The following points highlight the three major issues in development policy. The issues are: 1. Raising the Rate of Investment 2. Balanced Vs. Unbalanced Growth 3. Population Policy.
Issue # 1. Raising the Rate of Investment:
In LDCs like India the lack of capital or the low level of savings and investment is the biggest obstacle to growth. Whereas the rate of capital formation (net) in Japan was never below 30 per cent in the 1980s, in India it has fluctuated around 15 per cent in the same period.
In Germany, Italy, Austria and Finland, it has never fallen below 20%. The high rate of capital formation in these countries has been the most important source of growth. Since great reliance on foreign aid is risky, a country cannot hope to achieve economic growth unless its rate of capital formation is satisfactory.
While commenting on the strategic importance of capital in the growth process, Benjamin Higgins remarked, “Capital accumulation is the very core of economic development. Whether in a predominantly private enterprise system like the American, or in a communicate system like the Chinese, economic development cannot take place without capital accumulation.”
Since LDCs are capital-poor, the most important task facing them in their efforts to achieve economic progress is to raise the rate of investment or capital formation. Moreover, they require large amounts of capital to make use of western technology which they import. There is need to invest both in physical as well in human capital so as to achieve a sharp increase in overall productivity called total factor productivity.
Capital may be generated in the domestic economy or it may be imported from abroad. In the domestic sphere of the two major sources are: the household sector and the business sector. Since the first sector is unable to contribute substantially to the overall savings effort due to low per capita income, the business sector has to shoulder the major part of the burden.
In a typical ‘labour-surplus’ economy, investment may be stepped up as labourers are industrial profits and reinvestment of earnings. Economists like Nurkse and Lewis have suggested the use of unemployed or disguised unemployed labourers in capital formation — building roads, irrigation ditches, dams and the like will go a long way in promoting faster growth and rapid development.
This method has the obvious advantage that it makes use, at small cost, of resources that would otherwise remain idle. But this method is difficult to apply for various reasons.
Another method of raising the investment rate is by taxation, by which method the government takes away a part of the economy’s resources. Thereafter the government makes these resources available to private investors or engages in capital construction projects of its own. But this method has certain disadvantages.
Taxes may sap incentives and enterprise and penalise economic success. In a poor country most people fall outside the tax net due to high exemption limit and low per capita income. Moreover, the rural sector remains largely untaxed for political reasons. Moreover, the overall administrative machinery is not very strong. So, taxes are very difficult to collect.
(iii) Deficit Financing:
The third method of capital accumulation is essentially the same. When the government in an LDC finds it difficult to tax most people, it attempts to increase its investment spending by printing paper money. Inflation is the obvious consequence and becomes the mechanism for capital formation.
Spending goes up, prices rise, the value of money falls in real terms and the physical consumption of the community is curtailed. So, there is some sort of ‘forced savings’ of the community. This method is actually a concealed form of taxation (often called inflation tax) and easy to apply without creating political tensions.
Production is stimulated, prices soar and the economy moves in the upward direction. Orders are placed for new plants and machinery so as to expand capacity. Most economists feel that a little inflation (or a functional rise in the price level) is conducive to the process of growth.
But this method has its obvious shortcomings and weaknesses. A ‘little’ inflation may turn into ‘big’ inflation, with all its serious consequences. It distorts the pattern of capital formation and turns it into speculative channels. And domestic inflation makes a country’s products internationally uncompetitive. Exports fall and the balance of payments problem is aggravated.
It may not have even sufficient foreign exchange to pay for necessary imports of capital goods and strategic industrial materials to sustain its development effort. Thus, it is clear that the danger of a cumulative upward spiral of wages and prices makes inflation an ineffective, as also perilous, method of capital accumulation.
A related point may also be noted in this connection. Capital formation in an LDC may be limited not only by the difficulty of raising its domestic saving rate, but by the need for specific capital goods imports also.
In order to build up its industrial capacity in the early stages, a country may be compelled to import industrial goods from the developed countries of the world. Now in times of inflation, a country lacks the export capacity to pay for necessary import. So, its effective capital formation rate may be sharply lowered.
(iv) Foreign Assistance:
Foreign aid can play a vital role in helping a poor country solve its development problems. The resource needs of LDCs are often couched in terms of a two-gap analysis. Prima facie, we may refer to the savings gap. That basically most LDCs are unable to raise their savings rate sufficiently to permit a high rate of investment that is needed to meet its growth goals is reflected by this gap.
Moreover, an LDC is in dire need to import capital goods and industrial materials to sustain its development effort, but cannot finance such imports from normal export earnings. This is called the trade gap. It is believed that these gaps can be filled by foreign resources.
Foreign aid, in fact, plays a twofold role in this respect.
It permits a country either:
(a) To invest more and thus cover the domestic saving-investment gap, or
(b) To import strategic goods which it is unable to finance by normal export earnings.
To the extent that these constraints really do limit economic development, foreign aid helps promote growth in LDCs.
However, critics like Nobel laureate Milton Friedman comment the following:
“Foreign economic aid far from contributing to raise economic development along democratic long, is likely to retared improvement in the well-being at the masses to strong than the government sector at the expense of the private sector, and to undermine democracy and freedom.”
Issue # 2. Balanced Vs. Unbalanced Growth:
A second problem for an LDC relates to the ‘balance’ that needs to be preserved between the different sectors of the economy, viz., agriculture, industry, services, foreign trade, etc. One cannot have agricultural development first and industrial development next.
In fact, in the past two centuries development of agriculture and that of industry went hand in hand in the UK and the USA. Contrarily, the former USSR achieved a very high rate of growth even by neglecting agriculture and putting constant emphasis on heavy industry. However, irrespective of the strategy to be adopted, one cannot neglect agriculture-industry interdependence in any economy.
Issue # 3. Population Policy:
The third key issue in development policy concerns the means available for coping with the population problem. It is so because high rate of population growth in LDCs has a strong bearing on their future economic prospects.
There are two issues here:
First, we may take the rate of population growth as constant and attempt to cope with its effects.
Second, we may try to alter the rate of increase itself.
The second approach is concerned with the attempt to lower the rate of population growth, through family planning programmes which aim at reducing the birth-rate. Of course, such programmes may take a long time to make their effects felt on the rates of population growth in most LDCs.
This is so because of lack of education, social rigidities, inadequate or unsuitable methods and, above all, absence of social attitudes towards having fewer children (which come primarily as a result of industrialisation and economic affluence, i.e., raising per capita income).
So, there are various difficulties in implementing any massive birth-control programme. And “even those countries most committed to this second approach will probably also find themselves coping with the effects of a too-rapid rate of population increase for many years to come.”