Which Factors Determines Economic Growth ?

Which Factors Determines Economic Growth ? –

The process of economic growth is highly complex and is influenced by various factors such as social, political, economic and cultural factors.

According to Professor Nurkse, Economic development has much to do with human endowment, social attitudes, political conditions and historical accidents. Capital is necessary but not a sufficient condition progress.

Factors determining economic growth –

1. Supply of Natural Resources

2. Capital Formation

3. Education and Health

4. Technological Progress

5. Growth of Population

Supply of Natural Resources –

Supply of natural resources plays a very important role in the process of economic development. Economic growth and development also heavily depends on the quality and quantity of available resources to a country. Some of the most important natural resources are land, minerals, oil resources, water, forests and climate. The quality and quantity of available resources to a country puts a limit on the level of output of goods which can be attained.

It should be noted that the availability of resources is not a necessary condition for economic growth.

For example, India is rich in natural resources but it has remained under developed, because the resources have not been fully utilised for productive purposes. This is not the availability of resources but the ability to use the resources in an efficient manager to achieve desired level of economic development.

Supplies of natural resources can be increased by finding new resources within the country or by adopting new technology which can utillise previously useless resources and make them useful.

The use of natural resources and the role they play in economic growth also depends on the type of technology. The relationship between the natural resources and the available technology significantly affects the level of economic growth and development.

Capital Formation –

Capital formation is very important for economic development, without capital accumulation the process of economic growth cannot be accelerated.

The supply of capital goods can only be increased from investment, and investment is possible only if a portion of current income is saved. In this way, saving is essential for the economic growth.

According to Professor Arthur Lewis, The central problem in the theory of economic growth is to understand the process by which a community is converted from being a 5% saver to a 12% saver with all the changes in attitudes, in institutions and in techniques which accompany this conversion.

An another important point is that the savings in itself do not contribute to economic growth. Savings contribute the economic growth only when they are invested and used productively. If the savings are hoarded in the form of gold or metals or precious jewels or used for buying land, they do not increase the supplies of capital goods and so, makes no contribution to the economic growth.

Studies done to examine the relationship between investment and growth in terms of increase in GDP have shown that there exists a strong correlation between the investment and growth even though it is not perfect. Countries which allocates a large part of their GDP to investment achieves high growth rates and vice versa.

Foreign Capital –

When domestic savings are not sufficient for desired accumulation of capital goods, then borrowing from abroad plays an important role in the economic growth.

According to the Professor AJ. Brown, Development demands that people somewhere should refrain from spending a part of their incomes, and allowing a part of the world’s productive resources to be used for accumulation of capital goods.

Foreign capital is also flows in the form of Foreign Direct Investment (FDI) from the multinational companies to the developing countries which accelerates the economic growth. Though the foreign companies send back their profits, their investments increases the rate of capital accumulation in the developing countries which leads to a higher economic growth.

When the foreign capital comes in the form of private investment it also brings technical know-how and managerial ability which are very important for the economic development.

Foreign investment also creates a multiplier effect on output, income and employment in the developing countries.

In the modern world, there are governmental organisations such as World Bank and International Monetary Fund which provides loans at concessional rates to the developing countries for accelerating growth.

A country also needs foreign capital to pay for its imports of capital goods or other raw materials. In the absence of sufficient foreign capital, economic development and the balance of payments will be adversely affected.

Education and Health –

Technological Progress –

Growth of Population –

Population Growth and Demographic Dividend –