Economics(Paper-4) - Shivaji University

B. A. Part-III : Economics Paper 4 (Old) Paper-7 & 12 New
Resource Economics (g§gmYZmMo AW©emñÌ) (Old Book)
Economics of Development and Planning (New Book)
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UNIT - 1
Introduction to Economic Development
Index :
1.1 Objectives
1.1 Introduction.
1.2 Presentation of Subject Matter.
1.2.1. Concept of Economic Development.
1.2.2. Characteristics of Underdeveloped economy.
1.2.3. Millennium Development goals.
1.2.4. Sustainable Development : Meaning and Indicators.
1.3 Summary.
1.4 Glossary.
1.5 Questions for Self-Learning.
1.6 Answer of Self-Learning Questions.
1.7 Questions for Self-Study.
1.8 References for Further-Reading.
1.0 Objectives :
The main objectives of this topic are as follows.
To study the concept of Economic Development.
To understand characteristics of underdeveloped economy.
To study the millennium Development Goals.
To understand sustainable Development, meaning and indicators.
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B.A. III / Economics of Development & Planning ..... 1

1.1. Introduction :-
The economics of development refers to the problems of economic development
of Underdeveloped countries. Though the study of economic development has attracted
the attention of economists right from Adam Smith to marx and J.M. Keynes. In this unit
No. 1 we will study the concept of Economic development, Characteristics of
Underdeveloped economy, Millennium development Goals and meaning and Indicators
of Sustainable development etc.
1.2. Presentation of Subject Matter :-
This unit covers the concepts of Economic development, Characteristics of
underdeveloped economy, Millennium Development Goals and Meaning and Indicators
of Sustainable development.
1.2.1. Concept of Economic Developments.
Concept of Economic development is very important in developed and
underdeveloped Economy. It is not easy to define/concept of Economic development
in a precise manner because different Criteria have been used for differentiating between
developed and underdeveloped Countries. Some definitions are as follows.
1) “Economic development is a process whereby an economy’s real national
income increase over a long period of time.” Prot meier and Baldwin. This
definition is Simple and precise. This definition emphasis on three ingredients
of economic development (1) Process (2) Real National Income and (3) Long
period.
2) “The term economic development signify not merely economic growth, but
economic development with which is associated either rising per capital levels
of income or the maintenance of existing high levels of income.” – Prof Viner.
3) “ Development implies the enhancement of an economy’s power to produce
goods and services per capital, for such enhancement is the pre-requisite to
raising standard of living.” – Harvey Leibenstein.
4) “ Economic development or growth refers to the process, whereby the people
of the country or region come to utilize the resources available to bring about
a sustained increase in per capita production of goods and services.” –
Williamson and Buttrick.
5) “ Economic development refers to a process of economic growth within the
economy, the central. Objective of the process being higher and raising real
per capita income for the economy.” – Walter Krause.
6) “ Economic development implies both more output and change in technical
and constitutional arrangements by which it is produced.’’ – C.P. Kindleberger.
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7) “ Economic development is a process by which an economy is transformed
from whose rate of growth of per capita income is small or negative to one in
which a significant Self-Sustained rate of increase per capita income is a
permanent long term feature.” – Prof Irma Adelman.
8) “ Development Concerns not only man’s material needs but also the
improvement of social conditions of his life. Development is therefore, not
only economic growth plus change. Social, Cultural and institutional as well
as economic.” – UNO
9) “ Economic development may be defined as a sustained improvement in well
being. Which may be considered to be reflected in an increasing flow of goods
and services.” – Bernard Okun and W. Richardson.
All these definitions emphasis different aspects involved in the process of economic
development. Economic development implies progressive changes in the socioeconomic
structure of country.The concepted economic development is more
Comprehensive.
1.2.2. Characteristics of Underdeveloped economy :
The term underdeveloped country is not easy to define. We shall briefly analyse
here a few definitions :
According to the United Nations Experts, an under-developed country is one in
which per capita real income is low as compared with the per capita real income of the
U.S.A., Canada, Australia and Western Europe.’
The modified definition of the planning commission might run as follows – “An
under-developed country is one which is characterized by the co-existence , in greater
or less degree, of unutilised or under-utilised manpower on the one hand, and of
unexploited natural resources on the other, on account of a low rate of capital formation.”
Prof Colin Clark, who is the pioneer in the studies of underdeveloped economies,
also described, “Underdeveloped economies are such in which primary occupations
like agriculture predominate, the economic development consists in the progressive
enlargement of the proportion of tertiary occupation in the economy.
B Characteristics of under-Developed Countries :
While it would be very difficult to locate a representative under developed country,
it is much easier to bring out some fundamental characteristics common to underdeveloped
countries, which are considered as below :-
1) Primary production : An under developed economy is either exclusively or
predominantly is primary producing economy. It is mainly dependent upon the production
of raw materials and food grains or on non-agricultural primary production, viz. minerals.
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The share of the primary sector in the under-developed countries is significantly larger
an on the average, than in the group of advanced countries.
2) Capital Deficiency : Capital deficiency is another characteristics which is
universally applicable to all these countries. It is both a cause and an effect of
underdevelopment. Generally under developed countries suffer from chronic shortage
of capital which is largely responsible for low per capita income in an economy. In other
words availability of capital in underdeveloped countries is very low as compared to
that in well advanced countries.
3) Unutilized / underutilized Natural Resources : The natural resources in an
underdeveloped economy are either unutilized or under utilized. Generally speaking
under developed countries are not deficient in land, water, mineral, forest or power
resources, through they be untapped. In other worlds they constitute only potential
resources. The main problem in their case is that such resources have not been fully
and properly utilized due to various difficulties, such as their inaccessibility shortage of
capital, primitive techniques, and the small extent of the market.
4) General Poverty : An underdeveloped country is poverty-ridden . Poverty is
mostly reflected in very low per capita. Income as compared to that of the developed
countries. It is the per capita income of a country which determines whether a country
is richer or poor. i.e. developed or underdeveloped. The average annual per capita
income in under developed countries like India, Pakistan and Indonesia is below and
whereas it is much higher in the developed countries. The extremely low GNP per
capita of low-income economies reflected the extent of poverty in them. It is not relative
poverty but absolute poverty that is more important in assessing such economies. The
absolute poverty is reflected in low living standard of the people.
5) Economic Backwardness of the people : The people in under-developed
countries are economically very backward, that is the quality of the people as productive
agents is low. Instead of acquiring the greatest possible control over their physical
environment, the people have struck as balance with nature at an elementary level.
They have been relatively unsuccessful in solving the economic problem of man’s
conquest of this are low labour efficiency, factor immobility, limited specialization in
occupation and a value structure and social structure that minimize the incentives for
economic changes.
6) Demographic Features : The underdeveloped countries are generally suffering
from the problem of over population. The main demographic characteristics of these
countries are - 1) Most of the underdeveloped countries are in the high population growth
potential stage with high birth rate and sharp declining death rate. 2) The overage
expectation of life in underdeveloped countries is much lower than that of advanced
countries. 3) The percentage of economically active population is very small in
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underdeveloped countries in comparison to developed countries.
7) Agriculture is The main Occupation : In underdeveloped countries Two-third
(70 to 80%) or more of the people live in rural areas and their main occupation is
agriculture.
8) Foreign Trade Oriented : On making careful scrutiny, it has been noticed that
underdeveloped countries are foreign trade oriented. It is reflected by their dependence
on the production of few primary commodities which are almost completely exported
and import of consumer goods and machinery.
9) Dualism : A striking feature of under-developed economies is its dualism, a
strange admixture of the economically backward and economically developed
economies seen within the same economy.
10) Imbalance between Resources and population : In developing countries
there is a serious imbalance between the available stock of land, capital and other
productive resources and population i.e. resources are scare as compare to population.
11) Unemployment and Disguised Unemployment’ : In underdeveloped
countries there Is vast open unemployment and disguised unemployment. In rural as
well as urban both educated and uneducated youth.
Other characteristics of underdeveloped countries are – Lack of infrastructural
facilities, poor Economic organization, Technological Backwardness, Lack of
enterprenurial skill. Economic Backwardness and unfavorable Institutional set up.
1.2.3 Millennium Development Goals :
In September 2000 at the UN millennium Summit 189 world leaders adopted the
UN millennium Declaration which laid down the millennium Development Goals (MDGS)
made up of eight goals and 18 targets to be achieved by 2015. These goals and targets
have vast array of interlinked dimensions of development ranging from the reduction of
extreme poverty to gender equality, to health, education and environment.
The March 2002 UN International Conference on financing for Development in
Monterrey, Mexico and the September 2002 W orld Summit on sustainable Development
in Johansberg. South Africa reaffirmed the Commitments of rich and poor countries to
these goals and their development targets.
B Goals :
1) Eradicating extreme poverty and hunger.
2) Achieve universal primary education.
3) Promote gender equality and empowerment of women.
4) Reduce child mortality.
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5) Improve maternal health.
6) Combat HIV/AIDS, malaria and other diseases.
7) Ensure environmental Sustainability.
8) Develop a global partnership for development.
B Targets :
1) Halve, between 1990 and 2015, the proportion of people whose income is
less than one dollar a day.
2) Halve between 1990 and 2015, the proportion of people who suffer from hunger.
3) Ensure that, by 2015, boys and girls will be able to complete a full course of
primary schooling.
4) To eliminate gender disparity in primary and secondary education preferably
by 2005 and at all levels by 2015.
5) Reduce by two-thirds between 1990 and 2015 the under five the mortality
ratio.
6) Reduce by three-quarters between 1990 and 2015 the maternal mortality
ration.
7) Hale hated by 2015 and begin to reverse the spread of HIV/AIDS.
8) Halve hated by 2015 and begin to reverse the incidence of malaria and other
major diseases.
9) Integrate the principles of sustainable development into country policies and
programmes and reverse the loss of environmental resources.
10) Halve by 2015 the proportion of people without sustainable access to drinking
water and basic sanitation.
11) By 2015 to have achieved a significant improvement in the lives of least 100
million slum dwellers.
12) Develop further an open, rule-based, predictable, nondiscriminatory and
financial system which includes a commitment to good governance,
development and poverty reduction both national and international.
13) Address the special needs of the least developed countries relating to tariff
and quota free access for exports, enhanced programme of debt relief for
and cancellation of official bilateral debt, and more generous official
development assistance for countries committed to poverty reduction.
14) Address the special needs of land-locked countries and small island
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developing states through the programme of Action for Sustainable
Development of small Island Developing states.
15) Deal Comprehensively with the debt problems of developing Countries through
national and international measures.
16) Develop and implement strategies for decent and productive work for youth
in co-operation with developing Countries.
17) Provide access to afford able essential drugs in developing countries in cooperation
with pharmaceutical companies.
18) Make available the benefits of new technologies, especially information and
communications technologies, in co-operation with the private sector.
1.2.4. Sustainable Development : Meaning and Indicators :
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.
B Meaning/definitions :
1) According to Brundtland Report, Sustainable development means meeting
the needs of the present generation without compromising with the needs of
the future generation.
2) Sustainable development is a process in which natural resource base is not
allowed to deteriorate. It emphasizes the hither to unappreciated role of
environmental quality and environmental inputs in the process of rising real
income and quality of life- Pearce and warford.
The sustainable development referees to development which should keep
going. It is creation of sustainable improvement in the quality of life of all people through
increase in real income per capital, improvement in education, health and General
quality of life and improvements in quality of natural environmental resources. In other
words it is a situation in which economic development does not decrease over time. It
can be modified as a path of development in which options of future generation are not
compromised by the path taken by the present generation. Sustainable development is
development that is everlasting. It contributes to the quality of life through improvements
in natural environments. In turn if supply utility to individual inputes to the process of
economic and service that support human life.
There is no universally acceptable indicator of sustainability. In view of this,
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some scholars attempted to explore whether we could have some indicators of
sustainability that are easier to compute and more widely acceptable than the indicators
of sustainability. Indicators of sustainability are different from traditional indicators of
economic, social and environmental progress. Professor Barthwal of Indian Institute of
Technology Knapur has highlighted some important indicators of sustainable
development. They are –
1) GDP growth rate
2) Population stability.
3) Human Resources Development Index
4) Clean Air index
5) Energy intensity
6) Renewable energy proportion.
7) Material intensity
8) W ater use.
9) Soil degradation
10) Forest coverage.
11) Recycling proportions.
12) Transport intensity.
To this one may also add, proportion of urban population, access to sewage and
water facilities, government allocation for environmental protection, efficacy of policy
tools, environmental awareness of the people, etc.
1.3. Glossary :
1) Economic development : Economic development is process where by an
economy’s real national income increase over a long period of time.
