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. These factors are as follows:

Economic Factors

1. Natural Resources:

The principal factor affecting the development of an economy is the natural resources. The natural resources include the land area and the quality of the soil, forest wealth, good river system, minerals and oil resources, good 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. However, the availability of rich natural resources are a necessary condition for economic growth but not a sufficient one. In less developed countries, natural resources are unutilized, underutilized or mis utilised. This is one of the reasons of their backwardness. On the other hand countries such as Japan, Singapore etc. are not endowed with abundant natural resources but they are among the developed nations of the world. These countries have shown commitment towards preserving the available resources, putting best efforts to manage the resources, minimizing waste of resources etc.

2. Capital Formation:

Capital formation is another important factor for development of an economy. Capital formation is the process by which a community’s savings are channelised into investments in capital goods such as plant, equipment and machinery that increases nation’s productive capacity and worker’s efficiency thus ensuring a larger flow of goods and services in a country. The process of capital formation implies that a community does not spend whole of its income on goods for current consumption, but saves a part of it and uses it to produce or acquire capital goods that greatly add to productive capacity of the nation.

3. Technological Progress:

Technological progress is a very important factor in determining the rate of economic growth. Technological progress mainly implies the research into the use of new and better methods of production or the improvement of the old methods. Sometimes technical progress results in the availability of natural resources. But generally technological progress results in increase in productivity. In other words, technological progress increases the ability to make a more effective and fruitful use of natural and other resources for increasing production. By the use of improved technology, it is possible to have greater output from the use of given resources or a given output can be obtained by the use of a smaller quantity of resources. The technological progress improves an ability to make a fuller use of the natural resources e.g. with the aid of power – driven farm equipment a marked increase has been brought about in agricultural production. The USA, UK, France, Japan and other advanced industrial nations have all acquired the industrial strength from use of advanced technology. In fact economic development is facilitated with the adoption of new techniques of production.

 

• Entrepreneurship: Entrepreneurship implies an ability to find out new investment opportunities, willingness to take risks and make investment in the new and growing business units. Most of the underdeveloped countries in the world are poor not because there is shortage of capital, weak infrastructure, unskilled labor and deficiency of natural resources, but because of acute deficiency of entrepreneurship. It is, therefore, essential in the under-developed nations to create climate for promoting entrepreneurship by emphasizing education, new researches, and scientific and technological developments.

4. Human Resources Development:

A good quality of population is very important in determining the level of economic growth. So the investment in human capital in the form of educational and medical and such other social schemes is very much desirable. Human resource development increases the knowledge, the skills and the capabilities of the people that increase their productivity.

5. Population Growth:

Labor supply comes from population growth and it provides expanding market for goods and services. Thus, more labor produces larger output which a wider market absorbs. In this process, output, income and employment keep on rising and economic growth improves. But the population growth should be normal. A galloping rise in population retards economic progress. Population growth is desirable only in a under-populated country. It is, however, unwarranted in an overpopulated country like India.

6. Social Overheads:

Another important determinant of economic growth is the provision of social overheads like schools, colleges, technical institutions, medical colleges, hospitals and public health facilities. Such facilities make the working population healthy, efficient and responsible. Such people can well take their country economically forward.

Non-Economic Factors

Non-Economic factors that include socio-economic, cultural, psychological and political factors are also equally significant as are economic factors in economic development. We discuss here some of the essential non-economic factors which determine the economic growth of an economy.

1. Political Factors: 

Political stability and strong administration are essential and helpful in modern economic growth. The stable, strong and efficient government, honest administration, transparent policies and their efficient implementation develop confidence of investors and attracts domestic as well as foreign capital that leads to faster economic development.

2. Social and Psychological Factors:

Social factors include social attitudes, social values and social institutions which change with the expansion of education and transformation of culture from one society to the other. The modern ideology, values, and attitudes bring new discoveries and innovations and consequently to the rise of the new entrepreneurs. The outdated social customs restricts occupational and geographical mobility and thus pose an obstacle to the economic development.

3. Education:

It is now fairly recognized that education is the main vehicle of development. Greater progress has been achieved in those countries, where education is wide spread. Education plays an important role in human resource development, improves labor efficiency and removes mental block to new ideas and knowledge thus contributes to economic development.

4. Desire for Material Betterment:

The desire for material progress is a necessary precondition for economic development. The societies that focus on self-satisfaction, self-denial, faith in fate etc. limit risk and enterprise and thus keep the economy backward.