Economics(Paper-4) - Shivaji University
Economics(Paper-4) - Shivaji University
Economics(Paper-4) - Shivaji University
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B. A. Part-III : <strong>Economics</strong> <strong>Paper</strong> 4 (Old) <strong>Paper</strong>-7 & 12 New<br />
Resource <strong>Economics</strong> (g§gmYZmMo AW©emñÌ) (Old Book)<br />
<strong>Economics</strong> of Development and Planning (New Book)<br />
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UNIT - 1<br />
Introduction to Economic Development<br />
Index :<br />
1.1 Objectives<br />
1.1 Introduction.<br />
1.2 Presentation of Subject Matter.<br />
1.2.1. Concept of Economic Development.<br />
1.2.2. Characteristics of Underdeveloped economy.<br />
1.2.3. Millennium Development goals.<br />
1.2.4. Sustainable Development : Meaning and Indicators.<br />
1.3 Summary.<br />
1.4 Glossary.<br />
1.5 Questions for Self-Learning.<br />
1.6 Answer of Self-Learning Questions.<br />
1.7 Questions for Self-Study.<br />
1.8 References for Further-Reading.<br />
1.0 Objectives :<br />
The main objectives of this topic are as follows.<br />
To study the concept of Economic Development.<br />
To understand characteristics of underdeveloped economy.<br />
To study the millennium Development Goals.<br />
To understand sustainable Development, meaning and indicators.<br />
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B.A. III / <strong>Economics</strong> of Development & Planning ..... 1
1.1. Introduction :-<br />
The economics of development refers to the problems of economic development<br />
of Underdeveloped countries. Though the study of economic development has attracted<br />
the attention of economists right from Adam Smith to marx and J.M. Keynes. In this unit<br />
No. 1 we will study the concept of Economic development, Characteristics of<br />
Underdeveloped economy, Millennium development Goals and meaning and Indicators<br />
of Sustainable development etc.<br />
1.2. Presentation of Subject Matter :-<br />
This unit covers the concepts of Economic development, Characteristics of<br />
underdeveloped economy, Millennium Development Goals and Meaning and Indicators<br />
of Sustainable development.<br />
1.2.1. Concept of Economic Developments.<br />
Concept of Economic development is very important in developed and<br />
underdeveloped Economy. It is not easy to define/concept of Economic development<br />
in a precise manner because different Criteria have been used for differentiating between<br />
developed and underdeveloped Countries. Some definitions are as follows.<br />
1) “Economic development is a process whereby an economy’s real national<br />
income increase over a long period of time.” Prot meier and Baldwin. This<br />
definition is Simple and precise. This definition emphasis on three ingredients<br />
of economic development (1) Process (2) Real National Income and (3) Long<br />
period.<br />
2) “The term economic development signify not merely economic growth, but<br />
economic development with which is associated either rising per capital levels<br />
of income or the maintenance of existing high levels of income.” – Prof Viner.<br />
3) “ Development implies the enhancement of an economy’s power to produce<br />
goods and services per capital, for such enhancement is the pre-requisite to<br />
raising standard of living.” – Harvey Leibenstein.<br />
4) “ Economic development or growth refers to the process, whereby the people<br />
of the country or region come to utilize the resources available to bring about<br />
a sustained increase in per capita production of goods and services.” –<br />
Williamson and Buttrick.<br />
5) “ Economic development refers to a process of economic growth within the<br />
economy, the central. Objective of the process being higher and raising real<br />
per capita income for the economy.” – Walter Krause.<br />
6) “ Economic development implies both more output and change in technical<br />
and constitutional arrangements by which it is produced.’’ – C.P. Kindleberger.<br />
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7) “ Economic development is a process by which an economy is transformed<br />
from whose rate of growth of per capita income is small or negative to one in<br />
which a significant Self-Sustained rate of increase per capita income is a<br />
permanent long term feature.” – Prof Irma Adelman.<br />
8) “ Development Concerns not only man’s material needs but also the<br />
improvement of social conditions of his life. Development is therefore, not<br />
only economic growth plus change. Social, Cultural and institutional as well<br />
as economic.” – UNO<br />
9) “ Economic development may be defined as a sustained improvement in well<br />
being. Which may be considered to be reflected in an increasing flow of goods<br />
and services.” – Bernard Okun and W. Richardson.<br />
All these definitions emphasis different aspects involved in the process of economic<br />
development. Economic development implies progressive changes in the socioeconomic<br />
structure of country.The concepted economic development is more<br />
Comprehensive.<br />
1.2.2. Characteristics of Underdeveloped economy :<br />
The term underdeveloped country is not easy to define. We shall briefly analyse<br />
here a few definitions :<br />
According to the United Nations Experts, an under-developed country is one in<br />
which per capita real income is low as compared with the per capita real income of the<br />
U.S.A., Canada, Australia and Western Europe.’<br />
The modified definition of the planning commission might run as follows – “An<br />
under-developed country is one which is characterized by the co-existence , in greater<br />
or less degree, of unutilised or under-utilised manpower on the one hand, and of<br />
unexploited natural resources on the other, on account of a low rate of capital formation.”<br />
Prof Colin Clark, who is the pioneer in the studies of underdeveloped economies,<br />
also described, “Underdeveloped economies are such in which primary occupations<br />
like agriculture predominate, the economic development consists in the progressive<br />
enlargement of the proportion of tertiary occupation in the economy.<br />
B Characteristics of under-Developed Countries :<br />
While it would be very difficult to locate a representative under developed country,<br />
it is much easier to bring out some fundamental characteristics common to underdeveloped<br />
countries, which are considered as below :-<br />
1) Primary production : An under developed economy is either exclusively or<br />
predominantly is primary producing economy. It is mainly dependent upon the production<br />
of raw materials and food grains or on non-agricultural primary production, viz. minerals.<br />
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The share of the primary sector in the under-developed countries is significantly larger<br />
an on the average, than in the group of advanced countries.<br />
2) Capital Deficiency : Capital deficiency is another characteristics which is<br />
universally applicable to all these countries. It is both a cause and an effect of<br />
underdevelopment. Generally under developed countries suffer from chronic shortage<br />
of capital which is largely responsible for low per capita income in an economy. In other<br />
words availability of capital in underdeveloped countries is very low as compared to<br />
that in well advanced countries.<br />
3) Unutilized / underutilized Natural Resources : The natural resources in an<br />
underdeveloped economy are either unutilized or under utilized. Generally speaking<br />
under developed countries are not deficient in land, water, mineral, forest or power<br />
resources, through they be untapped. In other worlds they constitute only potential<br />
resources. The main problem in their case is that such resources have not been fully<br />
and properly utilized due to various difficulties, such as their inaccessibility shortage of<br />
capital, primitive techniques, and the small extent of the market.<br />
4) General Poverty : An underdeveloped country is poverty-ridden . Poverty is<br />
mostly reflected in very low per capita. Income as compared to that of the developed<br />
countries. It is the per capita income of a country which determines whether a country<br />
is richer or poor. i.e. developed or underdeveloped. The average annual per capita<br />
income in under developed countries like India, Pakistan and Indonesia is below and<br />
whereas it is much higher in the developed countries. The extremely low GNP per<br />
capita of low-income economies reflected the extent of poverty in them. It is not relative<br />
poverty but absolute poverty that is more important in assessing such economies. The<br />
absolute poverty is reflected in low living standard of the people.<br />
5) Economic Backwardness of the people : The people in under-developed<br />
countries are economically very backward, that is the quality of the people as productive<br />
agents is low. Instead of acquiring the greatest possible control over their physical<br />
environment, the people have struck as balance with nature at an elementary level.<br />
They have been relatively unsuccessful in solving the economic problem of man’s<br />
conquest of this are low labour efficiency, factor immobility, limited specialization in<br />
occupation and a value structure and social structure that minimize the incentives for<br />
economic changes.<br />
6) Demographic Features : The underdeveloped countries are generally suffering<br />
from the problem of over population. The main demographic characteristics of these<br />
countries are - 1) Most of the underdeveloped countries are in the high population growth<br />
potential stage with high birth rate and sharp declining death rate. 2) The overage<br />
expectation of life in underdeveloped countries is much lower than that of advanced<br />
countries. 3) The percentage of economically active population is very small in<br />
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underdeveloped countries in comparison to developed countries.<br />
7) Agriculture is The main Occupation : In underdeveloped countries Two-third<br />
(70 to 80%) or more of the people live in rural areas and their main occupation is<br />
agriculture.<br />
8) Foreign Trade Oriented : On making careful scrutiny, it has been noticed that<br />
underdeveloped countries are foreign trade oriented. It is reflected by their dependence<br />
on the production of few primary commodities which are almost completely exported<br />
and import of consumer goods and machinery.<br />
9) Dualism : A striking feature of under-developed economies is its dualism, a<br />
strange admixture of the economically backward and economically developed<br />
economies seen within the same economy.<br />
10) Imbalance between Resources and population : In developing countries<br />
there is a serious imbalance between the available stock of land, capital and other<br />
productive resources and population i.e. resources are scare as compare to population.<br />
11) Unemployment and Disguised Unemployment’ : In underdeveloped<br />
countries there Is vast open unemployment and disguised unemployment. In rural as<br />
well as urban both educated and uneducated youth.<br />
Other characteristics of underdeveloped countries are – Lack of infrastructural<br />
facilities, poor Economic organization, Technological Backwardness, Lack of<br />
enterprenurial skill. Economic Backwardness and unfavorable Institutional set up.<br />
1.2.3 Millennium Development Goals :<br />
In September 2000 at the UN millennium Summit 189 world leaders adopted the<br />
UN millennium Declaration which laid down the millennium Development Goals (MDGS)<br />
made up of eight goals and 18 targets to be achieved by 2015. These goals and targets<br />
have vast array of interlinked dimensions of development ranging from the reduction of<br />
extreme poverty to gender equality, to health, education and environment.<br />
The March 2002 UN International Conference on financing for Development in<br />
Monterrey, Mexico and the September 2002 W orld Summit on sustainable Development<br />
in Johansberg. South Africa reaffirmed the Commitments of rich and poor countries to<br />
these goals and their development targets.<br />
B Goals :<br />
1) Eradicating extreme poverty and hunger.<br />
2) Achieve universal primary education.<br />
3) Promote gender equality and empowerment of women.<br />
4) Reduce child mortality.<br />
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5) Improve maternal health.<br />
6) Combat HIV/AIDS, malaria and other diseases.<br />
7) Ensure environmental Sustainability.<br />
8) Develop a global partnership for development.<br />
B Targets :<br />
1) Halve, between 1990 and 2015, the proportion of people whose income is<br />
less than one dollar a day.<br />
2) Halve between 1990 and 2015, the proportion of people who suffer from hunger.<br />
3) Ensure that, by 2015, boys and girls will be able to complete a full course of<br />
primary schooling.<br />
4) To eliminate gender disparity in primary and secondary education preferably<br />
by 2005 and at all levels by 2015.<br />
5) Reduce by two-thirds between 1990 and 2015 the under five the mortality<br />
ratio.<br />
6) Reduce by three-quarters between 1990 and 2015 the maternal mortality<br />
ration.<br />
7) Hale hated by 2015 and begin to reverse the spread of HIV/AIDS.<br />
8) Halve hated by 2015 and begin to reverse the incidence of malaria and other<br />
major diseases.<br />
9) Integrate the principles of sustainable development into country policies and<br />
programmes and reverse the loss of environmental resources.<br />
10) Halve by 2015 the proportion of people without sustainable access to drinking<br />
water and basic sanitation.<br />
11) By 2015 to have achieved a significant improvement in the lives of least 100<br />
million slum dwellers.<br />
12) Develop further an open, rule-based, predictable, nondiscriminatory and<br />
financial system which includes a commitment to good governance,<br />
development and poverty reduction both national and international.<br />
13) Address the special needs of the least developed countries relating to tariff<br />
and quota free access for exports, enhanced programme of debt relief for<br />
and cancellation of official bilateral debt, and more generous official<br />
development assistance for countries committed to poverty reduction.<br />
14) Address the special needs of land-locked countries and small island<br />
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developing states through the programme of Action for Sustainable<br />
Development of small Island Developing states.<br />
15) Deal Comprehensively with the debt problems of developing Countries through<br />
national and international measures.<br />
16) Develop and implement strategies for decent and productive work for youth<br />
in co-operation with developing Countries.<br />
17) Provide access to afford able essential drugs in developing countries in cooperation<br />
with pharmaceutical companies.<br />
18) Make available the benefits of new technologies, especially information and<br />
communications technologies, in co-operation with the private sector.<br />
1.2.4. Sustainable Development : Meaning and Indicators :<br />
The concept of sustainable development is of recent origin. The term “<br />
Sustainable development” was first used by the world conservation strategy presented<br />
by the International union for the conservation of Nature and Natural Resources In 1980.<br />
It was commonly used and defined for the first time by the Brundtland Report. Entitled<br />
our common future of the world commission on Environment and Development in<br />
1987.<br />
B Meaning/definitions :<br />
1) According to Brundtland Report, Sustainable development means meeting<br />
the needs of the present generation without compromising with the needs of<br />
the future generation.<br />
2) Sustainable development is a process in which natural resource base is not<br />
allowed to deteriorate. It emphasizes the hither to unappreciated role of<br />
environmental quality and environmental inputs in the process of rising real<br />
income and quality of life- Pearce and warford.<br />
The sustainable development referees to development which should keep<br />
going. It is creation of sustainable improvement in the quality of life of all people through<br />
increase in real income per capital, improvement in education, health and General<br />
quality of life and improvements in quality of natural environmental resources. In other<br />
words it is a situation in which economic development does not decrease over time. It<br />
can be modified as a path of development in which options of future generation are not<br />
compromised by the path taken by the present generation. Sustainable development is<br />
development that is everlasting. It contributes to the quality of life through improvements<br />
in natural environments. In turn if supply utility to individual inputes to the process of<br />
economic and service that support human life.<br />
There is no universally acceptable indicator of sustainability. In view of this,<br />
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some scholars attempted to explore whether we could have some indicators of<br />
sustainability that are easier to compute and more widely acceptable than the indicators<br />
of sustainability. Indicators of sustainability are different from traditional indicators of<br />
economic, social and environmental progress. Professor Barthwal of Indian Institute of<br />
Technology Knapur has highlighted some important indicators of sustainable<br />
development. They are –<br />
1) GDP growth rate<br />
2) Population stability.<br />
3) Human Resources Development Index<br />
4) Clean Air index<br />
5) Energy intensity<br />
