The first and foremost economic explanation of underdevelopment or the existence of mass unemployment and poverty of today’s developing countries is that in them there has come about a serious imbalance between population and productive resources, especially the stock of capital. This imbalance between resources and population has manifested itself not only in low per capita income and poverty but also in the existence of huge open unemployment, disguised unemployment in the developing countries, especially those which have labour abundance. The present stock of capital (including land) is quite insufficient to employ all at a reasonable level of real per capita income.

In the present-day world man by himself can hardly produce anything. Even the primitive man needed some elementary tools like bow and arrow to engage in hunting for the earning of his livelihood. With the growth of technology and specialisation, he needs much more capital with which to be engaged in productive activity.

If he is an agriculturist, he needs a piece of land and also a plough, a pair of oxen, seeds and some food grains and other necessities of life to sustain himself during the period of the sowing to the reaping of the harvest. In the industrial sector, he needs factories to work in and machines to work with. All these instruments of production belong to the nation’s stock of capital. A nation’s stock of capital can be enlarged by increased investment which in the absence of any unutilised resources requires additional savings on the part of the community.

The rate of capital formation should be kept sufficiently high so that employment opportunities are successively enlarged to absorb the increase in the labour force. Now, if the population grows faster than the stock of capital of a country, the entire addition to labour force cannot be absorbed in productive employment because not enough instruments of production will be there to employ them.


It is important to note that the existing imbalance between capital and land resources on the one hand and population on the other is a legacy of the past. Thus, the present state of underdevelopment must be viewed in the long-run setting of these countries. For several decades in the past, especially prior to gaining political independence, the rate of investment and therefore the growth of the capital stock has not been keeping pace with the growth of population in the underdeveloped countries. This implies that opportunities for productive employment have not been increasing commensurate with the growth of population and labour force. This has resulted in mass poverty and unemployment.

It may be noted that population growth is an exogenous factor. There is nothing in the system that should keep the rate of population growth equal to the rate of investment. Nor is there any mechanism that should automatically raise the rate of investment commensurate with any given rate of population growth. Thus imbalance between resources, especially capital stock and population, emerges when population grows faster than investment.

Now, the question is when addition to labour force is unable to get employment in productive activities due to lack of capital, how is it absorbed in the economy? Unable to get employment in the organised sector on a wage basis additional workers remain in their families and share work with other members of the family on the farm and other traditional occupations i.e., whatever work their families do.

Since the same amount of work is done by more workers, the additional workers only share the given amount of work with the members of their families, they do not add to total output. Land, technology and capital resources remaining the same, sharing of work by more workers lowers the hours and intensity of work put in by each worker engaged in agriculture and traditional occupations, resulting in mass disguised unemployment and lowering the standards of living of the people.


Agricultural family farms and traditional occupations such as cottage industries, where disguised unemployment emerges, are run on family basis, do not represent modern form of economic organisation; they do not follow the principle of employing labour productively by equating marginal product of labour with wage rate. They are, in fact, traditional forms of economic organisation. It follows therefore that “it is through inferior forms of organisation and a reduction in the ratio of surplus to employed worker and/or through a general reduction in the levels of standards of living that the surplus population is absorbed.”

The lack of real capital per bead of population is so characteristic a feature of the developing economies that they are often called “capital-poor economies”. Low productivity of population and therefore their low income in the developing countries is mainly due to the small amount of capital per head of population. Thus an important economic explanation for underdevelopment and poverty is the imbalance between resources (e.g. capital) and population; capital is too small in relation to the huge amount of population.

Not only was the existing stock of capital very small, but the rate of capital formation in the 1950s when most of the developing countries started the process of development was also very low. In most underdeveloped countries rate of investment at that time was only 5% to 8% of the national income, whereas in the United States, Canada and Western European countries, it generally varied from 15% to 30% of the national income.

The low rate of capital formation in underdeveloped countries has been due to the following reasons:


(1) The supply of domestic savings has been very small.

(2) There has been a lack of daring, honest and dynamic entrepreneurs who should perform the task of making investments and bearing risks.

(3) Inducement to invest for various reasons has been very weak, that is, demand for making investment has been very small.

The basic solution to the problem of the above sort is the faster rate of capital formation so as to increase employment opportunities. For this purpose, every possible encouragement should be given to the increase in savings and their productive utilisation for increasing the rate of investment. In the developing countries investment incentives are generally very low and the State can assist in the process of capital formation directly as well as indirectly. Through a fiscal policy which encourages saving and investment and a sound monetary policy it can do much to encourage investors.

The State itself can participate in the process of capital formation by investing in infrastructure and basic heavy industries in which the private entrepreneurs do not find it profitable to undertake investment. Therefore, in the developing countries the State has got to assume a special role in speeding up the rate of investment. The other line of attack has got to be on the rate of population growth. If population grows at a rapid rate, then to maintain the people even at their existing per capita income (i.e., levels of living) large amounts of capital are needed. Besides, more capital is required to raise the amount of capital available per man and hence raise the living standards at a faster rate.

The important point to be borne in mind is that even if at present the rate of investment is raised to keep pace with the rate of population growth, the already existing huge disguised unemployment and mass poverty which came to exist as a result of the disproportion between investment and population will remain untouched.

It follows, therefore, that for the solution of existing disguised unemployment and poverty, mere raising the rate of investment equal to the current rate of population growth is not enough. “The central problem of economic growth in the context of India and other underdeveloped countries is that of the creation of those conditions under which the rate of investment can be stepped up above that of population growth.”

It is heartening to note that as under the development policies pursued in the Five Year Plans in India, rate of domestic saving rose to 25.1 per cent in 1995-96 and further to 36 per cent in 2007-08. Apparently this seems to be high rate of saving for a developing country like India with a very low per capita income.

Remember also that during the last 60 years of planned development, our population increased from 36 crore in 1951 to about 101 crore in 2001 and further to 121 crore in 2011. Our population is currently increasing at the rate of around 1.6 per cent per annum. For achieving adequate growth rate in per capita income, in the Twelfth Five Year Plan (2012-17), target of GDP growth rate of 8% per annum has to be achieved, for which it has been estimated that rate of saving has to be increased to 38% of GDP and rate of investment to 40% of GDP by 2016-17.