16. The Economics of Underdevelopment – Business Environment



This chapter takes you through a detailed study of the economics of underdevelopment. We define underdevelopment, distinguish between underdeveloped and developing economies and study the characteristics of underdevelopment. After reading this chapter, you will be able to understand where India stands as an underdeveloped country and how over the years has been finding its way to achieve development.


Enlightened as the last few centuries have been, it has taken three hundred years of scientific and industrial revolution and two devastating world wars for the leaders in most countries to identify the problem of poverty and to believe it practical to make the benefits of civilization available to the human race. There is growing awareness of this problem on account of the constant efforts of the United Nations and its agencies, and the increasing practical interest on the part of the governments in concerned countries. The large measure of success achieved by some of the developing countries in their march towards prosperity and higher standards of living is yet another significant factor in the new race for development.

To identify poverty in the world is to identify underdeveloped countries. Such identification will inevitably lead us to a study of their definition and characteristics so as to make them distinguishable from those countries that are not so underdeveloped. But this is not an easy thing to do. Poverty, like welfare, is a relative concept. So is the underdevelopment of countries. Underdevelopment is defined in relation to advanced countries; it is a definition that obtains only in contrast to developed countries. Yet a working definition of underdeveloped countries is essential for a proper study of the economics of underdevelopment.


The concept of underdevelopment has so far defied a precise, widely applicable and generally acceptable definition. There is a plethora of definitions on underdevelopment and an equal number of objections to these. This is because underdevelopment may have many facets: low income, a low percentage of exploited resources, lack of responsiveness of the social system to economic growth, large unproductive population, low capital formation, a low literacy rate among the people, underdeveloped transport and communication systems, etc. But a country which is judged to be underdeveloped by any one of these facts need not be deemed to be so from any other yardstick. There are some poor countries with huge population like China and India, while others are not so overpopulated. Likewise, there are very many poor countries with very low capital formation while India has a respectable 32 per cent and China 51 per cent.

An underdeveloped country is too complex a phenomenon to be distinctly diagnosed and clearly defined. We can take per capita income as a criterion of underdevelopment, but there are numerous problems involved in the quantitative assessment of the income levels of different nations to determine their relative economic positions. Some of the major problems in such an assessment for different nations are that (1) In order to compute the income of a nation, the different commodities produced by it have to be reduced to a single number, i.e., all outputs must be reduced to an equivalent amount of a single commodity. If for instance, an apple costs twice as much as a pear it is equivalent to two pears. Each commodity or service can thus be converted into equivalent pears and into national income measured in currency units. (2) Sometimes, differences in measurement conventions may create complications in international comparisons of income. The Soviet Union, for instance, preferred to leave out services from its income estimates since Marxist ideology regarded them as “unproductive” whereas the capitalist nations count them in. (3) Distortions in comparison may also arise because of differences in economic organization. Self-driving motorists do not figure in the calculations but chauffeurs do; a system that produced a large share of the former would therefore have its income relatively underestimated.1 But, in spite of these difficulties, these estimates of international comparisons of income are the only generally acceptable source to distinguish the developed nations from the underdeveloped ones.

An oft-quoted report of the United Nations observed: “We have had some difficulty in interpreting the term ‘underdeveloped countries’ We use it to mean countries in which per capita real income is low.” They went on to say: “An underdeveloped nation is simply one whose real per capita income is very low compared to the present day per capita incomes of such nations as Canada, the United States, Great Britain, France and Western Europe generally. Usually, an underdeveloped nation is one regarded as being capable of substantial improvement in its income level.”2 A substantially similar definition of underdeveloped countries was given by Bauer and Yamey: “The term underdeveloped countries usually refer loosely to countries or regions with levels of real income and capital per head of population which are low by the standards of North America, Western Europe and Australasia.”3

Both these definitions emphasize the low per capita income of underdeveloped countries. Though there are other factors that can identify an underdeveloped country, the most serviceable indicator is low per capita real income.

The Indian Planning Commission points out: “An underdeveloped economy is one which is characterized by the coexistence in greater or lesser degree of unutilized or underutilized manpower on the one hand and unexploited resources on the other.” Jacob Viner defines an underdeveloped country as one which “has good potential prospects for using more capital or more labour or more available natural resources or all of these to support its present population on a higher level of living, or, if its per capita income level is already fairly high, to support a larger population on a not lower level of living.”4

If natural resources are abundantly available in these countries and have not been exploited, one of the important reasons is non availability of capital. Therefore, we can define an underdeveloped country as one, which, when compared to a developed country, is not sufficiently endowed with capital in relation to its population and natural resources.”

To sum up, an underdeveloped country can be defined as a region or a country which has good potential prospects for using more labour and capital to exploit and utilize the available resources to support its present population at a higher standard of living, or, if its population is growing, to raise its standard of living faster than the rate of its population growth.


There is an unsettled point of dispute among economists concerning the correctness of designating a poor country “backward” “underdeveloped”, “undeveloped” “less developed”, “low-income country”, etc. Stephen Enke has a very interesting explanation to offer on this point. He observes, “These countries were once simply called “poor” or “backward”. But these terms seemed too accurate for diplomatic use in the mid-twentieth century. Hence for a brief period, they were called “undeveloped”. In time, this adjective in turn gave way to the more euphemistic “underdeveloped”. Still later, the most commonly adopted term came to be “less developed”. The latter adjectives also have more optimistic implications and so are usually preferred by international development agencies.”5 Sometimes, the wrong use of terminologies can lead to misconceptions; for instance, “underdeveloped” can be taken to refer to an economy that is on the stage of near-stagnation while “developing” can be taken to refer to nations that make continued efforts to progress economically. Some refer to these countries as “poor” and “backward”; here again, there could be differences in connotations because the former is more specific as an economic indicator while the latter is negative in character and more general. Likewise “less developed” could mean general low growth whereas the term “low-income countries” is more specific. But all this is a matter of terminology and are often used synonymously as the substance remains the same. The choice of a word depends largely on the sensitivity of the analyst and sensibility of the audience.

However, there are many who consider the term “underdeveloped” a misleading expression to describe a poor country as no country chooses to stagnate of its own volition. If it is trying to develop economically, howsoever small the progress, it is still “developing” nation. We must administer another word of caution here. An “underdeveloped” or a “backward” country in the language of Development Economics simply refers to the economic poverty of a nation and not to its level of culture, civilization or spiritual values. Countries such as Egypt, China and India are striking examples in this respect as they were the cradles of ancient cultures where civilizations flourished thousands of years ago, but they have stagnated in the sphere of economic development for hundreds of years.

Sometimes, “underdevelopment” and “non-industrialisation” are also used synonymously, as they seem to indicate similar conditions. Economic development has been in recent years closely associated with industrialization since invariably the most advanced countries of the world are also highly industrialized. Moreover, it has been increasingly realized that acceleration in the pace of industrialization is the key to economic growth.


One should not lump all developing countries together and take them to be similar in all their characteristics, sharing a uniform pattern of problems. For apart from the fact that there is a great diversity of culture, history and current political situation amongst nations, there is also a difference amongst them in economic status. They suffer from varying degrees of underdevelopment. Often, economists classify underdeveloped countries under three categories: high-income countries, middle-income countries and low-income countries. But as D. S. Nag holds, such classification can hardly be considered scientific. Some enterprising underdeveloped countries have come very close to a less enterprising developed country. The progress of poor countries presents a picture of marked difference in the rate of their economic growth. Some countries have progressed more rapidly than others in recent times.

These differences notwithstanding, there is an underlying uniformity in all underdeveloped countries inasmuch as they are all poor and less developed owing to political, social and historical accidents but have a great yet-to-be-tapped potential for growth. It is not perhaps possible to choose one country as typical of all underdeveloped countries, but one cannot but note some basic characteristics common to many of them. However, in general, there are some characteristics common to the majority of the underdeveloped area. Harvey Leibenstein classified these characteristics into: economic, demographic and health, technological, and cultural-political.6 Under economic characteristics he included, inter alia, a high proportion of the population in agriculture; disguised unemployment; little capital per head; practically zero savings for the mass of the population; high proportion of expenditures on food; low volume of trade per capita; poor credit facilities and poor housing. High fertility and mortality rates, dietary deficiencies, poor health, and inadequate, sanitation are typical demographic features. Low land productivity, crude technology, inefficient communications and transportation are included under the technological characteristics. A high degree of illiteracy, prevalence of child labour, absence of a middle class, traditional values and an inferior status for women are listed under cultural and political characteristics.

But, again, these common features may not be found in the same measure even in these underdeveloped countries nor are these the only features of such countries; yet broadly speaking, they do portray in combination a typical picture of a poor land. Poverty and technological backwardness bind them together and throw up certain common problems of development. Before we analyse the problems of underdevelopment, it will be useful to study the common basic characteristics of underdeveloped countries.


An impressionistic word picture of an underdeveloped country has been skillfully painted by Paul G. Hoffman: “Everyone knows an underdeveloped country when he sees one. It is a country characterized by poverty, with beggars in the cities, and villagers eking out a bare subsistence in the rural areas. It is a country lacking factories of its own, usually with inadequate supplies of power and light.” Such a country normally has poor transport and communication facilities, insufficient government and public utility services. It has insufficient hospitals and inadequate number of institutions of higher learning. A vast majority of its people are uneducated. There is inequality of incomes to an unacceptable degree. With a very poor and unorganized banking system, vendors and farmers in need of loans have to approach moneylenders who charge usurious rates of interest. In the external sector, these countries experience backlash effect inasmuch as their exports usually consist almost entirely of low-priced primary products such as raw materials, ores, fruits or some staple products such as tea, coffee and sugar and an admixture of luxury handicrafts. Due to intense competition among themselves and pressure from the well-organized Western buyers, they undersell their products, often unable even to cover their costs of production. On the other hand, they are made to pay very high prices for the capital goods they buy from the advanced countries. Figure 16.1 illustrates the various characteristics of underdeveloped countries.

It is common knowledge that most underdeveloped countries generally conform to this description though it may not be completely applicable in some cases. Given below is a detailed list of the characteristic features of poor countries:

Low Per Capita Income and Widespread Poverty

The characteristics of an underdeveloped nation are vividly summed up in the trite proposition of R. Nurkse: “A country is poor because it is poor.” Low per capita income is one of the most striking characteristic features of a poor country. Nicholas Kaldor calls it as “misery-go-round”. Successive United Nations surveys of developing countries reveal that these countries suffer from low per capita incomes. While in the 1960s some of them were earning incomes less than $100 per person, advanced countries were enjoying 20 to 30 times more income per person. In 2005, for instance, while the average per capita income of advanced countries was around USD 35,000, the poor countries averaged approximately USD 700.

Low per capita income leads to low consumption of goods and services; low consumption, apart from reducing productive efficiency, limits the size of the market and the level of production which in turn reduces employment, income, consumption, etc., so that the unbroken “vicious circle of poverty” moves on to make another cycle. When per capita income is very low, a greater portion of that income is spent on the bare necessities of life such as food and clothes etc.; this means that even if there are increases in their incomes, people spend them on necessities of convenience, conventional necessities, small comforts, etc. till they reach a stage where they will have exhausted the consumption of basic necessities, which in turn will act as a constraint on savings. This is in direct contrast to what is obtained in advanced countries where additional income can be saved as the majority of the people do not have to spend their additional income on necessities or comforts. Poor savings lead to low investment which in turn restrains the volume of production. This then causes general poverty. Another difficulty is that governments in these poor countries are unable to mobilize resources to break up the vicious cycle of poverty through taxation. The taxable level is extremely low because the income is low; an enhanced direct taxation would reduce the already low consumption while an increased indirect taxation would lead to inflation. Either way, the standard of living of the people is lowered creating a great deal of hardships. Thus, the low income of a country is caused by low incomes and results in low incomes.