2) Underdeveloped economy : Underdeveloped economy is one in which per
capital real income is low as compared to developed economy.
3) Capital Deficiency : Shortage of capital
4) Unutilized Natural Resources : Not fully and properly utilized.
5) Poverty : Mean a situation in which individual or family inable to satisfy basic
needs of life.
6) Sustainable development : Sustainable development means meeting the
needs of the future generation without compromising the needs of present
generation.
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7) Goals : objectives.
8) Disguised Unemployment : Hidden unemployment.
9) MDGS : Millennium Development Goals.
2.5. Questions for Self – Learning :
A) Write answers in one sentence.
1) What is economic development?
2) Define the underdeveloped economy.
3) What is sustainable development.
4) Who is the pioneer in the studies of underdeveloped economies.
5) Which striking feature of underdeveloped economies.
B) Fill in the blanks :
1) Per capita real income is ________ in the underdeveloped countries.
2) _______ is the pioneer in the studies of underdeveloped economy.
3) The share of the primary sector in the underdeveloped countries is ________.
4) An underdeveloped country is poverty _________
5) The people in underdeveloped countries are economically ___________
6) The underdeveloped countries are generally suffering from the problem of
________ population.
7) ________ is the main occupation of underdeveloped country.
8) _________ is striking feature of under-developed country.
9) The percentage of economically active population is ________ in
underdeveloped countries.
10) _________ is indicators of sustainable development.
2.6. Answer’s of self-Learning Question :
A)
1) “Economics development is a process whereby an economy’s real national
income increase over long period of time.”
2) An under-developed country is one in which per capital real income is low
compared with developed countries.
3) Sustainable development means meeting the needs of the present generation
without compromising with the need of the future generations.
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4) Prof Colin Clark. 5) Dualism.
B)
1) Low 2) Prof Colin Clark 3) Larger 4)Ridden
5) Backward 6) Over 7) Agriculture 8) Dualism
9) Very small 10) Green Accounting.
2.7. Question for Self-Study.
A) Write short notes on :
1) Economic development
2) Underdeveloped economy.
3) Millennium Development Goals.
4) Concept of sustainable development.
5) Indicators of sustainable development.
B) Broad Question :
1) Explain the concept of Economic development.
2) Explain the characteristics of underdeveloped economy.
3) Explain the millennium development Goals.
4) What is sustainable development? Explain indicators of sustainable
development.
1.8 References :
1) Lekhi R.K.- The Economics of Development and planning- Kalyani Publication.
Ludhiana-2004
2) Jhingan M.L.- The Economics of Development and planning- Vrinda publication
(p) Ltd. Delhi-40 Revised & Enlarged edition-2011.
3) Seth M.L.- Theory and practice of Economics planning – S. Chand and
Company Ltd. New delhi 1984.
4) Dewett, Varma and Wadhawan – Economics of growth and development –
S. Chand and Company Ltd. 1985
5) Misra and Puri- Growth and Development, Himalaya Publication, Mumbai-
2010.
6) Environmental Economies : A Textbook on internet.
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UNIT - 2
Theories of Economic Growth and Development
Index :
2.0 Objectives
2.1 Introduction
2.2 Subject Matter
2.2.1 Rostow’s Stages of Economic Growth
2.2.2 Lewis Theory of Unlimited Supplies of Labour
2.2.3 Rodan’s Theory of Big Push
2.2.4 Myrdal’s Theory of Circular Causation
2.3 Summery
2.4 Glossary of Terms
2.5 Exercise
2.6 Reference Books
2.0 Objectives
1. To study Rostow’s stages of economic growth.
2. To study Lewis theory of unlimited supply of labour.
3. To study the Rodan’s theory.
4. To study circular causation theory.
2.1 Introduction
Economic development is the process whereby the real per capita income of
country especially underdeveloped countries is more anxious about the attainment of
economic development. But it is difficult, but not impossible. Using natural resources,
manpower and capital available in the country, the country can achieve development
desire. But these factors are not abundant in all countries. Some countries have natural
resources but not skilled manpower and capital, and some countries have capital
but not natural resources abundantly.To use available factors of production, a country
how can achieve desired economic development? The answer of this question has
given many economists. In this chapter some economists’views about development
are given.
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2.2 Subject Matter
The chapter includes theories of economic development. In this chapter involves
theories of the economist’s viz. Rostow, Lewis, Myrdal and Rodan.The chapter conducts
Rostow’s stages of economic growth, Lewis’ unlimited supply of labour, Rodan’s theory
of big push and Myrdal’s theory of circular causation.
2.2.1 Rostow’s Stages of Economic Growth
W alt Witman Rostow’s (W.W.Rostow) the stages of economic growth was first
published in 1960 carrying a subtitle “A Non-Communist Manifesto”. Rostow’s intend
was to provide an alternative to Karl Marx’s theory, has laid emphasis on social and
institutional factors as vital ingredients of economic development. He has explained
economic advancement in terms of social and institutional set-up of a society and the
attitude of the people.
Rostow believes that development of an economy depends upon the following six
propensities;
1. Propensity to develop fundamental science
2. Propensity to apply science to economic needs
3. Propensity to accept innovations
4. Propensity to accept innovations
5. Propensity of consume
6. Propensity to have children
These propensities combine in themselves economic, social and institutional
factors, which determine the course of economic development.
B
Rostow’s stages of growth:
1. The traditional society
2. The pre-conditions to take-off
3. Take-off
4. Drive to maturity
5. Age of high Mass-consumption.
Brief explanations of these stages are given below.
1. The Traditional Society:
Rostow has defined traditional society, “as one, whose structure is developed
within limited production functions based on Pre-Newtonian Science and technology
and Pre-Newtonian attitudes towards physical world.” According to his definition, the
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structure of the traditional society was based on primitive technology and orthodox
ideas of the people. In this stage modern facilities of technology and science were
absent. The economic activities were carrying out in such societies with simply tools
and implements. And activities were confined only to meet the domestic needs. In fact
pre-industrial revolution societies could be called as traditional societies. The agricultural
production could be increased by bringing more land under cultivation. The increase in
agriculture production conformed to diminishing returns. The reason for diminishing
returns was absence of modern science and technology. The people were more
interested in spiritual and religious pursuits rather than material and physical world. In
brief the society revolved around agriculture. Other economic activities such as
manufacturing, trade etc. are depended on agriculture. Thus agriculture was the main
occupation of the people in the traditional society.
On the above explanation, the characteristics of traditional society can be
summarized as follows;
i. The agriculture was carried on with the primitive methods of production.
i. Law of diminishing return operated in agriculture.
i. There was absence of modern science and technology.
iv. The structure of the society was based on inheritance.
v. The political power was concentrated in the hands of big landlords.
vi. Increase or decrease in population was along with Malthusian lines.
These characteristics clearly depict the economic, social and political structure of
the traditional society.The societies of Pre-Newtonian are called the traditional society.
2. The Pre-Conditions for Take-off
This second stage of growth is a process of transition, which involves changes in
economic, social and political structure of the traditional society. According to
Kindleberger, “the pre-conditions stage involves slow changes especially in attitudes
and organization. The idea of economic improvement takes hold, and with it the frozen
traditional rigidity breaks becomes cheaper, and commerce spreads. New production
functions are adopted in agriculture and industry. But the pace is slow”.
During this stage, education spreads, mental horizon broadens and economic
activity expands. New enterprising men come forward and encourage the will to save.
They take risk in the pursuit of profit. Banks and other savings institutions attempt to
mobilize capital. Investment opportunities expand in other sectors, like transport and
communications etc. The scope for internal and external trade widens. New
manufacturing processes are developed. In general, the pre-conditions for take-off require
changes which touch and alter the traditional social structure, political system and
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economic organizations and institutions. According to Rostow, “preconditions for takeoff
are an era, when society prepares itself for sustained growth”.
Rostow has suggested that pre-conditions for take-off require radical changes in
the three non-industrial sectors. First, there should be expansion of social over-head
capital i.e. development of transport, communication, roads, etc. Secondly, radical
changes should take place in agriculture and thirdly, there should be an expansion of
foreign trade. The radical change of these three sectors is essential to take-off of an
economy.
Briefly it can be summed up that pre-conditions for take-off required the evolution
of modern science and technology, rational and scientific attitude of the people,
expansion of social over-head capital particularly transport, rising agricultural productivity,
large extent of market and expansion of internal and external trade.
3. Take-off :
The various factors discussed in the second stage, prepare the ground for third
stage of economic growth i.e. take-off. The expansion of different sectors transforms
the basic structure of an economy and it starts moving on the road to self-sustained
growth. Rostow defines take-off stage, “as an interval during which the Rate of
investment increase in such a way that real output per capita rise, and this initial increase
carries with itself radical changes in production techniques and the disposition so income
flows, which perpetuates the new scale of investment, and perpetuate thereby the
rising trend in per capita output.”
During the take-off, obstacles of resistance to steady growth are overcome and
forces of economic development expand and dominate the society. Then growth
becomes automatic during the stage of take-off. Modern writers call it by different names
such as, “a big push”, “an initial push”, “critical minimum effort”, “a great leap forward”,
etc.
During take-off industries expand rapidly yielding profits, profits are invested in
new industries, demand for manufactured goods expands, expands demand for
agricultural products, rise of level of income, expand financial institution etc. These
changes lead the economic growth rapidly and it becomes self-sustained.
B Pre-Requisites for Take-off :
Rostow has suggested three conditions for making the growth process selfsustained.
These conditions are discussed as follows.
a) Rate of Investment :
Rostow has suggested that the rate of net investment for self-sustained growth
should be over 10 per cent of the national income. The rate of increase in investment
should, however, outstrip the growth of population. Rostow explained this point with the
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help of example, “If we take marginal capital output ratio for an economy in its early
stages of economic development as 3.5: 1 and if we assume, population rise of 1 or
1.5 per cent per annum, it is clear that something between 3.5 (3.5x1) and 5.2% (3.5x1.5)
of NNP must be regularly invested if NNP per capita is to be sustained”. This example
assumes that marginal capital output ratio and population growth remains constant
and the effect of technology and labour force are not considered here.
b) Development of Leading Sectors:
Another essential pre-requisitefor take-off is the development of leading sectors.
Rostow has classified various sectors in to three broad categories discussed below.
i. Primary growth sector :
According to Rostow, the primary growth sectors are those, “where possibilities
for innovation or the exploration of newly profitable avenues or hitherto unexplored
resources yield a high growth rate and set in motion expansionary forces elsewhere in
the economy.” Such sectors initiate and stimulate growth in other sectors till growth
process becomes self-sustained.
ii. Supplementary growth sector :
According to Rostow, supplementary growth sectors are those sectors “where
rapid advance occurs in direct response to or as requirement of advance in the primary
growth sectors”. In supplementary growth sectors, those industries are included, whose
development reinforces the growth initiated by primary sectors.
iii. Derived growth sectors :
According to Rostow derived growth sectors are those, “where advance occurs in
some fairly steady relation to the growth of total real income, population, industrial
production or some other overall moderately increasing variable”. Agriculture, industrial
housing and transport, etc. are included in derived growth sectors.
C) Emergence of the new Political, Social and Institutional Framework :
Among non-economic factors, take-off requires the emergence of new political,
social and institutional framework. The new framework could take the shape of political
revolution, social reformation, technical innovations and institutional transformations.
According to Rostow, “the take-off usually witnesses a definite social, political and cultural
victory of those, who would modernize the economy over those who would either cling
to the traditional society or seek other goals.” The social and political changes are
necessary for generating momentum in the society and for achieving the goal of takeoff
into self-sustained growth.
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Tentative Take-off years of Selected Countries
Country Take-off Country Take-off
Great Britain 1783-1802 Russia 1890-1914
France 1830-1860 Canada 1896-1914
Belgium 1833-1860 Argentina 1935
United States 1843-1860 Turkey 1937
Germany 1850-1873 India 1952
Sweden 1868-1890 China 1952
Japan 1878-1900
The above table shows that in Great Britain, France, Belgium and United States,
the take-off occurred during the last quarter of the 18 th century and the first half of the
19 th century. Germany. Sweden and Japan experienced take-off in the latter half of the
19 th century. In Russia and Canada, the take-off occurred before the outbreak of first.world
ware. Argentina, Turkey, India and China appear to be in the midst of take-off stage
4. Drive to Maturity:
According to Rostow, “the period when a society has effectively applied the range
of modern technology to the bulk of its resources”. In this stage many technical changes
takes place, industrial development gets differentiated, new leading sectors gather
momentum and the old leading sectors face extinction. The leading sectors like cotton
textile industries railways, coal and heavy engineering industries, etc. lose their
momentum and new sectors such as steel, ship-building, chemicals, electricity,
machine-tools etc. appear to dominate the economy, and sustain overall growth. 10 to
20 per cent of the national income is reinvested and the growth of output regularly
outstrips the increase in population. Dependency of peoples on agriculture sector
diminishes. Increases industrial activities, trade expanses, social changes occur in
large manner etc. changes take place in this stage.
