases and the rate of economic progress is accelerated. Larger pecuniary external economies are available and benefits of indivisibilities accrue. These indivisibilities are power, transport, etc., and their uses lead to industrial progress. Production increases in this way and rapid economic growth takes place. One of the important factors in modern economic growth has been the spectacular development of the means of transport and communications through such technological changes as railroad, ironclad vessel, automobile and truck, and more recently the jet airplane and supertanker as well as cost-reducing investments, such as the Suez and Panama Canals, and the development of specialised and general press, the radio, the telephone and telegraph communications. Some of the developed countries having vast geographical areas such as the United States, Canada and Australia have been able to expand the size of their internal and external markets through the development of their means of transport and communications. The growth process in an LDC can be accelerated by widening of the market through adoption of modern means of transport and communications. To widen both domestic and foreign markets, it should also adopt standardisation and grading of its products. Further, there should be growth in the scale of firms and changes in the type of organisation so that there is greater specialisation and division of labour. In other words, economic growth through agricultural and industrial development in LDCs should be accompanied by commercialisation. 6. Structural Changes. Structural changes imply the transition from a traditional agricultural society to a modern industrial economy involving a radical transformation of existing institutions, social attitudes, and motivations. Such structural changes lead to increasing employment opportunities, higher labour productivity and the stock of capital, exploitation of new resources and improvement in technology. An LDC is characterised by a large primary sector and a very small secondary sector alongwith an equally small tertiary sector. Structural changes may begin with the transfer of population
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from the primary to secondary and then to tertiary employment. In an overpopulated agricultureoriented economy, 70-80 per cent of the population is engaged in the agricultural sector. Structural changes involve the expansion of the non-agricultural sector so that the proportion of population in the agricultural sector is progressively reduced. It implies reduction in the size of contribution to net national output by the agricultural sector. But a decline in the share of the agricultural sector in the net national product does not mean a fall in the output of agriculture. Rather agricultural output must increase in absolute terms. In order to increase agricultural output, radical changes will have to be made in the form of land reforms, improved agricultural techniques and inputs, better marketing organisation, new credit institutions etc. When agricultural production increases, it increases money incomes in the agricultural sector. This, in turn, expands rural demand for consumer goods and agricultural inputs which act as stimulants to the expansion of the industrial sector. The industrial sector itself affects the agricultural sector. First, the expansion of farm output requires improved farm machinery and other inputs manufactured by the industrial sector. Second, increasing agricultural productivity and income expands the demand for consumer goods and services available in the industrial sector. “The scope for increasing agricultural productivity and income, in other words, is heavily dependent upon the structural transformation of the economy as it affects the growth of commercial demand for goods produced, the growth of alternative employment opportunities, and the increased quantity of purchased inputs available to the agricultural sector.” Another important aspect of structural changes is the transfer of population from primary and secondary to tertiary employment. Tertiary production includes a number of dissimilar services producing non-material goods like transport, retail and wholesale distribution, education, government and domestic services, etc. With economic development the demand for tertiary products increases very rapidly because the expansion of the agricultural and industrial sectors is dependent largely on the existence of transport, retail and wholesale distribution, technical personnel, etc. So the proportion of working labour in tertiary occupations rises with economic development. But many of the tertiary occupations like railways, motor transport, etc., are of high capital intensity and involve substitution of capital for labour on a large scale. Thus, in the initial phase of economic growth, tertiary occupations fail to absorb large number of people, and the majority of workers become “pedlars of all kinds of goods and services requiring little or no capital outfit, such as vendors of fruit, newspapers, or else car washers, porters, waiters and shop assistants.” This type of underemployment is reinforced by disguised unemployment in the rural sector. An innovation or the opening of a new area may bring about a structural change within the economy thereby, widening the domestic market and creating a foreign market. Technical invention takes place in such societies where traditionalism gives way to desire for experimentation. “Apart from the build-up of economic overhead capital, such as a communications and transport system and investment in harbour facilities, some warehouses and similar installation favouring especially foreign trade, most of the innovations introduced during the preparatory period are based upon changes in the institutional arrangements in the legal, educational, familial, or motivational orders. Once these new institutions have been created, they operate as ‘gifts from the past,’ contributing freely to the vigorous spurt of economic activity in the period of take-off. What is perhaps most important about the structural changes taking
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place during the take-off period is the adaptation of previously existing institutions for new ends, especially for capital formation.”4 However, those structural changes which affect technical skills, administrative and entrepreneurial activities and the supply of capital are more important. The need for capital requires the existence of financial institutions through which savings can be collected and canalized into productive channels. To facilitate this process, such financial institutions like the savings banks, bond and stock exchanges, investment banks and complex of brokers, dealers and commercial banks that comprise the money market are required. The shortage of skilled personnel of various kinds such as scientists, managers, engineers, administrators, etc., posses a serious problem in LDCs. It requires the setting up of scientific, technological and managerial research and training institutes in the take-off stage. For instance, the practice of Dutch studies under the Tokugawa and the adoption of Western techniques and research facilities in science and technology resulted in far-reaching institutional changes which paved the way for Japan’s rapid progress. But the basic problem is to increase the supply of entrepreneurs which depends not on a set of particular institutions but upon a whole series of environmental conditions and appropriate personal motivations. Social and economic conditions must be conducive to the exercise of entrepreneurial abilities. Public policies should provide economic overhead capital and favourable monetary and fiscal incentives. Technological advance and facilities to finance innovations will increase the supply of entrepreneurship and so will the mobility of resources and wider markets. According to Kuznets, these structural changes are accompanied by growth in the scale of firms and changes in the type of organisation within sectors such as manufacturing and trade, from small incorporated firms to the large corporate unit with the rapid shifts in industrial structure and rapid change in technology. There are also rapid shifts in allocation of output among types and sizes of producing firms, and consequently in the allocation of labour force. There is high inter-industry, inter-status and inter-occupational mobility of the labour force among employees from blue to white-collar jobs, from less to more skilled occupations and from small to large enterprises.