But the most disquieting feature of underdevelopment is that the lacuna in the per capita income between developed and underdeveloped nations continues unabated, for both types of countries are experiencing economic growth and that it is fast in one case and very slow in the other. There is economic growth in all countries but the rate of growth varies and it is really in favour of advanced nations. The most alarming feature of this growth is that the gap widens rather than narrows with the passage of time. To illustrate this point, let us assume that the per capita income of a developed country and a poor country are USD1,000 and USD100, respectively. The difference between them is therefore USD 900. Further, we assume the growth rate to be 3 per cent per annum in both countries; then, the per capita income will stand at USD 1,030 and USD 103, respectively at the end of a year. Now, the difference between them has gone up to USD 927 which is greater by USD 27 within a year. To take a concrete example, in 1952–54, the per capita national product in India was estimated to be USD 60 while this was USD 1,010 and USD 1870 for Switzerland and the United States, respectively. In 1965–66, the respective figure for India was only about USD 80 while they were USD 2,250 and USD 3,520 for Switzerland and the United States, respectively. For the year 2008–2009, the per capita gross national income at market prices for India was USD 1,070; it was USD 54,930 and USD 43,740 for Switzerland and USA, respectively.7 It is like a giant and midget undertaking a walking race!

Excessive Dependence on Agriculture

The extent to which a country as a whole devotes its energies to obtain food also indicates its degree of poverty. One of the major characteristics of developing economies is the excessive dependence of their population on agriculture. In the initial phase of development, roughly, between 50 and 60 per cent of the total population of poor countries is engaged in agriculture which contributes about one-half of the GNP of these countries. There are twenty times as many people occupied in agriculture in some backward countries as there are in advanced countries. According to a recent World Bank report, the percentage of population actively engaged in agriculture in China is 47, Pakistan 52 and India 58 while it is just one in the United Kingdom, 4 in the United States and 5 in Japan.8 The main occupation of these rural inhabitants apart from cottage industries and the minor processing of agricultural raw materials is cultivating the land. Actually, about one-fifth of this agricultural population is not employed at all at any time of the year and this surplus labour can easily be withdrawn from agriculture without affecting production. Thus, a large volume of unemployed and underemployed resources, especially of labour, often characterizes underdeveloped areas. Statistically speaking, peasant-cultivators and their families are really the underdeveloped world for they comprise the majority in such a country.



Figure 16.1 The Characteristics of Underdeveloped Economies


The productivity of agricultural lands in poor countries is very low and this is one of the reasons they remain poor. Poor agricultural productivity in these countries is due to: (1) The uncertain system of land tenure. The question of proprietorship, tenure system and the tenancy legislation there reveals a very disquieting feature of not providing enough incentives to the farmers to produce more. (2) The unit of cultivation in these countries is so small that cultivation becomes very uneconomic. “The per capita availability of land in India is only 0.40 hectares as compared to 54.62 hectares in Australia and 42.85 hectares in Canada.”9 Subdivision and fragmentation of holdings owing to the pressure of evergrowing population, absence of alternate employment opportunities and laws of inheritance by which every child is entitled to a piece of land of the family are primarily responsible for the poor agricultural productivity. (3) The method of cultivation in these countries is primitive. On account of the uneconomic size of the land, modern techniques including the use of tractors and chemical fertilizers can be used only to a very limited extent.

Unexploited Natural Resources

The abundant supply of natural resources available in many developing countries which remain unexploited is also responsible for a country remaining poor. For a country to grow economically, her natural resources must be made use of through the employment of labour and capital. But even such resources as they do possess are not tapped fully and utilized owing to the absence of capital and technological knowhow. Even the present developed countries were once underdeveloped till they exploited their natural resources to the fullest extent. Many poor countries possess an abundant supply of arable land which is yet to be brought under the plough.

Apart from the large availability of cultivable wastelands, developing countries also have a considerable amount of mineral resources. If these minerals are properly exploited, it would substantially advance their economic development. To cite a few cases, Africa has a large quantity of copper, bauxite, and tin; petroleum, iron, bauxite and tin are found in Asia; South America has large deposits of petroleum, iron, copper and zinc. It is indeed unfortunate that despite these resources, these countries remain poor owing to their inability to exploit them in the absence of technical knowhow and capital components. At the same time, the mere presence of natural resources does not provide an answer for economic development because, firstly, complementary resources are also necessary, and secondly, there must be a sufficient indigenous or external demand for what is produced. The benefits of science and technology are not fully exploited in these countries and the slow capital formation, which is so essential to supplement these untapped resources, also adds to the problem. Thus, though many of these poor countries possess plenty of natural resources these usually remain unutilized, underutilized or misutilized.

Primary-producing Agricultural Economies

Agriculture constitutes an important sector of the developing countries. If we look into the occupational structure of the population of these countries, we can see that from 60 to 70 per cent of the population is engaged directly or indirectly in the production of food grains and other agricultural goods. Agriculture in these countries is very important since it contributes a large percentage to the national income. Agriculture is again found to produce mainly food stuffs and here too the production is not for the market but only for subsistence. These countries also specialize in the production of a few plantation produce such as tea, coffee and sugar although the plantation industry virtually differs from the agricultural sector in its pattern and organization, because in most of these countries, it is controlled by foreign commercial investors who run them as Western-oriented productive units with an eye on the export market. We are quite familiar with the British tactic of helping Indian agriculture to produce more cotton, jute, etc. to feed industries in England. Another important characteristic feature of the primary producing country is its specialization in some goods. For example, Sri Lanka specializes in tea, Malaysia in rubber, Bangladesh in jute, Mauritius and Cuba in sugar and so on. The dependence of these countriesy’ economies is more or less on any one of these exports. This is often done from the initiative of foreign investors.

Since these countries depend so much on international markets for the functioning of their economies, international fluctuations affect them adversely. Whenever there is a fall in the price of a commodity in the international market, it immediately affects these primary goods producing countries and their economic activities virtually come to a standstill. Moreover, when there is a steep fall in the prices of these primary products in the international market the production of such commodities become uneconomical, adversely affecting income and employment in the country.

Population Explosion

Most of the low-income countries suffer from what is now picturesquely spoken of as “population explosion.” The “invasion of babies” is so great in strength and pace that it positively hampers orderly economic development. The efforts of governments to raise the per capita incomes of the present citizens are often nullified by the “new arrivals”. Increased population not only slows down the pace of economic development but creates enormous problems for planners, governments and society at large. The growing population exerts tremendous pressure on the already overburdened overpopulated land; depresses agricultural productivity; leads to unemployment and underemployment of both the “disguised” and the “open” variety; piles on problems of congestion, sanitation and accommodation on the already overcrowded cities; makes planning an exercise in speculation rather than in the scientific projection and estimation of plan for the future for a definite number of people; stretches the limits of institutions — social, political and educational — to an impossible degree; works havoc on the existing structures of society which almost collapse because of the sheer weight of numbers. The problem of population is not one problem, but a conglomeration of problems rolled into one! No wonder it has become the number one problem of developing countries like China, India and Bangladesh.

The population problem is a byproduct of high birth rates and declining death rates. If the birth rates as well as death rates are correspondingly high, then the problem of population would not arise as it was the case with India up to 1931, the watershed year in the history of Indian population. If the problem has arisen in the less developed countries, it is mainly due to their inability to curtail their birth rates, while they have succeeded to some extent in making use of the latest developments in medical science to cure the diseases which had been hitherto taking a heavy toll of human lives. This has left these countries with a serious problem of overpopulation.

Paradoxical though it may seem, it is a fact that though these countries suffer from absolute increase in the number of people, they do not have a sufficient number of working people. It is described as being the population structure of the underdeveloped countries “bottom heavy”, i.e., the children belonging to the age-group 0 to 15 years constitute the largest percentage of population. The cost of bringing up children in these impoverished countries is very high. Underdeveloped countries suffer a considerable loss of investment—material as well as non-material—in bringing up and educating a number of young people who never reach the prime of life. Even if the amount invested per capita is below the equivalent of the cost of education, clothing and food customary in Western countries, the outlay lost in the aggregate is staggering. The average life expectancy is low in spite of medical advancement and the citizens of these poor countries are not able to contribute to the national wealth in proportion to what has been expended on their persons. The amount of money invested in these children cannot be fully recovered, while an earner in Western countries can easily repay to society the cost of his upbringing, training, etc. since he has had a fair chance of reaching his productive years, and is therefore able to contribute his share for a period of about 40 years or more.

In the case of India, population has reached 1,130 million in 2008 and is projected to be 1,160 million by 2010. In India, a child is born every 1.2 seconds. Everyday, the country adds 7,000 children to our population. Every year, Indians give birth to 25 million children. Making provision for deaths, the net addition to our population is 18 million per annum. In this context, consider this: the total population of Australia is only 20 million. India was the first country in the world in1952 to launch a national programme of family planning “to stabilize population at a level consistent with the requirement of national economy.”10 Obviously, it did not have much impact on population growth. Such a huge population brings in unbearable burden to the country. To maintain such a large population, we need to produce 16,000 tonnes more food and 250 million metres of more cloth, build 1,73,000 more schools, add 4 million more houses, employ 5,00,000 more teachers and create 9 million more jobs. This, of course, is a tall order and not an easy task to execute in the given circumstances.

Too much of population obviously retards economic growth by (i) reducing growth in national income as well as in personal incomes; (ii) lowering per capita availability of land which now stands at an unviable 0.4 acre per capita; (iii) reducing per capita availability of food grains; (iv) increasing dependency on the working population; (v) increasing the backlog of unemployment; (vi) decreasing capital formation; (vii) enhancing the burden on education, housing and public health; (viii) jeopardizing attempts at raising incomes and standard of living; and (ix) creating a number of social and civil problems.

Qualitatively Backward Population

If high population growth increases the impediments in the way of development of the poorer countries, its qualitative deficiency increases existing problems. For accelerated economic growth, increased production is a precondition; production would increase only if the proper coordination and cooperation of all factors are assured; and in this no other factor contributes more than labour. Unfortunately, poor countries have qualitatively backward population. This is why labour as a productive agent is extremely inefficient in these countries. This inefficiency may be due to reasons such as low efficiency, poor mobility of labour, lack of specialization, economic ignorance and lack of entrepreneurship.

A deeper analysis of these factors will bring home the gravity and the enormity of the problems poor countries face in this regard. The low efficiency of labour is due to: (1) the low nutritional standard obtained in these countries, resulting in a deficiency in the per capita diet both in quality and quantity. Workers are drastically undernourished.11 This leads to the poor health of the labourer who becomes susceptible to epidemic diseases. Many ailments arise out of malnutrition. (2) the situation is made worse by the inadequacy of medical facilities available in these countries. Medical facilities are so poor that some of the epidemics have become endemic. There is almost no personal medical care available for most of the population. (3) the prevalence of illiteracy in these countries owing to the inability of people to pay for the education of their children also brings down the efficiency of workers.

Poor mobility of the labour force is not a peculiar problem of less developed countries alone. As Adam Smith wryly remarked: “Of all the luggage, man is the most difficult to transport”. (1) The problem of lack of mobility of labour is aggravated in these countries by several factors obtained in their socio-economic systems. For instance, illiteracy, low efficiency and absence of training all of which make labour unsuitable for any specialized job, are contributory factors for its poor mobility. (2) Social systems, such as the caste system in India, restrain the choice between occupations. These social systems offer emotional and economic security to the workers, minimize risks and reward the performance of duties according to traditional expectations; (3) Besides, the unlettered, tradition-bound labour is always guided by social environment and institutions such as family, caste, etc. Again, tribal and family bonds of these societies are very strong and it is very difficult for people to move away from their kith and kin, etc. (4) Labourers in these countries are also ignorant of alterative forms of employments and of skills they could perhaps be helped to acquire; and (5) The economic incentives and monetary rewards offered in urban-based industries are not tempting enough to offset the enormous pull of social customs, affinities, sense of security, etc. All these factors are responsible for the poor mobility of the labour force which aggravates the problem of unemployment.

