Here we shall discuss those factors
and problems/obstacles in the way of economic growth. They are as:
(1) Vicious Circle of
According to Prof. Nurske:
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
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.
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.
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
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
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
(5) Backward Human
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
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
(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.