NON-ECONOMIC FACTORS Non-economic factors influence economic growth alongwith economic factors. According to Nurkse, “Economic development has much to do with human endowments, social attitudes, political conditions and historical accidents.” Therefore, social, cultural, psychological, human, political and administrative factors are as much important as economic factors in economic development. As pointed out by Cairncross, “Development is not just a matter of having plenty of money nor is it purely an economic phenomenon. It embraces all aspects of social behaviour; the establishment of law and order, scrupulousness in business dealings, including dealings with the revenue authorities; relationships between the family, literacy, familiarity with mechanical gadgets and so on.”5 We study the essential non-economic factors below: 1. SOCIAL FACTORS Social attitudes, values and institutions also influence economic, growth. The term “attitude” means the totality of beliefs and values that cause human behaviour to be what it is. The term 4. Bert F. Hoselitz, “Non-Economic Factors in Economic Development,” A.E.R., May, 1957. 5. A.K. Cairncross. Factors in Economic Development, p. 26.
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“values” refers to motivations of human behaviour towards particular ends. Modern economic growth has been influenced by social and psychological factors. Western culture and education led to reasoning and scepticism. It inculcated the spirit of adventure which led to new discoveries and inventions and consequently to the rise of the new mercantile classes. These forces brought about changes in social attitudes, expectations, and values. People cultivated the habits of saving and investment, and undertook risks to earn profits. They developed what Lewis calls, “The will to economise,” to maximise output for a given input. As a result, the European countries experienced the Industrial Revolution in the 18th and 19th centuries. Economic and religious freedom brought about further changes in social attitudes and values. Single family unit took the place of joint family system which further helped in modern economic growth. In LDCs there are such social attitudes, values and institutions which are not conducive to economic development. Religion gives less inducements to the virtues of thrift and hardwork. People are fatalists and therefore are not hard working. They are influenced more by traditional customs and place high values on leisure, contentment and participation in festivals and ceremonies. Thus social attitudes stand in the way of development when money is wasted on non-economic ventures. Moreover, the joint family is the primary social and economic unit. It prevents people from taking independent economic decisions, breeds lethargy, and encourages growth in numbers. In such societies relations are personal or patriarchal. People are influenced by caste, clan or creed at the social level. These social attitudes, values and institutions should be changed or modified for economic development to take place. Social organizations like the joint family, caste system, kinship, and religious dogmas should be modified so that they may be more favourable to development. But it is not an easy task. Any social change will bring discontentment and resistance in its wake. It may, therefore, adversely affect the national economy. Therefore, all socio-cultural changes should be selective. They should be introduced by stages. Persuasion and not coercion should be the method. Education and demonstration can do a lot in this direction. Popular education leads to popular enlightenment and opens the way to knowledge. It opens men’s mind to new methods and new techniques of production. It creates self-discipline, power to think rationally and to probe into the future. Emphasizing the importance of education in economic development. Cairncross writes: “No country can count itself developed, in which education in the way of industrial civilization has not taken place. Peasants have to be brought within the monetary economy and not left to pursue subsistence farming; workers have to become used to working fixed hours in factories for wage payments; towns have to grow, and so banks and business enterprises; the fruits of science have to be applied throughout the economy. Above all, there must emerge as a continuing element in the life of the country, a group of business, administrative and political leaders who can be depended upon to maintain the momentum of development by constant innovation.” Certain races have higher tendencies to develop than others, such as Punjabis and Parsees in India, and Negroes in America and Brazil. For development, it is essential that races should not be kept aloof from each other. Rather, they should be intermixed so that there is a union of cultural values and racial qualities. But such measures require a lot of patience. The society’s structure is transformed by such racial changes. The UN Report on Economic Development of Underdeveloped Countries, laying emphasis on changes in social attitudes, values and institutions observes that without painful adjustments rapid