5. Age of High Mass-Consumption:
From Maturity the economy moves to the age of high mass-consumption. Being
fed up with the fruits of industrial maturity, the people try to seek more leisure, more
welfare and social security, etc. In this period resources are directed on a large scale to
the production of durable consumer goods and services. This period is considered as
an era of consumer’s sovereignty.According to Rostow, Western Europe and United
States reached this stage in the beginning of the 1901. Great Britain reached this stage
in 1930’s and Japan in 1950’s.
Rostow believed that resources employed in the following three directions could
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promote and enhance social welfare. First, larger resources are allocated to military
and foreign policies for achieving international recognition and external power and
influence. Secondly, the resources of mature economy be directed to promote the
welfare of society and thirdly, the state should direct its resources to the expansion of
consumption levels beyond the basic necessities of life like food, clothing and shelter.
Kindleberger (and not Rostow) illustrates these stages with a Gompartz or ‘S’
curve.
Further development
Income
1. Traditional
2. Preconditioning
3. Take-offTime
4. Maturity
5. Mass-Consumption
0
1 2 3 4 5
Time
The diagram shows that a typical growth path of an economy. ‘S’ curve states that
an economy starts its growth slowly, picks up gradually and then proceeds very rapidly
before slowing down at some late stage to become asymptotic at some limit.
B
Critical Examination of the Rostow’s Theory:
The important points of criticism against the Rostow theory are:
1. The technological Approach to Development is basically incorrect:
In Rostow’s model development is not the result of policies; policies are the result
of development. This cannot be accepted. This approach leads to logical confusion.
2. Leading Sectors may not ‘lead’:
Kuznets and Cairncross are of the opinion that leading sectors may not lead. If we
examine the development linkages of industries, we can find that cotton textile industry
of Manchester or automobile industry of USA did not bring all the development.
3. Stage overleap and Works spill over to the Next Stages:
Kuznets, Habakkuk, Cairncross and Meier have commanded that the things that
are supposed to happen in a particular stage, may spill over to other stages also.
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4. The Take-off stage is not empirically vindicated in the same manner in which
Rostow Presented it:
Ian Orummand, Kuznets, David Wightman and Myrdal have examined the economic
history of various nations and came to the conclusion that all that is elaborated in the
Rostow’s stages is not realized in the same fluid manner.
5. Rostow ignores the “Bumps and Crash-Leadings” of the growth process:
Habakkuk, Sen and Streeton have pointed out that if Rostow was keen to use the
aeronautical metaphor, ‘take-off, he ought to have taken into consideration some other
aeronautical happenings also. There are ‘lumps and crash-leadings and nose-dive’
crashes also. There can be abortive take-offs.
6. An Economy can reach the stage of self-sustained stage without passing
through all the five stages:
Gerald Meier has even seen the possibility of a country reaching the fifth stage
without even passing through one particular stage of economic development, as
suggested by Rostow. One complete stage may be skipped over.A country with low
population burden and abundant natural resources may reach the stage of self-sustaining
stage of mass consumption early, by-passing one stage.
7. The last stage of ‘Mass-consumption’ may not reached at all:
Kuznets, Meier and Cairncross have raised doubts whether the last stage of ‘Massconsumption’
can continue eternally.
8. There are limits to growth:
Natural resources, manpower and capital set the upper limit of growth. A time
comes when a country should be regarded as “fully developed”, even if it has not reached
the standards of USA or any other country.
Despite of these critics the stages of economic development are most important
to know the development of human beings.
2.2.2 Lewis Theory of Unlimited Supplies of Labour :
Lewis developed his model to develop less developed countries. Lewis says there
is ‘absolute surplus population’ in less developed countries. Labour and natural
resources are adequate but capital is lacking here. Lewis wrote in his book “Economic
Development with Unlimited Supplies of Labour” in 1954 that using the abundant
population less developed countries can grow as developed countries. Lewis developed
his model for development of closed as well as open economy discussed as follows.
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B The Closed Economy :
Assumptions :
Lewis’ model is based on the following assumptions;
1. There exist unlimited supplies of labour in the economy.
2. The economy is dualistic in nature.
3. The cost of imparting training and skill to the unskilled labour is assumed to
remain constant through time.
4. The production in expanding capitalist sector takes place according to the
principle of profit maximization.
5. The capitalist sector operates by employing the reproducible capital and wage
labour.
6. The subsistence sector does not make use of reproducible capital.
7. The per capita output in the subsistence sector is considerable smaller than
that in the capitalist.
8. The relationship between the capitalist and the subsistence sector lies in the
fact that as former expands; it draws labour from the latter.
9. The wages which the expanding capitalist sector is not absolutely larger in
relation to population growth.
B Two Sector Economy :
Lewis divides the economy of an underdeveloped country into two sectors the
capitalist sector and the subsistence sector.
i) Capitalist Sector :
The capitalist sector is defined as, “that part of the economy which used
reproducible capital and pays capitalists for the use of thereof.” The use of capital is
controlled by capitalists, who hire the services of labour.The capitalists sector does
not include only manufacturing but also plantations and mines where labour is hired for
profit. The capitalist sector may either by private or public.
ii) Subsistence Sector :
The subsistence sector is that part of the economy which is not using reproducible
capital. It can also be designated as the indigenous traditional sector or the “selfemployment
sector”. Output per head is much lower in this sector than in the capitalist
sector, there is existence of disguised unemployment in the agricultural sector whose
marginal productivity is zero in this sector.
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iii) Relationship between the two sectors :
When the capitalist sector expands, it draws labour from the subsistence sector.
As a result, output per head of labours that move from the subsistence sector to the
capitalist sector increases. In this situation new industries can be created, or old
industries expanded at the existence wage rate. That results more unskilled labour
move from subsistence sector to capitalist sector.The migration will be continued till
the wages offered by subsistence sector. Labour will not leave the family from to seek
employment elsewhere if the wage that is offered to them is less than their marginal
productivity. In fact wages offered by the capitalist sector will have to be somewhat
higher than subsistence wages in order to compensate labour for the cost of transfer
and to induce labour to leave the traditional way of life of the subsistence sector.According
to Lewis, there is usually a gap of 30 per cent or more between capitalist wages and
subsistence earnings.
N 3
W age and Marginal Product
N 2
N 1
W
S
P1 P2 P3
Q 1 Q 2 Q 3
W
S
0 M 1 M 2 M 3 X
In the above diagram, OX axis shows that quantity of labour and OY axis shows
that marginal productivity of labour and wages offered to the labour. SS curve presents
wages offered in subsistence sector and WW curve indicates wages offered in capitalist
sector. WW is the perfectly elastic supply of labour. Given a fixed amount of capital at
the outset, the demand for labour is initially represented by the marginal productivity
schedule for labour N 1
Q 1
. If OW is the current wage, the amount of labour employed in
the capitalist sector is OM 1
. Beyond the point M 1
, workers earn whatever they can in the
subsistence sector. The total product in this case is ON 1
P 1
M 1
of which the share of
wages is OWP 1
M 1
and capitalists’ surplus or profits is N 1
WP 1
.
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Quantity of Labour
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B The Process of Economic Expansion :
Lewis emphasizes on the reinvestment of capitalists’ surplus for creation new
capital. Therefore the amount of fixed capital increases and the schedule of the marginal
productivity of labour rises to the level of N 2
Q 2
. The total product rises to ON 2
P 2
M 2
. As
a result, the share of wages increases to OWP 2
M 2
and capitalists’ surplus or profit also
rises to WN 2
P 2
. An increased part is again reinvested leading to a further rise in total
product. At each stage, capitalists’ surplus and the level of employment in the capitalist
sector increases from OM 1
to OM 2
, OM 3
etc. as labour withdraws from the subsistence
sector into Capitalist Sector, there is larger investment of profits and the process
continues as long as there is surplus labour exhausted from the subsistance sector.
B
The Role of Savings:
The role of savings in the process of growth is crucial and important. In this model
capitalists surplus do not reinvest, neither will the total product expand nor will
opportunities for employment increase. Therefore, unless savings increase, economic
growth cannot take place. Lewis argues that because of extreme inequalities of income
and wealth in underdeveloped countries, the capacity to save is limited to about 10 per
cent of the richest people. If the saving of richest people increases the process of
growth expands, the poor and middle class people does not save, because of their
capacity to save is low.
The reason of low saving in underdeveloped country because their capitalist sector
is small. Also there exist unequal distribution of income and wealth. If these countries
had a larger capitalist sector, profits would be a greater part of their national income,
and savings and investment would also be greater.
B
Role of Bank Credit:
Lewis admits the possibility that capital creation is also possible as a result of a
net increase in the supply of money especially bank credit. Bank credit is important for
development of underdeveloped countries which have idle resources and surplus labour
supply. In underdeveloped countries, the effect of bank credit on capital formation is
similar to that of reinvestment in profits. Bank credit helps in the expansion of employment,
output, effective demand and purchasing power of the community.
B
End of Growth Process:
Lewis model shows that if unlimited labour is available at constant real wage, the
capitalist surplus will rise continuously and annual investment will be a rising proportion
of national income. But this process of economic growth cannot go for ever. It comes
to an end when there is no surplus labour.According to Lewis, the growth process
comes to an end due to following reasons.
i. The capitalist sector expands so rapidly that it reduces absolutely the population
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in subsistence sector.The average productivity of subsistence sector rises, due
to that the wage rate of subsistence sector rises and the wages of capitalist sector
begins rises which lowers the capitalist surplus. It reduces the capital formation
and reverses the expansionary process.
i. The subsistence sector adopts new techniques of production; real wages would
rise in the capitalist sector and so reduce the capitalist surplus.
i. The workers in the capitalist sector imitate the capitalist way of living and agitate
for higher wages and in successful in getting their wages raised the capitalist
surplus and the rage of capital formation will be reduced.
B
The Open Economy:
In open economy there is greater possibility to move capital and labour easily. If
there is surplus labour in other countries, the capitalists can avoid such a situation by
taking resort to either of the following two methods:
i) By encouraging immigration
i) By exporting their capital to countries where there is still abundant labour at a
subsistence wage.
The first way is not possible in present restricted situation, but second way is
possible to export capital is such countries where availability of labour is abundant at
subsistence wage.
B
Critical Evaluation:
1. Unrealistic Assumptions:
The theory assumes a constant wage rate in the capitalist sector until the supply
of labour is exhausted from subsistence sector.Thisseems to be unrealistic because
the wage Rate continuously rises over time in the industrial sector of an underdeveloped
economy.
2. Supply of Labour is not Unlimited in all Countries:
The assumption of unlimited labour supply in underdeveloped countries is not
much relevant as it does not apply to the countries like South America and South Africa.
To some extent, it is applicable to Asian Countries.
3. One Sided Theory:
Prof. Lewis does not consider possibility of progress in agriculture sector, thus, it
is one sided theory.
4. Neglects Total Demand:
Lewis neglects the problem of aggregate demand. He thinks that whatever is
produced in capitalist sector is consumed by itself or is exported. But Lewis does not
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consider the possibility of the capitalist sector selling its product to subsistence sector.
If it happens, the growth process may come to an end through unfavourable terms of
trade or the subsistence sector adopting new techniques of production to meet
expanding raw material demand of capitalist sector.
5. Migration is not easy task:
Labour migration is very difficult to migrate from subsistence to capitalist sector.
The labourers have so deep affection for land and homes that they can’t think of leaving
them. Therefore, in underdeveloped countries, there are socio-cultural barriers to
occupational and geographical mobility which hinder the migration.
Despite of these critics, the utility of Lewis model is important in the process of
economic development. It explains the role of capital formation in Less Developed
Countries where labour is surplus and capital is scarce.
2.2.3 Rodan’s Theory of Big Push
Paul N. Rpsemsteom Rodan’s theory is based on the principle of big push or by
the way of big investment for development in an underdeveloped country, so that it can
make commendable progress and to overcome obstacles for development. The
investment below a certain level will be a mere wastage and will not enable to economy
to break the vicious circle of poverty.The process of development is not merely steady
and smooth but it is associated with many ‘discontinuities’, ‘jumps and lumps’.
Rosenstein Rodan quotes in this regard “There is a minimum level of resources
that must be devoted to…..a development programme if it is easy to have any chance
of success. Launching a country into itself sustaining growth is a little like getting
areoplane off the ground. There is a critical ground speed which must be passed before
the craft can become airborne….”
The theory of big push is a modern version of an old idea of ‘external economies’.