Moreover, social factors dominate productive agents such as labour in poor countries. Since the majority is engaged in the production of goods for consumption, the market and its mechanism do not provide any kind of incentive to the people, especially to the farmers. Religious institutions also generally determine the attitudes of these people in deciding the concept of material prosperity. Material welfare is invariably subordinated to spiritual ends and breaking the force of these institutions is indeed a Herculean task, even if it is important to remove such obstacles to development.

The importance of entrepreneurs cannot be overemphasized in the case of a less developed country. The entrepreneurial function constitutes the essential link between the available resources and the existing investment opportunities. The absence of this vital link retards potential demand for productive capital in many of the poor countries. Schumpeter observes in “The Theory of Growth”, “The entrepreneur is the innovating individual who introduces something new into the economy; a method of production not yet tested by experience in the branch of manufacture concerned, a product with which consumers are not yet familiar, a new source of raw materials or of new market hitherto unexploited, and other innovations in the strict sense of the term”. Such innovating individuals who would be ready to undertake business risks and invest their money in untested ventures are, unfortunately, conspicuous by their absence in poor countries. The absence of such individuals who have the dynamism, drive and initiative is responsible for the poor exploitation of natural resources of these countries. Governments cannot discharge successfully the commercial-industrial path-finding functions of the entrepreneurs as underdeveloped countries are being governed by inefficient and corruption ridden governments.

Disguised Unemployment

The problem of disguised unemployment is the characteristic feature of overpopulated peasant economies. The term “disguised unemployment” in simple terms, means “overcrowding”. There is considerable overcrowding in agriculture in the absence of alternative employment opportunities or poor mobility of labour among the farm population. It can also be explained in a number of ways. “Disguised unemployment is a situation in which the withdrawal of certain quantity of labour to other uses does not affect the total production.” In other words, if some labour is transferred from the cultivation of land to other occupations, the total production of land will remain unchanged. In technical terms, “the disguised unemployment is a situation where the marginal productivity of labour over a wide range is zero,” which means that the labour, beyond a certain stage, does not contribute anything to the total production.

The concept of disguised unemployment may be further elaborated by the following example. Suppose there is a family of four persons having one acre of land on which they produce 4 tons of food-grains. When the family adds four more persons to work on the same one-acre farm, the total production of the farm remains 4 tons; all this is assuming that there is no change in the techniques of production. In the second case, the productivity of labour has fallen to 0.5 ton (4/8) from 1 ton (4/4). Thus, the productivity of labour goes on diminishing as a result of more and more people being employed on the same piece of land and may ultimately even go down to zero. The excess labour here is considered to be disguisedly unemployed. The phenomenon of disguised unemployment displays certain distinct characteristics. Firstly, it is confined to those who are self-employed because no employer will employ any labour whose productivity is zero or labour that does not contribute anything to the total production. Secondly, the person who is disguisedly unemployed is not aware that he is unemployed because according to him he is also working in the field along with others. Thirdly, there is no one who is idle in the strict sense of the term and everyone is apparently employed and is working. Fourthly, the disguised unemployment is the characteristic feature of overpopulated peasant economies where we usually do not find visible unemployment. Unemployment and underemployment of peasant economies largely differ from the unemployment and underemployment of industrially advanced countries.

The problem of disguised unemployment in poor peasant economies arises owing to the following factors: (i) The primary occupation of the people in these countries is agriculture in which between 60 and 70 per cent of them are engaged. (ii) There is a secular growth in population of 2 to 3 per cent per annum. Without any corresponding rise in the alternative opportunities of employment, the newly added labour joins the ranks of those already engaged in agriculture. (iii) Social institutions such as the joint family system shape the pattern of such overcrowding on farms. (iv) The absence of technological improvement and poor capital formation in agriculture leave the farmers with the centuries old system of cultivation resulting in low productivity. The only factor supply which increases on land is labour without any corresponding rise in other inputs; with the result the law of diminishing returns operates and productivity falls. With more labour being employed, the marginal productivity of labour diminishes reaching zero and in certain cases it is even negative.

A rough estimate shows that disguised unemployment in these poor countries represent about 20 per cent of the agricultural labour force. The gravity of the problem depends upon the pressure of population. It may not be possible to measure with any degree of accuracy the extent of disguised unemployment in underdeveloped countries.

New members in a family cannot be provided with any alternative employment and have perforce to be employed on the same piece of land sharing the returns with those members who are already engaged in work on it. There is no extra land available to absorb the additional labour force.

The solution to this problem lies in mobilizing voluntary savings. Voluntary savings must come from savers who save voluntarily by curtailing their consumption though it might prove a very difficult proposition in view of the poor capacity to save on account of the low per capita income of the majority of the people in the thickly populated peasant economies. The second possibility is to levy new taxes or to raise the rates on existing taxes for the rich, thus deliberately curtailing the “conspicuous consumption” of the urban commercial class. Even then, it may raise the involuntary savings but voluntary savings may fall thereby bringing the total savings to the original level. There is a third possibility of financing the projects through large scale foreign aid. But, foreign aid apart from being uncertain is also difficult to get in a quantity that is adequate for financing such projects in the underdeveloped countries.

C. N. Vakil and P. R. Bramananda have also brought out a thesis on how to absorb surplus labour. According to them, “Planning in an underdeveloped country, if it is to be effective, must take into account the disguised unemployment of the subsistence sector and make full use of the ‘saving potential.’ The employment opportunities created by the economic development must be to the extent of not only absorbing the additional growth of labour force but also to provide employment to disguised unemployed rural labour.”

Besides the possibilities of absorbing the surplus labour by mobilizing savings through these methods, an additional step is also necessary to make the step more effective. If the labour force which is working on a farm is taken away and provided with alternative employment on other productive projects, then there is a likelihood that the consumption pattern of this labour may rise to a higher level. The increase in the production of “wage good” is essential in order to fill up the leakage that is likely to be caused. This only means that as the food production is not raised much, it is essential to curtail to a considerable extent the consumption level of labour, particularly of the people who are still on the farm. Otherwise, the problem of feeding the new labour force arises and causes difficulties. Another possibility of absorbing the surplus labour is through the redistribution of land. In most of the underdeveloped countries, there is a good deal of concentration of land in the hands of a few farmers. Equitable distribution of lands will go a long way in tackling disguised unemployment. But land reforms require political will. It is particularly difficult to initiate land reforms when there is a strong nexus between land owning class and the political elite.

Prevalence of Unemployment and Underemployment

One of the most disturbing features of an underdeveloped economy is the presence of widespread “chronic” as well as “seasonal” unemployment and underemployment. Unemployment is common to all economies, but there is a basic difference in its nature. In advanced countries, it is generally cyclical while in poor economies it is chronic and permanent. This is so because these economies lack the complementary resources such as capital assets needed for the full and best use of labour power. As these resources cannot be created within a short time in the required measure, the problem cannot be solved as fast as it can be in advanced countries. Poor countries also suffer from rural underemployment in the sense that four persons are seen cultivating a field when, in fact, only three could do the job equally well; one out of the four is redundant; either he remains wholly unemployed himself or by sharing the work he creates conditions in which the other three and himself are underemployed. If one person could be withdrawn from the farm and engaged in some alternative occupation where labour is short, not only will he himself be fully employed but his three erstwhile colleagues will also be fully or more productively employed. Thus under conditions of underemployment, the withdrawal of a certain quantity of manpower for other uses will not appreciably reduce the total output of the sector from which it is drawn.

This state of underemployment is also called “disguised” unemployment as it does not assume the form of an “open” industrial unemployment. This is so because in underdeveloped countries social institutions such as joint and extended family systems shape the pattern of subsistence. The pooling of economic activities and output within a family or an extensive group provides for the economically redundant members of the family or community. Idle labour is, thus, regarded as part of the nature of things and does not receive any serious attention either from the underemployed themselves or their supporters.12 “Disguised” unemployment is not a common characteristic of all the poor countries and as such the presence or absence of it cannot provide a criterion of underdevelopment. But in the densely populated agrarian economies of South Eastern Europe and South Eastern Asia, underemployment is a mass phenomenon and poses a serious problem. A quantitative measurement of this sort of underemployment is difficult because it is “disguised”. According to a United Nations study, the surplus manpower in South East Asia would be from 20 to 25 per cent of the population engaged in agriculture.13 Arthur Lewis more or less concurred with this estimate when he asserted that at least a quarter of the agricultural population in India is surplus to requirements.

Deficiency and Poor Capital Formation

Capital deficiency is an important characteristic of underdeveloped economies. The poor per capita income of such countries is the result of poor stock of capital and poor capital formation. Capital is essential for the exploitation and utilization of natural resources, but in the backward countries because of low incomes and inequalities in the distribution of income and wealth, sufficient capital is not available. The scarcity of capital, however, is a relative problem and not an absolute one because the deficiency of capital is in relation to the capital per head of population. Again, capital here is not simply in terms of money but also in terms of material and capital equipment. Insufficient capital formation is an important reason for economic backwardness of poor nations. Poor capital formation is due to poor income which leads to poor saving. Poor saving is the result of a peasant economy in these countries because a large section of the peasant population lives a life of chronic poverty and since they produce more for consumption than for the market, their marketable surplus is very low and hence the capital formation is also poor. It has been estimated that the savings of the poor countries is from 5 to 8 per cent of the total national income and if the economy of a country is to grow, it requires substantial capital formation to be ploughed back in productive investment. These countries do not possess so large an amount of capital for investment and the capital that is possessed by them is more often invested in light and consumer goods industries rather than in the required heavy industries to build a viable infrastructure.

Paucity of capital is both a cause and an effect of low productivity in developing countries. Most of these countries find it difficult to finance programmes of industrialization because of capital deficiency and poor capital formation. Economic development implies large scale investments not only in industry but also in agriculture, education, transport and communication and so on. Deficiency of capital is also responsible for the poor technique of production. Poor production per head means poor productivity of labour. Labour intensive techniques as advocated by some people do not provide a suitable answer to the problem because the substitution of capital by labour has its own limitations.

Since capital is scarce, the cost of capital, i.e., the rate of interest, is very high. Farmers and investors have to pay a very high price for borrowing capital and when the marginal productivity of capital is lower than the price of borrowing the capital, they lack inducement. The shortage of capital, therefore, leads to a higher rate of interest which in turn fails to bring about a comparatively higher marginal productivity, resulting in a smaller amount of capital formation. A low level of capital, therefore, implies a low level of production, a low level of consumption and poor incomes; these constitute inevitably the characteristic features of underdeveloped countries. Since the income of the majority of the people is low, the demand for goods and services is also very meagre which leads to less investments, poor economic activity and consequently poor economic growth. The efforts of the governments to spend on research and education or imparting of knowledge on modern techniques of production are also severely limited on account of the limited availability of capital. This is partly the reason for the inefficiency of labour in poor countries and limited productivity. All these inhibiting factors which arise out of low capital formation have a cumulative effect and so the poorer countries cannot extricate themselves from the “vicious circle of poverty”.

In the case of India, there has been a substantial improvement in the country's capital formation over the years. Net domestic capital formation which stood at a meagre 5.2 per cent of national income in 1950–51 has grown to 25.9 per cent in 2005–06. However, considering the need for faster growth in the context of a rising population, the country's capital formation is inadequate.

Inadequate Development of Infrastructure

A low-income economy is characterized by poor and inadequate development of infrastructure, which is both a feature and cause of underdevelopment. In stark contrast to highly developed infrastructure including use of sophisticated and state-of-the-art technology of developed counties, developing countries have minimum and yet underdeveloped roads, poorly-served railways, inadequate and undependable power supply, underdeveloped waterways and shipping and poor air connectivity. Likewise, communication facilities are inadequate as compared to their requirement. There is also power deficit in many of the developing countries, including India. Banking and insurance facilities also have not been developed, money markets and bill markets too are in a state of underdevelopment; with the result there are inadequate savings and poor capital formation.

