Following are the various factors which affect economic growth of countries: 1. Supply of Land and Other Natural Resources 2. Capital Formation 3. Human Capital 4. Technological Progress and Economic Growth.
Factor # 1. Supply of Land and Other Natural Resources:
The quantity and quality of natural resources play a vital role in the economic development of a country. Important natural resources are land, minerals and oil resources, water, forests, climate, etc. The quality of natural resources available in a country puts a limit on the level of output of goods which can be attained. Without a minimum of natural resources there is a not much hope for economic growth.
It should, however, be noted that resource availability is a necessary but not a sufficient condition for economic growth. For instance, India, though rich in natural resources, has remained poor and underdeveloped. This is because resources have not been fully utilised for productive purposes. Thus it is not only the availability of natural resources but also the ability to bring them into use, which determines the growth of an economy. On the other hand, Japan has a relatively few natural resources but has shown a very high rate of economic growth and as a result has become one of the richest countries in the world. How has Japan done this miracle?
It is international trade that has made possible for Japan to achieve higher growth rate. Japan imports many of natural resources such as mineral oil it requires for production of manufactured goods. It then exports manufactured goods to the countries that are rich in natural resources. Thus experience of Japan shows that paucity of natural resources can be overcome through foreign trade for bringing about economic growth.
Supplies of natural resources can be increased as a result of new discoveries of resources within a country or technological changes which facilitate discoveries or transform certain previously useless materials into highly useful ones. It should also be noted that the scarcity of certain natural resources can be overcome by synthetic substitutes. For example, the synthetic rubber is being increasingly used in the place of natural rubber in advanced countries. Further, nylon which is a synthetic substance is being largely used in place of silk which is a natural substance.
It was Malthus who first pointed out the possibility of growing relative scarcity of natural resources as a binding constraint on the growth process. He argued that with a given and fixed land and due to the operation of diminishing returns to labour the growth of output of food will not keep pace with the exponential growth in population which will result in food shortages and famines and bring growth process to a halt.
Though the present-day industrialized countries escaped from the gloomy forecast of Malthus by making technological progress, but the developing countries which made little progress in technology have often faced food-supply shortages and rising food prices. However despite the fixity of land and other natural resources, agricultural and food production can be substantially increased through science-based agriculture, that is, through raising productivity of land by the use of improved technology. It is through the use of green revolution technology that India has succeeded in raising food production from 100 million tonnes 1969-70 to 257 million tonnes in 2012-13.
Like gloomy prediction made by the Malthus theory in 1972, a report by Meadows and others titled ‘ The Limits to Growth’ submitted to the Club of Rome, pointed out that there is not only the problem of food crisis but also the crisis of natural resource exhaustion and environmental degradation due to over-exploitation of natural resources by the exponential population growth. The report pointed out that if this exponential industrial growth is not curbed, economic growth would start declining by the first two decades of 21st century and death rate will increase due to food shortage and environmental pollution. Though the gloomy forecast of this report by the Club of Rome has not come true but the report correctly predicted that environmental pollution will substantially increase causing increase in death rate.
If follows from above that a pertinent question has been raised – whether economic growth and living standards will continue rising in future or the depletion of non-renewable natural resources will limit it. The economists associated with Club of Rome argued that non-renewable natural resources such as oil and minerals put a limit to how much economies of the world could grow. This is because exponential economic growth will eventually use up the fixed stock of these natural resources. When this stage occurs economic growth will come to a halt and living standards may fall if population goes on increasing.
Though the above argument apparently seems to be plausible but it is not fully correct to assert that natural resources will limit economic growth. Two factors save us from this disaster of depletion of natural resources that results in halting the process of economic growth.
Firstly, technological progress helps us to produce more using fewer resources. Progress in technology enables us to improve the ways in which natural resources are used. Thus, modern cars have better petrol mileage than the old cars of fifty years ago. Energy efficiency of room lighting and heating has greatly increased. Besides, recycling permits some non-renewable resources to be used again.