The concept ‘external economies’ was first given by Marshall. The idea of external
economies can be illustrated with the help of an example. Suppose, there are two
industries A and B. If industry A expands in order to overcome the technical divisibilities,
it shall derive certain internal economies. It results in lowering the price for the product
of industry A. If A’s output is used as input for industry B, the profit of A’s internal economies
shall be passed on to B in the form of pecuniary external economies. Thus, “the profits
of industry B created by the lower prices of factor A, will call for investment and expansion
in industry B, one result of which will be an increase in industry B’s demand for industry
A’s product. This, in turn, will give rise to profits and call for further investment and
expansion of industry A.”
In the economy there exist certain ‘indivisibilities’ or ‘non-appropriabilities’ which
will hinder the occurrence and transmission of these external economies. These
indivisibilities can be removed by the large dose of investment i.e. by big push only.
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Prof.R.Rodan has mentioned three kinds of indivisibilities, explained as under.
1. Indivisibility in Production Function
2. Indivisibility in Demand
3. Indivisibility in Supply of Savings.
1. Indivisibility in Production Function:
Indivisibility in production function refers to the indivisibilities of input, output and
production processes. These indivisibilities lead to increasing returns higher output,
income, employment and lowering capital – output ratio. Rodan regards social overhead
capital (power, transport, communication and housing, etc.) as important constituent
of indivisibilities and external economies. The reason is that expansion of social
overhead capital creates investment opportunities in various industries which help in
rising the level of investment. Sustained economic development requires creation and
expansion of social facilities, which requires large amount of investment called
“lumpiness of capital”. Lumpiness of capital creates external economies which are the
way of economic development.
2. Indivisibility of Demand:
For expansion of market demand indivisibility is more important. The small markets
limit the investment opportunities and obstruct the development process. The indivisibility
of demand requires simultaneous investment in various industries. Rodan cites the
example of shoe factory to explain the point. Assuming a closed economy, let us suppose
that hundred disguised unemployed workers (whose marginal productivity is zero) are
employed in a shoe factory.Their wages would constitute additional income. If newly
employed workers spend their entire income for the purchase of shoes they produce,
the shoe factory will find a market. Considering workers have diverse demands and do
not spend their entire additional income on shoes, and then shoe factory may face the
problem of less demand for shoes and small market for its product. The small size of
market would reduce the incentive to invest and the result would be the closure of the
factory.This way the investment in a single project would fail to widen the size of market.
Now suppose the thousand workers are employed in hundred industries and they
produce consumer goods and newly employed workers spend their wages for the
purchase of those goods. This would enlarge the extent of demand and the size of the
market. Thus the indivisibility of demand necessarily implies a high quantum of
investment in complementary industries for enlarging the size of market.
3. Indivisibility in the Supply of Savings:
We have discussed above that a large amount of investment is necessary for
starting complementary industries. In underdeveloped countries the level of savings is
low because of low level of national income. To generate savings it is imperative that a
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gap between income and expenditure should be created and saving should be raised.
At the same time suitable mechanism be devised to channelize the savings in the
development activities. The desired objectives of growth and prosperity can be realised
when savings are invested in the productive pursuits which promote development and
employment.
Besides these three indivisibilities another important factor connected with
development is the creation of “psychological indivisibilities”. Progressive institutional
framework should be evolved to mould the people psychology in the direction of
development.
B
Critical Appraisal:
Following are the main points of criticism;
1. Inadequacy of Resources:
This theory fails to recognize that the amount of resources in an underdeveloped
country is very limited. They lack in capital, skilled labour, dynamic entrepreneurial ability,
power, etc. so these countries cannot adopt Big Push theory.
2. Danger of Inflation:
Since the underdeveloped countries do not adopt Big Push theory, but it envisages
the investment in different industries of consumption goods, capital goods as well as
other social overheads. As a result, they are likely to yield returns after a long time. This
process increases the demand rapidly while slow increasing supply cannot cope up
with the situation. The gap between demand and supply is likely to persist for something
resulting in increase in prices.
3. Neglect of Agriculture Sector:
The theory of big push lays more stress on the heavy dose of investment in different
industries such as capital goods, consumer goods industries and social overhead capital
etc. but it ignores the development of agricultural sector.Agriculture is extremely important
in most of the underdeveloped countries.
4. Limited Scope of External Economies:
Prof. Rodan advocated that Big Push emphasizes that simultaneous development
of industries would create external economies in the long run period in the shape of skill
of labour and training. But in the opinion of Prof. Viner and E. Ellis, external economies
generally result in reducing cost rather than expanding the output. In a developing country,
expanding output is more significant than cost. Therefore there is more possibility of
external diseconomies rather than economies.
5. Neglect of Importance of Techniques:
According to Celso Furtado, this theory neglects the importance of techniques in
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its over-enthusiasm for capital formation. Today, development depends increasingly
upon technique and less on direct capital formation in productive processes.
6. Not Supported by History:
The big push theory seems to suggest that whenever a large scale influence is
exerted on the process of capital formation, a stationary economy probably begins to
develop. Furtado stated that this is not confirmed by history.
2.2.4 Myrdal’s Theory of Circular Causation
Prof. Gunnar Myrdal maintains that economic development results in a circular
causation process results in rapid development of developed countries while the weaker
and backward countries tend to remain behind and poor.The theory of circular causation
has been built upon the two effects viz. the backwash effects and the spread effects.
The circular causation theory emphasizes that poverty is further perpetuated by poverty
and affluence is further promoted by affluence. In backward regions problems created
more problems; in developed regions solutions solve all problems. There is a failure
story and there is a success story.
The rebounded effects and circular causation effects are the net result of the
backwash effects and spread effects.
In an underdeveloped country, the backwash effects are predominant and the
spread effects are dampened. This tends to regional inequality as well as international
inequality.
The traditional theory is not able to explain the problem of development in underdeveloped
countries and it is based of unrealistic assumptions of stable equilibrium.
Myrdal builds a new theory of economic under development and development which is
capable of solving regional and international inequalities on national and international
plans. He tries to explain his theory with ‘Backwash’ and ‘Spread’ effects.
1. Backwash Effects : Myrdal defines backwash effects as, “all relevant adverse
changes….of economic expansion in locality….caused outside the locality. I include
under this label the effects viz. migration, capital movements and trade resulting from
the process of circular causation between all the factors, ‘noneconomic’ as well as
‘economic’”. In short, ‘backwash effects’ have unfavourable effects of economic
expansion.
The migration of people from backward regions results in regional imbalances.
The developing economy will attract young and active people from other parts of the
country.This will tend to favour the developing region and will depress the other backward
region from where people migrate.
Capital shifted from poorer region to prosperous where the rate of return is high
and capital is more secure. Therefore the poor regions make poorer again. Another
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disequalising force is trade, which is in favour of developed countries and against the
backward countries. The progressive regions will have better competitive advantages
and markets. The expansion of trade tends to create regional inequalities in
underdeveloped countries.
The circular causation will also act to sustain and expand these cumulative
stagnating forces. Therefore, the result is that, the developed regions become further
developed and underdeveloped regions become further underdeveloped.
2. Spread Effects: According to Myrdal, “certain centrifugal ‘spread effects’ or
expansionary momentum from the centres of economic expansion to other regions”.
The spread effects are favourable effects for economic developed.
The growths of industrial localities have also some good effects on other areas
too. The whole region will experience advantageous effects regarding demand,
technology, market etc. These favourable effects are called spread effects. These ‘spread
effects’ will try to neutralize the backwash effects to a greater extent. According to Prof.
Myrdal, “the spread effects in underdeveloped countries are weak and they are not
capable of balancing the backwash effects and regional imbalances.”
B
Role of State:
The free play of market, price mechanism and Laissez-faire policy has created
more regional inequalities in the presence of weaker spread effects. Therefore, the
government should take steps to spread effects to avoid poorness of the regions and
to bring economic development in circular causation. In other words, the government
of underdeveloped countries should adopt equalitarian policies to reduce the backwash
effects and strengthen the spread effects in order to eliminate regional inequalities.
Myrdal states in his theory, the reason of backwardness of an economy. The
economy is backward because it is backward. He said that a country is poor because
the domination of backward effect.
2.3 Summary :
These theories are useful to decide development path to underdeveloped countries
in the world. Rostow’s theory of economic development stages have useful to know
the development of human beings. Lewis theory of unlimited supply of labour is said
that, an underdeveloped country can progress to use unlimited labour availability.The
Rodan’s theory of big push said to us for development of an underdeveloped economy
has greater investment in all sectors in economy.And the circular causation theory of
Myrdal tells us the reason of backwardness of an economy.These theories are important
to policy makers to making policy for development of economy.
2.4 Glossary of Terms
a) Dual Economy: existence of two sectors in economy
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) Subsistence Sector: agriculture sector
c) Take-off stage: the stage ofpeak level development
d) Spread effect: effect which helps development of an economy.
e) Backwash effect: effect which affected economic development.
f) Indivisibility: unseparateness
2.5 Questions
2.5.1 Objective Type Questions:
A. Give Answer in one Sentence
1. In which book Lewis developed his unlimited supply of labour theory?
2. Which sector have unlimited supply of labour?
3. What is subsistence sector?
4. What is capitalists sector?
5. Which are the five stages of Rostow’s theory of development?
6. Which effect is favourable for development of economy?
7. Give two assumptions of Lewis theory.
8. In which book Rostow developed his theory?
9. According to Lewis what is dual economy?
10. When Rostow published his stages of economic development?
Answers :
1. Lewis developed his theory in “Economic Developed with Unlimited Supplies
of Labour”
2. The subsistence sector have unlimited supply of labour.
3. The part of the economy which used reproducible capital.
4. The subsistence sector is that part of the economy which is not using
reproducible capital.
5. a)The Traditional Stage, b)The Pre-Conditions for Take-off, c)Take-off Stage,
d) Drive to Maturity and e) High Mass-Consumption these are the stages of
economic development.
6. Spread effect is favourable for development of an economy.
7. Dual economy and unlimited supply of labour are the assumptions of Lewis
theory.
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8. Rostow developed his theory in “A Non-Communist Manifesto”.
9. Dual economy means existence of two sectors viz. subsistence sector and
capitalist sector.
10. Rostow published his stages of economic development in 1960.
B. Fill in the Blank
1. Lewis published his theory in………
a) 1952 b) 1954 c) 1958 d) 1960
2. The theory of circular causation is propounded by………..
a) Gunnar Myrdal b) W.W. Rostow
c) Arthur Lewis c) R. Rodan
3. The term ‘spread effect’ coined by………
a) Gunnar Myrdal b) W.W. Rostow
c) R. Rodan d) Arthur Lewis
4. The term ‘backwash effect’ coined by ………..
a) Gunnar Myrdal b) W.W. Rostow
c) R. Rodan d) Arthur Lewis
5. The book ‘A Non-Communist Manifesto” wrote by…….
a) Gunnar Myrdal b) W.W. Rostow
c) R. Rodan d) Arthur Lewis
6. Rostow published his stages of economic growth in ……
a) 1960 b) 1950 c) 1955 c) 1965
7. The ………stage also known as ‘Pre-Newtonian’ stage.
a) The Traditional Stage b) Take-off Stage
b) Drive to Maturity c) High Mass-Consumption
8. …….is the peak level development stage in Rostow’s theory.
Answers :
a) The Traditional Stage b) Take-off Stage
c) Drive to Maturity d) High Mass-Consumption
1. 1954 2. Gunnar Myrdal 3. Gunnar Myrdal
4. Gunnar Myrdal 5. W.W. Rostow 6. 1960
7.Traditional
8. Take-off Stage
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2.6 Exercise
A. Broad Questions.
1. Examine Lewis theory of unlimited supply of labour.
2. Evaluate Rostow’s theory of economic stages.
3. Critics on Rodan’s growth theory.
4. Explain the theory of circular causation.
B. Concepts
1. Spread effect
2. Backwash effect
3. Dual economy of Lewis.
4. Take-off stage.
5. Indivisibility of production function.
2.7 Reference Books
1. Felix Raj, S. Mukherjee, M. Mukherjee, A. Ghose & R. N. Nag (2006),
“Contemporary Development Economics From Adam Smith to Amartya Sen”,
New Central Book Agency Pvt. Ltd. Kolkata.
2. M.L. Jhingan (1975), “The Economics of Development and Planning”, Vikas
Publishing House Pvt. Ltd. New Delhi.
3. Misra, Puri (1995), “Economics of Development and Planing”, Himalaya
Publishin House, New Delhi.
4. O.S. Shrivastava (1996), “Economics of Growth Development and Planning”,
Vikas Publishing House Pvt.Ltd, New Delhi.