6) Renewable energy proportion.<br />
7) Material intensity<br />
8) W ater use.<br />
9) Soil degradation<br />
10) Forest coverage.<br />
11) Recycling proportions.<br />
12) Transport intensity.<br />
To this one may also add, proportion of urban population, access to sewage and<br />
water facilities, government allocation for environmental protection, efficacy of policy<br />
tools, environmental awareness of the people, etc.<br />
1.3. Glossary :<br />
1) Economic development : Economic development is process where by an<br />
economy’s real national income increase over a long period of time.<br />
2) Underdeveloped economy : Underdeveloped economy is one in which per<br />
capital real income is low as compared to developed economy.<br />
3) Capital Deficiency : Shortage of capital<br />
4) Unutilized Natural Resources : Not fully and properly utilized.<br />
5) Poverty : Mean a situation in which individual or family inable to satisfy basic<br />
needs of life.<br />
6) Sustainable development : Sustainable development means meeting the<br />
needs of the future generation without compromising the needs of present<br />
generation.<br />
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7) Goals : objectives.<br />
8) Disguised Unemployment : Hidden unemployment.<br />
9) MDGS : Millennium Development Goals.<br />
2.5. Questions for Self – Learning :<br />
A) Write answers in one sentence.<br />
1) What is economic development?<br />
2) Define the underdeveloped economy.<br />
3) What is sustainable development.<br />
4) Who is the pioneer in the studies of underdeveloped economies.<br />
5) Which striking feature of underdeveloped economies.<br />
B) Fill in the blanks :<br />
1) Per capita real income is ________ in the underdeveloped countries.<br />
2) _______ is the pioneer in the studies of underdeveloped economy.<br />
3) The share of the primary sector in the underdeveloped countries is ________.<br />
4) An underdeveloped country is poverty _________<br />
5) The people in underdeveloped countries are economically ___________<br />
6) The underdeveloped countries are generally suffering from the problem of<br />
________ population.<br />
7) ________ is the main occupation of underdeveloped country.<br />
8) _________ is striking feature of under-developed country.<br />
9) The percentage of economically active population is ________ in<br />
underdeveloped countries.<br />
10) _________ is indicators of sustainable development.<br />
2.6. Answer’s of self-Learning Question :<br />
A)<br />
1) “<strong>Economics</strong> development is a process whereby an economy’s real national<br />
income increase over long period of time.”<br />
2) An under-developed country is one in which per capital real income is low<br />
compared with developed countries.<br />
3) Sustainable development means meeting the needs of the present generation<br />
without compromising with the need of the future generations.<br />
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4) Prof Colin Clark. 5) Dualism.<br />
B)<br />
1) Low 2) Prof Colin Clark 3) Larger 4)Ridden<br />
5) Backward 6) Over 7) Agriculture 8) Dualism<br />
9) Very small 10) Green Accounting.<br />
2.7. Question for Self-Study.<br />
A) Write short notes on :<br />
1) Economic development<br />
2) Underdeveloped economy.<br />
3) Millennium Development Goals.<br />
4) Concept of sustainable development.<br />
5) Indicators of sustainable development.<br />
B) Broad Question :<br />
1) Explain the concept of Economic development.<br />
2) Explain the characteristics of underdeveloped economy.<br />
3) Explain the millennium development Goals.<br />
4) What is sustainable development? Explain indicators of sustainable<br />
development.<br />
1.8 References :<br />
1) Lekhi R.K.- The <strong>Economics</strong> of Development and planning- Kalyani Publication.<br />
Ludhiana-2004<br />
2) Jhingan M.L.- The <strong>Economics</strong> of Development and planning- Vrinda publication<br />
(p) Ltd. Delhi-40 Revised & Enlarged edition-2011.<br />
3) Seth M.L.- Theory and practice of <strong>Economics</strong> planning – S. Chand and<br />
Company Ltd. New delhi 1984.<br />
4) Dewett, Varma and Wadhawan – <strong>Economics</strong> of growth and development –<br />
S. Chand and Company Ltd. 1985<br />
5) Misra and Puri- Growth and Development, Himalaya Publication, Mumbai-<br />
2010.<br />
6) Environmental Economies : A Textbook on internet.<br />
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UNIT - 2<br />
Theories of Economic Growth and Development<br />
Index :<br />
2.0 Objectives<br />
2.1 Introduction<br />
2.2 Subject Matter<br />
2.2.1 Rostow’s Stages of Economic Growth<br />
2.2.2 Lewis Theory of Unlimited Supplies of Labour<br />
2.2.3 Rodan’s Theory of Big Push<br />
2.2.4 Myrdal’s Theory of Circular Causation<br />
2.3 Summery<br />
2.4 Glossary of Terms<br />
2.5 Exercise<br />
2.6 Reference Books<br />
2.0 Objectives<br />
1. To study Rostow’s stages of economic growth.<br />
2. To study Lewis theory of unlimited supply of labour.<br />
3. To study the Rodan’s theory.<br />
4. To study circular causation theory.<br />
2.1 Introduction<br />
Economic development is the process whereby the real per capita income of<br />
country especially underdeveloped countries is more anxious about the attainment of<br />
economic development. But it is difficult, but not impossible. Using natural resources,<br />
manpower and capital available in the country, the country can achieve development<br />
desire. But these factors are not abundant in all countries. Some countries have natural<br />
resources but not skilled manpower and capital, and some countries have capital<br />
but not natural resources abundantly.To use available factors of production, a country<br />
how can achieve desired economic development? The answer of this question has<br />
given many economists. In this chapter some economists’views about development<br />
are given.<br />
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2.2 Subject Matter<br />
The chapter includes theories of economic development. In this chapter involves<br />
theories of the economist’s viz. Rostow, Lewis, Myrdal and Rodan.The chapter conducts<br />
Rostow’s stages of economic growth, Lewis’ unlimited supply of labour, Rodan’s theory<br />
of big push and Myrdal’s theory of circular causation.<br />
2.2.1 Rostow’s Stages of Economic Growth<br />
W alt Witman Rostow’s (W.W.Rostow) the stages of economic growth was first<br />
published in 1960 carrying a subtitle “A Non-Communist Manifesto”. Rostow’s intend<br />
was to provide an alternative to Karl Marx’s theory, has laid emphasis on social and<br />
institutional factors as vital ingredients of economic development. He has explained<br />
economic advancement in terms of social and institutional set-up of a society and the<br />
attitude of the people.<br />
Rostow believes that development of an economy depends upon the following six<br />
propensities;<br />
1. Propensity to develop fundamental science<br />
2. Propensity to apply science to economic needs<br />
3. Propensity to accept innovations<br />
4. Propensity to accept innovations<br />
5. Propensity of consume<br />
6. Propensity to have children<br />
These propensities combine in themselves economic, social and institutional<br />
factors, which determine the course of economic development.<br />
B<br />
Rostow’s stages of growth:<br />
1. The traditional society<br />
2. The pre-conditions to take-off<br />
3. Take-off<br />
4. Drive to maturity<br />
5. Age of high Mass-consumption.<br />
Brief explanations of these stages are given below.<br />
1. The Traditional Society:<br />
Rostow has defined traditional society, “as one, whose structure is developed<br />
within limited production functions based on Pre-Newtonian Science and technology<br />
and Pre-Newtonian attitudes towards physical world.” According to his definition, the<br />
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structure of the traditional society was based on primitive technology and orthodox<br />
ideas of the people. In this stage modern facilities of technology and science were<br />
absent. The economic activities were carrying out in such societies with simply tools<br />
and implements. And activities were confined only to meet the domestic needs. In fact<br />
pre-industrial revolution societies could be called as traditional societies. The agricultural<br />
production could be increased by bringing more land under cultivation. The increase in<br />
agriculture production conformed to diminishing returns. The reason for diminishing<br />
returns was absence of modern science and technology. The people were more<br />
interested in spiritual and religious pursuits rather than material and physical world. In<br />
brief the society revolved around agriculture. Other economic activities such as<br />
manufacturing, trade etc. are depended on agriculture. Thus agriculture was the main<br />
occupation of the people in the traditional society.<br />
On the above explanation, the characteristics of traditional society can be<br />
summarized as follows;<br />
i. The agriculture was carried on with the primitive methods of production.<br />
i. Law of diminishing return operated in agriculture.<br />
i. There was absence of modern science and technology.<br />
iv. The structure of the society was based on inheritance.<br />
v. The political power was concentrated in the hands of big landlords.<br />
vi. Increase or decrease in population was along with Malthusian lines.<br />
These characteristics clearly depict the economic, social and political structure of<br />
the traditional society.The societies of Pre-Newtonian are called the traditional society.<br />
2. The Pre-Conditions for Take-off<br />
This second stage of growth is a process of transition, which involves changes in<br />
economic, social and political structure of the traditional society. According to<br />
Kindleberger, “the pre-conditions stage involves slow changes especially in attitudes<br />
and organization. The idea of economic improvement takes hold, and with it the frozen<br />
traditional rigidity breaks becomes cheaper, and commerce spreads. New production<br />
functions are adopted in agriculture and industry. But the pace is slow”.<br />
During this stage, education spreads, mental horizon broadens and economic<br />
activity expands. New enterprising men come forward and encourage the will to save.<br />
They take risk in the pursuit of profit. Banks and other savings institutions attempt to<br />
mobilize capital. Investment opportunities expand in other sectors, like transport and<br />
communications etc. The scope for internal and external trade widens. New<br />
manufacturing processes are developed. In general, the pre-conditions for take-off require<br />
changes which touch and alter the traditional social structure, political system and<br />
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economic organizations and institutions. According to Rostow, “preconditions for takeoff<br />
are an era, when society prepares itself for sustained growth”.<br />
Rostow has suggested that pre-conditions for take-off require radical changes in<br />
the three non-industrial sectors. First, there should be expansion of social over-head<br />
capital i.e. development of transport, communication, roads, etc. Secondly, radical<br />
changes should take place in agriculture and thirdly, there should be an expansion of<br />
foreign trade. The radical change of these three sectors is essential to take-off of an<br />
economy.<br />
Briefly it can be summed up that pre-conditions for take-off required the evolution<br />
of modern science and technology, rational and scientific attitude of the people,<br />
expansion of social over-head capital particularly transport, rising agricultural productivity,<br />
large extent of market and expansion of internal and external trade.<br />
3. Take-off :<br />
The various factors discussed in the second stage, prepare the ground for third<br />
stage of economic growth i.e. take-off. The expansion of different sectors transforms<br />
the basic structure of an economy and it starts moving on the road to self-sustained<br />
growth. Rostow defines take-off stage, “as an interval during which the Rate of<br />
investment increase in such a way that real output per capita rise, and this initial increase<br />
carries with itself radical changes in production techniques and the disposition so income<br />
flows, which perpetuates the new scale of investment, and perpetuate thereby the<br />
rising trend in per capita output.”<br />
During the take-off, obstacles of resistance to steady growth are overcome and<br />
forces of economic development expand and dominate the society. Then growth<br />
becomes automatic during the stage of take-off. Modern writers call it by different names<br />
such as, “a big push”, “an initial push”, “critical minimum effort”, “a great leap forward”,<br />
etc.<br />
During take-off industries expand rapidly yielding profits, profits are invested in<br />
new industries, demand for manufactured goods expands, expands demand for<br />
agricultural products, rise of level of income, expand financial institution etc. These<br />
changes lead the economic growth rapidly and it becomes self-sustained.<br />
B Pre-Requisites for Take-off :<br />
Rostow has suggested three conditions for making the growth process selfsustained.<br />
These conditions are discussed as follows.<br />
a) Rate of Investment :<br />
Rostow has suggested that the rate of net investment for self-sustained growth<br />
should be over 10 per cent of the national income. The rate of increase in investment<br />
should, however, outstrip the growth of population. Rostow explained this point with the<br />
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help of example, “If we take marginal capital output ratio for an economy in its early<br />
stages of economic development as 3.5: 1 and if we assume, population rise of 1 or<br />
1.5 per cent per annum, it is clear that something between 3.5 (3.5x1) and 5.2% (3.5x1.5)<br />
of NNP must be regularly invested if NNP per capita is to be sustained”. This example<br />
assumes that marginal capital output ratio and population growth remains constant<br />
and the effect of technology and labour force are not considered here.<br />
b) Development of Leading Sectors:<br />
Another essential pre-requisitefor take-off is the development of leading sectors.<br />
Rostow has classified various sectors in to three broad categories discussed below.<br />
i. Primary growth sector :<br />
According to Rostow, the primary growth sectors are those, “where possibilities<br />
for innovation or the exploration of newly profitable avenues or hitherto unexplored<br />
resources yield a high growth rate and set in motion expansionary forces elsewhere in<br />
the economy.” Such sectors initiate and stimulate growth in other sectors till growth<br />
process becomes self-sustained.<br />
ii. Supplementary growth sector :<br />
According to Rostow, supplementary growth sectors are those sectors “where<br />
rapid advance occurs in direct response to or as requirement of advance in the primary<br />
growth sectors”. In supplementary growth sectors, those industries are included, whose<br />
development reinforces the growth initiated by primary sectors.<br />
iii. Derived growth sectors :<br />
According to Rostow derived growth sectors are those, “where advance occurs in<br />
some fairly steady relation to the growth of total real income, population, industrial<br />
production or some other overall moderately increasing variable”. Agriculture, industrial<br />
housing and transport, etc. are included in derived growth sectors.<br />
C) Emergence of the new Political, Social and Institutional Framework :<br />
Among non-economic factors, take-off requires the emergence of new political,<br />
social and institutional framework. The new framework could take the shape of political<br />
revolution, social reformation, technical innovations and institutional transformations.<br />
According to Rostow, “the take-off usually witnesses a definite social, political and cultural<br />
victory of those, who would modernize the economy over those who would either cling<br />
to the traditional society or seek other goals.” The social and political changes are<br />
necessary for generating momentum in the society and for achieving the goal of takeoff<br />
into self-sustained growth.<br />
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Tentative Take-off years of Selected Countries<br />
Country Take-off Country Take-off<br />
Great Britain 1783-1802 Russia 1890-1914<br />
France 1830-1860 Canada 1896-1914<br />
Belgium 1833-1860 Argentina 1935<br />
United States 1843-1860 Turkey 1937<br />
Germany 1850-1873 India 1952<br />
Sweden 1868-1890 China 1952<br />
Japan 1878-1900<br />
The above table shows that in Great Britain, France, Belgium and United States,<br />
the take-off occurred during the last quarter of the 18 th century and the first half of the<br />
19 th century. Germany. Sweden and Japan experienced take-off in the latter half of the<br />
19 th century. In Russia and Canada, the take-off occurred before the outbreak of first.world<br />
ware. Argentina, Turkey, India and China appear to be in the midst of take-off stage<br />
4. Drive to Maturity:<br />
According to Rostow, “the period when a society has effectively applied the range<br />
of modern technology to the bulk of its resources”. In this stage many technical changes<br />
takes place, industrial development gets differentiated, new leading sectors gather<br />
momentum and the old leading sectors face extinction. The leading sectors like cotton<br />
textile industries railways, coal and heavy engineering industries, etc. lose their<br />
momentum and new sectors such as steel, ship-building, chemicals, electricity,<br />