Infrastructure development is fundamental to the development of industries and the overall growth of the economy. The economic history of Europe gives adequate evidence to the fact that infrastructure growth precedes industrial and commercial revolutions. Even though Germany and France were far more developed than England in the eighteenth century, it was the latter that benefitted from the Industrial and Agrarian Revolutions because of the well-developed transport and communication facilities including the steam engine. If we take the example of India, one of the reasons why our country is not developing fast commensurate with our human and natural potential is the poor development of infrastructure, especially electricity generation.

Dependence on Exports

Many underdeveloped countries depend heavily on exports. According to a United Nations survey, in all backward economies taken together, the ratio of exports to the national income appeared to be not more than 20 per cent. But, the proportion of its output which a country exports varies considerably from one country to another, from nearly 100 per cent for Kuwait to about 5 per cent for India.14 Many poor countries have natural advantages of climate or other factor endowments which coupled with the fact that they have been in the past colonies of some Western countries which needed raw materials, enabled them to specialize in exporting certain primary products. To cite a few prominent examples, the main export of Malaysia and Indonesia is rubber; of Egypt, cotton; of Cuba and Mauritius, sugar; of Brazil and Columbia, coffee; of Ceylon, tea; of Ghana, cocoa; of Zambia, copper; of Saudi Arabia and of Kuwait, oil.

Dependence on exports by itself is not harmful to any national economy. But it does damage the economy if the export basket mainly consists of raw materials and is sent to markets over which the exporting countries cannot exercise any control. A marked fall in the price of a major commodity of export may bring about a local recession and slow down the pace of development. Thus, the export trade acts as a damagingly effective transmitter of trade cycles originating in foreign markets. A depression abroad reduces the demand for primary products which affects adversely the industry and employment of the poor country. Over the past five decades, primary products have been subject to voluble fluctuations in price, sometimes as much as 25 per cent. This has an obvious and tragic effect on the budgets of poor countries.

Besides fluctuations in price, primary products also have another disadvantage. Industrialized nations have been developing substitutes and synthetics which render many primary products obsolete. The effect of this process on the exchequer of a poor country can be easily imagined. Without a secure and dependable source of income, no long-term economic plans can be drawn up and the necessary process of diversification and industrialization into less vulnerable areas cannot begin.15

In our own case, jute which was once a major item of export has been substituted by synthetic materials. Indian economy would have suffered a serious setback had the country not diversified its exports.

Moreover, the production system of the country is geared to the requirements of the export sector. Thus, export production assumes an abnormal importance in the production structure of the country. The problem is aggravated further by the fact that this sector in most poor countries is controlled by foreigners. In Zambia, where 95 per cent of the export earnings come from copper, all the mines and processing plants are owned by Western capitalists. These foreign investors are interested mainly in developing and processing primary products for exports and, therefore, foreign capital is invested heavily in the extractive industries as well as in transport and communication systems which act as arteries to the export sector. As a result, economic power is heavily concentrated in their hands to the disadvantage of indigenous enterprise. Besides, the profits they earn in the export industry are not utilized to diversify the industrial structure of the country as it would be done if it were in the hands of indigenous enterprise, but are repatriated as profits to the foreign countries to which the industrialists belong. Thus, the excessive dependence of the poor countries on exports exposes them to the inscrutable fluctuating forces of international trade, makes their economies susceptible to the vagaries of external changes and creates conditions within the industrial structure of the country that are not conducive to an orderly and balanced economic development.

Disparate Development

Disparity in the development of various sectors of the economy, as between different regions, is a characteristic feature that is associated with many poor countries. The underdeveloped or less developed sector inhibits the expansion of the developed sector. This sector being a subsistence economy sector employs antiquated techniques of production, prevents factor mobility and the people engaged in it produce less per capita income than those operating in the more developed sectors. Apart from the economic disadvantage, such lopsided development is likely to create social and political tensions in the country.

Factor Disequilibrium

The poor countries are characterized by a high degree of factor immobility. For instance, labour is almost immobilized due to the influence of social system and absence of trained skills. Often, workers concentrate on a few occupations even when they are capable of earning higher wages in others professions. Besides factor immobility, monopolistic practices, ignorance of existing indigenous and external market possibilities, lack of specialization, rigidity of price and production structure along with an unprogressive social setup create various imperfections resulting in submarginal allocation of resources.

Poor and Incompetent Administration

Developing countries are invariably known for inefficient, incompetent and corrupt administrative machinery. Almost all the developing countries have huge and bloated bureaucracy characterized by nepotism, red-tapes, delayed decision making, passing the buck and worse. Though it is inefficient in administration, it is extremely costly to run it. There are several states in India that pay their staff more than what they receive as revenue and borrow money to pay them! There is a saying that in India we have a Rolls Royce administration in a bullock cart economy! Besides, corruption is all pervading and vitiates the entire atmosphere. It was said that during the British rule in India, people had to bribe the petty bureaucrat to make him do things that law forbade him to do, but after Independence, people have to bribe a government servant to do things law requires him to do! The sum total of all these features of administration is poor economic growth, dilated progress and unethical practices all around.

The following case is based on a study of 12 economies with reference to the efficiency or otherwise of their civil servants.

Case 16.1 Indian Bureaucracy is Worst in Asia

Singapore's civil servants are the most efficient among their Asian peers, a business survey of 12 economies released on Wednesday showed, but they tend to clam up unhelpfully when things go wrong.

India's “suffocating bureaucracy” has been ranked the least efficient by the survey, which said working with the country's civil servants was a “slow and painful” process. “They are a power centre in their own right at both the national and state levels, and are extremely resistant to reform that affects them or the way they go about their duties,” the report said.

The island-state was ranked first for a third time in a poll of 1,274 expatriates working in 12 North and South Asian nations who were asked to rate the efficiency of bureaucrats in those countries.

“During normal times, when the system is not stress-tested, it operates very well,” the Hong Kong-based political and economic risk consultancy said in a 12-page report on Singapore's bureaucracy.

“However, during difficult times—or when mistakes are made that reflect badly on the system—there is a tendency among bureaucrats to circle the wagons in ways that lack transparency and make accountability difficult,” the report added. Thailand, despite four years of on–off street protests and a year of dysfunctional government, was ranked third, after Hong Kong.


Source: “Indian bureaucracy is worst in Asia: Study”, The Economic Times, 4 June, 2009

Underdeveloped and Uncoordinated Fiscal and Monetary Organizations

Fiscal systems in some poor countries do not reveal a balanced approach to taxation. They exhibit, for instance, a high ratio of revenue derived from indirect taxes and customs' duties which are regressive in incidence. Taxes on land constitute a meagre proportion of governments' total revenue while only a myopic minority pays progressive income tax. In India, for instance, agricultural income constitutes a measly 12 per cent whereas it is 33 per cent for incomes from other sectors; again, out of a population of 1,130 million only 35 million are income tax payers. The collection of taxes is inefficient and costly and there is also considerable tax evasion. The money markets also are underdeveloped. There is, too, a dichotomy between the organized and unorganized sectors of the money market. Most of the underdeveloped countries lack an organized, highly liquid call loans market and few of them have a commercial bill market of any significance. Under such conditions, the functions of the central bank, especially its function to manipulate monetary measures to accelerate economic development, are severely limited.

Existence of Inhibitory Social Institutions

India provides a classic example of social institutions as they exist in many of the underdeveloped nations. The system of joint family, social institutions such as caste and religion, the system of child marriages and other such conventions and social ceremonies divide the society into watertight compartments making it difficult to get out of such narrow circles hampering economic growth. The caste system has so much hold on the people that even modern science and technology as accelerators of economic development are not looked upon favourably, for we have built protective ramparts around our traditions and religion.

Religion has been given great amount of importance in these countries and the concept of faith and the spiritual traditions have been held so much sacrosanct that they are placed much above the pedestal of the mundane “material well-being” of man. Blind faith of the poor and illiterate people is exploited by a small group of people. It is also found that religious codes and conventions are given priority over economic issues; and society is encrusted in innumerable layers of inhibitory codes. These codes and conventions persist far beyond the biological and social situations which originally produced them. The coercive spirit of these codes is incompatible with the structure and the pattern of materialistic development. Even though conditions in India seem to be changing for the better with the passage of time due to education and socio-economic changes, there is still a sizeable population given to superstition, fatalistic attitudes and belief in the theory of karma. All these have an adverse impact on the economic growth of the country. Governments in underdeveloped countries are unable to take stern measures to deal with the social structure.

These are then the basic characteristics of an underdeveloped economy. As indicated earlier, this does not mean all underdeveloped economies possess all these distinguishing marks in equal measure.

If most of the economies are poor and underdeveloped, while a few others are developed and better off, there are reasons to explain this phenomenon. Economists explain these factors as obstacles to development or causes of underdevelopment. In the following pages, we will study these factors in some detail. Figure 16.2 shows various causes of underdevelopment.


For the sake of convenience, we may categorize the obstacles to development into the following categories: (i) poverty; (ii) deficiency of capital; (iii) market imperfections; (iv) international forces; (v) foreign rule affecting the development process; (vi) inhibiting socio-cultural institutions; (vii) demonstration effect; (viii) demographic factors; and (ix) corruption.


Countries are economically backward because they have been so in the past; they are likely to continue to be so in the future unless extraordinary steps are taken to arrest the trend. The “vicious circle of poverty” starts its rotative process from the fact exemplified in the now famous proposition of Nurkse “a country is poor because it is poor”. To quote Nurkse, “It implies a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty. Particular instances of such circular constellations are not difficult to imagine. For example, a poor man may not have enough to eat; being underfed, his health may be weak; being physically weak, his working capacity is low, which means that he is poor, which in turn means that he will not have enough to eat; and so on.”16 Figure 16.1 illustrates the vicious circle on the demand side of capital formation and Fig.16.2 illustrates the vicious circle on the supply side of capital formation.



Figure 16.2 The Causes of Underdevelopment


Extending this line of argument further, one may continue to state that because of the low level of income there is little or no inducement for entrepreneurs in the low-income countries to invest in more productive plants. Low aggregate and per capita incomes make markets too small to justify even small modern factories. There is no inducement for the construction of such plants. Income, therefore, remains low, the market remains small, the lack of inducement continues and no progress is made. Again, the inducement to invest may be low because of the small buying power of the people, which is due to their small real income, which again is due to low productivity. The low level of productivity, however, is a result of the small amount of capital used in production, which in its turn may be caused at least partly by the small inducement to invest.

Figures 16.3 and 16.4 show how the super constellation of forces works both on the demand and supply side of the vicious circle to make poor countries remain poor. On the demand side, in Fig.16.3, the circle moves like this: since people of the low-income countries are poor, their buying capacity is low, and as such their demand for goods being small, the market size is limited. Having to cater to a small market, industries cannot invest in more productive capital equipment. Investment is, thus, discouraged. With low incentive to invest, there is low capital formation, resulting in less efficient capital equipment and low productivity per worker. Low productivity causes low income and poverty causes low income and poverty. This way, the vicious circle of poverty is complete on the demand side.



Figure 16.3 Vicious Circle on the Demand Side of Capital Formation


Figure 16.4 illustrates the vicious circle of poverty on the supply side of capital. People in poor countries earn low income per capita that causes low savings as most of what they earn is spent on bare necessities of life. With poor savings, investment is bound to be low. Since the rate of investment is low, the rate of capital formation is low. Poor capital per capita causes low productivity. This causes, in turn, low income per person. This is the reason for poverty in poor countries.