5. R.K. Lekhi (2002), “Economics of Development and Planning”, Kalyani
Publishers, New Delhi.
6. Taneja, Myer (2000), “Economics of Development and Planning”, Shoban Lal
Nagin Chand & Co. Educational Publishers, Jalandhar.
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UNIT - 3
Domestic Measures for Economic Development
INDEX
3.0 Objectives
3.1 Introduction
3.2 Subject Matter
3.2.1 Capital Formation and Economic Development
3.2.2 Role of Agriculture and Industry in Economic Development
3.2.3 Role of Monetary and Fiscal Policy in Economic Development
3.2.4 Role of Government in Economic Development.
3.3 Summary
3.4 Glossary
3.5 Questions for Self-learning
3.6 Answers for Self leaving
3.7 Questions for self-study
3.8 Reference for further readings
3.0 Objectives :
In the last unit some of the important theories of Economic development have
gave us the ideas of economic development to take the problems of developing
countries. In this unit we will study the various variables in economy which helps to
have on Economic development and developing and developed countries. While doing
so we should keep in mind certain objectives as follows.
To find out the relation between capital formation and economic development.
To examine the role of agriculture and industry in Economic development.
To study the role of monetary and fiscal policy in Economic development.
To understand the role of Government in Economic development
3.1 Introduction :
Economic Development is an important aspect in the literature of economics.
Without this it would be impossible to understand the performance of rest of the factors
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in the economy. It is a fact that development of a country can be achieved through
various variables such as agriculture, capital, Industry, monetary and fiscal policy and
government approach etc. In this unit we are dealing the fact that how these variables
are contributing for the economic development of a country. Not only this, it tells us that
what changes should be followed in the various factors to achive the desired economic
growth.
3.2 Subject Matter :
3.2.1 Capital formation and Economic Development :
A) Meaning of Capital formation
1) Bom Bowark said that, “Capital is produced means of production.” In economic
the capital is not a money but it consists machinery, tools, factory buildings i.e. all the
real assets.
2) Ragnar Nurkse defines capital formation as follows, “The meaning of ‘Capital
formation’ is that society does not apply whole of its current productive activity to needs
and desire of immediate consumption, but directs a part of it to the making capital
goods, tools and instruments machines and transport facilities, plan and equipments –
all the various forms of real capital that can so greatly increase the efficiency of
productive Resources. The terms is some time used to cover human as well as material
capital; it can be made to include investment in skills, education and health – a very
important from of investment.
3) According to Singer, Capital formation consists of both tangible goods like plants,
tools and machinery and intangible goods like high standards of education, health,
scientific tradition and research. The same view has been expressed by Kuznets too.
B) Importance of Capital Formation :
Capital formation or accumulation is regarded as one of the important and pivotal
factors in economic development. The following are the important facts throw the light
on the importance of capital formation.
1) Poverty eradication : According to Nurkse, the vicious circle of poverty in
underdeveloped countries can scratched through capital formation. Low income is the
basic feature of these countries, which makes effect on demand, production and
investment of lower level. This deficiency can be removed with capital formation. The
optimum or full use of available resources in developing countries can be possible only
through the capital formation. In this way the extent of poverty can be reduced.
2) Productivity : In general, the productivity in agriculture, mining, plantation and
industry are very low in developing countries. To enhance the productivity of above kind
capital formation is needed to construct schools, hospitals, roads, railways, etc. In
other words, the creation economic and social overhead may boost the productivity of
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all kinds. Hence, capital formation is an important aspect for to have an economic
development.
3) Employment : Capital formation means investment in capital equipments which
results in the increase in production and in turn employment. Thus the capital formation
helps to labour, i.e. the creation of employment opportunities.
4) Expansion of Market : It is the capital formation which removes market
imperfection with the help of economic and social overhead capital. It is also breaks the
vicious circle of poverty and finally due employment people get income which tends to
spending activity.The ultimate result will be expansion of market.
5) To curb the Balance of Payment Problem : Capital formation is very essential
to curb the Balance of payment problem of developing countries. Most of the developing
countries imports exceed export, which deteriorates their Balance of payment situation.
6) Dispenses the need for foreign Aid : Capital formation helps a country to
dispenses the need of foreign Aid. Mostly the developing countries are inviting foreign
Aid to develop their economy. But, they can do it away if the concieve strongly the
capital formation.
7) Get rid of from inflation Pressure : Economists always advocates the
moderate inflation i.e. from 4% to 5% to have smooth growth of a country. But in reality
developing countries are facing the problem of higher inflation which is causing factors
for low development of an economy. If capital formation followed in a proper direction,
the things would be different.
8) Economic welfare : Capital formation also influences the economic welfare of
a country. Capital formation can exploited the natural resources in a right direction,
which could be useful to establish different kinds of industries to meet out the wants of
the people. If they consume variety of products their standard of living may rise and as
a result and this economic welfare increase.
9) National Income : The rise in rate of capital formation may lead to rise in the
level of national income. Thus capital formation is the principal solution to the complex
problems of underdeveloped countries. It is the pivotal key to economic development.
B Reasons for low capital formation :
It is a fact that capital formation is low in underdeveloped countries. The basic
reason is that they do not possess those factors, whose requirement is essential to
determine the capital formation. Infact, capital formation depends on number of factors.
But we must deal with the main reasons for low rate of capital formation in developing
countries are as under
1) Low income : Generally, large amount of savings are essential for capital
formation , which is very much depends on income. Since the agriculture, industry and
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other sectors backward in developing countries, which tends to low national income
and so as the saving and capital formation.
2) Low productivity : The low productivity makes low level of national income,
savings and finally low capital formation. It is the capital formation which may enhance
the level of productivity in agriculture as well as industry.
3) Demographic facts : In under developed country growth rate of population is
very high compare to rate of capital formation. Such countries people’s life expectancy,
becomes less. And at last demographic facts get affected.
4) Entrepreneurial ability : The entrepreneurial ability lacks in case of developing
countries as a result of this low capital formation takes place in such countries.
Entrepreneur faces many problems such as small size of market, deficiency of capital
lack of private property and contract etc. All these retard the economic development
and capital formation become less.
5) Lack of Economic overhead : Now a days economic overhead are called as
infrastructural facilities i.e. power, transport banking etc. These lacks in developing
countries. As a result of this capital formation becomes less available.
6) Size of Market : The small size of the market is another reason for the low rate
of capital formation in LDCs. It is a big hurdle in the growth of entrepreneurship. The
purchasing power is always less in such countries as a result capital formation becomes
less.
7) Tax policy : Taxes also retard economic development and also capital formation
if they are beyond certain limits. These and suma fact happens in case developing
countries and the result is less capital formation.
8) Technology : Obsolete (out of date) technology is also an important factor
forces for low growth of capital formation in less developed economics Technological
backwardness impacts badly on productivity and output and income etc. The net result
is less capital formation in such countries.
9) Weak financial Institutions : Aother important factor stands in the way of capital
formations is lack of efficient financial institutions to supply the desirable funds. Generally
heavy doses of funds are required for the productive forces. But due to inefficient financial
institutions, such climate of finance does not available and this makes less capital
formation.
10) Deficit financing : Deficit finance is panecia for economic development for a
country. If it never crosses the safety limits. But if it crosses the safety limits then tends
to lower the rate of capital formation.
B Sources of Capital formation :
Capital formation depends basically on savings financial institutions and government
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policy. But these trio are and may be internal or external. Thus, in a nutshell capital
formation depends upon internal (Domestic) source and External sources, which are
discussed in detail by following way.
1) Internal Sources : There are many internal sources of capital formation such
as, savings, profit of public undertakings, available human and natural resources etc.
These can be discussed in the following way.
a) Savings : Savings is a part of income which is not consumed. In developing
economy the rate of voluntary savings is vary low. It is the government job to preside
and inculcate habit of savings for their own interest after sufficient consumption. This
would lead to poor, middle class people to increase the rate of savings. To increase the
savings government of concerned countries should give incentives. Such as cash gifts,
tax exemption etc. Moreover issuing of savings certificate is the form govt bonds carrying
high rate of interest may mobilize high level of savings.
b) Financial Institutions : It is a fact that in under developing countries people do
save in the form of Gold, Jewellery and cash. Hence, the requirement is safe financial
institutions. Generally in under developed countries people save their money in some
local financial institution expecting high returns but most of the times such institutions
becomes bankrupt and poor people money looted by culprit of the country.This makes
people to not to keep money in the financial institutions and which makes less availability
of funds for capital formation. These setting up of a well developed capital and money
market by the central Bank can help to enhance capital formation.
c) Profit of Public Enterprise : The profit of public enterprise are an important
constituent in the source of capital formation. But, now a days most of the developing
countries stimulating the private enterprise, for example in India disinvestment policy is
retarding the growth of public enterprises. Thus their contribution to economic
development has been curtailed.
d) Deficit Financing : One important source of capital formation is deficit financing.
Deficit financing means Government borrows funds from market. In other words, people
invest in government securities to get maximum and secured rate of returns. Therefore
this would be considered as a forced savings. In developing country forced savings in
used for formation. People may get bad experience of more rely on deficit financing but
it is a source of capital.
e) Gold stock : Another important source of capital formation is gold stock. In
most of the developing countries people lock up their some amount in terms of gold,
jewellery and silver.They are not prepared to part of with it. This is a fact that it amounts
less less capital formation. Hence, it would be useful of a country stonts willgold
certificates and bond etc. Some countries like India have enhanced the gold trading
which may bring hurdles in capital formation.
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f) Use of disguised unemployed : According Nurkse, one of the important source
of capital is the concealed saving potential containd in rural under employment in over
populated underdeveloped countries. Disguised unemployed people contribute little or
nothing to total output i.e. the marginal physical productivity remains zero. In this way
mobilizing disguised unemployed becomes a savings potentional as well as selffinancing.
g) Taxation : Taxation is the most effective tool of fiscal policy for reducing inequality,
reducing private consumption and transfering resources to the government for
productive investment. Thus taxation will bring income to the budget of the country.
According to Prof. Lewis an underdeveloped country should raise at least 20% of
its national income through taxation Out of this 12% should be utilized on current
expenditure and 8% on capital investment in the public sector.The taxation should aim
at incentives to work, save and invest in this way capital formation would take place.
2) External Sources :
The following are the import aspect of external sources of capital formation. They
are as follows.
1) Foreign capital / Aid : If the domestic source of capital is inadequate then
capital formation should invited through foreign capital in the form of loans, grants and
Foreign Direct Investment. Now a days globalization has made a better climate to
developing countries to have more and more capital formation.
2) Imports Restricted : If a developing country restricts all luxurious imports will
save the foreign exchange. This will enhance the savings and it leads to an increase in
net capital formation.
3) Favourable Terms of Trade : If the terms of trade move in favour of an
underdeveloped country, it is in position to import large quantity of capital goods. Moreover
due to favourable terms of trade domestic income rises which should be saved and
invested productively.Then only the favourable terms of trade will be useful for capital
formation.
3.2.2 Role of Agriculture and Industry in economic Development :
A) Introduction :
The over-populated developing countries like India, Pakistan, Indonesia, China etc.
are heavily dependant on Agricultural sector.These country cannot go without agricultural
sectors help. Since most of these countries are fully dependent on agriculture. The role
of agriculture in economic development is self evident of these countries.
B) Role of Agriculture in Economic Development :
Agriculture helps the process of economic development in the following way.
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1) Provision of food to evergrowing population : Growing population of
developing countries leads to increase in demand for food grains that there were two
facts one Growth rate of population ranges from 1.5% to 3% and second is income
elasticity demand for food in developing countries is 0.6%. These two factors tell us the
importance of agriculture in economic development country and the shortage food grains
production. To solve these problems either agricultural marked surplus should be
increased or import the foodgrain from country who possess surplus food grains.
2) Contribution to capital formation : Agriculture is the basic occupation in
developing countries it plays an important role in pushing up the rate of capital formation.
If it fails to do so, the whole process of economic development will be stopped. Thus
now a days agriculture sector playing pivotal role in the development of economy.
3) Supports Industrial Sector : All agro based industries like Sugar, Cotton, Jute
etc are being supported by agriculture sector. In addition to this the raw material and
food stuffs are provided by the agriculture sector.This result in to the development of
industrial sector and in turn the economic development of a country.
4) Employment : In under developed countries Agriculture is basically labour
intensive industry. Most of the rural people seek gainful employment in agriculture. This
is nothing but a income source to the unskilled labour. Such unskilled labourers are
found more in developing country.Thus if the get employment, it leads to rise in income
of the people as well as nation and which can be regarded as important variable in
economic development.
