Economic Development and the Factors of Economic Development 1

Economic growth is the increase in the capacity of an economy to produce goods and services.

Economic growth is measured through gross domestic product (GDP). GDP is the market

value of all the goods and services produced by an economy within a year. The major

components of GDP are Consumption, Investment, Government expenditures, and Net exports.

Economic development is a process of consistent increase in income per capita and living

standards of people of a country. It refers to the improvement in quality of life and living

standards, e.g. education, health, life expectancy and other facilities of life.

We can compare the both concepts as below

Economic Growth Economic Development

Economic Growth is the positive change in Economic development is the quantitative and

the indicators of economy. qualitative change in an economy.

Economic Growth refers to the increment in Economic development refers to the reduction and

amount of goods and services produced by an elimination of poverty, unemployment and inequality

economy. with the context of growing economy.

Economic development means an improvement in

Economic growth means an increase in real the quality of life and living standards, e.g.

national income / national output. measures of literacy, life-expectancy and health care.

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Lecture notes by Dr. Muhammad Atiq ur Rehman, Assistant Professor of Economics, Higher Education
Department Punjab/ Adjunct faculty COMSATS University, Islamabad, Lahore Campus
It refers to an increase over time in a country’s Economic development includes process and policies

real output of goods and services (GNP) or real by which a country improves the social, economic

output per capita income. and political well-being of its people.

Economic growth focuses on production of Economic development focuses on distribution of

goods and services. resources.

Economic growth relates a gradual increase in

exports.

Economic growth is single dimensional in Economic development is multi-dimensional in

nature as it only focuses on income of the nature as it focuses on both income and

people. improvement of living standards of the people.

It is a continuous and long-term process. Economic

It is for short term/short period. It is measured development does not have specific time period to

in certain time frame/period. measure.

Indicators of economic development are:

 Human Development Index (HDI)

Indicators of economic growth are:  Human Poverty Index (HPI)

 GDP  Gini Coefficient

 GNI  Gender Development Index (GDI)

 Per capita income  Balance of trade

So, Economic growth is relatively narrow concept while economic development is a broader

concept.

Prerequisite Factors for Economic Development

Prerequisites mean those pre-conditions and factors which should be available for economic

growth and development. After a deep study of economic growth and development, one thing

is very clear that the process of economic growth and development is influenced by a number

of non-economic and Economic Factors. Economic Factors include capital, labor / Human

Resources, infrastructure and Technology, etc. On the other hand, non-economic factors

include administrative, social, educational and political factors.

According to Prof. Walson:

Economic development is the expansion of production and consumption faster than population

growth because of steadily higher productivity of resources and factors which should be

available combination of resources.

A brief discussion on economic factors is given below.

1. Economic Factors:

The role of economic factors in the development process of a country values a lot. An increase

or decrease in the economic growth rate of the country mainly affected due change in these

factors. The main economic factors are discussed next.

Capital formation or accumulation is another primary factor of economic growth of a country.

As computed capital accumulation means to increase the capital stock of a country. This stock

of capital may use to enhance the growth and development of a country. Sources of capital

formation includes the volume of savings and investment. Savings is the accumulated capital

which is boosted by different polices and saving schemes of the government i.e National saving

scheme. Investment is the use of capital to make more capital by earning profits. Investment

can be portfolio investment (i.e purchasing shares in stock market, bonds or other securities

deals) or foreign direct investment (i.e directly investing to launch production units, mainly by

multinational corporations).

Rate of capital formation is just 5 % in Pakistan, while it should be at least 20 % to make

development. Low capital formation rate is due to low investment, which is 16.6 % of GDP

and low domestic saving which only 9.9 % of GDP.

b. Labor (Human Capital)

By Labor can be called human capital or human resources available in a country. The human

knowledge and skills that contribute to the productive activities. Labor is an important factor

in development. Education and the health are the primary factor for the development of a

country. The analysis of investment in health and education is unified in human capital

approach.

The knowledge base of a nation is added by research and disseminated by teaching through

general education and vocational training. Investment in human capital results in new,

technically improved, products and production process which improve economic efficiency

and it can be as significant as physical capital in economic growth. The developing countries
are facing the shortage of skilled persons such as; scientists, managers, engineers,

administrators etc. Investment should be made to setup research and training institutes to

promote the human capabilities that will lead the progress of less developed countries.

Labor force is 53.82 million of the total population in Pakistan. Annual value of productivity

of labour in Pakistan is just $ 100 and it is $2500 in developed countries. Rate of unemployment

is 5.5 %.

c. Infrastructure (Power, Transport and Communications)

Power resources include coal, gas, oil and electricity etc. Today without use of power resources

economic development is impossible. Energy and power resources play very important role in

the economic development of a country.