The poignancy of the situation becomes clearer when it is discovered that causative circular reactions of these negative factors are of a cumulative nature. A push downward releases forces which depress the country to a still lower level. The tragic process of levels sliding downwards goes on operating continuously resulting in the further depression of a poor economy. The common saying “nothing succeeds like success” (emanating from the concept of an upward spiral) has its opposite too, “nothing fails like failure”.17

Capital Deficiency

The importance of capital for the development of the country need not be emphasized here. Suffice it to say it is the lifeblood of a country's economy. We shall analyse in the following lines reason for capital being shy in poor countries. A country's population is divided into three sets of people: the poor, the middle income group and the rich classes. There are a larger number of impecunious people in the less developed countries who are generally uneducated and unskilled, having a low per capita income and accustomed to an age-old way of life. The agricultural population which constitutes between 40 and 50 per cent of the total population is poor and subsists on a very low income. They produce for their own consumption with little marketable surplus. These people do not demand much by way of industrial goods. Thus, they do not provide any incentive to industrial development. In this sector, the marginal productivity of labour is very low and the presence of disguised unemployed labour exhibits a case of marginal productivity being near zero or less than zero. They are attached so much to family and social customs that mobility of labour is a rare phenomenon. Such stagnating illiterate and poor people are a significant section of the total population of a poor country. This fact is mainly responsible for the poor economic growth of such a country.



Figure 16.4 Vicious Circle on the Supply Side of Capital Formation


The second category of people called the “middle class” is essentially the product of the Industrial Revolution. In under developed economies, this class constitutes numerically a very small section though it holds a key position in providing managerial skill, technical skill, etc. to the economic growth of the nation. As far as the saving potential of this class is concerned, it is very limited; generally, it may be slightly better than the poor people's. Whatever is saved, they invest independently in small-scale enterprises. The channelizing of even small surpluses to needy industrialist is rendered extremely difficult in a poor country because of the absence of financial agencies and institutions. This class usually does not want to venture into risky business venture but even if it is prepared to take the initiative to start industries, lack of sufficient finance stifles their initiative while the rich are not inclined to take the risk either and provide the necessary finance. Besides, the interest rates on capital are well high prohibitive. Thus, the middle class also is unable to play its role effectively in economic development.

The last category of people in these countries is the microscopic minority of people who are fabulously rich. They are capable of saving a good portion of their incomes which could be invested in the processes leading to economic development. But unfortunately, the trend of their economic behaviour, purchases and activities are detrimental to the interest of industrialization. The total demand from this section of the community is far too small to provoke much economic activity. They do not, in general, encourage domestic production as consumption of foreign articles is considered a hallmark of a higher civilization. A sizeable portion of their expenditures which if channelled into home industries would have provided added incentives to them are diverted to pay for imported luxury articles. Within the country itself, these people spend their incomes on “conspicuous consumption”, such as acquiring modern amenities and appurtenances, building palatial mansions in cities and holiday bungalows in the country, etc., and thereby lock up their precious capital in socially unproductive channels. Rich people also hesitate to invest their capital in native government securities as risk involved is great and the dividends are low. They prefer to invest their savings in foreign countries, especially in industrially advanced ones where the risks are minimal and dividends large.

Therefore, the amounts of savings that can be mobilized from different sections of the community fall far short of requirements. But then, the capital flow for investment in projects does not depend only on the supply of savings but also on the demand for investible funds, and the incentive to invest is also low when there is a deficiency in demand. Even if people desire to save money and invest, the limited size of the domestic market in a low-income country can constitute an obstacle to the application of capital. The market is so small that the goods produced by a firm or industry which has absorbed the domestic savings cannot be sold within the country. Apart from these market deficiencies, there are other bottlenecks such as inadequate means of transport and communications, unexploited power resources, lack of entrepreneurial skill, skilled labour, etc. that hamper economic growth in these poor countries.

Investment, if at all there is any, is concentrated on the industries producing consumer goods as they have greater visibility and bring dividends sooner. Though these industries are also necessary, the primary need is to build an infrastructure of strategic industries on which can be built the edifice of economic growth. But the establishment of large factories such as steel plants is a very costly affair even for the richest people of a poor country. They, therefore, invest their capital in the export trade as it constitutes an important source of foreign exchange earnings and the most profitable avenue of trade. Since there is a regular demand for the products of rich countries which are made from the primary goods or raw materials of the poor nations, there is a smaller amount of risk involved besides providing regular and stable returns for the capital invested.

The above analysis shows that the private sector has a low propensity to save and even if it saves, the channels of investment are other than socially productive. The question that inevitably arises is: “If individuals failed their countries in this matter why did not the governments of these countries take the initiative?” In order to attempt to answer this question, we must divide the poor countries into two categories: (1) those nations which enjoyed political independence; and (2) those countries which were subjugated by foreign rulers.

In the case of politically independent countries, the following factors were responsible for the inability of native governments to put together enough capital to break the backbone of poverty: political instability consumed a substantial part of governments' resources and energies. These countries were mainly engaged in defending their territories either against foreign attacks or internal disorder. Besides, the rulers of these countries themselves in most cases indulged in conspicuous consumption. Pomp and show at the court rather than the prosperity of the common man governed their spending. In such countries, low incomes, unproductive expenditures, backward administration, etc. were all responsible for low capital formation and poor economic growth.

In the case of countries ruled by foreign powers, whatever investment took place did so with a view to acquiring raw materials and markets for the goods produced in the “mother countries”. Foreigners made investments in these poor countries to facilitate the export of raw materials rather than to help develop the country in a balanced manner. The development of railways, ports, canals and commercial crops in India was guided by self-interest on the part of an imperialist government. The same fact holds good in the case of investments in tea plantations in Sri Lanka, rubber plantations in Malaysia, sugar plantations in Indonesia, the tin mines of South-East Asia and the teak and oil industry of Burma. These were the reasons responsible for the low capital formation in these politically subservient countries. They also accounted for the lopsided economic development of these countries in the sense of coexistence of highly developed export-feeding industries and the almost primitive nature of industries that catered to their domestic consumers.

Market Imperfections

The goal of economic growth is to realize the optimum utilization of available resources. This is possible only when market conditions are perfect. Market imperfections such as factor immobility, price rigidity, ignorance of market conditions, a rigid social structure, and lack of specialization have prevented the maximum utilization of their resources in poor countries. Efficiency of production has been reduced to a low degree, and resources have been misdirected.

These days, factors of production move with ease from one place to another, from one occupation to another in search of higher rewards till marginal productivities in all industries are equalized. But in poor countries, a sizeable proportion of the workers are employed in such a way that their marginal productivities are almost zero. Yet, they do not migrate to industries where their returns would be much higher. Capital is not efficiently allocated. Customs, habits and attitudes towards alternative employment prevent the easy movement of labour and capital. Poverty is another deterrent to mobility of labour. Many workers are too poor to bear the costs of movement and re-employment. They are tied to their present jobs by their very inefficiency and poverty. Another obstacle to labour mobility is the lack of knowledge of alternative or better employments elsewhere such as producers are unaware of existing domestic and international market possibilities. Monopolistic practices create another set of imperfections that cause underutilization or wrong and misdirected allocation of resources. In such situations, it is possible for an underdeveloped country to increase its national income through a more efficient allocation of resources without any change in its capital stock, natural resources, etc.

International Forces

Since the Industrial Revolution and the time when many countries came under the political rule of Western powers, the working of international forces, economic as well as non-economic, through the media of trade and capital movements produced “backlash effects” on underdeveloped economies. By the process of cumulating, this resulted in positive gains for the advanced countries and losses for the poor nations.

Poor countries have been described as largely “primary producing” countries specializing in one or more commodities for export, the bulk of the economic activity being concentrated on the promotion of export industries. Though the increase in the export of goods is a welcome phenomenon, in the case of poor countries the concentration of economic activities in promoting export trade goes against their long-term interests. A large amount of unskilled labour is employed in the production of the exported commodity with foreign investment. These countries are suppliers of raw materials to the industrially advanced nations. The instability in the export market due to fluctuations in the world market in regard to demand and price of the commodities create disruptions in their sector of the economy thereby affecting incomes and employment.

But the poor countries were not always vulnerable to cyclical fluctuations. Very often, they earned very good foreign exchange by exporting large quantities of raw materials and other basic primary products such as tea, jute, cotton, oil, rubber, etc. But the fact was that very often the foreign exchange earnings were not utilized for the import of capital goods and technical knowhow but for the import of consumer goods and other luxury items. Thus, the export trade did not encourage the development of home industries but indirectly provided a market for the imported products from developed countries. Moreover, the earnings from international trade are directed not into the investment of capital projects in the home country but reserved or invested in foreign countries where the returns on capital are much higher and more secure than in the poor countries. The great amount of sterling balances in England prior to the independence of India is a glaring example of such misguided foreign trade orientation.

During the Great Depression, these foreign trade-oriented economies became the victims of falling prices, more particularly in raw materials which fell much faster than the industrial goods in the developed countries. And during a period of inflation with prices rising, more investments took place especially in the export trade sector resulting in the rise in the money incomes and creating an “inflationary climate” in the economy. This led to speculative activities hampering investment in the desired channels of economic development. Thus, both during depression and during inflation poor countries were not able to use their expanded export sector as an instrument for economic development. It is, therefore, quite clear that foreign trade instead of becoming an instrument of economic growth actually hampers economic development.

Another important obstacle to economic development is the existence of plantation industries in the underdeveloped countries. A large amount of investment comes from foreign countries for developing plantation industries. However, the expansion of this sector is not associated with the imported techniques of production but with the application of large scale unskilled labour whose productivity is low and remains low without much improvement. The low income of workers due to low productivity creates a vicious circle of poverty which is difficult to break. Even if the import of modern techniques takes place, the cost of training unskilled labour discourages further import of technical knowhow.

Yet another international obstacle is the type of foreign investment that takes place in these countries. This investment is largely directed towards the export trade sector. Much of the expansion in the foreign trade of these underdeveloped countries is primarily due to heavy foreign investment in the export sector; but the benefit of such a heavy investment to the nation's economy is negligible.

This does not mean, however, that foreign investment has not played an important role in promoting the development of underdeveloped countries. Large scale investments in domestic occupations provided employment to a number of people thus expanding the market for domestic as well as imported goods by generating additional income among the people. The entire profits of the foreign firms have not always been repatriated to their home countries but a portion of it was ploughed back for the growth of underdeveloped economies.

Foreign Rule

Foreign rule has been to a large extent responsible for the lack of development of the economies of the poor countries. The South East, Asian, African and Latin American countries were the victims of imperial powers for a long time. Such imperial rule for a considerable period of time allowed the economies of the subjugated countries to stagnate and discouraged their development.

Till the dawn of independence, these politically subservient countries' goals were directed to the well-being of the mother countries. The only consideration of the imperialist powers was the building up of social overhead capital in the colonies in order to boost the export of raw materials. If we study the economic history of India, it is quite clear that the British constructed railroads, built dams, irrigational projects, etc. which were and still are essential forces for the economic growth of the country, but they were guided by the needs of those days to serve their own interest. It has been said that the development of railways in India by the British was to enable them to move military personnel easily throughout the country in order to crush any more of the so-called sepoy mutiny. The attempts of the foreign rulers in improving the status of the people by providing education, medical health, etc. were all aimed at securing a firm hold, both politically and economically, on these underdeveloped economies. By and large, the efforts of the foreign rulers did not uplift stagnant economies.

The economic development of any country requires a deliberate attempt on the part of the people and of the government to generate the required impetus in economic activities in order to accelerate economic growth. A suitable climate must be created for the investment of funds in different industries by providing protection to infant industries and other necessary incentives through fiscal and monetary measures. The development of agriculture and industries in the colonies was neglected by the imperialist government and every programme of development was initiated to accelerate the economic development of the so-called “mother country”. The commercialization of agriculture, it is true, brought considerable prosperity to the farmers in India, but the country was at best an “economic appendage” exporting all the valuable raw materials. The economy was geared to produce a large exportable surplus so as to keep the wheels of the industries in the “mother country” moving, and moving fast. Besides, not one attempt was made by the colonial power to build the native basic industries which alone could provide a sound basis for economic growth.