5) Foreign Exchange for the country : Developing countries of the world are
exporting of primary products, which contributes 60 to 70% percent of their total export
earning. Thus the extent of import of capital goods required for industry depends mainly
on the export earnings of the agricultural sector. If the agricultural sector fails to export
largely.The country may face a heavy deficits in the balance of payments.
6) Welfare of the rural people : An increase in rural income is a result of
agriculture surplus which improve rural welfare. Now a days farmers have started
consuming higher nutritional farm products and using the modern amenities as well as
better services such schools health centers etc. Therefore agricultural surplus have
effected the raising the standard of living of the mass of rural people.
C) Role of Industry in Economic Development :
When a country opens number of industry quickly is called industrialization. The
industrialization is the process of manufacturing consumer goods and capital goods
and creating social overhead capital in order to provide goods and services to both
individuals and business. Thus, the following points indicate that how an industry or
industrialization plays a major role in the economic development of developing and
developed countries.
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1) Rise in employment : Industrial growth is pre-requisite for economic
development. The economic development of Germany, France, England, Japan have
been realized due to industrialization in rampant way. Its growth have been “trickle
down” to other sectors in the economy and led to rise in employment output and income.
2) To increase productivity of Farm : There is over crowding on the land. Thus
a country must begin with industrial development to supply fertilizers, farm machinery
and other inputs to raise the productivity of land. As a result, economic development is
possible.
3) Control over prices : Industrialization can control the fluctuations of prices of
primary products and deterioration in the terms of trade. Thus due to industrialization
sustainable development in an economy.
4) Modernization : People of urban as well as rural area may enjoy fruits of
modernization in the form of variety of goods and services availability due to
industrialization. Thus economic development can be achieved.
5) Social transformation : Most of the developing countries faces the problems
of social inequality lack of social transformation due to agriculture base of the economy.
With the introduction industrial atmosphere charges the out look of people which breaks
the social inequality.Thus it may play a greater role in the field of economic development
through more equitable distribution of income and balanced regional development.
3.2.3 Role of Monetary and Fiscal Policy in Economic Development :
A) Introduction :
Now a days monetary and fiscal policies are important tools to overhaul the basic
problems in developing economies. We will verify one after another.
B) Role of Monetary Policy in Economic Development :
Monetary policy refers to the policy of the monetary authority (Central Bank) of a
country with regard to money matters. This policy deals with control on supply of money
with changes in rate of interest. Sometimes monetary policy is also called as credit
policy of a country.The monetary policy cannot be one and same for both developed
and developing country.A developed country can use monetary policy to achieve variety
of objectives such as full employment, price stabilization or exchange rate stabilization
as per the requirement of economic situation. But in a developing economy the prime
objective is to achieve economic growth or development. Thus, the following points
highlights the role of monetary policy in economic development of a country.
1) Spread of Financial Institution : It is responsibility of the monetary authority in
a economy to extend banking facilities in those areas in the country which are either
unbanked or under banked. In addition to this, monetary authority should ensure that
the flow of finance to the priority sector must be accordance to the development plan of
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the country.The central bank control the commercial bank as it is chief weapon of
monetary policy. Finally monetary authority should see that the working of financial
institution stimulate the economic development.
2) Interest Rate Policy : Investor always correlate the rate of return of an asset
with rate of interest, if earlier is more than latter, he invests more which leads economic
development. In this sense, it is the job of Central Bank (Monetary authority) should
keep a suitable interest rate policy. In other words at the time of inflation, high rate of
interest and all time depression low rate of interest policy.The existence of high rate of
interest policy acts as an obstacle to the growth of private and public investment in
underdeveloped economy.
To discourage the flow of resources in to speculative borrowings and investment,
the central bank should follow a policy of discriminatory interest i.e. charging high rate
of interest for unproductive loans and low rate of interest for productive loans.
3) Control and Supervision Debt. : Monetary policy should be as such, it is
should control and supervise the debt management in developing economy. It is central
bank which aims at proper timing and issuing of government bonds stabilizing their
prices and minimizing the cost of servicing public debt. The success of debt
management, as a instrument of monetary policy, would depend upon the existence of
well-developed money and capital market. Thus monetary authority play an important
role in economic development through debt management.
4) Equality between Demand for and supply of money : Monetary policy is an
important tool which brings about a proper adjustment between demand for and supply
of money.A shortage of money supply may check of growth of an economy while an
excess of it will lead to inflation. Thus, in an excess of it will lead to inflation. Thus, in an
underdeveloped economy the supply of money and credit should be controlled In such
a way that the price level is prevented from rising without affecting investment and
productivity adversely.
5) Credit Control : Monetary authority of a country aim at controlling credit
through appropriate monetary policy. Generally it makes effort to curbs the inflationary
pressure in the process of economic development. Monetary authority must use the
quantitative and qualitative credit control method to have a requisite space of economic
development.
Along with these methods credit control direct control of plant and equipment,
control of capital issue, discriminatory taxes and control over import and export etc. will
have to be instituted for a necessary economic development in a economy.
C) Role of Fiscal Policy in Economic Development :
1) Meaning and importance : Fiscal policy means the policy of government
regarding taxation, public debt, public Expenditure, to achieve stabilization and economic
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development Keynes advocated fiscal policy to reduce the savings and raise the
propensity to consume. But in under developed country savings are low and consumption
is very high. Therefore Fiscal Policy plays a dynamic role in underdeveloped countries
and it is indispensable for economic development. According Raja J. Chelliah. “The
implementation of the financial plan and the achievement of balances in real and money
terms obviously will have to rely largely on fiscal measures.
Here are few objectives of Fiscal Policy.
1) To increase the rate of investment.
2) To increase socially optimal investment
3) To increase Employment opportunity
4) Economic stability
5) Control inflation.
6) To increase and redistribute National Income.
The success of fiscal policy in achieving these objectives depends upon how role
of fiscal policy plays in the instituted economic development.
2) Role of Fiscal Policy : Fiscal Policy is also a potent weapon for the
achievement of economic development in developing economy. To achieve high
economic growth, the government has to deploy all the tools of fiscal policy. Such as
taxation public expenditure public debt and deficit financing.
3) Aggregate Savings : Fiscal policy maximize the levels of aggregate savings
by applying a cut in the consumption of the public. It curbs conspicuous consumption
of the rich and force them to save more for capital formation.
4) To control inflation : Inflation can ruin an economy.The growth process gives
rise to some inflationary pressure in the economy. It is not controlled in time, then will
bring bad position to an economy.Thus, fiscal policy can play prominent role to have
economic development through the control of inflationary situations.
5) Eliminates unemployment : Fiscal policy prepares incentives for encouraging
those industries which have a high employment potential in the economy. In developing
country labour intensive industries should be according with better fiscal policy, which
may create more employment opportunities.
6) Inequality : Inequality of income and wealth retards the economic development
of a country.The fiscal policy can be worked out in such way that there will be equitable
distribution of income and wealth in society.Taxation policy can reduce the inequality in
income and wealth. Higher rate of taxation to rich people and lower rate of taxes to poor
people. Thus, inequality in income can be reduced.
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7) Public Spending : Fiscal policy will be instituted through public expenditure
and economic development can be achieved. Spending on Education may create
qualitative human capital which is necessary for economic development. Alongwith
this spending on health care centre the efficiency of labour force can be enhanced.
During the depression compensatory spending must be undertaken till the private
investment becomes normal. Thus, compensatory spending shall results in raising the
levels of income, output and employment.
8) Taxation : It is an inevitable instrument for raising finance for economic
development. The government may resort both Direct and Indirect taxation to have
adequate revenues for development purposes During inflation higher rate of direct
taxation and lower rate of indirect taxes may useful to poor people. Through this peoples
well being can be maintained at higher level. But at the same time rich class will be hit
hard. Thus, very wisely the taxation policy should be executed to have smooth space of
economic development of a country.
3.2.4 Role of Government in Economic Development :
After a big jolt of great depression 1930, people lost their confidence in market
mechanism Keynes economic models more emphasized that active government
participation is a necessary condition for economic development of an economy.Thus
to tackle various socio-economic problems in an effective way, government intervention
was deemed to be essential. Hence, World Development Report 1997 argues that,
“The state (government) is central to economic and social development not as a direct
provider of growth but as a partner, catalyst and facilator.Al the end the rationale role of
government in economic development in the following way.
1) Capital Formation : The process of economic development in the under
developed countries depends mainly on capital formation. The Government institutes
the monetary and fiscal policy to have a desirable capital formation for economic
development. In other words credit policy, spending and taxing policy launches in such
a way that there will be capital formation.
2) Building Institutions : The effective rate of capital formation is possible if
institutions are powerful. The institutional structure means the banking, education,
insurance and saving organization should be well developed then only capital formation
is possible. Thus, state / government takes an appropriate action to best institution
which in turns helps to achieve higher level of economic development.
3) Infrastructure : Government has to bear the responsibility of developing
infrastructure i.e. power, electricity, irrigation, transport system etc. Huge capital
investment are required to create such facilities, there private sector is reluctant to
spend on this sectors. Thus, government can only invest in such projects. Therefore
government plays an important role in economic development by instituting these
facilities.
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4) Industrial Development : Another important function of the government is to
develop the economy industrially.The private sector does not have the resources and
the willigness to invest in basic and key industries. They may start consumer goods
industries. Thus, it is the government, which can set up basic industries to help the
private investor as well as the general public. Therefore, government play an important
role in economic development through strengthening the industrial base.
5) Agriculture : Agriculture is the main occupation of a majority of the people in
underdeveloped countries and it provides not only employment to large section of the
economy but also contributes as significantly to National Income. Recently budget of
India in 2012 more investment as well as credit facilities were allocated to have more
than 3% growth rate of agriculture. Thus new technique, new agricultural policy any
other support to agriculture can be undertaken only by the Government. Therefore
government plays an important role in economic development through investment and
development in agriculture sector.
6) Monetary and Fiscal Policy : The government also helps in economic
development by adopting various monetary and fiscal policies. By implementing
monetary and fiscal policies, the state is able to solve social, institutional and economic
problems in underdeveloped countries. Through monetary policy cost credit reduced
and its availability will be at ease.
Through Fiscal policy government tries to correct inequalities and income and
wealth. The government follows appropriate taxing, spending and borrowing policy to
expand internal market, reduce no-essential imports, fight the inflation and enable higher
level of savings and investment.
7) Foreign Trade : Developing countries exports primary products, hence they
face deficit in the Balance payment. This is due to terms of trade becomes to agriculture
sector and in the field and industrial section they are very much weak. Thus, the
government can solve the problems related to balance of payment and balance of
trade through appropriate export promotion and import substitution policy.
Thus it may have an economic development with the help of suitable foreign trade
policy.
8) Health and Welfare : Now a days due to globalization rural masses and poor
families in urban are facing problems like safe drinking water, housing sites, slums,
education, energy, nutrition, roads and transport system. It is the responsibility of the
government to solve these socio-economic problems in the country.There, the role of
government is to carryout certain welfare and anti-poverty programmes to achieve
economic development.
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3.3 Conclusion / Summary :
Capital formation is an important determination of economic development. This
capital formation can be floated well in a country, if the political, social, cultural,
technological and entrepreneurial factors.
Economists have viewed that the development should be launched with
industrialization in a country.
Monetary policy is useful to fight many financial problem and will be help to have a
requisite economic development of a country.
Under Fiscal policy the taxation, public expenditure, public debt should be executed
suitably to achieve economic development. Thus, the role of Fiscal policy is an inevitable
potent instrument in Economic Development.
Here government institutes many policy to shoot up growth rate of respected
economy.
3.4 Glossary :
1) Capital formation : It means availability of men and material in the country.
2) Monetary Policy : It is the policy which deals with credit policy and interest
rates.
3) Fiscal policy : Policy related to spending, taxing and borrowing.
3.5 Question for self learning :
A) Choose correct alternatives and rewrite the sentences.
1) Capital means ……………… means of production
a) money b) produce c) none of these d) dollor
2) Monetary policy related to ……………..
a) supply of money b) production
c) Taxation d) None of these
3) Fiscal policy is nothing but ……………… policy of the Govt.
a) Taxing and spending b) production
c) Balance of payment d) on of all
4) Inflation means ………………
a) fall in price b) rise in price c) unemployment d) everything
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3.6 Answer for self learning
1) produced
2) supply of money
3) taxing and spending
4) rise in price
3.7 Questions for self study :
1) Explain the importance of capital formation.
2) Explain the sources of capital formation.
3) What are the causes for low capital formation in underdeveloped economies?
4) Explain the role of agriculture in economic development
5) Explain the role of industry in economic development.
6) State the role of Monetary policy in economic development.
7) Discuss the role of fiscal policy in economic development.
8) How government can achieve a faster rate of economic growth.