machine-tools etc. appear to dominate the economy, and sustain overall growth. 10 to<br />
20 per cent of the national income is reinvested and the growth of output regularly<br />
outstrips the increase in population. Dependency of peoples on agriculture sector<br />
diminishes. Increases industrial activities, trade expanses, social changes occur in<br />
large manner etc. changes take place in this stage.<br />
5. Age of High Mass-Consumption:<br />
From Maturity the economy moves to the age of high mass-consumption. Being<br />
fed up with the fruits of industrial maturity, the people try to seek more leisure, more<br />
welfare and social security, etc. In this period resources are directed on a large scale to<br />
the production of durable consumer goods and services. This period is considered as<br />
an era of consumer’s sovereignty.According to Rostow, Western Europe and United<br />
States reached this stage in the beginning of the 1901. Great Britain reached this stage<br />
in 1930’s and Japan in 1950’s.<br />
Rostow believed that resources employed in the following three directions could<br />
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promote and enhance social welfare. First, larger resources are allocated to military<br />
and foreign policies for achieving international recognition and external power and<br />
influence. Secondly, the resources of mature economy be directed to promote the<br />
welfare of society and thirdly, the state should direct its resources to the expansion of<br />
consumption levels beyond the basic necessities of life like food, clothing and shelter.<br />
Kindleberger (and not Rostow) illustrates these stages with a Gompartz or ‘S’<br />
curve.<br />
Further development<br />
Income<br />
1. Traditional<br />
2. Preconditioning<br />
3. Take-offTime<br />
4. Maturity<br />
5. Mass-Consumption<br />
0<br />
1 2 3 4 5<br />
Time<br />
The diagram shows that a typical growth path of an economy. ‘S’ curve states that<br />
an economy starts its growth slowly, picks up gradually and then proceeds very rapidly<br />
before slowing down at some late stage to become asymptotic at some limit.<br />
B<br />
Critical Examination of the Rostow’s Theory:<br />
The important points of criticism against the Rostow theory are:<br />
1. The technological Approach to Development is basically incorrect:<br />
In Rostow’s model development is not the result of policies; policies are the result<br />
of development. This cannot be accepted. This approach leads to logical confusion.<br />
2. Leading Sectors may not ‘lead’:<br />
Kuznets and Cairncross are of the opinion that leading sectors may not lead. If we<br />
examine the development linkages of industries, we can find that cotton textile industry<br />
of Manchester or automobile industry of USA did not bring all the development.<br />
3. Stage overleap and Works spill over to the Next Stages:<br />
Kuznets, Habakkuk, Cairncross and Meier have commanded that the things that<br />
are supposed to happen in a particular stage, may spill over to other stages also.<br />
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4. The Take-off stage is not empirically vindicated in the same manner in which<br />
Rostow Presented it:<br />
Ian Orummand, Kuznets, David Wightman and Myrdal have examined the economic<br />
history of various nations and came to the conclusion that all that is elaborated in the<br />
Rostow’s stages is not realized in the same fluid manner.<br />
5. Rostow ignores the “Bumps and Crash-Leadings” of the growth process:<br />
Habakkuk, Sen and Streeton have pointed out that if Rostow was keen to use the<br />
aeronautical metaphor, ‘take-off, he ought to have taken into consideration some other<br />
aeronautical happenings also. There are ‘lumps and crash-leadings and nose-dive’<br />
crashes also. There can be abortive take-offs.<br />
6. An Economy can reach the stage of self-sustained stage without passing<br />
through all the five stages:<br />
Gerald Meier has even seen the possibility of a country reaching the fifth stage<br />
without even passing through one particular stage of economic development, as<br />
suggested by Rostow. One complete stage may be skipped over.A country with low<br />
population burden and abundant natural resources may reach the stage of self-sustaining<br />
stage of mass consumption early, by-passing one stage.<br />
7. The last stage of ‘Mass-consumption’ may not reached at all:<br />
Kuznets, Meier and Cairncross have raised doubts whether the last stage of ‘Massconsumption’<br />
can continue eternally.<br />
8. There are limits to growth:<br />
Natural resources, manpower and capital set the upper limit of growth. A time<br />
comes when a country should be regarded as “fully developed”, even if it has not reached<br />
the standards of USA or any other country.<br />
Despite of these critics the stages of economic development are most important<br />
to know the development of human beings.<br />
2.2.2 Lewis Theory of Unlimited Supplies of Labour :<br />
Lewis developed his model to develop less developed countries. Lewis says there<br />
is ‘absolute surplus population’ in less developed countries. Labour and natural<br />
resources are adequate but capital is lacking here. Lewis wrote in his book “Economic<br />
Development with Unlimited Supplies of Labour” in 1954 that using the abundant<br />
population less developed countries can grow as developed countries. Lewis developed<br />
his model for development of closed as well as open economy discussed as follows.<br />
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B The Closed Economy :<br />
Assumptions :<br />
Lewis’ model is based on the following assumptions;<br />
1. There exist unlimited supplies of labour in the economy.<br />
2. The economy is dualistic in nature.<br />
3. The cost of imparting training and skill to the unskilled labour is assumed to<br />
remain constant through time.<br />
4. The production in expanding capitalist sector takes place according to the<br />
principle of profit maximization.<br />
5. The capitalist sector operates by employing the reproducible capital and wage<br />
labour.<br />
6. The subsistence sector does not make use of reproducible capital.<br />
7. The per capita output in the subsistence sector is considerable smaller than<br />
that in the capitalist.<br />
8. The relationship between the capitalist and the subsistence sector lies in the<br />
fact that as former expands; it draws labour from the latter.<br />
9. The wages which the expanding capitalist sector is not absolutely larger in<br />
relation to population growth.<br />
B Two Sector Economy :<br />
Lewis divides the economy of an underdeveloped country into two sectors the<br />
capitalist sector and the subsistence sector.<br />
i) Capitalist Sector :<br />
The capitalist sector is defined as, “that part of the economy which used<br />
reproducible capital and pays capitalists for the use of thereof.” The use of capital is<br />
controlled by capitalists, who hire the services of labour.The capitalists sector does<br />
not include only manufacturing but also plantations and mines where labour is hired for<br />
profit. The capitalist sector may either by private or public.<br />
ii) Subsistence Sector :<br />
The subsistence sector is that part of the economy which is not using reproducible<br />
capital. It can also be designated as the indigenous traditional sector or the “selfemployment<br />
sector”. Output per head is much lower in this sector than in the capitalist<br />
sector, there is existence of disguised unemployment in the agricultural sector whose<br />
marginal productivity is zero in this sector.<br />
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iii) Relationship between the two sectors :<br />
When the capitalist sector expands, it draws labour from the subsistence sector.<br />
As a result, output per head of labours that move from the subsistence sector to the<br />
capitalist sector increases. In this situation new industries can be created, or old<br />
industries expanded at the existence wage rate. That results more unskilled labour<br />
move from subsistence sector to capitalist sector.The migration will be continued till<br />
the wages offered by subsistence sector. Labour will not leave the family from to seek<br />
employment elsewhere if the wage that is offered to them is less than their marginal<br />
productivity. In fact wages offered by the capitalist sector will have to be somewhat<br />
higher than subsistence wages in order to compensate labour for the cost of transfer<br />
and to induce labour to leave the traditional way of life of the subsistence sector.According<br />
to Lewis, there is usually a gap of 30 per cent or more between capitalist wages and<br />
subsistence earnings.<br />
N 3<br />
W age and Marginal Product<br />
N 2<br />
N 1<br />
W<br />
S<br />
P1 P2 P3<br />
Q 1 Q 2 Q 3<br />
W<br />
S<br />
0 M 1 M 2 M 3 X<br />
In the above diagram, OX axis shows that quantity of labour and OY axis shows<br />
that marginal productivity of labour and wages offered to the labour. SS curve presents<br />
wages offered in subsistence sector and WW curve indicates wages offered in capitalist<br />
sector. WW is the perfectly elastic supply of labour. Given a fixed amount of capital at<br />
the outset, the demand for labour is initially represented by the marginal productivity<br />
schedule for labour N 1<br />
Q 1<br />
. If OW is the current wage, the amount of labour employed in<br />
the capitalist sector is OM 1<br />
. Beyond the point M 1<br />
, workers earn whatever they can in the<br />
subsistence sector. The total product in this case is ON 1<br />
P 1<br />
M 1<br />
of which the share of<br />
wages is OWP 1<br />
M 1<br />
and capitalists’ surplus or profits is N 1<br />
WP 1<br />
.<br />
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B The Process of Economic Expansion :<br />
Lewis emphasizes on the reinvestment of capitalists’ surplus for creation new<br />
capital. Therefore the amount of fixed capital increases and the schedule of the marginal<br />
productivity of labour rises to the level of N 2<br />
Q 2<br />
. The total product rises to ON 2<br />
P 2<br />
M 2<br />
. As<br />
a result, the share of wages increases to OWP 2<br />
M 2<br />
and capitalists’ surplus or profit also<br />
rises to WN 2<br />
P 2<br />
. An increased part is again reinvested leading to a further rise in total<br />
product. At each stage, capitalists’ surplus and the level of employment in the capitalist<br />
sector increases from OM 1<br />
to OM 2<br />
, OM 3<br />
etc. as labour withdraws from the subsistence<br />
sector into Capitalist Sector, there is larger investment of profits and the process<br />
continues as long as there is surplus labour exhausted from the subsistance sector.<br />
B<br />
The Role of Savings:<br />
The role of savings in the process of growth is crucial and important. In this model<br />
capitalists surplus do not reinvest, neither will the total product expand nor will<br />
opportunities for employment increase. Therefore, unless savings increase, economic<br />
growth cannot take place. Lewis argues that because of extreme inequalities of income<br />
and wealth in underdeveloped countries, the capacity to save is limited to about 10 per<br />
cent of the richest people. If the saving of richest people increases the process of<br />
growth expands, the poor and middle class people does not save, because of their<br />
capacity to save is low.<br />
The reason of low saving in underdeveloped country because their capitalist sector<br />
is small. Also there exist unequal distribution of income and wealth. If these countries<br />
had a larger capitalist sector, profits would be a greater part of their national income,<br />
and savings and investment would also be greater.<br />
B<br />
Role of Bank Credit:<br />
Lewis admits the possibility that capital creation is also possible as a result of a<br />
net increase in the supply of money especially bank credit. Bank credit is important for<br />
development of underdeveloped countries which have idle resources and surplus labour<br />
supply. In underdeveloped countries, the effect of bank credit on capital formation is<br />
similar to that of reinvestment in profits. Bank credit helps in the expansion of employment,<br />
output, effective demand and purchasing power of the community.<br />
B<br />
End of Growth Process:<br />
Lewis model shows that if unlimited labour is available at constant real wage, the<br />
capitalist surplus will rise continuously and annual investment will be a rising proportion<br />
of national income. But this process of economic growth cannot go for ever. It comes<br />
to an end when there is no surplus labour.According to Lewis, the growth process<br />
comes to an end due to following reasons.<br />
i. The capitalist sector expands so rapidly that it reduces absolutely the population<br />
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in subsistence sector.The average productivity of subsistence sector rises, due<br />
to that the wage rate of subsistence sector rises and the wages of capitalist sector<br />
begins rises which lowers the capitalist surplus. It reduces the capital formation<br />
and reverses the expansionary process.<br />
i. The subsistence sector adopts new techniques of production; real wages would<br />
rise in the capitalist sector and so reduce the capitalist surplus.<br />
i. The workers in the capitalist sector imitate the capitalist way of living and agitate<br />
for higher wages and in successful in getting their wages raised the capitalist<br />
surplus and the rage of capital formation will be reduced.<br />
B<br />
The Open Economy:<br />
In open economy there is greater possibility to move capital and labour easily. If<br />
there is surplus labour in other countries, the capitalists can avoid such a situation by<br />
taking resort to either of the following two methods:<br />
i) By encouraging immigration<br />
i) By exporting their capital to countries where there is still abundant labour at a<br />
subsistence wage.<br />
The first way is not possible in present restricted situation, but second way is<br />
possible to export capital is such countries where availability of labour is abundant at<br />
subsistence wage.<br />
B<br />
Critical Evaluation:<br />
1. Unrealistic Assumptions:<br />
The theory assumes a constant wage rate in the capitalist sector until the supply<br />
of labour is exhausted from subsistence sector.Thisseems to be unrealistic because<br />
the wage Rate continuously rises over time in the industrial sector of an underdeveloped<br />
economy.<br />
2. Supply of Labour is not Unlimited in all Countries:<br />
The assumption of unlimited labour supply in underdeveloped countries is not<br />
much relevant as it does not apply to the countries like South America and South Africa.<br />
To some extent, it is applicable to Asian Countries.<br />
3. One Sided Theory:<br />
Prof. Lewis does not consider possibility of progress in agriculture sector, thus, it<br />
is one sided theory.<br />
4. Neglects Total Demand:<br />
Lewis neglects the problem of aggregate demand. He thinks that whatever is<br />
produced in capitalist sector is consumed by itself or is exported. But Lewis does not<br />
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consider the possibility of the capitalist sector selling its product to subsistence sector.<br />
If it happens, the growth process may come to an end through unfavourable terms of<br />
trade or the subsistence sector adopting new techniques of production to meet<br />
expanding raw material demand of capitalist sector.<br />
5. Migration is not easy task:<br />
Labour migration is very difficult to migrate from subsistence to capitalist sector.<br />
The labourers have so deep affection for land and homes that they can’t think of leaving<br />
them. Therefore, in underdeveloped countries, there are socio-cultural barriers to<br />
occupational and geographical mobility which hinder the migration.<br />
Despite of these critics, the utility of Lewis model is important in the process of<br />
economic development. It explains the role of capital formation in Less Developed<br />
Countries where labour is surplus and capital is scarce.<br />
2.2.3 Rodan’s Theory of Big Push<br />
Paul N. Rpsemsteom Rodan’s theory is based on the principle of big push or by<br />
the way of big investment for development in an underdeveloped country, so that it can<br />
make commendable progress and to overcome obstacles for development. The<br />
investment below a certain level will be a mere wastage and will not enable to economy<br />
to break the vicious circle of poverty.The process of development is not merely steady<br />
and smooth but it is associated with many ‘discontinuities’, ‘jumps and lumps’.<br />
Rosenstein Rodan quotes in this regard “There is a minimum level of resources<br />
that must be devoted to…..a development programme if it is easy to have any chance<br />
of success. Launching a country into itself sustaining growth is a little like getting<br />
areoplane off the ground. There is a critical ground speed which must be passed before<br />
the craft can become airborne….”<br />
The theory of big push is a modern version of an old idea of ‘external economies’.<br />
The concept ‘external economies’ was first given by Marshall. The idea of external<br />
economies can be illustrated with the help of an example. Suppose, there are two<br />
industries A and B. If industry A expands in order to overcome the technical divisibilities,<br />
it shall derive certain internal economies. It results in lowering the price for the product<br />
of industry A. If A’s output is used as input for industry B, the profit of A’s internal economies<br />
shall be passed on to B in the form of pecuniary external economies. Thus, “the profits<br />
of industry B created by the lower prices of factor A, will call for investment and expansion<br />
