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Economic Development

Introduction
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
• 1)Low level of GNI per capita and slower GNI per
capita growth
• 2)larger Income inequalities
• 3)Low Level of Productivity
• 4)Greater Dependence on agriculture with a
backward industrial structure:
• 5)The industrial sector is both small and
backward.
• 6) High proportion of consumption expenditure
and low saving rate:
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
• 07)High rates of population growth and
dependency burden:
• 08)High level of Unemployment and
Underemployment:
• 09)Technological backwardness:
• 10)Dualism
• 11)Lower participation in Foreign Trade:
• 12) Dependence:
• 13) Other Factors
Their Common Characteristics -
Technological backwardness
• Lack of research and development, weak
communication system between the research
institutes, lack of capital, lack of skilled labour leads to
technological backwardness.
• UDCs do not have large effective institutions working
for discovering appropriate technology.
• Failing to adopt local technology, they depend on the
import of technology.
• Sometime, out of ignorance, they keep on using
outdated techniques.
• Strong labour union oppose introduction of labour
displacing technology.
Their Common Characteristics- Dualism
• In UDCs, there are two compartmentalized
sectors: the traditional rural sector and
modern sector.
• Rapid growth of population which is not
accompanied by a sufficient capital
accumulation leads of unemployment of
excess supply of labour.
• It must seek employment in the rural sector
where marginal productivity falls to zero.
Their Common Characteristics - Lower
participation in Foreign Trade
• The export volumes are less, Imports are
relatively more.
• Inadequate development transportation
facilities and inefficiency leads to comparative
disadvantage.
• The prices are high and hence they do not
have competitive advantage.
Underdeveloped Countries (UDC/LDC)
Their Common Characteristics
12) Dependence:
• Many UDCs were under colonial rule and now
specializing in production of primary products.
• They always depend on developed countries for
capital goods.
13) Other factors:
Social system is orthodox
High degree of illiteracy
Legal system is defective
Corruption is very high
Obstacles to Growth and Development
• When we were discussing the common
characteristics of UDCs, we have given a
glimpse of the characteristics related to
obstacle to growth.
• Here we will discuss certain major obstacles of
development.
• 1) Vicious Circle of poverty and scarcity of
capital
Vicious Circle of poverty and scarcity
of capital
• For decades together, many UDCs have remained
in a period of stagnation.
• R Nurkse, in his book, “Problems of capital
formation in underdeveloped countries” had
explained the problems of the stagnation.
• According to him, Vicious circle of poverty implies
“a circular constellation of forces tending to act
and react upon one another in such a way as to
keep a poor country in a state of poverty.”
1) Vicious Circle of poverty and
scarcity of capital
• The circle has both demand side as well as the
supply side.
• Demand side:
• Low productivity  low income  low demand
 low investment  low capital deficiency 
low productivity.
• Supply Side:
• Low productivity  low income  Low saving 
Low investment  capital deficiency  low
productivity.
Vicious Circle of poverty and
scarcity of capital
• R Nurkse is of the view that “A country is
poor because it is poor”.
• Poor people not having enough food  health
deteriorates  becomes weak physically and
mentally  productivity decreases  income
decreases and become poor.
• Low level of real income, reflecting low investment
and capital deficiency is a common feature of both
the circle.
Vicious Circle of poverty and
scarcity of capital
• Supply side is governed by the ability and willingness
to save.
• Demand side is governed by the incentives to invest.
• Extremely poor countries rarely save more than 10%
of their NI and faces shortage of capital for
development activities
• Scarcity of capital  use of labour intensive
technology  low productivity.
• Low productivity  less income  less standard of
living.
2) Inappropriate Technology
• UDCs generally have low productivity
techniques which fails to generates economic
surplus.
• In UDCs there are excess supply of labour and
hence it is not possible to discard these
technologies which have larger labour
absoption capacity.
• Their inability of displacing this techniques is
also due to scarcity of capital.
2) Inappropriate Technology
• Sometimes UDCs also may have imported
sophisticated techniques with low labour
absorption capacity.
• This imported techniques are some time second
hand used techniques/ machinary.
• Hence, UDCs rarely compete in the international
markets due to technological gaps.
• These technologies are highly capital and skill
intensive and hence it is not of any sue to LDCs.
3) Population Growth
• In UDCs the mortality rates have suddenly
decreased without a decline in birth rates.
• Population growth arrest development
because it leads to decrease in land-man ratio
and capital-man ratio.
• This also results in disguised unemployment
with marginal productivity of labour equals
zero.
• Due to population expansion and increase in the
percentage of poor people, many are deprived off
food.
• Govt. takes measures to provide food at
subsidized price (Food Security).
• On the one had govt. gives food at subsidized
price and on the other Govt. guarantees good
price for the producers of food.
• This gap creates a huge pressure on the budget
and budget deficit / GDP ratio increases.
• Hence the contradiction and not conducive for
development.
• Growth of population and labour force is an
impediments to the rising of average incomes
and the alleviation of poverty.
4) Political and Administrative
Obstacles
• UDCs have suffered colonial exploitation in the
past and present political and administrative
system of the UDCs are not conducive for
development.
• Political instability, democracy and people
participation, strikes and dharna, loss of
confidence in the mind of people.
• Administration is inefficient and unethical, large
public section with less contribution, corruption
in the system, Industrial licensing is not
transparent.
5. Socio-cultural Obstacles
• Religion (spiritualism), Casteism and tribal loyalties, Contempt for manual
labour among the high caste Hindu
• According to Max Weber, religion excludes the economic
motive, and replaces it with customs and status.
– It has prevented occupational mobility
– An essential condition for economic development is that
there should be optimum utilization of human resources for
which occupational mobility is necessary along with
geographical mobility.
– Person were forced to accept the traditional occupation of
his caste, which decreases his efficiency level.
• Joint family system ties.
– Encourages inactivity
– Prevent migration
6. External Bottlenecks

• Comparative advantage theory states that


international trade between nations is beneficial.
• In UDCs, international trade did not stimulate
manufacturing industries, rather promoted production
of primary products.
• The demand for these product is inelastic.
• Thus, their production and employment linked with
exports has little prospects of expansion.
• The wages and the export returns per unit of product
fail to rise as supply of labour is almost unlimited.