Inhibiting Socio-cultural Institutions

Apart from these effects, the social and political structures of the underdeveloped countries are also considered to be important obstacles to economic growth and development. The rigid social structure where the system of caste, social discrimination, economic disparity between the urban and rural sectors, feudalism of one kind or another have had degenerating effects on the economic development of the country; the absence of self-rule in the colonies did not provide the people with the initiative to prosper in economic terms. Even in countries that obtained freedom from their alien rulers, age-old socio-cultural institutions hold their sway to the detriment of faster economic growth. People are divided on the basis of castes, community and religion and uniting them together to work for the country's growth involves considerable spending in time and resources which could have been better utilized for nation building. Besides, old attitudes do not change. Religion-based superstition, fatalistic attitudes and people clinging to discredited values such as female foeticide, etc. take a heavy toll on the growth process. Paradoxes tend to coexist causing considerable conflicts of interest. Democracy and caste based politics cause tremendous damage to the orderly evolution of democratic polity essential for economic growth.

The country's rigid and arch-conservative social system has a severe adverse impact on economic growth in innumerable ways. Retrograde social institutions and superstitious beliefs hinder and inhibit economic growth in the following ways: (i) The age-old caste-based society does not help occupational mobility which is necessary for people to enjoy the benefits of division of labour and specialization. People are stratified on the basis of castes which determine the occupations they have to follow. Their innate qualities, capabilities and acumen have very little to do with the occupation they inherit. (ii) The joint-family system, though had several merits in the olden days, has outlived its usefulness in the present individual-based era. Though the system has broken down with greater urbanization, its influence still lingers on especially in our vast rural hinterland and hinders growth. (iii) Poor savings in low-income communities are not entirely due to low incomes and low surpluses from what they produce and earn, but due to people squandering away their resources in too many traditional family, caste and religious rituals. (iv)The traditional caste-based society has been perpetuating and even widening the chasm between the rich and the poor. This has also contributed for the lack of “trickle down” effect that normally arises from economic growth to the poorer sections of the society. By and large, the most affluent sections of the society have shown very little interest in mass development and in most cases have failed to motivate the masses for development.

Apart from these socio-cultural cum religious institutions that act as stumbling blocks to economic development of poor countries, the traditional attitudes of people based on their socio-religious moorings are also not conducive to economic growth. For instance, the theory of karma (as popularly understood) and the fatalistic attitudes of people create in them a mindset that whatever they do to improve their economic status, it is not possible to do so since it is divine wisdom that has made them what they are. Though through the spread of education and the inculcation of scientific knowledge things seem to improve, it seems to have done so to a limited extent.

India as a developing nation suffers from a plethora of economic problems and social factors that have made the country impoverished and have acted as road blocks to the economic progress. An inefficient and corrupt administration, as a major political factor, has also thwarted economic growth.

Demonstration Effect

James S. Dussenbery in 1949 suggested, with impressive statistical evidence from American data, that the ratios of its income consumed and saved respectively by a family was not related to the absolute level of that income but depended rather on the size of the family's income relative to those of other families in the group with which it compared itself, a group which included its entire community. His studies revealed that though there was a three-fold increase in the level of the income of the people between 1890 and 1920, the national saving ratio registered a downward trend. Dussenberry found that the average urban American family in 1917–19 saved 8 per cent of its annual income, but the same family saved virtually nothing in 1941. He found that 75 per cent of American families spent their extra incomes on the consumption of goods to which they were hitherto unaccustomed but which were familiar only to the most affluent section of the American community. He also concluded that the entire saving in the country at that time was effected by the 25 per cent of the people who were not susceptible to the “demonstration effect”. Dussenberry thus tried to explain the demonstration effect by establishing an interrelationship between movements in income, consumer behaviour and savings in a society.

Dussenberry's findings hold good for all countries including underdeveloped ones. Some studies made in backward countries such as India and the Middle East have revealed that there is a substantial increase in the consumption of non-essential goods and services by the people of these countries. People buy in increasing measure goods such as bikes, cars, colour TVs, music systems, perfumes, superior textile, etc. even before improving their dietary contents. Demonstration effect, in effect, challenges the premises of Engel's law of family expenditure which in essence implied that as incomes of the people increased, they first exhausted the consumption of essential goods, then if the increment in income was still maintained, they moved up towards comforts, luxuries and so on. Demonstration effect proved that though there was not any substantial increase in the food consumption standards, the total consumption was increasing because of the increase in the demand for non-essential articles.

This phenomenon has an adverse effect on the savings level of the country as it pushes up the propensity to consume while the propensity to save shows a downward trend. Thus, what would have constituted savings of the community and helped in capital formation for augmenting investments for economic growth gets converted into unnecessary consumption at the present stage of economic development.

People of the backward countries ape those in the advanced countries where the consumption standards are high consequent to the higher levels of income and the easy availability of a variety of goods and services. Such imitation leads to an upward shift in the aggregate consumption function resulting in a fall in savings. It is obvious that when consumption increases without any increase in income, savings fall; when consumption increases in a greater proportion than that of the increase in income, then savings decline. The ever-widening gap between the rich and the poor nations reflected in the extremely divergent standards of living creates the problem of “demonstration effect” for the poor countries. Nowadays, not only have the countries of the world fallen into two distinct groups of the rich and the poor ones but even within individual country there exists extreme disparities in income between the “haves” and the “have nots”. Such inequalities of income, either at internal or international level, are the breeding grounds for the demonstration effect which is not created simply by the people of a poor country imitating the rich of advanced countries alone but also by poor people imitating the superior consumption pattern of the rich within their own country, region and locality.

The individual consumption standard is not a function of the individual income alone; the average and the marginal living standards of the people within the country also contribute to this. Therefore, the increase in the consumption of an individual is the result of three important factors: (i) the increase in income; (ii) the amount of contact with superior consumption goods; and (iii) the consumption standard of the social group in which the consumer lives or the contact he has developed with more advanced ways of living. The rise in the consumption standard on account of these three factors may be described as the international demonstration effect.

International demonstration effect is equally responsible for hindering the growth of capital formation in underdeveloped countries. People in poor countries know the existence and availability of consumer goods that add creature comforts in the developed countries, through mass media. When they learn the existence of such goods, they crave for them and try to purchase them when their incomes increase. It becomes extremely difficult to curtail consumption in low-income countries because measures for doing so are inadequate and ineffective or sometimes undesirable to adopt.

Thus, the awareness of these poor people of the existence of consumer goods from developed nations creates a problem in the sense that the craving for material comforts and luxuries increases with rise in income. Moreover, (i) today the whole world has shrunk into a global village. This has brought about closeness among the countries of the world facilitated by the development of the means of communication explosion and faster transportation; (ii) people in poor countries think that any article from an advanced country is superior to and more durable than the indigenous product. Moreover, the possession and use of foreign goods is considered to be a sign of affluence, status and culture. A widespread imitative use of imported goods from foreign countries takes place first in cities and later on infiltrates into rural areas fuelled by mass media.

It is said that the demonstration effect is a mixed blessing; it has good as well as bad effects. Among the good effects, we can say that it tends to increase the “aspiration to consume” as well as the “propensity to consume”. When a person's imagination is stimulated after seeing a new product in the market, he strives to acquire it through hard work which will enhance the productivity of labour and eventually the volume of savings. This good effect is not only confined to increasing productivity, but it also leads to an improvement in the methods and techniques of production of the low-income countries. Companies tend to diversify and improve the quality of their products to siphon off the excess income generated thanks to the demonstration effect and the aspiration of the people to purchase these commodities.

Among the adverse effects, firstly, there is the reduction in the saving capacity of these poor countries as a consequence of demonstration effect. Secondly, when the demand for goods, which is created on account of the demonstration effect, is unaccompanied by an increase in its production owing to extraneous causes, it will lead to an inflationary spiral in the prices of commodities. Rising prices create complications in the economy, and also hamper a smooth economic growth of these underdeveloped countries. Thirdly, the demonstration effect creates balance of payment difficulties as a result of the purchase of luxury and superfluous commodities by the citizens, which a poor country on the threshold of economic growth can ill-afford. The “foreign trade oriented” economy of an underdeveloped country, where trade is controlled by a few people, impels them to import luxury items from the developed countries, to indulge in conspicuous consumption. Such indulgence on the part of the affluent class of people in underdeveloped countries accentuates difficulties in the balance of payments. Besides, when a developing economy tries to curb the international demonstration effect through exchange control, currency regulations etc., it leads to evasion of laws, contravention and large-scale smuggling. Apart from the conspicuous consumption by individuals, there is also conspicuous consumption on the part of governments to overspend on imported products. It is said that many countries live “beyond” their means, which though paradoxical, is tragically true.

It is argued that if a country is completely isolated, like Japan and Russia in the earlier years of their history, there will be hardly any impact on the living standards of the people of the country owing to a higher standard of living of developed nations elsewhere. However, it must be remembered that isolation alone is incapable of promoting economic development. “Japan was isolated for centuries without experiencing any significant economic advance”. But it must be conceded also that the demonstration effect in underdeveloped countries is still not very effective. In many developing countries like India, there exists a myopic minority which is very rich as contrasted with the rest who have but a subsistence level of consumption. Therefore, the impact of demonstration effect is noticed only in the case of the rich and not among the poor.


One of the most disquieting problems confronting our nation today is the rapid increase of population. Efforts and sacrifices made by us to attain planned economic development are being neutralized by the explosive rate of growth of population in the country.

In earlier chapters, we have studied the size, composition and consequences of high and explosive growth of population in developing countries like India. The main cause of the rapid growth of population is the steady decline in the death rate and the high level of birth rate. The death rate during the decade 1901–1911 was 42.6 per 1000. The same had dwindled to about 19 per thousand during 1961–70 and further to 7.7 in 2004. The birth rate has remained almost constant since the dawn of the twentieth century. It was as high as 48.1 per thousand during 1911–20 and it declined to 41.2 during 1961–70 and further to 23.5 in 2006. It declined further to 23.1 in the year 2007.18

In India, the birth rate has been high because: (a) More than 70 per cent of its population lives in the rural areas. They are poor, unsophisticated, mostly illiterate and superstitious and subject to strong religious prejudices. “Every arrival in the family is considered as a “divine gift” from the point of view of augmenting family income. Further, their utter poverty deprive them of all worldly pleasures and therefore like other “have nots” of the world, being deprived of all other avenues of pleasure owing to material poverty, are still left with sex, the only avenue of self-satisfaction. In a misery-ridden and severely restricted existence, they resort to it, only too eagerly in the hope of some relief from a perpetually joyless existence.” 19 (b) A very low average age at marriage in India, particularly among the females, is another cause of the high birth rate in the country. Early marriages help in increasing the mean duration of fertile union. “The duration of fertile union has been taken to mean the time spent by a woman between the age of her effective marriage and her age at the time of her widowhood or at crossing the age of 50, the maximum fertile age.”20 Hence, there is an increase in the fertility rate. Urbanization in India has not helped in reducing the fertility rate because urban living has not been accompanied by the type of social change which favours a lower birth rate. (c) Lastly, as the UN report on “Family Planning in India” concludes, “Some decline in fertility would undoubtedly take place in the future, even in the absence of a birth control programme, as a result of modernization and changes in the customs and other social factors, particularly a slow but steady rise in average age at marriage. However, the idea is not excluded that this decline in fertility will, at least partly, be counterbalanced by an increase in fecundity and by an increase in the proportion of live births to total births, or a result of improved health conditions. Future decline in adult mortality will also reduce the frequency of widowhood and keep a large proportion of women in marital status; and a weakening taboo against remarriage might tend to raise the present relatively low level of fertility in India.”

Reduction in birth rate would affect the standard of living in a developing country in many ways: (a) Firstly, lowering of birth rate will reduce the total population to a smaller number. This would automatically lead to fewer persons sharing the entire cake of national income and thereby enjoying a bigger slice therein than otherwise. However, it is to be assumed that reduction in fertility will not damage the productive capacity of the economy. The production capacity of the nation depends upon (i) accumulation of capital; (ii) quantity and quality of labour; and (iii) technology and natural resources. Technology and natural resources are independent of the population factor; hence, accumulation of capital and quantity and quality of labour need further analysis.