3.8 Prepare a report on Agriculture and Indian Economy.
3.9 References for further readings.
1) Jhingan M. L. (2005) The Economics and Development and planning, Vrinda
Publication Ltd., Delhi.
2) S. K. Misra and V. K. Puri (2001), Economics of Development and planning
(theory and Practice) Himalaya Publication.
3) Todaro (10 th edition), Economic Development Pearson Publication.
4) Weil (2 nd edition), Economic Growth peason publication.
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UNIT - 4
International Measures for Economic Development
INDEX
4.0 Objectives
4.1 Introduction
4.2 Subject Matter
4.2.1 Role of Foreign Trade in Economic Development
4.2.2 Foreign Capital and Aid in Economic Development
4.2.3 Private Foreign Investment and Multinationals
4.2.4 Globalization and Economic Development
4.3 Summary
4.4 Questions for Self learning
4.5 Questions for Self-study
4.6 Glossary
4.7 Field Work
4.8 References
4.0 Objectives :
In the preceding unit we have studied the Domestic Measures for economic
development. In this unit we will study international measures for Economic Development
Here, it is necessary to see that the objectives laid down to study this unit are as
follows –
To study the Role of Foreign Trade in economic development of an Economy.
To discuss the importance of Foreign Capital and Aid in Economic Development
To know the Private Foreign Investment and Multinationals.
To understand Globalization and Economic Develoment.
4.1 Introduction
Some of international Measures which helps for economic development of a
country.At this junction, it is essential to know that when domestic capital is short in
supply, it is only a foreign capital or Aid is a supportive tool to have an economic
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development. The foreign capital can be paid out through the effective trade policy at
international level. But the fact is that foreign trade is not favourable to undeveloped
countries. To find the solution for this problem, private foreign Investment, multinationals
and Globalization are the measures to have an economic development of developing
nations.
4.2 Subject Matter :
In this unit we are going to study the various aspects of International Measures for
the economic development as under –
4.2.1 Role of Foreign Trade in Economic Development :
Many economists like Ricardo, Haberler,T. S. Mill. Wortkin, Myint have argued that
foreign trade is an essential condition to have an economic development. Thus, the
classical and new-classical economists attached much importance to international
trade in country’s economic development and regarded it as egine of growth. The
Economists like G. Myrdal, Prebisch, Singer, have enunciated that historically foreign
trade has led to international inequality where the rich countries have become rich at
the expenses of the poor countries. These two approaches tells us the role of foreign
trade in economic development of an economy.
A) Role / Importance of Foreign Trade in Economic Development :
Classical and New-classical Economists have argued that foreign trade possess
great importance for developing economies. According to Haberler…. ‘International Trade
has made a tremendous contribution to the development of less developed countries
in 19 th and 20 th centuries and can be expected to make an equally big contribution in the
future. Thus, free trade is the best policy from the point of view of economic development.
1) Rise in National Income : When a country specializes in the production of a
particular commodity, due to foreign trade and division of labour, at lower cost it exports
to other countries which raise the national income. Thus, trade breaks the vicious circle
of poverty and promotes economic development.
2) Widens the Market : In developing country a small size of domestic market
fails to absorb market surplus. As a result, income, purchasing power and savings and
investment becomes very less. But fact is that foreign trade widens the market and
increases investment, income and savings efficiently. Myint has used the smith’s “Vent
for surplus” theory for developing countries to have gains from international trade. This
theory states that foreign trade provides a better opportunities to developing countries
to produce and export primary products. The following diagrame exhibits “Vent for surplus
theory.”
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Y
P
S
C
Import
E
D
P
O
X1
X2
B
X
Export
Explaination of a Graph :
OY = imports
OX = Exports
AB = Production possibility curve
Before Foreign Trade
E = production level
OX1 = Primary products produces consumes and
XiE = Manufacturing products
After Foreign Trade :
D = Production Point level
OX1 to OX2 = Exports Primary products.
XPP1 = International Terms of Trade.
OX1 to OX2 primary products required mid market to export which is possible
through foreign Trade.
3) Reduction in unemployment and under employment : According to Watkins
“staple theory of economic growth” unemployment, under employment have been
reduced and savings investment, have increased. Thus, the foreign trade benefits
directly to the developing countries in their economic development.
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4) Increase in Domestic Investment : The staple commodities of developing
countries are exchanged with capital goods. As a result, more export used to pay import
price and stimulates the domestic investment for economic development.
5) Educative Effect : Underdeveloped countries are suffering from critical skill
which hinders the economic development. But foreign trade over comes this weakness.
According to Haberler foreign trade helps in the development of developing countries
by faciliting the selective borrowing of ideas, skills and know how from the development
countries. The rapid development of the USA, Japan and Soviet Russia has been the
result of the educative effect of foreign trade.
6) Rise of Foreign Capital : The importation foreign capital in developing country
depends upon the policy of foreign trade. Through foreign trade the foreign capital can
flow from rich to poor countries. Ultimately, volume of trade determines the volume of
foreign trade. It would be much easier to get foreign capital from export increasing
industries rather than import substitution and public utility industries. However, the use
of foreign capital for import substitution, public utilities and manufacturing industries is
more useful for accelerating development than only for export promotion.
7) Healthy Competition : Foreign Trade benefits developing countries by fostering
healthy competition and checking inefficient monopolies. Healthy competition is a
necessary condition for the economic development of such economics. They would
be supportive for inform industry.
B) Bad effects of Foreign Trade :
In above discussion, they set the trend that the foreign trade has acted as a egine
of growth and developing countries. But according to R. Prebisch; H. W. Singer; G.
Myrdal, E. R. Grilli, M. C. Yang and Cairn cross etc. have argued that foreign trade is not
useful for the development of underdeveloped economy.They have putforth views in
the following ways.
1) Strong backwash effects : According Gunnar Myrdal international trade has
strong backwash effects on developing countries. He writes, “Trade operates (as a
rule) with a fundamental bias in favour of the richer and progressive regions (and
continues) and in disfavour of the less developed countries. The rich countries have a
large base of manufacturing industries with strong spread effects. The developing
countries does not get the benefit of foreign trade, due to inelastic demand for their
export of primary products. Thus strong backwash effects are generated in the economy.
2) Less Capital formation : It has been argued that the international demonstration
effect through foreign trade has adversely affected the capital formation in developing
economics.
3) Terms of trade deteriorated : Prebisch-singer thesis argued that terms of
trade of primary commodities has shown a secular deterioration and the terms of trade
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for the developing countries has also shown a secular deteriorated. This could be
understood by studying the R. Prebisch Singer thesis as it is given below.
R. Prebisch Hans Singer Thesis :
According Raoul Prebisch the terms of trade between the peripheral
(underdeveloped countries) have shifted in favour of developed countries due to their
monopoly element in their product and factor market.
R. Prebisch assumes that the capacity to import is the determining factor of
economic growth in developing countries. He analysied terms of trade of U.K. with poor
countries during 1870’s and 1930’s, during this period there was a secular downward
trend in the price of primary goods relative to the price of manufactured goods. He
concluded that peripheral countries have not only failed to share in the productivity
gains from the developed countries but also in retaining their own productivity gains
due to population pressures, technological backwardness and domination of industrial
activities of developed countries.
Hans W. Singer argued that opening of gate of developed countries to foreign
trade investment have been inhibited their development. Developing countries have
been specialized in exports of food and raw material to industrialized countries in a big
way due to three reasons.
1) The investing countries were benefited due to cumulative multiplier effect of
foreign investment.
2) Less scope of technical progress, internal and external economies to
developing countries.
3) Deterioration of terms of trade of developing countries.
All these things have taken place due to the operation of Engel’s Law, which is
major factor in accentuating price differentials between the peripheral and the centre.
H.W. Singer writes that “the under developed countries are in danger of falling
between two stools : failing to industrialize in a boom because things are as good as
they are, and failing to industrialize in a slump because things are as bad as they are”
Here, singer suggested remedy for this problem that developing countries should absorb
the flow of international investment into their economic system by reinvesting its profits,
by generating complementary domestic investment and by finding the requisite domestic
resources.
Human Development Report 1997 reports that “Poor countries often lose out
because the rules of the game are biased against them – particularly those realiting to
international trade” No dought some of economist are not agree with views put forth by
prebisch – Singer.
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4.2.2 Foreign Capital and Aid in Economic Development :
I) Introduction and Foreign Capital and Aid :
The level of capital formation is very low in developing countries, thus, they can
not meet the financial requirements to have their economic development. At this critical
juncture, developing country must import capital which they can not produce. To pay
for the imports, the external resources are borrowed in the form of foreign capital or
aid.
History reflects that almost every country had to rely on foreign capital and foreign
aid for speeding up economic growth. According to Prof. W.A. Lewis England as well
as U.S.A. have had assistance of foreign finance in 17 th , 18 th and 19 th century
respectively. Thus it is very much clear that both developed and underdeveloped countries
have to have a foreign capital to get desired economic growth.
II) Meaning :
Foreign Capital means investment by foreign government, private foreign investors,
and international financial institutions in the productive activities to a receipt country.
Thus, when a country receives capital from any corner of the world is called foreign
capital.
Foreign aid is the aid which flows from the Donar country or International Financial
Institutions in the form of grant, loans, technical assistance to receipent country.
III) Forms or Classification of Foreign Capital
In the view of receiving country foreign capital can be divided into two parts
1) Private Foreign Capital
2) Public Foreign Capital
1) Private Foreign Capital :
The private foreign capital can be received from private sources, it may be private
individual or private corporation i.e. Multinationals. They invest in private sector or public
sector.Thus, the private foreign capital may be of the following types.
a) Direct Foreign Investment (FDI) : Foreign Direct Investment is incurred by
private enterprenuers in a subsidiary in another country or enterprises of a another
country.The investors have full or partial control on the enterprises of another country.
They bear risk as well profit.
b) Indirect Foreign Investment : The indirect foreign Investment is also
recognized as “Portfolio investment” or “rentier investment”. Foreign investor or a
company can hold shares and debentures of some other countries. Such holdings of
securities does not give any right to control over the company. But, they as a shareholder
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they are entitled to get dividend as per rule. Thus foreign investor gets a fixed rate of
interest on his investment.
c) Commercial Borrowings : This form of foreign capital is one which flows
through commercial Bank. Commercial Banks provide export credit to developing
countries or finance projects which are undertaken by developing countries.
e) Loans by International Agencies : These loans are given by various
international agencies of the United Nations, such as world Bank. International Finance
Corporation (IFC) International Development Association (IDA) Dsian Development Bank
(ADB)
II) Public Foreign Capital :
Public Foreign Capital means when a government of one country provides loan or
grant to the government of another country is called public foreign capital. It accelerate
the growth of an economy. Now a days it is an important source of rapid industrialization
and economic development. Finanlly, it is also called as inter-governmental loans. It
may be listed in a following way.
a) Soft loan : The loans which are granted for long period at a low rate of interest
to have an economic development of developed country are called soft loan. These
loans are given at local currency.
b) Hard Loan : These loans are provided at a high rate of interest for a short
period. They are given in hard currency like Dollor Ponds, Euro Doller etc.
c) Project Loan : Project loans are such loans, which are given for a specific
project. Receipant country must use such loan for allotted projects only.
d) Non-project : This kind of loan are given for general use. The receiving country
can use the loan for any purpose.
e) Foreign Aid :
i) Meaning :
Foreign Aid means financial assistance flows from the donar country in the form
of grant, loans and technical assistance to the receipient country.
Foreign aid is given for some definite purpose and it is used in the manner as
agreed between foreign aid receipt country and the foreign aid giving country. Generally
foreign aid provided to gain support from receiving country in international politics and
strategic issues such as flood control, earthquakes, removal of diseases, slums,
eradication of powerty etc.
ii) Types of Foreign Aid
a) Tied aid
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) United aid
a) Tied Aid :
Tied aid may be by source, project or commodities. Tied aid by source is given by
developed countries such as U.S. Government Assistance under PL. 480 and Exime
Bank loans, Aid given by U.S.A. should be spent by receipient country to purchase
U.S.A. goods and services only.
Aid tied by project is that aid under which aid must be used for specific development
project like construction of dam, hospital, bridges, roads etc.
Tied commodity aid is that aid which is given to purchase specific commodities
such as food grains, machinery, spareparts raw materials etc. Here, receipient country
are requried to purchase commodities from donar country at higher cost.
b) Untied Aid :
When a donar country gives aid to receipient country without any condition. Here,
such kind of aid is useful to the receipent country because it may use aid freely be
keeping in-view its plan requirements.
B Role of Foreign Capital and Foreign Aid in Economic Development :
Foreign Capital and Foreign Aid plays an important role in the economic
development of both developed and developing countries. Now a days foreign capital
has becoming essential condition to have growth either in developing and developed
country. Let us see how its role is creating an impact on economic development.