Secondly, as shortage of some specific natural resources was felt, their prices rose which led to the discovery and use of their substitutes. For example, some fifty years ago, it was feared that due to excessive use of tin and copper, their natural stocks would soon be depleted posing great problems. These were then essential commodities Tin was used to make various types of food containers and copper was used to make telephone wires. Today, plastic has replaced tin for making food containers and telephones now use fibre-optic cables which are made from sand. Ethanol is being used as substitute for gasoline. It follows from above that technological progress and growing ability to find synthetic substitutes for natural products show that there is no reason to believe that natural resources are a limit to economic growth.
The use of natural resources and the role they play in the economic growth depend, among other things, on the type of technology. The relationship of resources to the kind and level of technology is very intimate. One does not have to go back very far in history to find when an item currently as valuable as petroleum was of little or no significance. It is only recently that the various radioactive elements have come to be regarded as valuable. In many developing economies there are, no doubt, deposits of many minerals that are not being used because of technological deficiencies.
Factor # 2. Capital Formation:
Capital formation which depends upon the rate of domestic saving and investment and inflow of foreign capital.
Labour is combined with capital to produce goods and services. Workers need machines, tools and factories to work. In fact the use of capital makes workers more productive. Setting up more factories equipped with machines and tools raises the productive capacity of the economy. Therefore, in the opinion of many economists, capital formation is the very core of economic development. Whatever the type of economic system, without capital accumulation the process of economic growth cannot be accelerated.
Levels of productivity in the United States of America are very high mainly because American people work with more and better type of capital goods built up over the last several years. Low productivity and poverty of developing countries is largely due to the scarcity or shortage of real physical capital in these countries. Economic growth cannot be speeded up without accumulating various types of capital goods. Physical capital can be classified into two main categories.
First type of physical capital is in the form of machines, equipment and plant which directly help to produce further goods. The second type of physical capital is overhead capital which is also called infrastructure which facilitates the production of goods. The examples of infrastructure are power (i.e., electricity), transport (i.e., roads, railways, ports, communication network). Lack of infrastructure impedes economic growth. Economic growth cannot be accelerated without accumulating these types of capital, namely, fixed capital goods such as machines, equipment, plants and infrastructure facilities such as power, roads etc. There is a third type of capital input commonly known as circulating capital such as irrigation, fertilizers, HYV seeds, pesticides which raise the productivity of land and are therefore called land-augmenting.
Accumulation of capital is necessary for economic growth as it raises the productive capacity of the economy to produce goods and services. Besides, capital accumulation is important because it generates more employment opportunities. The workers need to be equipped with capital goods to be employed for production of goods and services.
Therefore, to absorb growing labour force in productive activities capital accumulation needs to be stepped up. It may be noted that in production function of the type of Cobb-Douglas production (Y= AKaL1-a), both capital (K) and labour (L) are required to increase output (Y). That is, according to this production function, labour without capital will produce nothing and similarly capital without labour will also produce nothing.
But capital formation requires saving, that is, the sacrifice of some current consumption. An increase in supplies of capital goods can only result from investment, and investment in turn is only possible if a portion of current income is saved. Thus saving is essential to economic growth. According to Professor Arthur Lewis, “The central problem in the theory of economic growth is to understand the process by which a community is converted from being a 5 per cent saver to a 12 per cent saver with all the changes in attitudes, in institutions and in techniques which accompany this conversion.” Underdeveloped economies generally save very little; not more than 5 per cent of their national income. For instance, saving in India on the eve of independence was about 6 per cent of the national income.
On the other hand, rich countries save from 15 to 30 per cent of their national income. In order to bring about economic growth, rate of savings must be stepped up to over 15 per cent of national income. But in developing countries, the rate of saving is low because income of the people is low and that they are living at the level of subsistence. Thus, the lower the per capita income, the more difficult it is to forgo current consumption. It is difficult for people living at or near subsistence level to curtail current consumption. This in large part explains the low level of saving in the poor, underdeveloped countries.