in industry B, one result of which will be an increase in industry B’s demand for industry<br />
A’s product. This, in turn, will give rise to profits and call for further investment and<br />
expansion of industry A.”<br />
In the economy there exist certain ‘indivisibilities’ or ‘non-appropriabilities’ which<br />
will hinder the occurrence and transmission of these external economies. These<br />
indivisibilities can be removed by the large dose of investment i.e. by big push only.<br />
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Prof.R.Rodan has mentioned three kinds of indivisibilities, explained as under.<br />
1. Indivisibility in Production Function<br />
2. Indivisibility in Demand<br />
3. Indivisibility in Supply of Savings.<br />
1. Indivisibility in Production Function:<br />
Indivisibility in production function refers to the indivisibilities of input, output and<br />
production processes. These indivisibilities lead to increasing returns higher output,<br />
income, employment and lowering capital – output ratio. Rodan regards social overhead<br />
capital (power, transport, communication and housing, etc.) as important constituent<br />
of indivisibilities and external economies. The reason is that expansion of social<br />
overhead capital creates investment opportunities in various industries which help in<br />
rising the level of investment. Sustained economic development requires creation and<br />
expansion of social facilities, which requires large amount of investment called<br />
“lumpiness of capital”. Lumpiness of capital creates external economies which are the<br />
way of economic development.<br />
2. Indivisibility of Demand:<br />
For expansion of market demand indivisibility is more important. The small markets<br />
limit the investment opportunities and obstruct the development process. The indivisibility<br />
of demand requires simultaneous investment in various industries. Rodan cites the<br />
example of shoe factory to explain the point. Assuming a closed economy, let us suppose<br />
that hundred disguised unemployed workers (whose marginal productivity is zero) are<br />
employed in a shoe factory.Their wages would constitute additional income. If newly<br />
employed workers spend their entire income for the purchase of shoes they produce,<br />
the shoe factory will find a market. Considering workers have diverse demands and do<br />
not spend their entire additional income on shoes, and then shoe factory may face the<br />
problem of less demand for shoes and small market for its product. The small size of<br />
market would reduce the incentive to invest and the result would be the closure of the<br />
factory.This way the investment in a single project would fail to widen the size of market.<br />
Now suppose the thousand workers are employed in hundred industries and they<br />
produce consumer goods and newly employed workers spend their wages for the<br />
purchase of those goods. This would enlarge the extent of demand and the size of the<br />
market. Thus the indivisibility of demand necessarily implies a high quantum of<br />
investment in complementary industries for enlarging the size of market.<br />
3. Indivisibility in the Supply of Savings:<br />
We have discussed above that a large amount of investment is necessary for<br />
starting complementary industries. In underdeveloped countries the level of savings is<br />
low because of low level of national income. To generate savings it is imperative that a<br />
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gap between income and expenditure should be created and saving should be raised.<br />
At the same time suitable mechanism be devised to channelize the savings in the<br />
development activities. The desired objectives of growth and prosperity can be realised<br />
when savings are invested in the productive pursuits which promote development and<br />
employment.<br />
Besides these three indivisibilities another important factor connected with<br />
development is the creation of “psychological indivisibilities”. Progressive institutional<br />
framework should be evolved to mould the people psychology in the direction of<br />
development.<br />
B<br />
Critical Appraisal:<br />
Following are the main points of criticism;<br />
1. Inadequacy of Resources:<br />
This theory fails to recognize that the amount of resources in an underdeveloped<br />
country is very limited. They lack in capital, skilled labour, dynamic entrepreneurial ability,<br />
power, etc. so these countries cannot adopt Big Push theory.<br />
2. Danger of Inflation:<br />
Since the underdeveloped countries do not adopt Big Push theory, but it envisages<br />
the investment in different industries of consumption goods, capital goods as well as<br />
other social overheads. As a result, they are likely to yield returns after a long time. This<br />
process increases the demand rapidly while slow increasing supply cannot cope up<br />
with the situation. The gap between demand and supply is likely to persist for something<br />
resulting in increase in prices.<br />
3. Neglect of Agriculture Sector:<br />
The theory of big push lays more stress on the heavy dose of investment in different<br />
industries such as capital goods, consumer goods industries and social overhead capital<br />
etc. but it ignores the development of agricultural sector.Agriculture is extremely important<br />
in most of the underdeveloped countries.<br />
4. Limited Scope of External Economies:<br />
Prof. Rodan advocated that Big Push emphasizes that simultaneous development<br />
of industries would create external economies in the long run period in the shape of skill<br />
of labour and training. But in the opinion of Prof. Viner and E. Ellis, external economies<br />
generally result in reducing cost rather than expanding the output. In a developing country,<br />
expanding output is more significant than cost. Therefore there is more possibility of<br />
external diseconomies rather than economies.<br />
5. Neglect of Importance of Techniques:<br />
According to Celso Furtado, this theory neglects the importance of techniques in<br />
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its over-enthusiasm for capital formation. Today, development depends increasingly<br />
upon technique and less on direct capital formation in productive processes.<br />
6. Not Supported by History:<br />
The big push theory seems to suggest that whenever a large scale influence is<br />
exerted on the process of capital formation, a stationary economy probably begins to<br />
develop. Furtado stated that this is not confirmed by history.<br />
2.2.4 Myrdal’s Theory of Circular Causation<br />
Prof. Gunnar Myrdal maintains that economic development results in a circular<br />
causation process results in rapid development of developed countries while the weaker<br />
and backward countries tend to remain behind and poor.The theory of circular causation<br />
has been built upon the two effects viz. the backwash effects and the spread effects.<br />
The circular causation theory emphasizes that poverty is further perpetuated by poverty<br />
and affluence is further promoted by affluence. In backward regions problems created<br />
more problems; in developed regions solutions solve all problems. There is a failure<br />
story and there is a success story.<br />
The rebounded effects and circular causation effects are the net result of the<br />
backwash effects and spread effects.<br />
In an underdeveloped country, the backwash effects are predominant and the<br />
spread effects are dampened. This tends to regional inequality as well as international<br />
inequality.<br />
The traditional theory is not able to explain the problem of development in underdeveloped<br />
countries and it is based of unrealistic assumptions of stable equilibrium.<br />
Myrdal builds a new theory of economic under development and development which is<br />
capable of solving regional and international inequalities on national and international<br />
plans. He tries to explain his theory with ‘Backwash’ and ‘Spread’ effects.<br />
1. Backwash Effects : Myrdal defines backwash effects as, “all relevant adverse<br />
changes….of economic expansion in locality….caused outside the locality. I include<br />
under this label the effects viz. migration, capital movements and trade resulting from<br />
the process of circular causation between all the factors, ‘noneconomic’ as well as<br />
‘economic’”. In short, ‘backwash effects’ have unfavourable effects of economic<br />
expansion.<br />
The migration of people from backward regions results in regional imbalances.<br />
The developing economy will attract young and active people from other parts of the<br />
country.This will tend to favour the developing region and will depress the other backward<br />
region from where people migrate.<br />
Capital shifted from poorer region to prosperous where the rate of return is high<br />
and capital is more secure. Therefore the poor regions make poorer again. Another<br />
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disequalising force is trade, which is in favour of developed countries and against the<br />
backward countries. The progressive regions will have better competitive advantages<br />
and markets. The expansion of trade tends to create regional inequalities in<br />
underdeveloped countries.<br />
The circular causation will also act to sustain and expand these cumulative<br />
stagnating forces. Therefore, the result is that, the developed regions become further<br />
developed and underdeveloped regions become further underdeveloped.<br />
2. Spread Effects: According to Myrdal, “certain centrifugal ‘spread effects’ or<br />
expansionary momentum from the centres of economic expansion to other regions”.<br />
The spread effects are favourable effects for economic developed.<br />
The growths of industrial localities have also some good effects on other areas<br />
too. The whole region will experience advantageous effects regarding demand,<br />
technology, market etc. These favourable effects are called spread effects. These ‘spread<br />
effects’ will try to neutralize the backwash effects to a greater extent. According to Prof.<br />
Myrdal, “the spread effects in underdeveloped countries are weak and they are not<br />
capable of balancing the backwash effects and regional imbalances.”<br />
B<br />
Role of State:<br />
The free play of market, price mechanism and Laissez-faire policy has created<br />
more regional inequalities in the presence of weaker spread effects. Therefore, the<br />
government should take steps to spread effects to avoid poorness of the regions and<br />
to bring economic development in circular causation. In other words, the government<br />
of underdeveloped countries should adopt equalitarian policies to reduce the backwash<br />
effects and strengthen the spread effects in order to eliminate regional inequalities.<br />
Myrdal states in his theory, the reason of backwardness of an economy. The<br />
economy is backward because it is backward. He said that a country is poor because<br />
the domination of backward effect.<br />
2.3 Summary :<br />
These theories are useful to decide development path to underdeveloped countries<br />
in the world. Rostow’s theory of economic development stages have useful to know<br />
the development of human beings. Lewis theory of unlimited supply of labour is said<br />
that, an underdeveloped country can progress to use unlimited labour availability.The<br />
Rodan’s theory of big push said to us for development of an underdeveloped economy<br />
has greater investment in all sectors in economy.And the circular causation theory of<br />
Myrdal tells us the reason of backwardness of an economy.These theories are important<br />
to policy makers to making policy for development of economy.<br />
2.4 Glossary of Terms<br />
a) Dual Economy: existence of two sectors in economy<br />
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) Subsistence Sector: agriculture sector<br />
c) Take-off stage: the stage ofpeak level development<br />
d) Spread effect: effect which helps development of an economy.<br />
e) Backwash effect: effect which affected economic development.<br />
f) Indivisibility: unseparateness<br />
2.5 Questions<br />
2.5.1 Objective Type Questions:<br />
A. Give Answer in one Sentence<br />
1. In which book Lewis developed his unlimited supply of labour theory?<br />
2. Which sector have unlimited supply of labour?<br />
3. What is subsistence sector?<br />
4. What is capitalists sector?<br />
5. Which are the five stages of Rostow’s theory of development?<br />
6. Which effect is favourable for development of economy?<br />
7. Give two assumptions of Lewis theory.<br />
8. In which book Rostow developed his theory?<br />
9. According to Lewis what is dual economy?<br />
10. When Rostow published his stages of economic development?<br />
Answers :<br />
1. Lewis developed his theory in “Economic Developed with Unlimited Supplies<br />
of Labour”<br />
2. The subsistence sector have unlimited supply of labour.<br />
3. The part of the economy which used reproducible capital.<br />
4. The subsistence sector is that part of the economy which is not using<br />
reproducible capital.<br />
5. a)The Traditional Stage, b)The Pre-Conditions for Take-off, c)Take-off Stage,<br />
d) Drive to Maturity and e) High Mass-Consumption these are the stages of<br />
economic development.<br />
6. Spread effect is favourable for development of an economy.<br />
7. Dual economy and unlimited supply of labour are the assumptions of Lewis<br />
theory.<br />
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8. Rostow developed his theory in “A Non-Communist Manifesto”.<br />
9. Dual economy means existence of two sectors viz. subsistence sector and<br />
capitalist sector.<br />
10. Rostow published his stages of economic development in 1960.<br />
B. Fill in the Blank<br />
1. Lewis published his theory in………<br />
a) 1952 b) 1954 c) 1958 d) 1960<br />
2. The theory of circular causation is propounded by………..<br />
a) Gunnar Myrdal b) W.W. Rostow<br />
c) Arthur Lewis c) R. Rodan<br />
3. The term ‘spread effect’ coined by………<br />
a) Gunnar Myrdal b) W.W. Rostow<br />
c) R. Rodan d) Arthur Lewis<br />
4. The term ‘backwash effect’ coined by ………..<br />
a) Gunnar Myrdal b) W.W. Rostow<br />
c) R. Rodan d) Arthur Lewis<br />
5. The book ‘A Non-Communist Manifesto” wrote by…….<br />
a) Gunnar Myrdal b) W.W. Rostow<br />
c) R. Rodan d) Arthur Lewis<br />
6. Rostow published his stages of economic growth in ……<br />
a) 1960 b) 1950 c) 1955 c) 1965<br />
7. The ………stage also known as ‘Pre-Newtonian’ stage.<br />
a) The Traditional Stage b) Take-off Stage<br />
b) Drive to Maturity c) High Mass-Consumption<br />
8. …….is the peak level development stage in Rostow’s theory.<br />
Answers :<br />
a) The Traditional Stage b) Take-off Stage<br />
c) Drive to Maturity d) High Mass-Consumption<br />
1. 1954 2. Gunnar Myrdal 3. Gunnar Myrdal<br />
4. Gunnar Myrdal 5. W.W. Rostow 6. 1960<br />
7.Traditional<br />
8. Take-off Stage<br />
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2.6 Exercise<br />
A. Broad Questions.<br />
1. Examine Lewis theory of unlimited supply of labour.<br />
2. Evaluate Rostow’s theory of economic stages.<br />
3. Critics on Rodan’s growth theory.<br />
4. Explain the theory of circular causation.<br />
B. Concepts<br />
1. Spread effect<br />
2. Backwash effect<br />
3. Dual economy of Lewis.<br />
4. Take-off stage.<br />
5. Indivisibility of production function.<br />
2.7 Reference Books<br />
1. Felix Raj, S. Mukherjee, M. Mukherjee, A. Ghose & R. N. Nag (2006),<br />
“Contemporary Development <strong>Economics</strong> From Adam Smith to Amartya Sen”,<br />
New Central Book Agency Pvt. Ltd. Kolkata.<br />
2. M.L. Jhingan (1975), “The <strong>Economics</strong> of Development and Planning”, Vikas<br />
Publishing House Pvt. Ltd. New Delhi.<br />
3. Misra, Puri (1995), “<strong>Economics</strong> of Development and Planing”, Himalaya<br />
Publishin House, New Delhi.<br />
4. O.S. Shrivastava (1996), “<strong>Economics</strong> of Growth Development and Planning”,<br />
Vikas Publishing House Pvt.Ltd, New Delhi.<br />
5. R.K. Lekhi (2002), “<strong>Economics</strong> of Development and Planning”, Kalyani<br />
Publishers, New Delhi.<br />
6. Taneja, Myer (2000), “<strong>Economics</strong> of Development and Planning”, Shoban Lal<br />
Nagin Chand & Co. Educational Publishers, Jalandhar.<br />
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UNIT - 3<br />
Domestic Measures for Economic Development<br />
INDEX<br />
3.0 Objectives<br />
3.1 Introduction<br />
3.2 Subject Matter<br />
3.2.1 Capital Formation and Economic Development<br />
3.2.2 Role of Agriculture and Industry in Economic Development<br />
3.2.3 Role of Monetary and Fiscal Policy in Economic Development<br />
3.2.4 Role of Government in Economic Development.<br />
3.3 Summary<br />
3.4 Glossary<br />
3.5 Questions for Self-learning<br />
3.6 Answers for Self leaving<br />
3.7 Questions for self-study<br />
3.8 Reference for further readings<br />
3.0 Objectives :<br />
In the last unit some of the important theories of Economic development have<br />
gave us the ideas of economic development to take the problems of developing<br />
countries. In this unit we will study the various variables in economy which helps to<br />
have on Economic development and developing and developed countries. While doing<br />
so we should keep in mind certain objectives as follows.<br />
<br />
<br />
<br />
<br />
To find out the relation between capital formation and economic development.<br />
To examine the role of agriculture and industry in Economic development.<br />
To study the role of monetary and fiscal policy in Economic development.<br />
To understand the role of Government in Economic development<br />
3.1 Introduction :<br />