Reduced fertility will immediately increase the saving potential of the economy. Reduction in birth rate will mean fewer children which in turn will help the country to save more than before. Some resources necessary for maintaining the growing population will be saved as fewer children would mean less expense on education and other social uses. Hence, the government can shift some of the investment resources from social uses to the provision of productive equipment.

The resources that may be released owing to the reduction in the number of births may be either consumed in toto or they may be saved and invested. In the latter case, it will have a positive effect on the growth. Even in the former case, there is likely to be some improvements in economic performances as there is some effect of consumption on productivity in a developing country.21 In any case, “recent investigations suggest that the ‘burden of dependency’ is an important explanation of the high observed differences in saving nations among the countries of the world, in addition to other variables that are normally considered to ‘determine’ savings proportion.”22

As regards the labour force, the decline in the birth rate will not in any way affect the total labour force for the first fifteen years because the persons born today will enter the labour force only after fifteen years and beyond that period the reduction in the fertility rate will affect the total labour force. But whether it will affect the economy depends upon the country under consideration.

The present state of affairs have “en effect” potentiality to flounder our developmental plans unless a deliberate national effort is made to pull down the current alarming rate of growth of population and to peg it down to a certain level. The investment necessary for a stipulated rate of growth should provide not only for the normal rate of expansion, but also for the increase in population (which is called “demographic investment”). Investment which is required to offset the effect of population growth and which enables the growing population to live at the same level of living as the previous generation is called “demographic investment”; and of improvement of equipment anticipated in order to provide a larger average product per worker and higher standard of living. Further investment would be required over and above the “demographic investment”. This is called ‘economic investment'.23 India has to invest over 10 per cent of its gross national product in order to keep her per capita income at a constant level. In other words, in India USD 5,070 million (at 1964 prices)24 worth resources per annum are absorbed by population growth. This gives a general idea of the resources that are required to support such a huge rise in population.

In a country like India, which suffers from the chronic problem of surplus labour and haunting unemployment, the total production may not be affected, at least initially, as a result of reduced birth rate. Secondly, fertility decline brings about a change in the age distribution. In the long-run, the “burden of dependency” is reduced and the proportion of the persons in the age group between 15 and 64 years is substantially increased. This naturally leads to increase in the labour force without any increase in population. Also, declining fertility will enable the female labour to increase their participation in production. Better nutrition, health and education owing to declining fertility will have a positive effect on the quality of labour. Reduced fertility will reduce the claimants of national income. Hence, the individuals will enjoy larger per capita income.

It is often argued that as every developed country has experienced the reduction of fertility to the extent of 50 per cent or more, efforts should be diverted towards accelerating the economic growth to the extent possible and allow the fertility decline to take care of itself. But there are no comparable circumstances between what happened in Europe's early periods and what is happening in the developing world today. Further, it is estimated that underdeveloped countries would need from two to six decades, with the prevalent conditions, to attain the level of industrialization, when an “autonomous” decline in fertility would set in.

“Urbanization” is another factor that helps in fertility reduction. The process of urbanization leads to rational thinking and to lower birth rates. Whatever urbanization we have is not accompanied by the type of social change through a modernistic outlook which favours lower birth rate. Hence, in India the process of urbanization does not seem to be a solution to the urgent problem of population growth. It may contribute to fertility reduction in its own way when necessary social changes are brought about. Moreover, increased cost of living and to offset it women being employed with no one to look after the kids also reduces the incentive to have children in urban areas.

Some social scientists argue that economic development itself acts as a strong contraceptive. Educated and empowered women having a preference for high standard of living prefer to have “a baby Austin rather than a human baby”. A study of developed countries clearly reveals that higher economic growth is associated with families with fewer children. Birth rates in almost all developed countries have gone down so low as to be bringing no addition to population. Europe and Japan experience almost negative birth rates. This has been causing for some time serious concern to the authorities who encourage families to have children through various incentives.

Thus, all these methods have no immediate relevance to a country like India which is threatened with a “baby-boom” and the inadequacies of these methods invariably point towards the adoption of concerted action through the family planning programme as the only viable means of population control. The success of family planning depends upon:

  1. Educative propaganda and spreading of knowledge of family planning;
  2. Acquainting people with family planning methods;
  3. Ready supply of material and service.

    It should be noted that “people would not, however, submit to any and every experiment the authorities care to perform upon them”. However uneducated these people might be, they have their prejudices, beliefs and sentiments. The key to success of family planning lies in the acceptability of the method even if the effective reduction is low. Here, the technologically advanced countries can make one of their greatest contributions.

  4. In addition to the three abovementioned factors, these countries can initiate research in reproductive biology. Also, they should devise some acceptable contraceptives and supply them to the undeveloped countries. In underdeveloped countries, even the science of demography has remained mute owing to the lack of sufficient funds.

Thus in conclusion, we may say that reduction in fertility is accompanied by numerous economic benefits and that a well-managed family planning programme can bestow upon the economy all these benefits.


Corruption is another debilitating disease that eats at the very vitals of the economy and makes severe inroad into the growth process. There is hardly any sector of the economy that is untouched by the cancer of corruption. India has been ranked a lowly 74 (two steps down since last year) among 180 countries of the world on the worldwide Corruption Perceptions Index (CPI), prepared by independent international agency Transparency International.25 Total monetary value of petty corruption nationally in 11 services is estimated at INR 210,680 million.26 Transparency International has revealed that an estimated amount of INR 26,300 million was paid in bribes to the lower judiciary in India during the year 2006. This was revealed in the Global Corruption Report 2007 of Transparency International.27 Even India's poorest are being forced to pay bribes to ensure that their children go to school. This is according to a survey by Transparency International that looked at corruption in India's school education sector, especially with reference to below poverty line (BPL) households in rural India. The report further said that approximately 700,000 households belonging to the lowest income groups in the country had to grease the palms of authorities to avail services concerning school education of their children over the one year period.28

“Corruption tends to erode the growth and pride of our country. The hidden cost of compliance is prohibitive. Frequent amendments to laws and providing unbridled powers without accountability have facilitated the growth of corruption.29 Moreover, the country is unable to proceed with its development work since she is unable to access funds from abroad because of corruption. India lacks sufficient cash reserves to finance its infrastructure development. “Corruption in India has made international financing in infrastructure hard to come by; without it India's infrastructure will remain stuck in the previous era30,” says the report titled “Infrastructure 2007: A Global Perspective” from Ernest and Young.

C. K. Prahalad of the University of Michigan said: “If India could graduate from the current 125th position on the global list of most corrupt nations to the position of the US it will add USD 20 trillion to its GDP. We have to believe in a different India and take corruption as an act of terrorism”.31 He argues that when two million people are dying of hunger in India, we should consider it as much a terrorist act as 100 people dying in a bomb blast. It is a fact that it is not possible for any country to make the best use of its human resources, if it is corrupt. It will only end up accumulating wealth in selected pockets and would not achieve inclusive growth. It is too well known that more than five decades of planned development has benefited only a selected band of people in the country—politicians, bureaucrats and contractors—thanks to all pervading corruption in the country.

If the country has to be free from corruption and pave the way for faster and inclusive growth, it should simplify laws, reduce the use of forms, and introduce robust administration online as it has already been tried in some state administrations, dilute discretionary powers, reward honest officials through salary increments and promotions while penalizing the corrupt with exemplary punishments, facilitate a free compliant mechanism without fear of retribution and transparent promotion and transfer policies. Ethics and principled governance should be inculcated to all those who deal with people in any official capacity. Some earnest attempts in this direction has already been made, as far example, the Right to Information Act, making available government certificates online, some brave acts of whistle blowing and creation of a strong public opinion against corruption by media and NGOs. However, the situation is so grave and ubiquitous that very strong, sincere and passionate efforts need to be taken to enforce laws without fear or fervour and bring in accountability, if we have to save the nation from a precipitous fall and disgrace.

  • Poverty, like welfare, is a relative concept; so is the underdevelopment of countries which is defined in relation to advanced countries and in contrast to developed countries. To the UN, “An underdeveloped nation is simply one whose real per capita income is very low compared to the present day per capita incomes of such nations as Canada, USA, Great Britain, France and Western Europe generally. Usually, an underdeveloped nation is one regarded as being capable of substantial improvement in its income level.”
  • How to designate a poor country “backward” “underdeveloped”, “undeveloped” “less developed”, “low-income country”? Stephen Enke observes, “These countries were once simply called “poor” or “backward”. But these terms seemed too accurate for diplomatic use in the mid-twentieth century. Hence for a brief period, they were called “underdeveloped”. In time, this adjective in turn gave way to the more euphemistic “underdeveloped”. Still later, the most commonly adopted term came to be “less developed”.
  • Low per capita income is the most striking feature of a poor country. The extent to which a country as a whole devotes its energies to obtain food also indicates its degree of poverty. Another feature is the excessive dependence of their population on agriculture. These countries also suffer from poor stock of capital and capital formation which are due to low incomes and inequalities in the distribution of income and wealth. Thus, sufficient capital for exploitation of natural resources is not available, making the exploitation of available natural resources virtually impossible. Disparity in the development of various sectors of the economy, as between different regions, is another feature seen in many poor countries. There is also disguised unemployment in these countries. Many underdeveloped countries depend heavily on exports.
  • There is also the problem of lack of mobility of labour which is aggravated by illiteracy, low efficiency and absence of training, all of which make labour unsuitable for any specialized job and contribute to its poor mobility.
  • India provides a classic example of social institutions as they exist in many of the underdeveloped nations. The system of joint family, social institutions such as caste and religion, the system of child marriages and such conventions and social ceremonies divide the society into watertight compartments making it difficult to get out of such narrow circles hampering economic growth. Religion has been given great importance in these countries often to the detriment of economic growth.
  • The chracterisitics of an underdeveloped economy include low per capita income and widespread poverty, excessive dependence on agriculture, unexploited natural resources, primary-producing agricultural economies, population explosion, qualitatively backward population, disguised unemployment, prevalence of unemployment and underemployment, deficiency and poor capital formation, inadequate development of infrastructure, dependence on exports, disparate development, factor disequilibrium, poor and incompetent administration, underdeveloped and uncoordinated fiscal and monetary organizations and the existence of inhibitory social institutions.
  • Poor countries exhibit several characteristics some of which are significant as contributors to their lack of development by doubling as obstacles. The prominent obstacles to development are: poverty, capital deficiency, market imperfections, international forces, foreign rule, inhibiting socio-cultural institutions, demonstration effect, overpopulation and corruption.
  • Social and political structures of the underdeveloped countries are also considered to be important obstacles. The rigid social structure where the system of caste, social discrimination, economic disparity between the urban and rural sectors, feudalism of one kind or another have had degenerating effects on the economic development of the country.
  • People of the backward countries ape those in the advanced countries where the consumption standards are high consequent to higher levels of income and the easy availability of a variety of goods and services. Such an imitation leads to an upward shift in the aggregate consumption function resulting in a fall in savings. The increase in the consumption of an individual is the result of three important factors: (i) the increase in income; (ii) the amount of contact with superior consumption goods; and (iii) the consumption standard of the social group in which the consumer lives or the contact he has developed with more advanced ways of living. The rise in the consumption standard on account of these three factors may be described as the internal demonstration effect.
backlash effects capital deficiency conspicuous consumption
consumption standards demonstration effect disparate development
factor disequilibrium increase in fecundity inhibitory social institutions
misery ridden existence mobility of labour peasant cultivators
primary producing reduction in birth rate superfluous commodities
technical knowhow techniques of production underutilized manpower
vicious circle of poverty    
  1. Discuss fully the basic characteristics of underdevelopment economies. What are the main obstacles to progress in such economies? Answer the question with special reference to India.
  2. Discuss fully the basic characteristics of underdeveloped economies and indicate the institutional changes which are indispensable for their rapid economic development.
  3. Enumerate the basic characteristic features of backward economies. What measures would you suggest for their rapid economic development?
  4. Write an explanatory note on the basic characteristics of agriculture in underdeveloped areas.
  5. To what extent can the economic backwardness of underdeveloped countries be attributed to the social, political and human factors? Illustrate your answer with special reference to India.
  6. Write short notes on:
    1. Categories of underdeveloped countries.
    2. Demographic characteristics of poor countries.
  7. Discuss the problem of disguised unemployment in the rural sector of the Indian economy. What suggestions have been offered for utilizing the saving potential of the subsistence sector for further expansion of the organized sector?
  8. What is “disguised unemployment”? How does it contain saving potential in the subsistence sector of the economy? What are the practical difficulties in the mobilization of surplus labour for capital formation?
  9. What is meant by vicious circle of poverty? Explain fully the implications of the statement “A country is poor because it is poor.” What measures would you recommend for breaking through this “vicious circle” in an underdeveloped economy like India?
  10. Explain fully the following:
    1. “A country is poor because it is poor.”
    2. “Inducement to invest is limited by the size of the market.”
  11. “To move out of the dead centre of stagnation is absolutely necessary in underdeveloped economies.” Explain.
  12. “The only reason the vicious circles appear vicious is because it is so very difficult to find and marshal stimulants to development that are of sufficient magnitudes.” Discuss.
  13. What are market imperfections? How do they hinder the progress of economic growth?
  14. Write short notes on:
    1. Demonstration effect
    2. Population growth and economic development

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Meier, G. M. and R. E. Baldwin. Economic Development: Theory, History, Policy, New York, N.Y.: John Wiley and Sons, 1957.

