Determinanats Of Economic Development

ECONOMIC ENVIRONMENT The economic environment of various countries mostly and directly influences international business. In fact, international economic environment and global business interact with each other. Global economy has undergone a sea change during the last 50 years. The change was revolutionary after 1990. The results of these changes are the emergence of global markets, establishment of WTO, emergence of global business houses and global competition rather than local competition. The major changes include: • Capital flow rather than trade or product flow across the globe • Establishment of production facilities in various countries. • Technological revolution delinked the relation between the size of production and level of employment • Primary products are delinked from the industrial economies • The macroeconomic factors of individual nations independently do not significantly control the global economic outcomes. • The contest between ‘capitalism’ and ‘communism’ is over. Capitalism succeeded over communism0socialism as a model for the organization of economic activity.

Economic systems: It is an organization of institutions established to satisfy human wants/needs. There are 3 types of economic system, viz., capitalism, communism, and mixed. Economic systems are based on resource allocation in the system. They are market allocation in case of capitalistic, command/central allocation in case of communistic and mixed allocations in case of mixed economic systems. Capitalistic economic systems: Under this system, customer allocates resources. Customers’ choice of product/services decides what to be produced by whom. This economic system provides for economic democracy, thus giving the customer, his choice for products and services. This system emphasizes the philosophy of individualism believing in private ownership of production and distribution facilities. The limitations of this economic system made the government introduce the welfare state concept which includes: workmen’s compensation law, provision for social security, labor legislation for state and housing, agriculture, medical, food, transportation, communication, security, education, water, power supply, etc. The USA, Japan, UK are the examples of the capitalistic economy. Most of the other countries like India, France, Italy and Malaysia have started shifting their economic system towards this economic system. Mixed economic systems: Under this economic system, major factors of production and distribution are owned, managed and controlled by the state. The purpose is to provide the benefits to the public more or less on equity basis. The other factors of mixed economic system are development of strong public sector, agrarian reforms, control over private wealth, regulation of private investment and national self-reliance. This system does not distribute the existing wealth equally among the people, but advocates the ‘egalitarian’ principle. It believes in full employment, suitable rewards for the workers effort. This is called the ‘Fabian socialism’.

There is no pure capitalistic system or communistic economic system. All capitalistic system has a command sector and communistic system have a market sector. The command sector accounts for 32%in USA, 40% in India and 64% in Sweden. The trend that is taking place in the globe today is the move towards privatization i.e., move towards market allocation. The UK, France, India, Holland, for example, have reduced their command sector after 1990. Communistic economic system: In this economic system, private property and property rights to income are abolished. The state owns all the factors of production and distribution. Communism is also called as ‘Marxism’. Lenin set up a communist state in Russia after the Great October Revolution in 1917. Later, the ideology spread to Czechoslovakia, China, Rumania, Yugoslavia, Poland and Sweden. Most of the EastEuropean countries follow the Marxist ideologies. In communistic/command allocation countries, the resource allocation decisions are made by the government planners. The number of automobiles, shoes, shirts, television sets – their size, color, quality, features, etc.., motor cycles, and scooters are determined by the government planners. Under this system, consumers are free to spend their income on what is available. The major limitations of this system include: • It reduces individual freedom of choice due to restrictions on items to be produced. • IT imposes too many restrictions on MNC and FDI. • It fails to get total commitment of people to work and country’s welfare. • It failed to achieve significant economic growth. • It could not achieve equality – the main plank of Marxism. • The rules of this system did not set fine examples for the executors to follow or implement. • It has been obsessed with rights of workers. • It provides less scope for foreign investment and businesses. Communism collapsed in the former USSR. Similarly, communism collapsed in most of the African countries. This is mostly due to the changes towards privatization. The degree of command allocation has been declining even in China. Cuba is an example of the last remaining predominantly communistic country. CASE (communism and McDonald’s): After long negotiations between McDonald’s and Soviet officials, the former entered Russian market in 1990. Moscow city council was a partner of McDonald’s in the Russian Joint Venture. But McDonald’s faced the severe shortages in supply of building materials to build the restaurant as these requirements were not included in the central plan. The company was not provided with sufficient supply of wheat floor, sugar, mustard either due to non-inclusion in the central plan or due to the inability of Soviet manufacturers to deviate from their standard output or due to the strict control that Soviet manufacturers should sell to the Soviet companies. Another problem was that certain products like iceberg, lettuce, pickling cucumbers and the Russet Burbank potatoes used for McDonald’s French fries were not produced or consumed in Russia. McDonald’s educated Soviet farmers and cattle ranchers on how to grow and raise the products it needed.