It must be emphasized, however, that savings itself do not contribute to economic growth. It is only when savings are invested in accumulation of capital that they contribute to economic growth. If savings are hoarded in the form of gold or precious jewels, or if they are used for buying land, they do not result in an increase in supplies of capital goods and thus make no contribution to economic growth. Studies conducted to examine the relationship between investment and growths in terms of increase in GDP have found that there exists a strong correlation between the two. Countries that allocate a larger fraction of their GDP to investment such as Japan and Singapore achieved high growth rates, and countries that allocate a small share of GDP to investment such as Bangladesh and Nepal have low growth rates.
That the rate of growth depends on rate of saving or investment on which capital accumulation depends has been clearly brought out by Harrod-Domar model of growth. According to this model, growth rate depends on rate of saving or investment (i.e., ratio of saving or investment to national income) and capital-output ratio which means how much extra capital is required to produce an extra unit of output. This Harrod-Domar growth formula can be written as-
where g is growth rate of output (that is, (ΔY/Y) , s is the saving rate (i.e., ratio of saving to national income or S/Y) and ν is incremental capital-output ratio, that is, ratio of capital investment to the increase in output by one unit.
Since rate of saving is assumed to be equal to rate of investment, it follows from above formula that the higher the rate of saving or investment, the higher the rate of economic growth, capital-output ratio (ν) remaining the same.
Foreign Capital- Foreign Aid and Foreign Investment:
As domestic savings are not sufficient to make possible the necessary or desired accumulation of capital goods, borrowing from abroad may play an important role. Professor A.J. Brown rightly says that “Development demands that people somewhere should refrain from spending a part of their incomes, thus allowing part of the world’s productive resources to be used for accumulation of capital goods. The people who can best afford to do this are generally those who live in countries of high average income. On the other hand, the countries where development is likely to alleviate suffering and promote welfare to the greatest extent are those where average incomes are low. There is a strong general case for the rich countries lending to the poor ones.”
Nearly every developed state obtained the foreign assistance to supplement its own small saving during the early stages of its development. England borrowed from Holland in the seventeenth and eighteenth centuries, and in turn came to lend to almost every other country in the world in the nineteenth and twentieth centuries. The United States of America, now the richest country in the world, borrowed heavily in the nineteenth century, and has now emerged as the major lender country of the twentieth- century which is assisting the poor countries in their attempts to bring about economic growth.
It should be noted that foreign capital does not flow into the developing countries in the form of aid alone (that is, loans at concessional rates of interest) but also through direct investment by foreign companies. Foreign direct investment (FDI) is an important way for a country to accelerate its economic growth. Though the foreign companies send back profits earned, their investments in factories increase the rate of capital accumulation in the developing countries leading to a higher rate of economic growth and higher productivity of labour. Besides, foreign direct investment enables the developing countries to learn the new advanced technologies developed and used in the rich developed countries.
The importance of foreign capital is reinforced by the need of a developing country for foreign exchange to buy imports. A developing country has to import huge quantities of capital goods, technical know-how and essential raw materials which are required for industrial growth and building up of infrastructure such as power projects, roads, irrigation facilities, ports and telecommunication.
For all these, foreign exchange is needed which can be obtained if foreign rich countries lend it to developing economies or if foreign companies make direct investment in the developing countries. If foreign assistance is not forthcoming in adequate quantity, then the developing countries will experience serious difficulties of balance of payments. In the absence of sufficient borrowing from abroad, or direct foreign investment, rapid economic development of the developing countries will turn their balance of payments seriously adverse.
Furthermore, developing countries suffer not only from a shortage of savings but also from a lack of technical know-how, managerial ability, etc. Foreign capital when it comes in the form of private investment in developing countries by foreign companies, especially the multinational corporations (MNCs), bring with it these complementary factors which are very essential for development.
Due to bad experience of the colonial rule in the past, the developing countries were generally against the foreign capital, especially against private foreign investment. However, the fears of foreign investment and aid are now no longer there. Further, now multilateral foreign aid is available through World Bank and International Monetary Fund (IMF) which provide loans at concessional rates to the developing countries for accelerating growth.