Meier, G. M., D. Seers (Eds.). Pioneers in Development, New York, N.Y.: Oxford University Press for the World Bank, 1984.

Meier, Gerald M. and Dudley Seers (eds.). Pioneers in Development, Oxford: World Bank, 1984.

Meier, Gerald M. Biography of a Subject: An Evolution of Development Economics. Oxford and New York: Oxford University Press, 2005.

Myrdal, Gunnar. Asian drama: An Inquiry into the Poverty of Nations. New York, N.Y.: Pantheon, 1968.

Nurkse, Ragnar. Problems of Capital Formation in Underdeveloped Countries. New York: Oxford University Press, 1953.

Perkins, Dwight H., Radelet, Steven, Snodgrass, Donald R., Gillis, Malcolm and Michael Roemer. Economics of Development. Fifth Edition, New York, N.Y.: W. W. Norton, 2001.

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Case 16.2 Billion People Go To Bed Hungry Everyday Worldwide

Jacques Diouf, Director-General, Food and Agriculture Organization (FAO), estimates that the global financial meltdown combined with war, drought, political instability, high food prices and poverty, hunger has in a “devastating combination for the world's most vulnerable” brought the number of the world's hungry to one billion causing a threat to peace and security. Compared to 2008, 100 million more people go to bed hungry in 2009. They consume less than 1,800 calories a day. The 1,800-calorie threshold represented the number of calories most adults need to maintain their body weight, but the figure would vary depending on a person's size and level of physical activity. The number of calories for children varies even more. They need fewer calories because they are smaller, but also need increasing amounts as they get older to ensure they are growing.1 The number of hungry people is actually said to have reached 1.02 billion—up 11 per cent from last year's 915 million, according to FAO which based its estimate on analysis by the US Department of Agriculture.

“The problem with the food crisis and financial crisis is that it has silently permeated throughout the world with the world's bottom billion (in terms of poverty) selectively hit the hardest because they are the most vulnerable” according to Josette Sheeran, Executive Director of World Food Programme (WFP) who said that less than a mere 0.01 per cent of the bailout earmarked for the global financial crisis would suffice to solve the hunger crisis, but the WEP got just a third of the funds needed.2

The crisis is not only humanitarian but also a political issue. There is a definite link between hunger and instability as soaring prices for staples such as rice and maze triggered riots in the developing world. Hungry people rioted in at least 30 countries last year, especially it led to deadly riots in Haiti to Ivory Coast. “A hungry world is a dangerous world.” “Without food, people have only three options: they riot, they emigrate or they die. None of these are acceptable options.”3

FAO said that the growth in the number of hungry people is becoming faster than the world population, with the trend beginning in 2006. Though all regions of the world have registered two digit increases in hunger from last year, almost all the world's undernourished live in developing countries. The vast majority of the world's undernourished people—907million—live in developing countries. Of these, 65 per cent live in India, China, the Democratic Republic of Congo, Bangladesh, Indonesia, Pakistan and Ethiopia. The world's most populous region, Asia and the Pacific, has the largest number of hungry people—642 million, up 10.5 per cent from last year. Sub-Saharan Africa registers 265 million undernourished, an 11.8 per cent increase. Even in the developed world, undernourishment is a growing concern, with 15 million in all and a 15.4 per cent increase, the sharpest rise around the world. “No part of the world is immune and all regions have been affected by the rise of food insecurity.”4 “Progress in these countries with large populations would have an important impact on global hunger reduction”.5

Inadequate intake of food and its low quality cause undernourishment and malnutrition which by weakening the immune system kills children. Experts warn donors to act before “skeletal African children are shown on the television screen at dinnertime” in the West. “For millions of people in developing countries, eating the minimum amount of food every day to live an active and healthy life is a distant dream. The structural problems of hunger, such as the lack of access to land, credit and employment, combined with high food prices remain a dire reality”.6

It is the first time in human history that there are so many hungry people in the world. This should not be happening because much of the world is very rich despite the economic crisis. So what is happening contradicts what historically has happened.7 We have to reduce this number; eradicating hunger in the world is not a big issue since we have the resources and enough food to go on. It's not lack of food. For instance, this year (2009), the world has reaped a record crop. So it is not the lack of food, but it is the lack of access to food by those that are hungry. That is the basic issue. World cereal production in 2009 was good, but the global economic downturn resulted in lower incomes and higher unemployment rates—and therefore reduced access to food. We cannot be indifferent to the world's worsening food insecurity anymore. Food insecurity and hunger are growing problems for the poor of the world in spite of the fact that agricultural production, consumption and trade are likely to increase in developing countries.

An FAO-OECD report argues that the longer term problem is access to food rather than food availability, with poverty reduction and economic growth a big part of the solution. Even though prices have retreated from their mid-2008 highs, they are still “stubbornly high” in some domestic markets, according to FAO. On average, food prices were 24 per cent higher in real terms at the end of 2008 as compared to 2006.8 The hardest hit by high food prices are the poorest, landless and women managed households. Around 40 million people have been impoverished into hunger this year mainly due to higher food prices. Depressed commodity prices will rule the market in a depression set global economy for the next couple of years, though they would be above the average over the previous decade. Crop prices will be 10 per cent to 20 per cent higher over the next 10 years than from 1997 to 2006 and vegetable oils will advance more than 30 per cent. Meat prices won't exceed the average of the previous decade, while dairy prices may be “slightly higher.”9 Continued weaknesses in the general economy will further depress commodity prices over the next 2–3 years. Still, lesser agricultural prices, moderate production and consumption associated with lower incomes will be prevalent, as long as economic recovery begins within 2–3 years.

It is highly unlikely that a goal set by the wealthiest nations in the 1996 World Food Summit to cut hunger in the world in half by 2015 will be met. To achieve that commendable target, it requires a strong political commitment and investment in poor countries of at least USD 30 billion per year for agriculture and social protection of the poor. Some countries almost reached the summit's target, before skyrocketing food prices affected the poorest most. “Even these countries may have suffered setbacks—some of the progress has been cancelled due to high food prices…It will require an enormous and resolute global effort and concrete actions to reduce the number of hungry by 500 million by 2015.”10 “Poor countries must be given the development, economic and policy tools required to boost their agricultural production and productivity. Investment in agriculture must be increased because for the majority of poor countries a healthy agricultural sector is essential to overcome poverty”.11

The world hunger situation may further deteriorate as the financial crisis hits the real economies of more and more countries. Reduced demand in developed countries threatens incomes in developing countries via exports. Remittances, investments and other capital flows including development aid are also at risk.12 Developing economies especially are subject to lasting impacts from liquidity problems even if the crisis itself is short-lived.

On the positive side, some countries in Southeast Asia like Thailand and Vietnam have made good progress towards reduced poverty, while South Asia and Central Asia have suffered setbacks in this direction. In sub-Saharan Africa, more than 30 per cent of the people are perennially hungry, the largest proportion of malnourished people in the total population. The largest segment amongst the hungry was from one single country, the Democratic Republic of Congo where widespread and persistent conflict resulted in the number of undernourished people rising from 11 million to 43 million and their proportion rising from 29 per cent to 76 per cent (in 2003–05). Overall, sub-Saharan Africa has been able to reduce the proportion of people suffering from chronic hunger; it came down from 34 per cent (1995–97) to 30 per cent (2003–2005). Five countries were able to achieve the steepest reductions in the proportion of undernourished; they are Ghana, Congo, Nigeria, Mozambique and Malawi. Amongst them, Ghana is the only country that has reached both the hunger reduction target of the World Food Summit and the Millennium Development Goals. Progress in agricultural production has been mainly responsible for the success. Before the spurt in food prices, Latin America and the Caribbean were also successful in reducing hunger. However, high food prices have increased the number of hungry people in the sub-region to 51 million in 2007.13 Countries in the Near East and North Africa generally experience the lowest levels of undernourishment in the world. But war-like situations both in Iraq and Afghanistan along with high food prices have escalated the numbers from 15 million in 1990–92 to 37 million in 2007.



1 Alessandra Rizzo, “World hunger reaches the 1 billion people mark: Associated Press, 19 June, 2009.

2 Reuters, “World food aid at 20-year low, 1 billion hungry”, The Times of India, 17 September, 2009.

3 “One in Six of World Are Going Hungry”, Morning Star, 21 June, 2009.

4 Alessandra Rizzo, “UN food agency says 1 billion people going hungry each day”, The Boston Globe, 20 June, 2009. Available online: http://www.boston.com/news/world/europe/articles/2009/06/20/un_food_agency_says_1_billion_people_going_hungry_each_day.

5 DK Matai, “Thrift is the Future—Interventions will only Prolong the Credit Crisis”, 11 December, 2008. http://www.intentblog.com/archives/2008/12/thrift_is_the_f.html.

6 Truth About Trade and Technology, “Hunger: Agriculture Has Role to Play”, 01 January, 2009. https://www.truthabouttrade.org/content/view/13063/lang,fr/.

7 Lisa Schlein, “More Than a Billion People Hungry in the World”, 19 June, 2009. http://www.voanews.com/english/2009-06-19-voa22.cfm.

8 Dollars and Sense, “World Hunger Reaches 1 Billion Mark”, 22 June, 2009. http://www.dollarsandsense.org/blog/2009/06/world-hunger-reaches-1-billion-mark.html.

9 Tara Patel and Stuart Wallace, “Commodities to be Restrained for 2–3 Years, OECD Says (Update1)”, 17 June, 2009. http://www.bloomberg.com/apps/news?pid=20601082&sid=aFv5abmm3RrA)

10 Biopact, “FAO: number of hungry people rises to 963 million—economic crisis could compound woes”, 9 December, 2008. http://news.mongabay.com/bioenergy/2008/12/fao-number-of-hungry-people-rises-to.html.

11 Food and Agriculture Organization, “Food security major challenge for world's poorest,” Food and Agriculture Organization, 9 December, 2008. http://www.universalrights.net/people/stories.php?category=live.

12 Food and Agricultural Organization, “Number of hungry people rises to 963 million”, 9 December, 2008. Available at http://www.fao.org/news/story/en/item/8836/.

13 John Vidal, “Food Prices Add 40 Million People to Number of Malnourished in year”, The Guardian, 9 December, 2008. Available at http://www.guardian.co.uk/environment/2008/dec/09/food-unitednations.