McDonald’s did not face any problem in respects of employees and customers and advertising. Russian television covered the event; it became almost impossible to accommodate the customers for the first time in January 1990, even though the Moscow’s restaurant was biggest in the world. Customers preferred its food though it was five times costlier than the normal local meal. Despite the crisis in 1998, McDonald’s grew in Russia and had 73 storages by the end of 2001. McDonald’s success in Russia enabled it to enter China and also become successful there.

Countries classified by income: The World Bank categorizes economies into one of the following groups according to the per-capita gross national income in 1999 Low Income Countries US$ 755 or less Lower Middle Income Countries US$ 756 to US$ 2995 Upper Middle Income Countries US$ 2996 to US$9265 Higher Income Countries US$ 9266 or more Basket cases: They are countries which are unattractive for investment and operations due to economic, social, and political problems. Some are low income countries like Rwanda. Some of them are affected by civil wars. Republics of former USSR are the best examples for this. Location of income: Income level is the most valuable factors for determining business in the international arena. However, income alone cannot determine the market as it is not an accurate measure of potential The USA, Canada, Japan and European Economic Area represent the major share in world’s GNP among the high income countries. 77% of the world income is concentrated in the triad, i.e., the USA and Canada, European Union and Japan. For most of the consumer and consumer durable products income level is not the major criteria due to income inelasticity of demand. Location of population: Ten most populated countries in the world account for 57% of world income. Five largest countries account for 37%. Most of the income is concentrated in the high-income and high-population countries. International business can concentrate in these countries. Population is the major consideration for low priced products. In fact, India and China account for two-fifths of the world population. The ten most populous countries account for two-thirds of the world population.

BUSINESS AND ECONOMIC DEVELOPMENT Business helps for identification of people’s needs, wants, production of goods, supply them to the people. Thus, it creates for the conversion of inputs into output and enables for consumption. Ultimately, it leads to economic development. The developing countries concentrate on allocation of scarce resources, increasing production and productivity to meet the growing needs of the population. Further, business also streamlines the

distribution of goods from the manufacturing centres to the customers. International business houses establish their manufacturing centres in various countries and distribute the goods to the customers of a number of countries. Thus, international business contributes to the economic development.

Macroeconomic issues affecting business decisions: Various macroeconomic issues like economic growth, inflation, balance of payments and transition to market economies affect business decisions. •

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Economic growth: the high economic growth rate of the countries lift the quality of life of their citizens in addition to providing an opportunity of expanding marketing share to international business firms. The stagnation or decline in economic growth of countries result in intensive competition among the companies to retain their market share and/or to increase their market shares. The stagnation in global economy in 2001 and 2002 led to aggressive competition among international business firms. Inflation: Balance of payments: Economic transition:

