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Economics of Growth and Development

Notes However, for the kind of long-horizon, large-scale developments that are typically of interest in
economic growth, these differences are inessential. Potentially more important is whether this one
measure can suitably proxy for the wide spectrum of different variables of concern in economic
growth. Across countries, per capita income is positively correlated with a broad range of alternative
indicators for economic performance including life expectancy, (the negative of) infant mortality,
and adult literacy.

1.9 Factors Affecting Economic Growth

The process of economic growth is a highly complex phenomenon and is influenced by numerous
and varied factors such as political, social and cultural factors. As such economic analysis can
provide only a partial explanation of this process. To repeat here the remark of Prof. Ragnar Nurkse
in this connection, “Economic development has much to do with human endowments, social attitudes,
political conditions and historical accidents. Capital is a necessary but not a sufficient condition of
progress”. The supply of natural resources, the growth of scientific and technological knowledge-
all these too have a strong bearing on the process of economic growth. We shall briefly notice some
of these factors one by one.
1.9.1 Economic Factors

The following are the important factors which determine the economic growth of an economy.
1. Natural Resources: The principal factor affecting the development of an economy is the natural
resources. Among the natural resources, we generally include the land area and the quality of
the soil, forest wealth, good river system, minerals and oil resources, good and bracing climate,
etc. For economic growth, the existence of natural resources in abundance is essential. A
country deficient in natural resources may not be in a position to develop rapidly. In fact
natural resources are a necessary condition for economic growth but not a sufficient one. Japan
and India are the two contradictory examples. As pointed out by Lewis, “other things being
equal man can make better use of rich resources than they can of poor”. In less developed
countries, natural resources are unutilised, underutilized or misutilised. This is one of the
reasons of their backwardness. There is little reason to expect natural resource development if
people are indifferent to the products or service which such resources can contribute. This is
due to economic backwardness and lack of technological factors. According to Professor Lewis,
“A country which is considered to be poor in resources may be considered very rich in resources
some later time, not merely because unknown resources are discovered, but equally because
new methods are discovered for the known resources”. Japan is one such country which is
deficient in natural resources but it is one of the advanced countries of the world because it has
been able to discover new use for limited resources.

2. Capital Formation: Among several economic factors, capital formation is another important
factor for development of an economy. Capital may be defined as the stock of physical
reproducible factors of production. Capital accumulation and capital formation, both of these
terms carry the same meaning which may be understood simply by the stock of capital. As we
know, capital formation is cumulative and self-feeding and includes three interrelated stages;
a) the existence of real savings and rise in them; b) the existence of credit and financial institutions
to mobilise savings and to divert them in desired channels; and c) to use these savings for
investment in capital goods.
Low prospensity to save in underdeveloped countries is due to low per capita income of the
people, which may not be raised merely by voluntary savings. Hence, the rate of per capita
savings can be increased by emphasizing forced savings which will reduce consumption and
thereby release savings for capital formation. Forced savings can be possible through the
implementation of a proper fiscal policy. In this regard, taxation, deficit financing and public
borrowing are better instruments in the hands of the State to collect savings and accumulate

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