As far as private foreign investment is concerned, the developing countries (including China and India) are now competing with each other to attract private foreign investors. It has now been realised that foreign investment will not only supplement domestic saving and thereby raise the rate of investment, bring better technology and managerial know-how but will also ease the problem of foreign exchange. Through raising the rate of investment and providing foreign exchange resources, it will not only increase output but will also generate employment opportunities. Besides, like the domestic investment, foreign investment also produces a multiplier effect on output, income and employment in the developing countries.
In the last fifteen years, China’s very high rate of economic growth which is generally described as “Chinese growth miracle” is due to higher inflow of foreign direct investment (FDI) as compared to India. Foreign direct investment flows to China grew from $3.5 billion in 1990 to $53 billion in 2002. On the other hand, FDI flow to India was a low $0.4 billion in 1990 and rose to $5.5 billion in 2002. Further, FDI has contributed significantly to the rapid growth of China’s manufacturing exports. In India by contrast FDI has been much less important in driving India’s export growth, except in information technology.
For higher foreign direct investment flows China has more business-oriented and FDI-friendly attitudes, its FDI procedures are easier and decisions are taken rapidly. Besides, China has more flexible labour laws, a better labour climate and better entry and exit procedures for business. It is therefore not unexpected that China has emerged at the top in attracting FDI flows. Against this, at present (i.e., in 2002) India is 15th in the world’s FDI destination.
Factor # 3. Human Capital – Education and Health:
Till recently economists have been considering physical capital as the most important factor determining economic growth and have been recommending that rate of physical capital formation in developing countries must be increased to accelerate the process of economic growth and raise the living standards of the people. But the last three decades of economic research has revealed the importance of education as a crucial factor in economic development. Education refers to the development of human skills and knowledge of the labour force.
It is not only the quantitative expansion of educational opportunities but also the qualitative improvement of the education which is imparted to the labour force that holds the key to economic development. Because of its significant contribution to economic development, education has been called as human capital and expenditure on education of the people as investment in man or human capital.
Speaking of the importance of education, or human capital, Prof. Harbison writes – “Human resources constitute the ultimate basis of production, human beings are the active agents who accumulate capital, exploit natural resources, build social, economic and political organisations. And carry forward national development. Clearly, a country which is unable to develop the skills and knowledge of its people and to utilise them effectively in the national economy will be unable to develop anything else.”
Several empirical studies made in developed countries, especially the U.S.A., regarding the sources of growth or, in other words, contributions made by various factors such as physical capital, man-hours (i.e., physical labour), education etc. have shown that education or the development of human capital is a significant source of economic growth.
Professor Solow who was one of the first economists to measure the contribution of human capital to economic growth estimated that for United States between 1909 and 1949, 57.5 per cent of growth in output per man-hour could be attributed to the residual factor which represents the effect of technological change and of the improvement in the quality of labour mainly as a consequence of education.
Denison, another American economist made, further refinement in estimating the contribution to economic growth of various factors. Denison tried to separate and measure the contributions of various elements of ‘residual factor’. Denison’s estimates for various sources of US growth during 1929-82 are given in Table 6.1.
As will be seen from the Table 6.1 Gross Domestic Product in USA grew at the rate of 2.9 per cent per annum over this period. The factors determining growth in this period have been divided into two groups. It will be seen from the table that the growth in the quantity of labour accounted for 32 per cent of growth in GDP of the USA over this period. The other group consists of various variables determining growth in labour productivity has been divided into five factors. It is noteworthy that education per worker contributed 14 per cent to growth in output during this period; technological change contributed 28 per cent to the growth in output.
Thus, growth in education per worker and technological change together accounted for 42 per cent of growth in the output in the USA over this period whereas capital formation contributed 19 per cent to the growth rate. This shows the great importance of education and technological change as determinants of economic growth.