DETERMINANATS OF ECONOMIC DEVELOPMENT: Having examined most of the factors determining economic development, economists have drawn the conclusion that there are some economic and non-economic factors which are necessary to break the vicious circle of poverty and achieve the state of economic development. These factors are called the factors determining economic development. In the words of Cairn cross,” development is not just a matter of having plenty of money, nor behavior, the establishment of law and order. Scrupulousness in business dealings, including dealings with revenue authorities, relationship between the families, familiarity with mechanical gadgets and so on.” In the words of Dr. R. D.Gill,” determinants of economic development are based upon the size of production capacity, organization and character of an economy”. The determinants of economic development can be classified into 2 categories: • Economic determinants of economic development or growth • Non-economic determinants of economic development or growth ECONOMIC DETERMINANTS: = Economic development of a country depends upon the following national and international economic determinants: • Natural Resources: Prof. H. Lewis is of the opinion that natural resources are of prime significance in the context of economic development of a country. “Natural resources determine the limit of economic development of a nation” – Lewis. Countries with more natural resources can develop much easily than others. Thus, most of the developed nations such as UK, USSR, Canada, and others, have plenty of natural resources. However, natural resources can make effective

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contribution to economic development only when these are effectively exploited by the labor or human resources of the concerned country. New and better resources are discovered with the help of scientific and technical inventions. Labor or Human Resources: labor or human resources occupy a significant status among the determinants of economic development. However, this is a double-edged sword. If properly used, human resources accelerate the process of development. If not, these may hamper that very process of development. Both labor and enterprise emanate from human resources. Efficient, industrious and disciplined labor along with able enterprise would certainly be a boon to the process of growth. This may even overcome the shortage of natural resources in the country. That is, useful human capital may compensate for the shortages of natural resources. Thus, Japan does not have iron mines; Sweden faces the acute shortage of minerals and Switzerland is full of hard soil. Yet, owing to the efficient utilization of their human resources, these countries have emerged as one of the leading industrialized nations of the world. Rising population of any country may prove to be either boon or bane for the economic development of that country. a. Rising population may help the process of development in the following ways: i. It offers cheap labor power for the growing agricultural and industrial production of the country. As a result, cost of production would be less to encourage more and more of investment. European merchants made lots of investment in the production of rubber, tea and sugarcane in various nations of the Asian and African continents primarily because of the cheap labor cost in these areas. ii. Rising population raises the aggregate demand to stimulate investment through large size of the market iii. Rising population is generally associated with its changed composition. This leads to diversity of human wants to further stimulate investment. a. Rising population may hamper the process of development in the following ways: i. It would raise the level of consumption, reduce the level of savings and consequently impede the process of capital formation. ii. Rising population may lead to unemployment in the country. iii. It may also cause food problem to adversely affect the level of efficiency. iv. There would be less expenditure per capita on social services such as education, and medical aid. In short, as stated by Prof. A.A. Mount,”in certain less developed countries, abundance of labor power is a source of economic capital. Its appropriate utilization facilitates capital formation. Proper manpower planning is needed to render population compatible with economic growth”.

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Structural change: Structural changes refer to change in the occupational structure of the economy. Economy of the country is generally divided into basic sectors comprising of a. Primary activities, such as agriculture, animal husbandry, forestry, etc. b. Secondary activities, such as industrial production, constructions and the like and c. Tertiary activities, such as trade, banking and commerce. It is essential for economic development that more and more people are engaged in the secondary and tertiary activities. This would stimulate the process of growth. Standard of living would rise and the rate of economic development would improve. According to Prof. Schultz, “with a view to accomplish the objectives of economic development in less developed countries, capital and labor power should be directed towards three basic activities in these countries: one, increasing the production of reproducible goods; two, raising the quality of the people as agents of production; three, raising the technique of production.” Size of the market: size of the market also determines the pace of development. Large size of the market would stimulate production, increase employment and raise income per capita. For expanding the size of the market it is essential that shortcomings of the markets are removed. Thus, monopoly tendencies must be restricted and monetization be encouraged. Also, credit facilities should be extended to the farmers, small traders and entrepreneurs. Capital formation: capital formation is the principal determinant of economic development. Capital formation implies the expenditure of wealth on industrial building, machines, means of transport and the like. In the words of Prof. Nurkse, “the principal aim of economic development is to utilize part of the world-resources on the production of capital goods, so that greater production of consumer goods is possible in the future”. Rate of capital formation is related to three factors: a. Rate of real savings in the country depends upon the will to save as well as the power to save b. For savings, it is essential that more and more banking and institutional credit facilities are available c. Capital formation depends upon the investment of savings Investment depends upon the ability of the entrepreneurs. Both savings and investment are essential elements of capital formation. People may even be forced to save more out of their incomes. This may be done through Deficit Financing and other measures like this. Capital formation may be encouraged through the import of machinery and equipment rather than the consumer goods. Prof. Nurkse is of the opinion that disguised unemployment in the agricultural sector is a potential source of savings if the working population is moved to work in the urban areas. Besides domestic sources, there are several external sources of capital formation as well. Capital may be obtained in two forms: external assistance or foreign aid. It is essential for economic development that nearly 20% of the GNP is channelised towards capital formation. Prof. Lewis has very rightly said that no country is so poor as to be incapable of generating 15-20% rate of

