The following points highlight the five main causes of low per capita output. The causes are: 1. Low Rates of Saving and Capital Accumulation 2. Shortage of Skilled and Educated Workers 3. Lagging Technological Know-How 4. High Population Growth and Unemployment 5. Political Instability and Government Policies that Discourage Produc­tion.

Cause # 1. Low Rates of Saving and Capital Accumulation:

The key to economic growth is the accumulation of capital such as roads, structures, bridges, equipment, and vehicles. Capital accumulation depends on saving. LDCs like India are so poor that their saving is very low.

To obtain capital, such countries most often borrow from more industrialised nations. Per capita incomes are also low because workers have little capital equipment to work with Consequently, their productivity is low, and so is their output per capita This prevents them from saving. Such a vicious circle that can often be broken only by assistance from other nations.

Such assistance can come from foreign governments or from direct investment by private (multina­tional) corporations. For example, if a US car manufacturer builds its own plant in India, capital will flow into that nation and contribute to higher incomes.

Cause # 2. Shortage of Skilled and Educated Workers:


Human capital is as important as physical capital for the productivity of workers. In most LDCs, workers are often illiterate and have little training. Low productivity is caused by a lack of both human capital and physical capital.

Cause # 3. Lagging Technological Know-How:

Production methods in LDCs are often old-fashioned. The use of traditional technology is related to a lack of capital and a poorly informed and trained workforce. The problem is particularly acute in agriculture, where the use of more modern cultivation methods can result in enormous productivity gains that would free labour for use in industrial activities and generate an exportable surplus of food.

Cause # 4. High Population Growth and Unemployment:

Medical advances in many poor nations have reduced the death rate while the birth rate remains high This contributes to a rate of population growth that is often as much as 10 times the rate in typical industrialised nations.

The average age of the population tends to be low in poor nations, which contributes to a higher rate of natural unemployment. Much of the unemployment in LDCs is disguised in the sense that the marginal product of many workers is close to zero. Traditional practices provide many people with work of little social value.


For example, many government jobs could be eliminated without making anyone worse off except the workers who lose their salaries. Simi­larly on many farms four workers do the job of three workers? Spreading work out over more workers than necessary disguise the fact that many workers have zero marginal products.

Cause # 5. Political Instability and Government Policies that Discourage Produc­tion:

Most LDCs experiences political instability. Political insurgency and civil war are common in many nations of Africa, Asia and Central and South America. Governments sometimes pursue policies that are helpful in the short run but slow long- run development.

Price-control policies may keep food prices and prices of other basic goods low, but they inevitably destroy farmers’ incentives to produce and innovate. Governments of LDCs often support their own currency with price controls that overvalue the currency relative to the equilibrium value in international markets. This decreases the demand for a nation’s exports and makes its imports appear to be cheap, which discourages local business people and farmers from innovating to increase productivity.