Economic Development is an important aspect in the literature of economics.<br />
Without this it would be impossible to understand the performance of rest of the factors<br />
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in the economy. It is a fact that development of a country can be achieved through<br />
various variables such as agriculture, capital, Industry, monetary and fiscal policy and<br />
government approach etc. In this unit we are dealing the fact that how these variables<br />
are contributing for the economic development of a country. Not only this, it tells us that<br />
what changes should be followed in the various factors to achive the desired economic<br />
growth.<br />
3.2 Subject Matter :<br />
3.2.1 Capital formation and Economic Development :<br />
A) Meaning of Capital formation<br />
1) Bom Bowark said that, “Capital is produced means of production.” In economic<br />
the capital is not a money but it consists machinery, tools, factory buildings i.e. all the<br />
real assets.<br />
2) Ragnar Nurkse defines capital formation as follows, “The meaning of ‘Capital<br />
formation’ is that society does not apply whole of its current productive activity to needs<br />
and desire of immediate consumption, but directs a part of it to the making capital<br />
goods, tools and instruments machines and transport facilities, plan and equipments –<br />
all the various forms of real capital that can so greatly increase the efficiency of<br />
productive Resources. The terms is some time used to cover human as well as material<br />
capital; it can be made to include investment in skills, education and health – a very<br />
important from of investment.<br />
3) According to Singer, Capital formation consists of both tangible goods like plants,<br />
tools and machinery and intangible goods like high standards of education, health,<br />
scientific tradition and research. The same view has been expressed by Kuznets too.<br />
B) Importance of Capital Formation :<br />
Capital formation or accumulation is regarded as one of the important and pivotal<br />
factors in economic development. The following are the important facts throw the light<br />
on the importance of capital formation.<br />
1) Poverty eradication : According to Nurkse, the vicious circle of poverty in<br />
underdeveloped countries can scratched through capital formation. Low income is the<br />
basic feature of these countries, which makes effect on demand, production and<br />
investment of lower level. This deficiency can be removed with capital formation. The<br />
optimum or full use of available resources in developing countries can be possible only<br />
through the capital formation. In this way the extent of poverty can be reduced.<br />
2) Productivity : In general, the productivity in agriculture, mining, plantation and<br />
industry are very low in developing countries. To enhance the productivity of above kind<br />
capital formation is needed to construct schools, hospitals, roads, railways, etc. In<br />
other words, the creation economic and social overhead may boost the productivity of<br />
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all kinds. Hence, capital formation is an important aspect for to have an economic<br />
development.<br />
3) Employment : Capital formation means investment in capital equipments which<br />
results in the increase in production and in turn employment. Thus the capital formation<br />
helps to labour, i.e. the creation of employment opportunities.<br />
4) Expansion of Market : It is the capital formation which removes market<br />
imperfection with the help of economic and social overhead capital. It is also breaks the<br />
vicious circle of poverty and finally due employment people get income which tends to<br />
spending activity.The ultimate result will be expansion of market.<br />
5) To curb the Balance of Payment Problem : Capital formation is very essential<br />
to curb the Balance of payment problem of developing countries. Most of the developing<br />
countries imports exceed export, which deteriorates their Balance of payment situation.<br />
6) Dispenses the need for foreign Aid : Capital formation helps a country to<br />
dispenses the need of foreign Aid. Mostly the developing countries are inviting foreign<br />
Aid to develop their economy. But, they can do it away if the concieve strongly the<br />
capital formation.<br />
7) Get rid of from inflation Pressure : Economists always advocates the<br />
moderate inflation i.e. from 4% to 5% to have smooth growth of a country. But in reality<br />
developing countries are facing the problem of higher inflation which is causing factors<br />
for low development of an economy. If capital formation followed in a proper direction,<br />
the things would be different.<br />
8) Economic welfare : Capital formation also influences the economic welfare of<br />
a country. Capital formation can exploited the natural resources in a right direction,<br />
which could be useful to establish different kinds of industries to meet out the wants of<br />
the people. If they consume variety of products their standard of living may rise and as<br />
a result and this economic welfare increase.<br />
9) National Income : The rise in rate of capital formation may lead to rise in the<br />
level of national income. Thus capital formation is the principal solution to the complex<br />
problems of underdeveloped countries. It is the pivotal key to economic development.<br />
B Reasons for low capital formation :<br />
It is a fact that capital formation is low in underdeveloped countries. The basic<br />
reason is that they do not possess those factors, whose requirement is essential to<br />
determine the capital formation. Infact, capital formation depends on number of factors.<br />
But we must deal with the main reasons for low rate of capital formation in developing<br />
countries are as under<br />
1) Low income : Generally, large amount of savings are essential for capital<br />
formation , which is very much depends on income. Since the agriculture, industry and<br />
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other sectors backward in developing countries, which tends to low national income<br />
and so as the saving and capital formation.<br />
2) Low productivity : The low productivity makes low level of national income,<br />
savings and finally low capital formation. It is the capital formation which may enhance<br />
the level of productivity in agriculture as well as industry.<br />
3) Demographic facts : In under developed country growth rate of population is<br />
very high compare to rate of capital formation. Such countries people’s life expectancy,<br />
becomes less. And at last demographic facts get affected.<br />
4) Entrepreneurial ability : The entrepreneurial ability lacks in case of developing<br />
countries as a result of this low capital formation takes place in such countries.<br />
Entrepreneur faces many problems such as small size of market, deficiency of capital<br />
lack of private property and contract etc. All these retard the economic development<br />
and capital formation become less.<br />
5) Lack of Economic overhead : Now a days economic overhead are called as<br />
infrastructural facilities i.e. power, transport banking etc. These lacks in developing<br />
countries. As a result of this capital formation becomes less available.<br />
6) Size of Market : The small size of the market is another reason for the low rate<br />
of capital formation in LDCs. It is a big hurdle in the growth of entrepreneurship. The<br />
purchasing power is always less in such countries as a result capital formation becomes<br />
less.<br />
7) Tax policy : Taxes also retard economic development and also capital formation<br />
if they are beyond certain limits. These and suma fact happens in case developing<br />
countries and the result is less capital formation.<br />
8) Technology : Obsolete (out of date) technology is also an important factor<br />
forces for low growth of capital formation in less developed economics Technological<br />
backwardness impacts badly on productivity and output and income etc. The net result<br />
is less capital formation in such countries.<br />
9) Weak financial Institutions : Aother important factor stands in the way of capital<br />
formations is lack of efficient financial institutions to supply the desirable funds. Generally<br />
heavy doses of funds are required for the productive forces. But due to inefficient financial<br />
institutions, such climate of finance does not available and this makes less capital<br />
formation.<br />
10) Deficit financing : Deficit finance is panecia for economic development for a<br />
country. If it never crosses the safety limits. But if it crosses the safety limits then tends<br />
to lower the rate of capital formation.<br />
B Sources of Capital formation :<br />
Capital formation depends basically on savings financial institutions and government<br />
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policy. But these trio are and may be internal or external. Thus, in a nutshell capital<br />
formation depends upon internal (Domestic) source and External sources, which are<br />
discussed in detail by following way.<br />
1) Internal Sources : There are many internal sources of capital formation such<br />
as, savings, profit of public undertakings, available human and natural resources etc.<br />
These can be discussed in the following way.<br />
a) Savings : Savings is a part of income which is not consumed. In developing<br />
economy the rate of voluntary savings is vary low. It is the government job to preside<br />
and inculcate habit of savings for their own interest after sufficient consumption. This<br />
would lead to poor, middle class people to increase the rate of savings. To increase the<br />
savings government of concerned countries should give incentives. Such as cash gifts,<br />
tax exemption etc. Moreover issuing of savings certificate is the form govt bonds carrying<br />
high rate of interest may mobilize high level of savings.<br />
b) Financial Institutions : It is a fact that in under developing countries people do<br />
save in the form of Gold, Jewellery and cash. Hence, the requirement is safe financial<br />
institutions. Generally in under developed countries people save their money in some<br />
local financial institution expecting high returns but most of the times such institutions<br />
becomes bankrupt and poor people money looted by culprit of the country.This makes<br />
people to not to keep money in the financial institutions and which makes less availability<br />
of funds for capital formation. These setting up of a well developed capital and money<br />
market by the central Bank can help to enhance capital formation.<br />
c) Profit of Public Enterprise : The profit of public enterprise are an important<br />
constituent in the source of capital formation. But, now a days most of the developing<br />
countries stimulating the private enterprise, for example in India disinvestment policy is<br />
retarding the growth of public enterprises. Thus their contribution to economic<br />
development has been curtailed.<br />
d) Deficit Financing : One important source of capital formation is deficit financing.<br />
Deficit financing means Government borrows funds from market. In other words, people<br />
invest in government securities to get maximum and secured rate of returns. Therefore<br />
this would be considered as a forced savings. In developing country forced savings in<br />
used for formation. People may get bad experience of more rely on deficit financing but<br />
it is a source of capital.<br />
e) Gold stock : Another important source of capital formation is gold stock. In<br />
most of the developing countries people lock up their some amount in terms of gold,<br />
jewellery and silver.They are not prepared to part of with it. This is a fact that it amounts<br />
less less capital formation. Hence, it would be useful of a country stonts willgold<br />
certificates and bond etc. Some countries like India have enhanced the gold trading<br />
which may bring hurdles in capital formation.<br />
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f) Use of disguised unemployed : According Nurkse, one of the important source<br />
of capital is the concealed saving potential containd in rural under employment in over<br />
populated underdeveloped countries. Disguised unemployed people contribute little or<br />
nothing to total output i.e. the marginal physical productivity remains zero. In this way<br />
mobilizing disguised unemployed becomes a savings potentional as well as selffinancing.<br />
g) Taxation : Taxation is the most effective tool of fiscal policy for reducing inequality,<br />
reducing private consumption and transfering resources to the government for<br />
productive investment. Thus taxation will bring income to the budget of the country.<br />
According to Prof. Lewis an underdeveloped country should raise at least 20% of<br />
its national income through taxation Out of this 12% should be utilized on current<br />
expenditure and 8% on capital investment in the public sector.The taxation should aim<br />
at incentives to work, save and invest in this way capital formation would take place.<br />
2) External Sources :<br />
The following are the import aspect of external sources of capital formation. They<br />
are as follows.<br />
1) Foreign capital / Aid : If the domestic source of capital is inadequate then<br />
capital formation should invited through foreign capital in the form of loans, grants and<br />
Foreign Direct Investment. Now a days globalization has made a better climate to<br />
developing countries to have more and more capital formation.<br />
2) Imports Restricted : If a developing country restricts all luxurious imports will<br />
save the foreign exchange. This will enhance the savings and it leads to an increase in<br />
net capital formation.<br />
3) Favourable Terms of Trade : If the terms of trade move in favour of an<br />
underdeveloped country, it is in position to import large quantity of capital goods. Moreover<br />
due to favourable terms of trade domestic income rises which should be saved and<br />
invested productively.Then only the favourable terms of trade will be useful for capital<br />
formation.<br />
3.2.2 Role of Agriculture and Industry in economic Development :<br />
A) Introduction :<br />
The over-populated developing countries like India, Pakistan, Indonesia, China etc.<br />
are heavily dependant on Agricultural sector.These country cannot go without agricultural<br />
sectors help. Since most of these countries are fully dependent on agriculture. The role<br />
of agriculture in economic development is self evident of these countries.<br />
B) Role of Agriculture in Economic Development :<br />
Agriculture helps the process of economic development in the following way.<br />
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1) Provision of food to evergrowing population : Growing population of<br />
developing countries leads to increase in demand for food grains that there were two<br />
facts one Growth rate of population ranges from 1.5% to 3% and second is income<br />
elasticity demand for food in developing countries is 0.6%. These two factors tell us the<br />
importance of agriculture in economic development country and the shortage food grains<br />
production. To solve these problems either agricultural marked surplus should be<br />
increased or import the foodgrain from country who possess surplus food grains.<br />
2) Contribution to capital formation : Agriculture is the basic occupation in<br />
developing countries it plays an important role in pushing up the rate of capital formation.<br />
If it fails to do so, the whole process of economic development will be stopped. Thus<br />
now a days agriculture sector playing pivotal role in the development of economy.<br />
3) Supports Industrial Sector : All agro based industries like Sugar, Cotton, Jute<br />
etc are being supported by agriculture sector. In addition to this the raw material and<br />
food stuffs are provided by the agriculture sector.This result in to the development of<br />
industrial sector and in turn the economic development of a country.<br />
4) Employment : In under developed countries Agriculture is basically labour<br />
intensive industry. Most of the rural people seek gainful employment in agriculture. This<br />
is nothing but a income source to the unskilled labour. Such unskilled labourers are<br />
found more in developing country.Thus if the get employment, it leads to rise in income<br />
of the people as well as nation and which can be regarded as important variable in<br />
economic development.<br />
5) Foreign Exchange for the country : Developing countries of the world are<br />
exporting of primary products, which contributes 60 to 70% percent of their total export<br />
earning. Thus the extent of import of capital goods required for industry depends mainly<br />
on the export earnings of the agricultural sector. If the agricultural sector fails to export<br />
largely.The country may face a heavy deficits in the balance of payments.<br />
6) Welfare of the rural people : An increase in rural income is a result of<br />
agriculture surplus which improve rural welfare. Now a days farmers have started<br />
consuming higher nutritional farm products and using the modern amenities as well as<br />
better services such schools health centers etc. Therefore agricultural surplus have<br />
effected the raising the standard of living of the mass of rural people.<br />
C) Role of Industry in Economic Development :<br />
When a country opens number of industry quickly is called industrialization. The<br />
industrialization is the process of manufacturing consumer goods and capital goods<br />
and creating social overhead capital in order to provide goods and services to both<br />