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economic development is impossible. Old ideas will have to be dispensed with; old institutions will have to be dispensed with; the bonds of caste, religion and race will have to be broken. But the process of change should be evolutionary rather than revolutionary. Otherwise, radical changes in social attitudes and values will bring about dissatisfaction, discontentment and violence in their wake and retard the path to economic development. Myrdal in his Asian Drama advocates the adoption of “modernisation values” or “modernisation ideals” for the rapid economic development of LDCs. Modernisation means “the social, cultural and psychological framework which facilitates the application of tested knowledge to all phases and branches of production.” The modernisation ideals include, first, rationality in thought and action through a deliberate cultivation of scientific attitude and application of modern technology in order to increase productivity, raise levels of living, and bring about social and economic equalisation. As pointed out by Jawaharlal Nehru, “The test of a country’s advance is how far it is utilising modern techniques. Modern -technique is not a matter of just getting a tool and use it. Modern technique follows modern thinking.” But the desire to better their lot and the initiative to make material progress must arise among the nationals of the country. Development must be willed by the country itself; it cannot be implanted from outside. External forces should stimulate and facilitate the national forces. They should supplement and not supplant them. Foreign aid can only initiate or stimulate development; it cannot maintain it. Development will falter in the absence of sufficient internal motivation. Unless the momentum of development comes from within the economy, the initial initiative to development will be dissipated and shortlived. As Cairncross puts it, “Development is impossible if it does not take place in the minds of men.” It is, therefore, imperative that if the process of economic growth is to be cumulative and long lasting, the forces of development must be firmly rooted within the domestic economy. Modernisation ideals also require changes in institutions and attitudes ‘in order to increase labour efficiency and diligence, effective competition, mobility and enterprise; permit greater equality of opportunities, make possible higher productivity and well-being and generally promote development’. The barriers of caste, colour, religion, ethnic origin, culture, language, and provincial loyalties should be broken down, and property and education should not be so unequally distributed as to represent social monopolies. All this is possible through changes in social institutions and attitudes of the people by spreading education and knowledge. People should be aware of the objectives before them and the ‘will’ to attain them. But where the social set-up is influenced by rigid caste and joint family systems, there is little individual freedom and professional mobility. As a result, people have little incentive to work more, earn more and save more, and have a backward sloping curve of effort and risk taking. For development, therefore, such social institutions and attitudes should be changed which stand in the way of free society and free competition. For instance, Myrdal views the various land reforms in India as attempts to breakup the caste system so as to eradicate social monopolies and barriers to free competition. Modernisation of ideals with regard to attitudes are called by Myrdal as the creation of the “new man” or the “modern man”, the “citizen of the new state”, the “man in the era of science”, the “industrial man”. This implies change in attitudes so that people have efficiency, diligence, orderliness, punctuality, frugality, scrupulous honesty, rationality in decision on action, preparedness for change, alertness to opportunities as they arise in the changing world, energetic enterprise, integrity and self-reliance co-operativeness, and willingness to take the long view.
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Changes in attitudes towards modernisation lead to development of the agricultural, industrial and tertiary sectors of the economy. But the development of these sectors is not possible without entrepreneurship. According to Myrdal, LDCs lack entrepreneurship not because they are deficient in capital or raw materials but because they are deficient in persons with right attitude for entrepreneurship. E. Hagen in his On the Theory of Social Change (1962) ascribes the lack of entrepreneurship to the childhood environment in the traditional society which creates tensions, anxieties, and rage among adults. They suffer from “respect withdrawal” and develop “retreatism” as the dominant personality trait. According to Hagen, it is over a very long period of several generations that there develops a class of entrepreneurs with “need achievement” motivation. Such psychological attitude emerges when a generation of fathers demand achievement or do not stand in the way of achievement, and mothers play a supporting role in encouraging activity on the part of infants. McClelland in The Achieving Society (1961) propounds the view that the growth of entrepreneurship depends on the need for achievement motivation. According to him, n-Ach (n-achievement) is a relatively stable personality characteristic rooted in experiences in middle of childhood. Variations in n-Ach levels were correlated with the stories in children’s textbooks, and it was found that n-Ach was very high in the United States of America 80 or 90 years ago. It is the highest in Russia and China now. It is rising in such developing countries as Mexico and Nigeria. He attributes high n-Ach in these countries to ideological reform hypothesis, to Protestantism in Europe and America, to zealous Communist ideology in Russia and China, and to the spirit 0f nationalism in the developing countries. McClelland alongwith David Winter conducted experiments in Kakinada town of Andhra Pradesh in India and revealed that neither money, nor caste, nor traditional beliefs played an important part in the n-Ach factor in the emergence of entrepreneurship there. It was found that those who were trained in the Small Industries Extension Training Institute at Hyderabad in 1964-65 for a two-week motivation programme displayed a more active entrepreneurial behaviour later on. Thus, attitudes, motivations and environment should all combine to promote entrepreneurship for economic development. 