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Home Developing Countries and Their Features Problems/Obstacles in the Way of Economic Growth


Problems/Obstacles in the Way of Economic Growth:


Here we shall discuss those factors and problems/obstacles in the way of economic growth. They are as:


(1) Vicious Circle of Poverty (VCP):


Definition and Explanation:


According to Prof. Nurske:


"Vicious Circle of Poverty is a constellation of forces in a circular form which act and react in such a way to keep the country in state of poverty".


In other words, a poor country remains poor because it is poor. The VCP starts with this fact that in case of UDCs the productivity remains poor because of shortage of capital, market imperfections and economic backwardness. However, VCP operates both through supply side as well as through demand side.


Demand Aspect of VCP: The real national income of UDCs is low which results in lower demand for goods and services. With this the level of investment remains low leading to reduced supply of means of production. Because of deficiency of capital the productivity remains low which again leads to reduce the real national income of the country.


Supply Aspect of VCP: The real national income of UDCs is low which results in lower savings. Consequently, the level of investment remains low. The low investment would result in lower level of capital. The lower capital means lower level of productivity which again leads to reduce the level of real national income of the country.

The VCP whether originated from demand side or supply side it is furnished with lower level of income. The lower income leads to lower investment and deficiency of capital.


The economists also present a Third VCP which is concerned with backwardness of natural and human resources. The natural resource development depends upon the productive capabilities of the people. If people are illiterate, unskilled and lack the organizational capabilities the natural resources of the country would not be utilized efficiently. When the resources arc not properly utilized the country will remain backward. This shows that the uneconomic use of resources is the cause as well as the effect of keeping the people poor and backward.


Thus, according to economists the poverty and backwardness are same. A country is poor because it is backward and a country is backward because it is poor. Thus it is proved that it is the poverty which keeps a country poor and poverty is a curse.


(2) Low Rate of Capital Formation:


The other internal limiting factor regarding economic growth is concerned with the deficiency of capital and investment. It is also attributed to vicious circle of poverty. The poverty is not only the cause but also the effect of low rate of capital formation.


The people are illiterate, use primitive techniques of production and out-dated equipment. There is subsistence farming in agri. sector. There is limited mobility of factors of production. There is a reduced use of money, particularly in villages. In such situation the productivity of labor remains low. As a result, national income, savings, investment and capital formation remains low. In the poor countries the level of consumption is already at very low level and it can not be decreased any more to raise savings and investment. Here, whatsoever is saved is re-ploughed in the purchase of lands and gold In these countries, there are reduced banking facilities. The savings are made by the rich class which is in minority. But this class diverts its savings in unproductive fields like construction of palacious houses and imported luxurious goods. Again, in case of UDCs the inducement to save is low because of socio-economic backwardness. In addition to these the following factors are responsible for low capital formation in UDCs.


(i) The people do not take risk, (ii) the domestic market is limited, (iii) the availability of funds for investment is difficult, (iv) the costs of production increase due to reduced factor mobility, (v) the organizational and administrative capabilities are limited.


(3) Socio-Cultural Constraints:


The capital is a necessary condition for economic growth but it is not a sufficient condition. The economic development is also influenced by human resources, social trends and political conditions. The poor countries are not only deficient in resources, but they are also backward with respect to their social set-up, culture, traditions customs, thinking and outlook. People of UDCs are highly fond of contentment, fatalism and their so-called traditions.


Consequently, the social and geographical mobility remains limited. Hence, the people remain backward economically. The people are not fond of new ideas, inventions and innovations. In these countries the 'Family' is a social and economic unit. It is common to observe the love for family profession, family superiority feelings, and the caste system. In such poor societies the savings are either kept in the form of hoardings or they are used to perform the social obligations. Moreover, due to conspicuous consumption and demonstration effect the level of savings and investment remains poor. Here 'Man' is valued on the basis of wherefrom he is not on the basis of what is he. The man is given importance on the basis of his family, relationships, caste and sect. Thus the relationships in these societies are particularistic rather universalistic.


All such state of affairs hampers the productivity of the labor. The politics, administration and policy making is owned or controlled by the dominant and powerful families of the country. They protect their vested interests, and even sacrifice the national interests for their owns. These countries are furnished with corruption, bribery, red tapism and official formalities. The feudals and land lords are very much strong in the rural areas.

they often crush their tenants and subjects. The educational system is very much out-dated and obsolete. People are fond of getting general education rather technical education. In such situation the educational unemployment is increasing. As according to Prof. Krishen:


"The culture of East is just to live, while the culture of West is full of life, progress and adventure".