individuals and business. Thus, the following points indicate that how an industry or<br />
industrialization plays a major role in the economic development of developing and<br />
developed countries.<br />
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1) Rise in employment : Industrial growth is pre-requisite for economic<br />
development. The economic development of Germany, France, England, Japan have<br />
been realized due to industrialization in rampant way. Its growth have been “trickle<br />
down” to other sectors in the economy and led to rise in employment output and income.<br />
2) To increase productivity of Farm : There is over crowding on the land. Thus<br />
a country must begin with industrial development to supply fertilizers, farm machinery<br />
and other inputs to raise the productivity of land. As a result, economic development is<br />
possible.<br />
3) Control over prices : Industrialization can control the fluctuations of prices of<br />
primary products and deterioration in the terms of trade. Thus due to industrialization<br />
sustainable development in an economy.<br />
4) Modernization : People of urban as well as rural area may enjoy fruits of<br />
modernization in the form of variety of goods and services availability due to<br />
industrialization. Thus economic development can be achieved.<br />
5) Social transformation : Most of the developing countries faces the problems<br />
of social inequality lack of social transformation due to agriculture base of the economy.<br />
With the introduction industrial atmosphere charges the out look of people which breaks<br />
the social inequality.Thus it may play a greater role in the field of economic development<br />
through more equitable distribution of income and balanced regional development.<br />
3.2.3 Role of Monetary and Fiscal Policy in Economic Development :<br />
A) Introduction :<br />
Now a days monetary and fiscal policies are important tools to overhaul the basic<br />
problems in developing economies. We will verify one after another.<br />
B) Role of Monetary Policy in Economic Development :<br />
Monetary policy refers to the policy of the monetary authority (Central Bank) of a<br />
country with regard to money matters. This policy deals with control on supply of money<br />
with changes in rate of interest. Sometimes monetary policy is also called as credit<br />
policy of a country.The monetary policy cannot be one and same for both developed<br />
and developing country.A developed country can use monetary policy to achieve variety<br />
of objectives such as full employment, price stabilization or exchange rate stabilization<br />
as per the requirement of economic situation. But in a developing economy the prime<br />
objective is to achieve economic growth or development. Thus, the following points<br />
highlights the role of monetary policy in economic development of a country.<br />
1) Spread of Financial Institution : It is responsibility of the monetary authority in<br />
a economy to extend banking facilities in those areas in the country which are either<br />
unbanked or under banked. In addition to this, monetary authority should ensure that<br />
the flow of finance to the priority sector must be accordance to the development plan of<br />
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the country.The central bank control the commercial bank as it is chief weapon of<br />
monetary policy. Finally monetary authority should see that the working of financial<br />
institution stimulate the economic development.<br />
2) Interest Rate Policy : Investor always correlate the rate of return of an asset<br />
with rate of interest, if earlier is more than latter, he invests more which leads economic<br />
development. In this sense, it is the job of Central Bank (Monetary authority) should<br />
keep a suitable interest rate policy. In other words at the time of inflation, high rate of<br />
interest and all time depression low rate of interest policy.The existence of high rate of<br />
interest policy acts as an obstacle to the growth of private and public investment in<br />
underdeveloped economy.<br />
To discourage the flow of resources in to speculative borrowings and investment,<br />
the central bank should follow a policy of discriminatory interest i.e. charging high rate<br />
of interest for unproductive loans and low rate of interest for productive loans.<br />
3) Control and Supervision Debt. : Monetary policy should be as such, it is<br />
should control and supervise the debt management in developing economy. It is central<br />
bank which aims at proper timing and issuing of government bonds stabilizing their<br />
prices and minimizing the cost of servicing public debt. The success of debt<br />
management, as a instrument of monetary policy, would depend upon the existence of<br />
well-developed money and capital market. Thus monetary authority play an important<br />
role in economic development through debt management.<br />
4) Equality between Demand for and supply of money : Monetary policy is an<br />
important tool which brings about a proper adjustment between demand for and supply<br />
of money.A shortage of money supply may check of growth of an economy while an<br />
excess of it will lead to inflation. Thus, in an excess of it will lead to inflation. Thus, in an<br />
underdeveloped economy the supply of money and credit should be controlled In such<br />
a way that the price level is prevented from rising without affecting investment and<br />
productivity adversely.<br />
5) Credit Control : Monetary authority of a country aim at controlling credit<br />
through appropriate monetary policy. Generally it makes effort to curbs the inflationary<br />
pressure in the process of economic development. Monetary authority must use the<br />
quantitative and qualitative credit control method to have a requisite space of economic<br />
development.<br />
Along with these methods credit control direct control of plant and equipment,<br />
control of capital issue, discriminatory taxes and control over import and export etc. will<br />
have to be instituted for a necessary economic development in a economy.<br />
C) Role of Fiscal Policy in Economic Development :<br />
1) Meaning and importance : Fiscal policy means the policy of government<br />
regarding taxation, public debt, public Expenditure, to achieve stabilization and economic<br />
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development Keynes advocated fiscal policy to reduce the savings and raise the<br />
propensity to consume. But in under developed country savings are low and consumption<br />
is very high. Therefore Fiscal Policy plays a dynamic role in underdeveloped countries<br />
and it is indispensable for economic development. According Raja J. Chelliah. “The<br />
implementation of the financial plan and the achievement of balances in real and money<br />
terms obviously will have to rely largely on fiscal measures.<br />
Here are few objectives of Fiscal Policy.<br />
1) To increase the rate of investment.<br />
2) To increase socially optimal investment<br />
3) To increase Employment opportunity<br />
4) Economic stability<br />
5) Control inflation.<br />
6) To increase and redistribute National Income.<br />
The success of fiscal policy in achieving these objectives depends upon how role<br />
of fiscal policy plays in the instituted economic development.<br />
2) Role of Fiscal Policy : Fiscal Policy is also a potent weapon for the<br />
achievement of economic development in developing economy. To achieve high<br />
economic growth, the government has to deploy all the tools of fiscal policy. Such as<br />
taxation public expenditure public debt and deficit financing.<br />
3) Aggregate Savings : Fiscal policy maximize the levels of aggregate savings<br />
by applying a cut in the consumption of the public. It curbs conspicuous consumption<br />
of the rich and force them to save more for capital formation.<br />
4) To control inflation : Inflation can ruin an economy.The growth process gives<br />
rise to some inflationary pressure in the economy. It is not controlled in time, then will<br />
bring bad position to an economy.Thus, fiscal policy can play prominent role to have<br />
economic development through the control of inflationary situations.<br />
5) Eliminates unemployment : Fiscal policy prepares incentives for encouraging<br />
those industries which have a high employment potential in the economy. In developing<br />
country labour intensive industries should be according with better fiscal policy, which<br />
may create more employment opportunities.<br />
6) Inequality : Inequality of income and wealth retards the economic development<br />
of a country.The fiscal policy can be worked out in such way that there will be equitable<br />
distribution of income and wealth in society.Taxation policy can reduce the inequality in<br />
income and wealth. Higher rate of taxation to rich people and lower rate of taxes to poor<br />
people. Thus, inequality in income can be reduced.<br />
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7) Public Spending : Fiscal policy will be instituted through public expenditure<br />
and economic development can be achieved. Spending on Education may create<br />
qualitative human capital which is necessary for economic development. Alongwith<br />
this spending on health care centre the efficiency of labour force can be enhanced.<br />
During the depression compensatory spending must be undertaken till the private<br />
investment becomes normal. Thus, compensatory spending shall results in raising the<br />
levels of income, output and employment.<br />
8) Taxation : It is an inevitable instrument for raising finance for economic<br />
development. The government may resort both Direct and Indirect taxation to have<br />
adequate revenues for development purposes During inflation higher rate of direct<br />
taxation and lower rate of indirect taxes may useful to poor people. Through this peoples<br />
well being can be maintained at higher level. But at the same time rich class will be hit<br />
hard. Thus, very wisely the taxation policy should be executed to have smooth space of<br />
economic development of a country.<br />
3.2.4 Role of Government in Economic Development :<br />
After a big jolt of great depression 1930, people lost their confidence in market<br />
mechanism Keynes economic models more emphasized that active government<br />
participation is a necessary condition for economic development of an economy.Thus<br />
to tackle various socio-economic problems in an effective way, government intervention<br />
was deemed to be essential. Hence, World Development Report 1997 argues that,<br />
“The state (government) is central to economic and social development not as a direct<br />
provider of growth but as a partner, catalyst and facilator.Al the end the rationale role of<br />
government in economic development in the following way.<br />
1) Capital Formation : The process of economic development in the under<br />
developed countries depends mainly on capital formation. The Government institutes<br />
the monetary and fiscal policy to have a desirable capital formation for economic<br />
development. In other words credit policy, spending and taxing policy launches in such<br />
a way that there will be capital formation.<br />
2) Building Institutions : The effective rate of capital formation is possible if<br />
institutions are powerful. The institutional structure means the banking, education,<br />
insurance and saving organization should be well developed then only capital formation<br />
is possible. Thus, state / government takes an appropriate action to best institution<br />
which in turns helps to achieve higher level of economic development.<br />
3) Infrastructure : Government has to bear the responsibility of developing<br />
infrastructure i.e. power, electricity, irrigation, transport system etc. Huge capital<br />
investment are required to create such facilities, there private sector is reluctant to<br />
spend on this sectors. Thus, government can only invest in such projects. Therefore<br />
government plays an important role in economic development by instituting these<br />
facilities.<br />
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4) Industrial Development : Another important function of the government is to<br />
develop the economy industrially.The private sector does not have the resources and<br />
the willigness to invest in basic and key industries. They may start consumer goods<br />
industries. Thus, it is the government, which can set up basic industries to help the<br />
private investor as well as the general public. Therefore, government play an important<br />
role in economic development through strengthening the industrial base.<br />
5) Agriculture : Agriculture is the main occupation of a majority of the people in<br />
underdeveloped countries and it provides not only employment to large section of the<br />
economy but also contributes as significantly to National Income. Recently budget of<br />
India in 2012 more investment as well as credit facilities were allocated to have more<br />
than 3% growth rate of agriculture. Thus new technique, new agricultural policy any<br />
other support to agriculture can be undertaken only by the Government. Therefore<br />
government plays an important role in economic development through investment and<br />
development in agriculture sector.<br />
6) Monetary and Fiscal Policy : The government also helps in economic<br />
development by adopting various monetary and fiscal policies. By implementing<br />
monetary and fiscal policies, the state is able to solve social, institutional and economic<br />
problems in underdeveloped countries. Through monetary policy cost credit reduced<br />
and its availability will be at ease.<br />
Through Fiscal policy government tries to correct inequalities and income and<br />
wealth. The government follows appropriate taxing, spending and borrowing policy to<br />
expand internal market, reduce no-essential imports, fight the inflation and enable higher<br />
level of savings and investment.<br />
7) Foreign Trade : Developing countries exports primary products, hence they<br />
face deficit in the Balance payment. This is due to terms of trade becomes to agriculture<br />
sector and in the field and industrial section they are very much weak. Thus, the<br />
government can solve the problems related to balance of payment and balance of<br />
trade through appropriate export promotion and import substitution policy.<br />
Thus it may have an economic development with the help of suitable foreign trade<br />
policy.<br />
8) Health and Welfare : Now a days due to globalization rural masses and poor<br />
families in urban are facing problems like safe drinking water, housing sites, slums,<br />
education, energy, nutrition, roads and transport system. It is the responsibility of the<br />
government to solve these socio-economic problems in the country.There, the role of<br />
government is to carryout certain welfare and anti-poverty programmes to achieve<br />
economic development.<br />
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3.3 Conclusion / Summary :<br />
Capital formation is an important determination of economic development. This<br />
capital formation can be floated well in a country, if the political, social, cultural,<br />
technological and entrepreneurial factors.<br />
Economists have viewed that the development should be launched with<br />
industrialization in a country.<br />
Monetary policy is useful to fight many financial problem and will be help to have a<br />
requisite economic development of a country.<br />
Under Fiscal policy the taxation, public expenditure, public debt should be executed<br />
suitably to achieve economic development. Thus, the role of Fiscal policy is an inevitable<br />
potent instrument in Economic Development.<br />
Here government institutes many policy to shoot up growth rate of respected<br />
economy.<br />
3.4 Glossary :<br />
1) Capital formation : It means availability of men and material in the country.<br />
2) Monetary Policy : It is the policy which deals with credit policy and interest<br />
rates.<br />
3) Fiscal policy : Policy related to spending, taxing and borrowing.<br />
3.5 Question for self learning :<br />
A) Choose correct alternatives and rewrite the sentences.<br />
1) Capital means ……………… means of production<br />
a) money b) produce c) none of these d) dollor<br />
2) Monetary policy related to ……………..<br />
a) supply of money b) production<br />
c) Taxation d) None of these<br />
3) Fiscal policy is nothing but ……………… policy of the Govt.<br />
a) Taxing and spending b) production<br />
c) Balance of payment d) on of all<br />
4) Inflation means ………………<br />
a) fall in price b) rise in price c) unemployment d) everything<br />
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3.6 Answer for self learning<br />
1) produced<br />
2) supply of money<br />
3) taxing and spending<br />
4) rise in price<br />
3.7 Questions for self study :<br />
1) Explain the importance of capital formation.<br />
2) Explain the sources of capital formation.<br />
3) What are the causes for low capital formation in underdeveloped economies?<br />
4) Explain the role of agriculture in economic development<br />
5) Explain the role of industry in economic development.<br />
6) State the role of Monetary policy in economic development.<br />
7) Discuss the role of fiscal policy in economic development.<br />
8) How government can achieve a faster rate of economic growth.<br />
3.8 Prepare a report on Agriculture and Indian Economy.<br />
3.9 References for further readings.<br />
1) Jhingan M. L. (2005) The <strong>Economics</strong> and Development and planning, Vrinda<br />
Publication Ltd., Delhi.<br />
2) S. K. Misra and V. K. Puri (2001), <strong>Economics</strong> of Development and planning<br />