2. HUMAN FACTOR Human resources have been an important factor in modern-economic growth. Economic growth does not depend on the mere size of human resources but on their efficiency. According to Kuznets, the population of Europe increased by 433 per cent between 1750-1950 while the population of the remaining world increased by 200 per cent over the period. Whereas population increased five-fold in European and now developed countries, there was ten-fold increase in their GNP per capita. Such a phenomenal increase in their GNP per capita is attributed to the development of the human factor which is reflected in the increased efficiency or productivity: of their labour force. This is called human capital formation. This “is the process of increasing knowledge, the skills, and the capacities of all people of the country.” It includes expenditure on health, education and generally on social services. Denison’s estimates reveal that expenditure incurred on education in the United States between 1929-57 contributed 23 per cent to its gross national output . According to Soloman Fabricant, the increase in the total national product of the United States through increase in physical capital between 1889-1957 equalled the increase through higher labour productivity. But rapidly increasing population is a great hindrance to the economic development of LDCs.
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With their low per capita incomes and low rates of capital formation, it becomes difficult for them to support the increase in population. And when output increases due to improved technology and capital formation, it is swallowed up by increase in numbers. As a result, there is no improvement in the real growth rate of the economy. A proper use of human resources can be made for economic development in the following ways: First, there should be control over population. Human resources can be utilized best if the size of population is controlled and reduced. This requires family planning and research on population control so as to bring down the birth-rate. Second, there should be change in the outlook of the labour force. The social behaviour of the labour force is important in the process of economic development. To increase labour productivity and the mobility of labour, there should be change in the outlook of the people so that they should imbibe the importance of dignity of labour. This requires changes in institutional and social factors. Such changes depend upon the spread of education. It is the educated and trained labour force with high productive efficiency that leads to rapid economic development. Thus “the most important requirement of rapid industrial growth is people. People ready to welcome the challenge of economic change and the opportunities in it. People, above all, who are dedicated to the economic development of their country, and to high standards of honesty, competency, knowledge and performance.” 3. POLITICAL AND ADMINISTRATIVE FACTORS Political and administrative factors also helped in modern economic growth. The economic growth of Britain, Germany, the United States, Japan and France has been due to their political stability and strong administration since the 19th century. With the exception of the United States, they were directly involved in the two World Wars and were devastated. Still they have continued to progress on the strength of their political and administrative traditions. On the other hand, Italy has not been able to grow up to their level due to political instability and corrupt and weak administration. Peace, protection and stability have encouraged the development of entrepreneurship in developed countries, alongwith the adoption of appropriate fiscal and monetary policies by the governments from time to time. The weak administrative and political structure is a big hindrance to the economic development of LDCs. A strong, efficient and incorrupt administration is, therefore, essential for economic development. Prof. Lewis rightly observed: “The behaviour of government plays an important role in stimulating or discouraging economic activity.” Peace, stability and legal protection encourages entrepreneurship. The greater the freedom, the more the entrepreneurship will prosper. Technical progress, factor mobility and large size of market help stimulate enterprise and initiative. But the former can only take place under clean administration and stable political conditions. Similarly, a good government can help in capital formation by adopting the right monetary and fiscal policies, and by providing timely overhead capital fatilities. Thus “a government must offer society the services if it desires to stimulate economic development: order, justice, police and defence; rewards commensurate with ability and application in productivity, security in the enjoyment of property which may be of extremely varied character; testamentary rights; the assurance that business covenants and contracts will be kept; the provision of standards of weights and measures and currency and the stability of governmental system itself, to maintain the sense of order and future calculability of expectations and duties.”
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In this way, clean and strong administration, full of justice, stimulates economic development. As rightly pointed out by Lewis, “No country has made progress without positive stimulus from intelligent governments.” All LDCs have emerged as independent nations from the colonial rule. But independence has not necessarily led to national consolidation. Myrdal regards national consolidation as “a precondition both for the preservation of the states as a growing concern and for its efficient functioning as a matrix for the effective formation and execution of national policies, that is for planning.” By national consolidation he means “a national system of government, courts and administration that is effective, cohesive, and internally united in purpose and action, with unchallenged authority over all regions and groups within the boundaries of the state.” National consolidation, in turn, requires “emotional integration” which coincides with the modernisation ideals of changes in values, attitudes and institutions.