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capital formation. Capital formation is a self propelling force, which once starts it takes care of itself. Capital – Output Ratio: economic development of a country is also influenced by the capital-output ratio. Capital output ratio implies the amount of capital needed to produce one unit of output. Capital-output ratio = K/Y, where K=capital and Y=output. Suppose capital-output ratio is 3:1. It means that to produce a unit of output, three units of capital are needed. This ratio differs at different stages of economic development as well as for different types of industrial establishments. Capital-output ratio is generally low in agriculture and small-scale industries. In the engineering goods, industries on the other hand, it is generally high. This ratio depends upon several factors such as capital efficiency, type of investment, rate of investment as well as the proportion of capital goods in GNP. A low rate of capital-output ratio is conducive to economic development Scientific and technical progress: Scientific and technical progress are equally important for economic development. It has been the principal determinant of growth in Japan and West Germany. Scientific innovations are imperative for both the industrial as well as agricultural development. Economic development of a country cannot be accelerated without technical progress. In the context of economic development, Prof. Schumpeter considers innovations as of foremost importance. Economic development, to a great extent, is limited by the use of innovative techniques by the entrepreneurs of a nation Financial stability: Economic development of a country also depends upon its financial stability. It implies the existence of an efficient and organized banking system in the country. Also, there should be an organized money market and developed capital market to facilitate easy availability of capital. Monetary policies of the nation should be conducive to economic growth. That is, the supply of money should be in assonance with its needs, and low rate of interest should prevail. Economic development generally leads to rise in prices. It is essential that price rise in kept in control. In fact, financial stability is a significant determinant of growth. Able entrepreneurs and organization: according to Prof. Bauer and Yamey, “ability of the entrepreneurs to explore and exploit new opportunities of profit is an important determinant of economic development”. Economic development of a nation depends upon its entrepreneurial ability as well as organizational efficiency. Entrepreneurs set up industrial establishments and are responsible for their efficient management. Schumpeter is of the opinion that able entrepreneurs play an extremely important role for the economic development of a country. It is required for economic development that the number of entrepreneur is increased. Owing to the shortages of entrepreneurial ability in less developed countries, the government itself has to act as the principal entrepreneur of the nation. So, mixed economic system is generally adopted in these countries. A special type of social, political and religious environment is essential for efficient entrepreneurship. Entrepreneurship can just not develop without such an environment. In the words of Prof. Dobb,”the problem of economic development is not mainly the problem of finance; instead, it is a problem of economic organization”.