1) Use of Human and Natural Resources :
Under developed countries are suffering from excessive pressure of population
on land and exist of disguised unemployment on large scale. But, natural resources
are available in huge way. It is the job of the economy to utilize both natural as well as
human resource and this could be possible only through either foreign capital or aid.
2) Improvement in Technology :
Generally, technological backwardness is the well know feature of developing
countries. This has retarded the development process of an economy. Hence, through
foreign capital and aid they can have technical assistance in the forms of research,
training, expert services, etc. to built-up strong industrialization. Thus, with foreign
collaboration, developing countries can a higher economic development.
3) Filling up resource gap :
The resources which are available in under developed countries are extremely
low due to low savings, low investment and vicious circle of poverty. Here, foreign
capital and foreign aid is the only way to bridge the gap between the low domestic
savings and the huge investment required for rapid economic development.
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4) Infrastructure :
Since last three four decades, international financial institutions and many
governments of developed countries have made substantial capital to the underdevelop
countries to develop their system of transport and communication, roads, distribution
of electricity and development of irrigation facilities.
5) Balance of Payment :
The foreign aid and capital also solves the problem of adverse balance of payments.
The developing countries are heavily importing the food grains, pulses, oil seeds, capital
raw materials, as a result they face as adverse balances of payment. Altimately,
correction should be made in deficit of balance of payment through foreign capital and
aid only.
6) Increase in level of standard of living, income and employment :
Foreign capital and aid also helps to raise the level of national income, productivity,
employment and standard of living of every country which is in need.
7) Controls Inflation :
Every country in general and developing country in particular are facing the problem
of inflation. The foreign capital and aid helps to minimize inflationary pressures by
increasing the supplies of imported goods and services. Thus, obstacle of inflation is
being removed in the way of economic development by foreign capital and aid.
To conclude, the inflow of foreign capital and foreign aid is indispensable for the
economic development and industrialization of underdeveloped and developing countries
of the world.
4.2.3 Private Foreign Investment and Multinationals :
A) Private Foreign Investment :
i) Introduction :
Private foreign capital was flowed indirectly upto 1920. But after II nd word war it
was flowing in the form of direct investment. It has been concentred on the mainly in
the extracting of raw materials like iron, crude oil, magnese, bauxite, copper, electric
energy etc. Now a days it is moving towards countries which are somewhat industrially
advanced and have large domestic markets.
ii) Merits of Private Foreign Investment : (PFI)
PFI possess certain advantages which are discussed as below –
1) It provides finances, managerial, administrative and technical personnel, new
technology, research and innovations in products and techniques of production
which are short in supply in developing countries.
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2) Local Enterprises are encouraged to invest more in ancillary industries or in
collaboration with foreign enterprises.
3) It helps in filling the extraction and refining manufacturing for home production
and exports.
4) They are operating in service industries such as banking, insurance, shipping
hotels and so on.
Thus, the Private foreign investment are generally followed by Multinational
Companies. Thus they are animals in the 200. The MNC’s come in various shapes,
forms and sizes.
B) Multinational Corporations :
1) Meaning :
A multinational corporations (MNC) is a corporation company or enterprise or firm
within headquarter in a developed countries like U.K., U.S.A., Germany, Japan etc. and
operate in developed and developing countries. They are also known as Transnational
Corporations (TNCs)
According to U.N. Report ‘Multinational Corporation deal with group of enterprises
which own or control production or service of facilities outside the country in which they
are based. Such enterprises are not always incorporated, they can also be corporative
or state owned entities.
According to Lal and Streeten “Multinational Corporations in general are very large
firms with vide spread operations which are clearly international in character and have
more than five foreign subsudirics or more than 15% of total sales produce abroad,
and acting in a convenient manner to achieve maximum profits or growth.”
II) Features / Characteristics of MNC’s :
1) Its head quarter in developed countries like U.K., U.S.A. etc.
2) It operates in both developed or developing countries.
3) It may have its group of subsidiary companies with their branch network
operating in various countries.
4) They have gigantic size.
5) They have multi-national stock ownership.
6) The profits of the corporation is divided among the countries in proportion of
their share capital.
7) They have multi-national management.
8) It possess vast resources for production, capital technology marketing and
exports etc.
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III) Advantages of Multi-national Corporations :
Generally developing countries have to depend on MNC’s. The main benefits of
the MNC’s are as follows.
1) Capital and Technology :
The developing country face the acute shortage of capital as well as technology,
this can be met with the MNC’s with their operational and management. The capital
intensive technology can be drawn through the MNC’s. Thus, it is very important
advantage to the receiving countries.
2) Rabid Industrialization :
The MNC’s provide better environment for the rapid industrialization in receipient
country through the cheap foreign capital and new technology.
3) Expolitation of Domestic Resources :
The operation of the MNC’s in developing countries like India and others, enabled
them to exploit their domestic resources and increase productivity in the exploration of
new resources. Further, they help the developing economies to integrate with the global
economy.
4) Space for International Market and Export Promotion :
The MNC’s produce commodities and services in a huge quantity with better quality,
which help to recipient country to capture domestic as well as international market.
This results in increased size of export.
5) Large scale employment :
Along with increase in savings, investment and production in developing and
underdeveloped countries, the MNC’s presents the opportunity of enhancing employment
on a large scale.
6) Foreign exchange Reserves :
MNC’s plays a vital role in meeting the deficit and increasing foreign exchange
reserves in under developed and developing countries by increasing their export both
of semi finished and finished products.
7) Infrastructures :
MNC’s assist in the development of infrastructural facilities in recipient countries,
which help in the development of other sectors of the economy, such as, agriculture,
mining trade, commerce and other related activities.
8) Increase in the standard of living :
Multinational corporations spend huge funds on research and development (R &
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D) It makes to recipient country to avail the discovery and introduction of new process,
new technique and variety of products to raise the standard of living of the masses
living in these countries.
IV) Dis advantages / Demerits of MNC’s :
Though the MNC are proved to be a powerful instrument of rapid economic growth
of recipient countries but they have been criticized widely on several grounds which
are –
1) Harmful for producers and consumers :
MNC’s are oligopolists in nature and have loyalties to none, So they have power to
eliminate any actual and potential competition. They manipulate future markets,
differentiate their products through deceptive advertisement. This makes bad impact
and effect on the part of producer as well as consumer.
2) Bad Business ethics :
MNC’s follow bad business ethics such as bribes to officials to get work done.
They also interfere in political affairs of the host countries to make favorable legal system
for their own benefits. These are the serious aspects of the working of MNCs.
3) Exit of transfer-pricing :
This referes to intra-company transactions related to deceptive prices with view to
maximize group profits. For example. MNC’s sells dear to its affiliate with low tax country
A. and buyes cheap from affiliated with high tax in ‘B’. This increase the profit of country
‘A’ and loss to country ‘B’. Hence, as a result of this it make huge profit which is retained
in their own country.
4) Currency Manipulations :
The MNC’s involve in financial dealings in several national currencies. They keep
on accumulating funds in places that are safe with strong currencies and high interest
rates. In case of weak-currencies MNC’s ask their affiliates to go in for larger debts
through raising fresh loans, premature repayments of old loans etc. In short they built
up assets in strong currencies, and debt in weak currencies. This impact no advantage
to the less developed countries and further harm them directly to weaking currencies
and indirectly add up currency crises at the world level.
4.2.4 Globalization and Economic Development :
1) Introduction :
Much discussion has been taking place in the world about globalization and its
impact on economic development for both developing and developed countries. The
seriousness was croppled after world trade organization (WTO) inception in 1995. It
has started its involvement in expansion of economic activities across political
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oundaries of nation states.
2) Meaning :
Globalization means it is a process of increasing economic integration and growing
economic interdependence between countries in the world economy.
According Jagdish Bhagvati “Globalization constitutes integration of national
economies into the international economy through trade, direct foreign investment (by
MNC’s), short-term capital flows, international flows of workers and humanity generally
and follows of technology.
Thus, Globalization mean it has got following four parameters.
1) Free flow of goods and services in the world.
2) Free flow of capital in the world.
3) Free flow of technology among nation states.
4) Free movement of labour in the world.
Therefore “Globalization”, infact, is nothing but a modern version of the “Theory of
comparative Cost Advantages” which was propagated by the classical economists to
provide the theoretical foundation of free trade from Great Britain to other less developed
countries. Eventually, globalization would mean being able to procure raw material and
labour and drawing management resources from the cheapest sources any where in
the world.
B Merits of Globalization for Economic Development :
1) Efficiency :
It is argued that globalization helps to developing countries to improve the allocative
efficiency of resources, reduces the capital output ratio, increase in labour productivity,
expand the exports, update the technology and boost the economic growth rate etc.
This make the sustainable development of developing countries and developed too.
2) Production and Trade Structure :
It will help to restructure the production and trade pattern in capital scare, labour
abundant economy infavour of labour – intensive goods and techniques.
3) FDI :
It helps to inflow more and more FDI to recipient country who are facing the acute
shortages of capital.
4) Better Consumer goods :
Globalization has made people happy of developing countries through cheaper
and high quality of consumer goods.
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5) Banking and Financial Services :
Under Pre-globalization period people of developing countries were suffering from
poor facilities of banking and financial services. But, with the opening the gates economy
most of the countries banking and financial sectors have become efficient in their working.
6) Double standard policy :
Developed countries have adopted double standard. They demand many
concessious and reduction in tariffs from developing countries but have adopted
protectionist attitude for themselves.
7) Deteriorating Terms of Trade :
After 1995, trade agreement have worsen the trade structure of the poor countries.
Their terms of trade were deteriorated.
B
Demerits / disadvantages of Globalization in the way of economic
development :
The imperialist nations were strong supporters of free trade.
1) Developing countries were benefited :
As per would commission (2004) The group of 12 developing countries were
accounted lion’s share in world trade but sub-saharan Africa experienced in proportional
decline in their world markets.
2) Imports of developing countries were increased :
These countries were facing deficit in their trade.
3) FDI :
Flow of FDI have benefited developed countries.
4) No growth :
FDI inflows are not all growth oriented, this flows have destroyed the comparative
cost advantage of developing countries.
5) Employment :
According world commission world unemployment rates have increased since
1991 in latin America and the Caribbean and South East Asia, and since 1995 in East
Asia.
6) Income inequality :
Some people are benefited the environment of globalization which has resulted in
income inequalities.
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4.3 Summary :
1) Role of Foreign Trade in Economic Development :
An in the past foreign trade was considered as engine of economic growth of
recipient country. But now a days some of the developing countries as well as por
countries also not benefited in a proper way.
2) Foreign Capital and Aid in Economic Development :
Developing countries are in acute shortage of capital, therefore, they had the shelter
of foreign capital and Aid for their economic development. India is one of them which
has achieved high economic growth during 2001 to 2010.
3) Private Foreign Investment and Multinationals :
Multinationals have created oligopolist environment in the world which have created
hazards effects at the world level specifically for developing countries and poor countries.
4) Globalization and Economic Development : The waves of globalization have
created both goods effect And bad effect on the economy of developing countries.
5) Exports :
Globalization widens the access of developing countries to export their produce in
the developed countries. This will result into expansion and diversification of exports.
Thus it is regards as engine of growth.
4.4 Questions for Self-learning :
1) Globalization is a modern version of :
a) colonialism b) Imperalism
c) Capitalism d) Theory of comparative cost advantages.
2) MNCs bring :
a) Foreign capital, b) Technology, c) Technical expert, d) All of them.
3) Public foreign capital is not essential of the economic development of :
a) Backward countries b) underdeveloped countries
c) Developing countires d) Developed countries.
4) Find out the correct statement :
a) Globalization has benefited all the countries.
b) Globalization has benefited only developing countries.
c) Globalization has benefited only few developing countries.
d) Globalization has benefited none.
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5) Which of the following is an essential feature of globalization.
a) Privatization b) Dis-investment
c) Reduction of trade barriers. c) Development capital market.
Answers : 1. (d), 2. (d), 3. (d), 4. (a), 5. (c)
4.5 Questions for self study.
1) Explain the Role of foreign trade in economic development.
2) What is foreign aid ? Explain its type.
3) Explain role of foreign capital in the economic development of developing
country.
4) Explain prebisch – Singer Model.
5) What is multinational corporation ? Discuss its merits and demerits.
6) What do you mean by Globalization ? Discuss its merit and demerits.
4.6 Field work.
Prepare a Report on FDI in India.
4.7 References.
1) R. C. Agrwal, (2011), Economics of Development and playing.
2) M. L. Thingan, (lasted edition), The economics of Development and planning.
3) Misbra & Puri (2010 Growth and Development.
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