(theory and Practice) Himalaya Publication.<br />
3) Todaro (10 th edition), Economic Development Pearson Publication.<br />
4) Weil (2 nd edition), Economic Growth peason publication.<br />
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UNIT - 4<br />
International Measures for Economic Development<br />
INDEX<br />
4.0 Objectives<br />
4.1 Introduction<br />
4.2 Subject Matter<br />
4.2.1 Role of Foreign Trade in Economic Development<br />
4.2.2 Foreign Capital and Aid in Economic Development<br />
4.2.3 Private Foreign Investment and Multinationals<br />
4.2.4 Globalization and Economic Development<br />
4.3 Summary<br />
4.4 Questions for Self learning<br />
4.5 Questions for Self-study<br />
4.6 Glossary<br />
4.7 Field Work<br />
4.8 References<br />
4.0 Objectives :<br />
In the preceding unit we have studied the Domestic Measures for economic<br />
development. In this unit we will study international measures for Economic Development<br />
Here, it is necessary to see that the objectives laid down to study this unit are as<br />
follows –<br />
<br />
<br />
<br />
<br />
To study the Role of Foreign Trade in economic development of an Economy.<br />
To discuss the importance of Foreign Capital and Aid in Economic Development<br />
To know the Private Foreign Investment and Multinationals.<br />
To understand Globalization and Economic Develoment.<br />
4.1 Introduction<br />
Some of international Measures which helps for economic development of a<br />
country.At this junction, it is essential to know that when domestic capital is short in<br />
supply, it is only a foreign capital or Aid is a supportive tool to have an economic<br />
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development. The foreign capital can be paid out through the effective trade policy at<br />
international level. But the fact is that foreign trade is not favourable to undeveloped<br />
countries. To find the solution for this problem, private foreign Investment, multinationals<br />
and Globalization are the measures to have an economic development of developing<br />
nations.<br />
4.2 Subject Matter :<br />
In this unit we are going to study the various aspects of International Measures for<br />
the economic development as under –<br />
4.2.1 Role of Foreign Trade in Economic Development :<br />
Many economists like Ricardo, Haberler,T. S. Mill. Wortkin, Myint have argued that<br />
foreign trade is an essential condition to have an economic development. Thus, the<br />
classical and new-classical economists attached much importance to international<br />
trade in country’s economic development and regarded it as egine of growth. The<br />
Economists like G. Myrdal, Prebisch, Singer, have enunciated that historically foreign<br />
trade has led to international inequality where the rich countries have become rich at<br />
the expenses of the poor countries. These two approaches tells us the role of foreign<br />
trade in economic development of an economy.<br />
A) Role / Importance of Foreign Trade in Economic Development :<br />
Classical and New-classical Economists have argued that foreign trade possess<br />
great importance for developing economies. According to Haberler…. ‘International Trade<br />
has made a tremendous contribution to the development of less developed countries<br />
in 19 th and 20 th centuries and can be expected to make an equally big contribution in the<br />
future. Thus, free trade is the best policy from the point of view of economic development.<br />
1) Rise in National Income : When a country specializes in the production of a<br />
particular commodity, due to foreign trade and division of labour, at lower cost it exports<br />
to other countries which raise the national income. Thus, trade breaks the vicious circle<br />
of poverty and promotes economic development.<br />
2) Widens the Market : In developing country a small size of domestic market<br />
fails to absorb market surplus. As a result, income, purchasing power and savings and<br />
investment becomes very less. But fact is that foreign trade widens the market and<br />
increases investment, income and savings efficiently. Myint has used the smith’s “Vent<br />
for surplus” theory for developing countries to have gains from international trade. This<br />
theory states that foreign trade provides a better opportunities to developing countries<br />
to produce and export primary products. The following diagrame exhibits “Vent for surplus<br />
theory.”<br />
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Y<br />
P<br />
S<br />
C<br />
Import<br />
E<br />
D<br />
P<br />
O<br />
X1<br />
X2<br />
B<br />
X<br />
Export<br />
Explaination of a Graph :<br />
OY = imports<br />
OX = Exports<br />
AB = Production possibility curve<br />
Before Foreign Trade<br />
E = production level<br />
OX1 = Primary products produces consumes and<br />
XiE = Manufacturing products<br />
After Foreign Trade :<br />
D = Production Point level<br />
OX1 to OX2 = Exports Primary products.<br />
XPP1 = International Terms of Trade.<br />
OX1 to OX2 primary products required mid market to export which is possible<br />
through foreign Trade.<br />
3) Reduction in unemployment and under employment : According to Watkins<br />
“staple theory of economic growth” unemployment, under employment have been<br />
reduced and savings investment, have increased. Thus, the foreign trade benefits<br />
directly to the developing countries in their economic development.<br />
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4) Increase in Domestic Investment : The staple commodities of developing<br />
countries are exchanged with capital goods. As a result, more export used to pay import<br />
price and stimulates the domestic investment for economic development.<br />
5) Educative Effect : Underdeveloped countries are suffering from critical skill<br />
which hinders the economic development. But foreign trade over comes this weakness.<br />
According to Haberler foreign trade helps in the development of developing countries<br />
by faciliting the selective borrowing of ideas, skills and know how from the development<br />
countries. The rapid development of the USA, Japan and Soviet Russia has been the<br />
result of the educative effect of foreign trade.<br />
6) Rise of Foreign Capital : The importation foreign capital in developing country<br />
depends upon the policy of foreign trade. Through foreign trade the foreign capital can<br />
flow from rich to poor countries. Ultimately, volume of trade determines the volume of<br />
foreign trade. It would be much easier to get foreign capital from export increasing<br />
industries rather than import substitution and public utility industries. However, the use<br />
of foreign capital for import substitution, public utilities and manufacturing industries is<br />
more useful for accelerating development than only for export promotion.<br />
7) Healthy Competition : Foreign Trade benefits developing countries by fostering<br />
healthy competition and checking inefficient monopolies. Healthy competition is a<br />
necessary condition for the economic development of such economics. They would<br />
be supportive for inform industry.<br />
B) Bad effects of Foreign Trade :<br />
In above discussion, they set the trend that the foreign trade has acted as a egine<br />
of growth and developing countries. But according to R. Prebisch; H. W. Singer; G.<br />
Myrdal, E. R. Grilli, M. C. Yang and Cairn cross etc. have argued that foreign trade is not<br />
useful for the development of underdeveloped economy.They have putforth views in<br />
the following ways.<br />
1) Strong backwash effects : According Gunnar Myrdal international trade has<br />
strong backwash effects on developing countries. He writes, “Trade operates (as a<br />
rule) with a fundamental bias in favour of the richer and progressive regions (and<br />
continues) and in disfavour of the less developed countries. The rich countries have a<br />
large base of manufacturing industries with strong spread effects. The developing<br />
countries does not get the benefit of foreign trade, due to inelastic demand for their<br />
export of primary products. Thus strong backwash effects are generated in the economy.<br />
2) Less Capital formation : It has been argued that the international demonstration<br />
effect through foreign trade has adversely affected the capital formation in developing<br />
economics.<br />
3) Terms of trade deteriorated : Prebisch-singer thesis argued that terms of<br />
trade of primary commodities has shown a secular deterioration and the terms of trade<br />
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for the developing countries has also shown a secular deteriorated. This could be<br />
understood by studying the R. Prebisch Singer thesis as it is given below.<br />
R. Prebisch Hans Singer Thesis :<br />
According Raoul Prebisch the terms of trade between the peripheral<br />
(underdeveloped countries) have shifted in favour of developed countries due to their<br />
monopoly element in their product and factor market.<br />
R. Prebisch assumes that the capacity to import is the determining factor of<br />
economic growth in developing countries. He analysied terms of trade of U.K. with poor<br />
countries during 1870’s and 1930’s, during this period there was a secular downward<br />
trend in the price of primary goods relative to the price of manufactured goods. He<br />
concluded that peripheral countries have not only failed to share in the productivity<br />
gains from the developed countries but also in retaining their own productivity gains<br />
due to population pressures, technological backwardness and domination of industrial<br />
activities of developed countries.<br />
Hans W. Singer argued that opening of gate of developed countries to foreign<br />
trade investment have been inhibited their development. Developing countries have<br />
been specialized in exports of food and raw material to industrialized countries in a big<br />
way due to three reasons.<br />
1) The investing countries were benefited due to cumulative multiplier effect of<br />
foreign investment.<br />
2) Less scope of technical progress, internal and external economies to<br />
developing countries.<br />
3) Deterioration of terms of trade of developing countries.<br />
All these things have taken place due to the operation of Engel’s Law, which is<br />
major factor in accentuating price differentials between the peripheral and the centre.<br />
H.W. Singer writes that “the under developed countries are in danger of falling<br />
between two stools : failing to industrialize in a boom because things are as good as<br />
they are, and failing to industrialize in a slump because things are as bad as they are”<br />
Here, singer suggested remedy for this problem that developing countries should absorb<br />
the flow of international investment into their economic system by reinvesting its profits,<br />
by generating complementary domestic investment and by finding the requisite domestic<br />
resources.<br />
Human Development Report 1997 reports that “Poor countries often lose out<br />
because the rules of the game are biased against them – particularly those realiting to<br />
international trade” No dought some of economist are not agree with views put forth by<br />
prebisch – Singer.<br />
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4.2.2 Foreign Capital and Aid in Economic Development :<br />
I) Introduction and Foreign Capital and Aid :<br />
The level of capital formation is very low in developing countries, thus, they can<br />
not meet the financial requirements to have their economic development. At this critical<br />
juncture, developing country must import capital which they can not produce. To pay<br />
for the imports, the external resources are borrowed in the form of foreign capital or<br />
aid.<br />
History reflects that almost every country had to rely on foreign capital and foreign<br />
aid for speeding up economic growth. According to Prof. W.A. Lewis England as well<br />
as U.S.A. have had assistance of foreign finance in 17 th , 18 th and 19 th century<br />
respectively. Thus it is very much clear that both developed and underdeveloped countries<br />
have to have a foreign capital to get desired economic growth.<br />
II) Meaning :<br />
Foreign Capital means investment by foreign government, private foreign investors,<br />
and international financial institutions in the productive activities to a receipt country.<br />
Thus, when a country receives capital from any corner of the world is called foreign<br />
capital.<br />
Foreign aid is the aid which flows from the Donar country or International Financial<br />
Institutions in the form of grant, loans, technical assistance to receipent country.<br />
III) Forms or Classification of Foreign Capital<br />
In the view of receiving country foreign capital can be divided into two parts<br />
1) Private Foreign Capital<br />
2) Public Foreign Capital<br />
1) Private Foreign Capital :<br />
The private foreign capital can be received from private sources, it may be private<br />
individual or private corporation i.e. Multinationals. They invest in private sector or public<br />
sector.Thus, the private foreign capital may be of the following types.<br />
a) Direct Foreign Investment (FDI) : Foreign Direct Investment is incurred by<br />
private enterprenuers in a subsidiary in another country or enterprises of a another<br />
country.The investors have full or partial control on the enterprises of another country.<br />
They bear risk as well profit.<br />
b) Indirect Foreign Investment : The indirect foreign Investment is also<br />
recognized as “Portfolio investment” or “rentier investment”. Foreign investor or a<br />
company can hold shares and debentures of some other countries. Such holdings of<br />
securities does not give any right to control over the company. But, they as a shareholder<br />
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they are entitled to get dividend as per rule. Thus foreign investor gets a fixed rate of<br />
interest on his investment.<br />
c) Commercial Borrowings : This form of foreign capital is one which flows<br />
through commercial Bank. Commercial Banks provide export credit to developing<br />
countries or finance projects which are undertaken by developing countries.<br />
e) Loans by International Agencies : These loans are given by various<br />
international agencies of the United Nations, such as world Bank. International Finance<br />
Corporation (IFC) International Development Association (IDA) Dsian Development Bank<br />
(ADB)<br />
II) Public Foreign Capital :<br />
Public Foreign Capital means when a government of one country provides loan or<br />
grant to the government of another country is called public foreign capital. It accelerate<br />
the growth of an economy. Now a days it is an important source of rapid industrialization<br />
and economic development. Finanlly, it is also called as inter-governmental loans. It<br />
may be listed in a following way.<br />
a) Soft loan : The loans which are granted for long period at a low rate of interest<br />
to have an economic development of developed country are called soft loan. These<br />
loans are given at local currency.<br />
b) Hard Loan : These loans are provided at a high rate of interest for a short<br />
period. They are given in hard currency like Dollor Ponds, Euro Doller etc.<br />
c) Project Loan : Project loans are such loans, which are given for a specific<br />
project. Receipant country must use such loan for allotted projects only.<br />
d) Non-project : This kind of loan are given for general use. The receiving country<br />
can use the loan for any purpose.<br />
e) Foreign Aid :<br />
i) Meaning :<br />
Foreign Aid means financial assistance flows from the donar country in the form<br />
of grant, loans and technical assistance to the receipient country.<br />
Foreign aid is given for some definite purpose and it is used in the manner as<br />
agreed between foreign aid receipt country and the foreign aid giving country. Generally<br />
foreign aid provided to gain support from receiving country in international politics and<br />
strategic issues such as flood control, earthquakes, removal of diseases, slums,<br />
eradication of powerty etc.<br />
ii) Types of Foreign Aid<br />
a) Tied aid<br />
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) United aid<br />
a) Tied Aid :<br />
Tied aid may be by source, project or commodities. Tied aid by source is given by<br />
developed countries such as U.S. Government Assistance under PL. 480 and Exime<br />
Bank loans, Aid given by U.S.A. should be spent by receipient country to purchase<br />
U.S.A. goods and services only.<br />
Aid tied by project is that aid under which aid must be used for specific development<br />
project like construction of dam, hospital, bridges, roads etc.<br />
Tied commodity aid is that aid which is given to purchase specific commodities<br />
such as food grains, machinery, spareparts raw materials etc. Here, receipient country<br />
are requried to purchase commodities from donar country at higher cost.<br />
b) Untied Aid :<br />
When a donar country gives aid to receipient country without any condition. Here,<br />
such kind of aid is useful to the receipent country because it may use aid freely be<br />
keeping in-view its plan requirements.<br />
B Role of Foreign Capital and Foreign Aid in Economic Development :<br />
Foreign Capital and Foreign Aid plays an important role in the economic<br />
development of both developed and developing countries. Now a days foreign capital<br />
has becoming essential condition to have growth either in developing and developed<br />
country. Let us see how its role is creating an impact on economic development.<br />
1) Use of Human and Natural Resources :<br />
Under developed countries are suffering from excessive pressure of population<br />
