Determinants of Development

The enduring issue of why some countries are rich while others remain poor has long been the subject of great interest among scholars. New research on the determinants of development, though, appears to better identify the driving force behind development by taking an incisive look at the three traditional economic explanations for these cross-country disparities – economic policy, political institutions and geography.

Based on the findings, the researchers conclude that the primary determinant of developmental success may be the strength of institutions.

Economic Policy, Political Institutions and Geography

The research first laid out the traditional arguments for the importance of policy, institutions and geography as determinants of development.

All three are pretty straightforward: economic policy, such as a nation’s savings rate and the strength of its currency, clearly dictate, to some extent, the economic vitality of a country; geographic factors can also matter, for instance, a landlocked country like Chad – without access to the ocean or major rivers – is at a natural disadvantage because trade becomes a logistical nuisance; institutions — like the rule of law to maintain public safety, ensure property rights, and mitigate corruption — still were found to have a greater impact.

However, the researchers’ revelation was not just that policy and geography took a back seat in importance to the role of institutions in development, but that they were, independently, hardly influential at all. Research sampling 72 countries found that while poor policies may hurt growth rates temporarily, they did not have the sort of impact on long-term income levels that many had previously suspected.

Promotion of Stable Institutions

The relationship between geography and development was a bit more complicated. Although nations with poor geography and stable institutions still do well, the authors acknowledge the role geography often plays in promoting stable institutions historically.

Specifically, nations colonized by Europe in unfavorable regions (in regard to disease and other conditions) were typically turned into rentier states and dealt poorer institutions. Conversely, regions which could be settled were afforded European-mainland style institutions: democracy, property rights and the rule of law.

Determinants of Development

So, Europe’s unique colonial history shows that geography did affect the type of institutions implemented in various countries, and it is these institutions that explain differences in development.

In a sense, the revelation that among the determinants of development, growth is primarily a function of institutions should be somewhat heartening, as institutions can be reformed. Therefore, instead of nations across Sub-Saharan Africa and parts of Central America being condemned to second-class status economically, focus can shift to the ways their poor institutions can be altered to better catalyze development.

Although researchers failed to explain the means of doing so directly, recognizing that building robust institutions is the best path toward progress is an important insight.

– Brendan Wade

The following are various factors which determine economic growth and development:

(i) Supply of Natural Resources: The quantity and quality of natural resources play a vital role in the economic development of a country. Important natural resources are land, minerals and oil resources, water, forests, climate, etc. The quality of natural resources available in a country puts a limit on the level of output of goods which can be attained.

Without a minimum of natural resources there is not much hope for economic development. It should, however, be noted that resource availability is not a necessary condition for economic growth. For instance, India, though rich in natural resources, has re­mained poor and under-developed.

This is because resources have not been fully utilised for productive purposes.

(ii) Capital Formation: Labour is combined with capital to produce goods and services. Workers need machines, tools and factories to work. In fact the use of capital makes workers more productive. Setting up of more factories equipped with machines and tools which raise the productive capacity of the economy.

Therefore, in the opinion of many economists, capital formation is the very core of economic development. Whatever the type of economic system, without capital accumulation the process of economic growth cannot be accelerated.

(iii) Technological Progress and Economic Growth: Another important factor in economic growth is progress in technology, Use of advanced techniques in production or progress in technology brings about a significant increase in per capita output. Technological advance refers to the discovery of new and better ways of doing things or an improvement in the old ways.

(iv) The Growth of Population: The growth of population is another factor which determines the rate of economic growth. The growing population increases the level of output by increasing the number of working population or labour force provided all are absorbed in productive employment.

So, development is measured in terms of these factors:

1. Per capita income: national income/ total population (including children) of the country. It shows the per head availability of goods and services, or the average income earned by a person.
2. Life expectancy: the average life period a normal person is expected to live. It mainly indicates the level of medical facilities available to the people and the general health level.
3. Literacy rate: the proportion of the population aged above a particular age (in India it is 7 year +) that can read and write with understanding.
4. Skilled population: how much of the available work force includes skilled workers, and unskilled workers.
5. Employment rate: the percentage of the working population (able and willing to do work) who are actually employed.
6. Infant mortality rate (IMR): the mortality within 1 year of age per 1000 live births in a year.

These are the main indications of economic development, but there can be many more indicating the quality of life enjoyed by the people of a country

As a country develops economically, the income increases, per capita income should also increase and people generally are able to live with better living standards. However, these factors too have their own limitations.