(4) Agricultural Backwardness:


 In so many developing countries the agri. sector is the largest sector. The agri. sector greatly contributes to NI, employment and exports. But agri. sector is extremely backward. It uses the primitive techniques of production, rotten seeds and traditional equipment. The farmers are of the view that, to follow some new technique of production means to take risk which may take the farmers to starvation. The poor farmers have to face the problems of seeds, climate, fertilizers, irrigation, marketing and storage. The agri. sector of poor countries is characterized by cyclones and droughts. Consequently, there are big fluctuations in the prices and outputs in the farms. The cobweb fluctuations are very much common in UDCs. With this the agri. sector remains a subsistence sector, it is hardly commercialized. Thus this sector fails to create surplus for national development. In certain cases the agri. sector does not provide enough food to meet the domestic needs. In this way, the poor countries have to spend] precious foreign exchange on the imports of food stuff. As a result, the BOP problems in UDCs are further aggravated.


(5) Backward Human Resources:


The backward human resources also serve as a constraint in the way of economic growth of UDCs. The people of UDCs are highly unskilled, illiterate and low qualified. The human resources backwardness leads to reduce the productivity of the labor. The mobility of labor remains limited. There is reduced division of labor and specialization. The economic quality of labor is poor. People are! unaware of with the market conditions. The low human resource development would not allow to use the resources and capital in the optimal way. Consequently, the domestic output will remain low keeping the country poor and backward.


(6) Foreign Exchange Constraints:


According to Prof. Mint, Prebisch, Singer, Lewis and Myrdal such a forces operate at international level that the poor and developing countries remain deprived of the benefits of world trade. It means that the prices of exports of UDCs go on to fall while prices of their imports (manufactured goods) goon to increase. In this way, the terms of trade go against developing countries. Moreover, the UDCs have to face deficits in their BOPs. In such situation, the UDCs have to suffer from foreign exchange constraint. The shortage of foreign exchange obstructs the process of economic development in UDCs because due to shortage of foreign exchange they fail to start the process of industrialization.


Economic Growth and Structural Change:


The countries which have grown economically or which are having higher level of real GDP their structure is different from those countries which are backward economically or which are having lower level of real GDP. Moreover, it has also been observed that the goods and services produced by DCs are mostly different from the of UDCs. The production functions of DCs widely differ from those practiced in UDCs. The nature of professions and Jobs also differ in both UDCs and DCs. It means to say that economic development leads to structural changes in the economy. In other words, due to economic growth all the aspects of consumption and production change more or less. It means that due to economic development not only real GDP and per capita real GDP change, but the components of real GDP also change. The agriculture, industry and services sectors are the important sectors of an economy and whenever economic development takes place the proportions of agriculture, industry and services change in GDP.


As in case of US which has a higher per capita GDP, but here the proportion of agri. sector is low while that of services is higher. When real GDP of a country increases in the beginning, the proportion of manufactured sector increases. But as per capita real GDP reaches maximum, the share of manufactured sector starts declining. Now we see in detail how the structure of an economy changes as a result of economic development.


(1) As due to economic development when incomes of the people increase their consumption patterns change. As the persons which are from UDC's their per capita incomes are lower, they are bound to spend major shares of their incomes on basic needs, like food and shelter. They do not have the resources to spend on recreation, entertainment and consumer durables. The countries where the per capita incomes of the people are higher, they not only eat more but also improved one. Here, people enjoy hotling and spend their vacation in remote islands and on mountains. They travel by planes, and dance in clubs as their incomes rise.


(2) Due to economic growth, not only consumption patterns change, but the production phenomenon also changes. An economy functions well when it is in a position to work in better way. Because of improved. techniques and methods of production the efficiency as well as payments of factors increase. The working conditions are improved. The working class gets heating and cooling facilities. Their working hours are determined. They avail medical, education and health care facilities. They all represent the effects of economic development on the structure of the economy.


(3) On account of economic growth when the structure of the economy changes, it also has the effect on International Trade. As the changes take place in international division of labor and specialization. The DCs import labor-intensive goods and export technology intensive goods. It means that economic growth affects international trade through structural changes.


But due to structural changes economy has to face following costs. As an economy grows due to structural changes, the workers shift from agriculture sector to industrial sector. But during such shifting the workers will have to face the transportation costs. There will be distortions in the family life. Again, so many socio-economic, cultural, linguistic and ethnic issues will have to be confronted during mobility. Due to structural changes, the urban life is expanded and rural life comes to an end. As in the year 1800 there lived 10% of European population in cities, but now there reside 75% population in urban centers. In 1995, there lived 27% of the population of UDCs in cities in 1995, while they were 38% in case of middle income group.


Despite this that the nations have to face the cost of structural transformation, but they cannot be avoided of as the economies hardly develop without structural changes, as it is said that economic development and structural changes are equivalent.

Relevant Articles:

Introduction to Developing/Underdeveloped/Less Developed/Third World Countries
Structure of Developing Countries
Common Characteristics of Developing/Third World Countries
Problems/Obstacles in the Way of Economic Growth

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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