on land and exist of disguised unemployment on large scale. But, natural resources<br />
are available in huge way. It is the job of the economy to utilize both natural as well as<br />
human resource and this could be possible only through either foreign capital or aid.<br />
2) Improvement in Technology :<br />
Generally, technological backwardness is the well know feature of developing<br />
countries. This has retarded the development process of an economy. Hence, through<br />
foreign capital and aid they can have technical assistance in the forms of research,<br />
training, expert services, etc. to built-up strong industrialization. Thus, with foreign<br />
collaboration, developing countries can a higher economic development.<br />
3) Filling up resource gap :<br />
The resources which are available in under developed countries are extremely<br />
low due to low savings, low investment and vicious circle of poverty. Here, foreign<br />
capital and foreign aid is the only way to bridge the gap between the low domestic<br />
savings and the huge investment required for rapid economic development.<br />
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4) Infrastructure :<br />
Since last three four decades, international financial institutions and many<br />
governments of developed countries have made substantial capital to the underdevelop<br />
countries to develop their system of transport and communication, roads, distribution<br />
of electricity and development of irrigation facilities.<br />
5) Balance of Payment :<br />
The foreign aid and capital also solves the problem of adverse balance of payments.<br />
The developing countries are heavily importing the food grains, pulses, oil seeds, capital<br />
raw materials, as a result they face as adverse balances of payment. Altimately,<br />
correction should be made in deficit of balance of payment through foreign capital and<br />
aid only.<br />
6) Increase in level of standard of living, income and employment :<br />
Foreign capital and aid also helps to raise the level of national income, productivity,<br />
employment and standard of living of every country which is in need.<br />
7) Controls Inflation :<br />
Every country in general and developing country in particular are facing the problem<br />
of inflation. The foreign capital and aid helps to minimize inflationary pressures by<br />
increasing the supplies of imported goods and services. Thus, obstacle of inflation is<br />
being removed in the way of economic development by foreign capital and aid.<br />
To conclude, the inflow of foreign capital and foreign aid is indispensable for the<br />
economic development and industrialization of underdeveloped and developing countries<br />
of the world.<br />
4.2.3 Private Foreign Investment and Multinationals :<br />
A) Private Foreign Investment :<br />
i) Introduction :<br />
Private foreign capital was flowed indirectly upto 1920. But after II nd word war it<br />
was flowing in the form of direct investment. It has been concentred on the mainly in<br />
the extracting of raw materials like iron, crude oil, magnese, bauxite, copper, electric<br />
energy etc. Now a days it is moving towards countries which are somewhat industrially<br />
advanced and have large domestic markets.<br />
ii) Merits of Private Foreign Investment : (PFI)<br />
PFI possess certain advantages which are discussed as below –<br />
1) It provides finances, managerial, administrative and technical personnel, new<br />
technology, research and innovations in products and techniques of production<br />
which are short in supply in developing countries.<br />
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2) Local Enterprises are encouraged to invest more in ancillary industries or in<br />
collaboration with foreign enterprises.<br />
3) It helps in filling the extraction and refining manufacturing for home production<br />
and exports.<br />
4) They are operating in service industries such as banking, insurance, shipping<br />
hotels and so on.<br />
Thus, the Private foreign investment are generally followed by Multinational<br />
Companies. Thus they are animals in the 200. The MNC’s come in various shapes,<br />
forms and sizes.<br />
B) Multinational Corporations :<br />
1) Meaning :<br />
A multinational corporations (MNC) is a corporation company or enterprise or firm<br />
within headquarter in a developed countries like U.K., U.S.A., Germany, Japan etc. and<br />
operate in developed and developing countries. They are also known as Transnational<br />
Corporations (TNCs)<br />
According to U.N. Report ‘Multinational Corporation deal with group of enterprises<br />
which own or control production or service of facilities outside the country in which they<br />
are based. Such enterprises are not always incorporated, they can also be corporative<br />
or state owned entities.<br />
According to Lal and Streeten “Multinational Corporations in general are very large<br />
firms with vide spread operations which are clearly international in character and have<br />
more than five foreign subsudirics or more than 15% of total sales produce abroad,<br />
and acting in a convenient manner to achieve maximum profits or growth.”<br />
II) Features / Characteristics of MNC’s :<br />
1) Its head quarter in developed countries like U.K., U.S.A. etc.<br />
2) It operates in both developed or developing countries.<br />
3) It may have its group of subsidiary companies with their branch network<br />
operating in various countries.<br />
4) They have gigantic size.<br />
5) They have multi-national stock ownership.<br />
6) The profits of the corporation is divided among the countries in proportion of<br />
their share capital.<br />
7) They have multi-national management.<br />
8) It possess vast resources for production, capital technology marketing and<br />
exports etc.<br />
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III) Advantages of Multi-national Corporations :<br />
Generally developing countries have to depend on MNC’s. The main benefits of<br />
the MNC’s are as follows.<br />
1) Capital and Technology :<br />
The developing country face the acute shortage of capital as well as technology,<br />
this can be met with the MNC’s with their operational and management. The capital<br />
intensive technology can be drawn through the MNC’s. Thus, it is very important<br />
advantage to the receiving countries.<br />
2) Rabid Industrialization :<br />
The MNC’s provide better environment for the rapid industrialization in receipient<br />
country through the cheap foreign capital and new technology.<br />
3) Expolitation of Domestic Resources :<br />
The operation of the MNC’s in developing countries like India and others, enabled<br />
them to exploit their domestic resources and increase productivity in the exploration of<br />
new resources. Further, they help the developing economies to integrate with the global<br />
economy.<br />
4) Space for International Market and Export Promotion :<br />
The MNC’s produce commodities and services in a huge quantity with better quality,<br />
which help to recipient country to capture domestic as well as international market.<br />
This results in increased size of export.<br />
5) Large scale employment :<br />
Along with increase in savings, investment and production in developing and<br />
underdeveloped countries, the MNC’s presents the opportunity of enhancing employment<br />
on a large scale.<br />
6) Foreign exchange Reserves :<br />
MNC’s plays a vital role in meeting the deficit and increasing foreign exchange<br />
reserves in under developed and developing countries by increasing their export both<br />
of semi finished and finished products.<br />
7) Infrastructures :<br />
MNC’s assist in the development of infrastructural facilities in recipient countries,<br />
which help in the development of other sectors of the economy, such as, agriculture,<br />
mining trade, commerce and other related activities.<br />
8) Increase in the standard of living :<br />
Multinational corporations spend huge funds on research and development (R &<br />
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D) It makes to recipient country to avail the discovery and introduction of new process,<br />
new technique and variety of products to raise the standard of living of the masses<br />
living in these countries.<br />
IV) Dis advantages / Demerits of MNC’s :<br />
Though the MNC are proved to be a powerful instrument of rapid economic growth<br />
of recipient countries but they have been criticized widely on several grounds which<br />
are –<br />
1) Harmful for producers and consumers :<br />
MNC’s are oligopolists in nature and have loyalties to none, So they have power to<br />
eliminate any actual and potential competition. They manipulate future markets,<br />
differentiate their products through deceptive advertisement. This makes bad impact<br />
and effect on the part of producer as well as consumer.<br />
2) Bad Business ethics :<br />
MNC’s follow bad business ethics such as bribes to officials to get work done.<br />
They also interfere in political affairs of the host countries to make favorable legal system<br />
for their own benefits. These are the serious aspects of the working of MNCs.<br />
3) Exit of transfer-pricing :<br />
This referes to intra-company transactions related to deceptive prices with view to<br />
maximize group profits. For example. MNC’s sells dear to its affiliate with low tax country<br />
A. and buyes cheap from affiliated with high tax in ‘B’. This increase the profit of country<br />
‘A’ and loss to country ‘B’. Hence, as a result of this it make huge profit which is retained<br />
in their own country.<br />
4) Currency Manipulations :<br />
The MNC’s involve in financial dealings in several national currencies. They keep<br />
on accumulating funds in places that are safe with strong currencies and high interest<br />
rates. In case of weak-currencies MNC’s ask their affiliates to go in for larger debts<br />
through raising fresh loans, premature repayments of old loans etc. In short they built<br />
up assets in strong currencies, and debt in weak currencies. This impact no advantage<br />
to the less developed countries and further harm them directly to weaking currencies<br />
and indirectly add up currency crises at the world level.<br />
4.2.4 Globalization and Economic Development :<br />
1) Introduction :<br />
Much discussion has been taking place in the world about globalization and its<br />
impact on economic development for both developing and developed countries. The<br />
seriousness was croppled after world trade organization (WTO) inception in 1995. It<br />
has started its involvement in expansion of economic activities across political<br />
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oundaries of nation states.<br />
2) Meaning :<br />
Globalization means it is a process of increasing economic integration and growing<br />
economic interdependence between countries in the world economy.<br />
According Jagdish Bhagvati “Globalization constitutes integration of national<br />
economies into the international economy through trade, direct foreign investment (by<br />
MNC’s), short-term capital flows, international flows of workers and humanity generally<br />
and follows of technology.<br />
Thus, Globalization mean it has got following four parameters.<br />
1) Free flow of goods and services in the world.<br />
2) Free flow of capital in the world.<br />
3) Free flow of technology among nation states.<br />
4) Free movement of labour in the world.<br />
Therefore “Globalization”, infact, is nothing but a modern version of the “Theory of<br />
comparative Cost Advantages” which was propagated by the classical economists to<br />
provide the theoretical foundation of free trade from Great Britain to other less developed<br />
countries. Eventually, globalization would mean being able to procure raw material and<br />
labour and drawing management resources from the cheapest sources any where in<br />
the world.<br />
B Merits of Globalization for Economic Development :<br />
1) Efficiency :<br />
It is argued that globalization helps to developing countries to improve the allocative<br />
efficiency of resources, reduces the capital output ratio, increase in labour productivity,<br />
expand the exports, update the technology and boost the economic growth rate etc.<br />
This make the sustainable development of developing countries and developed too.<br />
2) Production and Trade Structure :<br />
It will help to restructure the production and trade pattern in capital scare, labour<br />
abundant economy infavour of labour – intensive goods and techniques.<br />
3) FDI :<br />
It helps to inflow more and more FDI to recipient country who are facing the acute<br />
shortages of capital.<br />
4) Better Consumer goods :<br />
Globalization has made people happy of developing countries through cheaper<br />
and high quality of consumer goods.<br />
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5) Banking and Financial Services :<br />
Under Pre-globalization period people of developing countries were suffering from<br />
poor facilities of banking and financial services. But, with the opening the gates economy<br />
most of the countries banking and financial sectors have become efficient in their working.<br />
6) Double standard policy :<br />
Developed countries have adopted double standard. They demand many<br />
concessious and reduction in tariffs from developing countries but have adopted<br />
protectionist attitude for themselves.<br />
7) Deteriorating Terms of Trade :<br />
After 1995, trade agreement have worsen the trade structure of the poor countries.<br />
Their terms of trade were deteriorated.<br />
B<br />
Demerits / disadvantages of Globalization in the way of economic<br />
development :<br />
The imperialist nations were strong supporters of free trade.<br />
1) Developing countries were benefited :<br />
As per would commission (2004) The group of 12 developing countries were<br />
accounted lion’s share in world trade but sub-saharan Africa experienced in proportional<br />
decline in their world markets.<br />
2) Imports of developing countries were increased :<br />
These countries were facing deficit in their trade.<br />
3) FDI :<br />
Flow of FDI have benefited developed countries.<br />
4) No growth :<br />
FDI inflows are not all growth oriented, this flows have destroyed the comparative<br />
cost advantage of developing countries.<br />
5) Employment :<br />
According world commission world unemployment rates have increased since<br />
1991 in latin America and the Caribbean and South East Asia, and since 1995 in East<br />
Asia.<br />
6) Income inequality :<br />
Some people are benefited the environment of globalization which has resulted in<br />
income inequalities.<br />
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4.3 Summary :<br />
1) Role of Foreign Trade in Economic Development :<br />
An in the past foreign trade was considered as engine of economic growth of<br />
recipient country. But now a days some of the developing countries as well as por<br />
countries also not benefited in a proper way.<br />
2) Foreign Capital and Aid in Economic Development :<br />
Developing countries are in acute shortage of capital, therefore, they had the shelter<br />
of foreign capital and Aid for their economic development. India is one of them which<br />
has achieved high economic growth during 2001 to 2010.<br />
3) Private Foreign Investment and Multinationals :<br />
Multinationals have created oligopolist environment in the world which have created<br />
hazards effects at the world level specifically for developing countries and poor countries.<br />
4) Globalization and Economic Development : The waves of globalization have<br />
created both goods effect And bad effect on the economy of developing countries.<br />
5) Exports :<br />
Globalization widens the access of developing countries to export their produce in<br />
the developed countries. This will result into expansion and diversification of exports.<br />
Thus it is regards as engine of growth.<br />
4.4 Questions for Self-learning :<br />
1) Globalization is a modern version of :<br />
a) colonialism b) Imperalism<br />
c) Capitalism d) Theory of comparative cost advantages.<br />
2) MNCs bring :<br />
a) Foreign capital, b) Technology, c) Technical expert, d) All of them.<br />
3) Public foreign capital is not essential of the economic development of :<br />
a) Backward countries b) underdeveloped countries<br />
c) Developing countires d) Developed countries.<br />
4) Find out the correct statement :<br />
a) Globalization has benefited all the countries.<br />
b) Globalization has benefited only developing countries.<br />
c) Globalization has benefited only few developing countries.<br />
d) Globalization has benefited none.<br />
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5) Which of the following is an essential feature of globalization.<br />
a) Privatization b) Dis-investment<br />
c) Reduction of trade barriers. c) Development capital market.<br />
Answers : 1. (d), 2. (d), 3. (d), 4. (a), 5. (c)<br />
4.5 Questions for self study.<br />
1) Explain the Role of foreign trade in economic development.<br />
2) What is foreign aid ? Explain its type.<br />
3) Explain role of foreign capital in the economic development of developing<br />
country.<br />
4) Explain prebisch – Singer Model.<br />
5) What is multinational corporation ? Discuss its merits and demerits.<br />
6) What do you mean by Globalization ? Discuss its merit and demerits.<br />
4.6 Field work.<br />
Prepare a Report on FDI in India.<br />
4.7 References.<br />
1) R. C. Agrwal, (2011), <strong>Economics</strong> of Development and playing.<br />
2) M. L. Thingan, (lasted edition), The economics of Development and planning.<br />
3) Misbra & Puri (2010 Growth and Development.<br />
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