A better infrastructure plays a major role in the economic uplift of a country as it promotes

internal and external trade, economic use of natural resources, production, mobility of skilled

labor-force, diversification of markets, provision of fuel, reduction in employment, increase in

agricultural and industrial production etc.

The transport and communication improvements in Central Africa and Asia has been improved

due to increased investment in roads, railways and seaports. Part of this investment has come

from Chinese companies who have a vested interest in transporting raw materials from Africa

to China.

At present total length of roads is 2,59,618 kilometers and total number of registered motor

vehicles till March 2010 is 67,57,315. More than 91.4 million population is using mobile

phones. The telecommunication sector has attracted an investment of $ 716 million over the

last few years.

Technology plays pivotal role in the process of economic development of a country.

Technological progress regarded as one of the key factors of economic growth of developing

countries. Productivity and efficiency of labor depends upon existing capital, technology and

other factors of production.

In modem economic growth the five factors, mentioned by Kuznet,

 a scientific discovery

 an invention

 an innovation

 an improvement

 and the spread of invention, have helped in the development of technology.

Due to shortage of technology in developing countries, LDC’s must import it to accelerate their

production capacity in the short run. LDC’s must develop their technical skills while importing

modern technology from developed countries. However, LDC’s should be very careful while

adopting modern technology in his industrial and agricultural sector.

e. Natural Resources

Natural resources are the material source of wealth, such as mineral deposits, climate,

forest, fisheries and fresh water that occur in a natural state and have economic value.

Accordingly, natural resources are available on the surface, below the level of earth, in the air

and in ocean. If a country has more natural resources then there is more possibility of

development. Availability of natural resources is a necessary but not a sufficient condition for

economic growth & development. More natural resources mean more possibility of increase

in national income.
 Natural resources are available in the country but these are not utilized optimally.

Contribution of natural resources to GDP is just 0.8 %. Forest area of Pakistan is 4.21 % of its

total area. Land area for wild life is 11.3 %.

The following non-economic factors are also mentioned briefly.

2. Administrative Factors

Public administration is concerned with the systematic study and improvement of government

capacity and practice in forming policies, making decisions, implementing

Basic Functions of Administration are

 Planning.

 Organization.

 Direction.

 Control.

3. Social factors

The social factors like social inclusion, women rights, and social welfare benefits that are

positively correlated with the economic growth and development. Similarly, the expected years

of schooling and the life expectancy are also affected by the social factors that contribute to the

economic development.
Cast system: People in developing countries have strict attachment with the occupations of

their castes. Adoption of jobs only with accordance of caste is the status symbol.

Social Behaviour: Social attitude of backward population in developing countries is not

desirable. People give preference to fortune instead to work-hard. They have no mind to

develop and to improve their living standard.

Control the Customs and Traditions: In developing countries like Pakistan, people have to

spend a large amount of their income to maintain the customs and traditions. A huge proportion

of income is used at the time of death, birth, marriages and other circumstance.

An underdeveloped social setup keeps countries underdeveloped.

4. Education and Training

The better education and training facilities can make people more productive and useful. So,

better education and training facilities result in economic development of a country. According

to the new growth theory by David Romer (1990s), the better education and skills can

constantly raise economic growth and productivity in the logrun. So, better education and

training facilities are pivotal for the economic development of a country.

Education and training situation in Pakistan is at its low stage. There is shortage of training

institutions and literacy rate is only 57 %. The government has decided to raise the public-

private investment in the educational sector from the present level of 2.0 % of GDP.
 5. Political Factors

Political stability and the protection of private property was ranked as the most important

factors to establish the confidence of investors and incentivize investors /firms to invest in the

developing economies through stock market equity or through FDI. Any sign of instability

increases the economic and personal risk of investing in developing countries. Many less

developed countries including Pakistan are facing political instability problem which affects

economy in many ways.

The political stability includes the following factors.

Stability in Govt. Policies

Stable government and stability in the policies of government is also a major factor of economic

progress. Stability causes more investment and rapid growth and development of an economy.

In most of the developing countries like Pakistan, political situation is not satisfactory.

Law and Order Conditions

Better implementation of law and order is compulsory for the development of economy.

Pakistan is a strange country where the Chief Justice (Iftikhar Muhammad Chohdery) was

crying for justice and Chief of Army Staff (General Pervaiz Musharf) was depending on

security.

Democratic Government

Democratic government is another requirement of economic development. In most of the

developing countries there is absence of election but selection exists at political stages.

Efficient Bureaucracy

To enhance the process of economic development an efficient bureaucracy is needed. Public

servants and administrators should do their jobs honestly and efficiently. Without efficient and

effective bureaucracy economic development is impossible.

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Students Activity:

I advise the students to consult economic Survey of Pakistan to enter the latest figures about

GDP, GDP per capita, literacy, population, education and health expenditures etc on this page.

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