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Development planning: Development planning plays a crucial role in the context of economic development of less developed countries. Development planning refers to that process in which a central planning authority plans for the achievement of certain targets within the stipulated period of time, given the resource base of the country concerned. The planning programme concerns both the public as well as private sectors of the economy. These programmes ensure proper utilization of the national resources with a view to stimulate the process of growth. Development planning is indeed a crucial determinant of the process of development. International determinants: international determinants such as foreign capital, technical know-how, international trade and investment also play a significant role in the economic development of less developed countries. Almost every less developed country of the world seeks development assistance from the advanced nations. There are several ways the developed countries can help the underdeveloped countries. Importantly, scarcity of capital in less developed countries can be made up through capital from the advanced countries. The advanced nations can offer technical know-how, machinery and other essentials of development to the poor nations. In Arabian countries – Libya, Kuwait, Iran, and other development of the petroleum industry have been facilitated largely by external assistance. Many international institutions such as IBRD and IDA provide financial as well as technical assistance to the less developed countries. Changes in the advanced countries affect the social, political and religious environment in the less developed countries. These countries tend to develop materialistic outlook conducive to their development programmes Skill formation: skill formation is another important determinant of economic development. It implies the flow of efficient and trained labor force in the various sectors of the economy. This requires general as well as technical education, good health of the workers besides their general national character and wisdom. Expenditure incurred on the training and education of workers would help generate skill formation. In the words Prof. Schultz, “development of human capital is the principal objective of our economic system. Emancipation from poverty is not possible without it”

NON-ECONOMIC DETERMINANTS: Process of economic development is a complex process. It is governed by both economic and non-economic determinants. According to Prof. Kaldor, “the study of dynamism of economic development takes us to the analysis of various psychological and social determinants, besides the economic determinants of growth”. Main non-economic determinants of growth are as follows: •

Political determinants: economic development of a country is very much influenced by its political environment. An efficient, honest and welfare oriented administration is a main determinant of national development. Political stability should be ensured. Greater the political stability in a country more the people will have confidence in the government. Long-term plans will be formulated and the

process of development would continue without any hindrance. If there is peace in the country, it will motivate accumulation of private property, there will be more capital formation. Rate of economic growth also depends on government’s policy regarding public sector. It will be accelerated further by the proper development of social over-head capital, roads, railways, canals, electricity, etc. under competent administration. • Social determinants: economic development is closely associated with social changes. Social institutions like caste system, joint family system, laws of inheritance, etc. have their powerful impact on economic development. These institutions should undergo such changes as are likely to promote economic development. As a result of proper institutional changes, supply of capital increases, scientific efficiency and technical know-how develops. Economic development calls for radical change in the outlook of the people. They should have an instant desire for economic growth. Rapid rate of economic development may take place of under-developed countries give up orthodox approach and adopt new and progressive ideas and latest production techniques. • Religious determinants: Among the determinants of economic development, religious outlook of the people plays a significant role. It the people of a country give importance to material development, do not consider economic progress as anti-religious, are not dependent on fate alone, and have full faith in their labor, rapid economic growth of the country is definite. In the words of Prof. Lewis, “a country may either commit economic suicide by adhering to dogmatism or stimulate the process of economic growth by a rational outlook towards their religious faiths”. • Aspiration of development: economic development should not be taken as a self-generating process. In fact, economic development is very much influenced by the aspirations of the people for growth. If the people of a country are fatalists, hold fate responsible for their poverty and make little effort to remove it, then the chances of economic development is not a mechanical process. It is not simply a summation of various elements. It is indeed a human effort. • Freedom from corruption: on account of corruption at all levels, there is tax evasion on a large-scale in under-developed countries. Licenses are issued to undeserving people. It has an adverse effect on industrial development. Prof. Gunnar Mydral is of the view that “freedom from corruption is so very essential for economic development of the less developed countries” • Law and order situation: atmosphere of peace and law and order in the country are the essential pre-requisites for its economic development. It is the primary duty of the government to defend the frontiers against any external aggression and to protect life and public and private property within the country. If there are disputes in the country on issues like language and state boundaries or terrorism is raising its ugly--head, then no economic development is possible. Conclusion: In short economic development is not determined by any single factor. Economic development depends on economic, social, political and religious factors.

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