In our above analysis we have explained that education is regarded as investment and like investment in physical capital, it raises productivity of labour and thus contributes to growth of national income. Some economists have argued that education is of crucial importance not only because education raises the productivity and therefore earnings of individual workers, but it creates positive externalities, that is, beneficial external effects.
A positive externality occurs when the activity of a person provides benefits to others. For example, an educated person might generate new ideas which may lead to the improvement in methods of producing goods. When these ideas becomes a part of society’s pool of knowledge (i.e., stock of human capital), everyone use them and derive benefits from them. These ideas are therefore external benefits of education.
One problem facing the developing countries, especially India, is of brain drain, that is; migration of a large number of highly educated persons (such as those trained by IIT, IIM and medical colleges) to the developed countries such as USA to make higher earnings there. If education has positive external effects, then this brain drain will deprive the Indian economy of the beneficial effects which these educated people would have created in India.
Like education, improvement in health and nutrition is a sort of investment in human capital. Both better education and health are good for them and directly raise the well-being of the people but, according to human-capital approach, better health increases ability and productivity of the workers and therefore contributes to the growth of output. Better health and nutrition increases the life span of the people and thereby lengthens their working life and enables them to go on earning incomes for an expanded period.
Besides, they complement educational investment since returns to education will be higher if they are able to work and earn for a longer period. Further, healthy persons especially healthy children, are in a better position to acquire more education and skills to become more productive.
Improvement in health is very difficult to measure and, therefore, its contribution to growth of output cannot be easily ascertained. However, life expectancy at birth has been usually used as a proxy for health; the higher life expectancy reflects better health of the people and, they are able to earn a stream of income for a long time in future and along with their higher individual returns on health, they make greater contribution to growth of national output for a longer period. Development economists Haymi and Godo in their empirical study of relationship between life expectancy at birth and growth rate of GDP for the years 1965-2000 for a number of countries have found correlation coefficient to be equal to 0.43 which is quite significant.
Factor # 4. Technological Progress and Economic Growth:
Another important factor in economic growth is progress in technology. Use of advanced techniques in production or progress in technology brings about a significant increase in per capita output. Technological advance refers to the discovery of new and better techniques of doing things.
Sometimes technological advances result in an increase in available supplies of natural resources. But more generally technological advance results in increasing the productivity or effectiveness with which natural resources, capital and labour are used and worked to produce goods. As a result of technological advance it becomes possible to produce more output with same resources or the same amount of product with less resource.
But the question arises as to how the technological progress takes place. The technological progress takes place through inventions and innovations. The word invention is used for the new scientific discoveries, whereas the innovations are said to take place only when the new scientific discoveries are used for actual production processes or commercial purposes. Some inventions may not be economically profitable to be used for actual production.
It is quite well known that improvements in technology greatly increase the productivity of factors. In United States, for instance, increased use of mechanized power-driven farm equipment on land greatly raised the agricultural productivity of land per hectare. It may also be noted that some technological improvements have resulted in the increased effectiveness with which capital goods are used.
Technological change raises the productivity of workers through the provision of better machines, better methods and superior skills. By bringing about increase in productivity of factors the progress in technology makes it possible to produce more output with the same amount of factors or the same amount of output with less amount of factors.
Technological progress manifests itself in the change in production function. So a simple measure of the technical progress would be the comparison of the position of production function at two points of time. The technological change may operate upon the production function through improvements of various sorts such as a superior equipment, an improved material, and superior organisational efficiency.
Technological progress increases the productivity of factors, labour and capital, so that with the same amount of a factor, more output can be produced. In other words, technological change causes an upward shift in the production function. This is shown in Fig. 6.1 in which along the X-axis number of workers is measured and on the vertical axis total output is measured. To begin with, with production function PF0, the number of workers OL produces OQ1 amount of output. Now suppose technological progress takes place causing shift in the production function upward from PF0 to PF1 and as will be seen from Fig. 6.1 that now the same number of workers OL can produce more output OQ2. This means technological change has raised the productivity of labour. Similarly, technological change will raise the productivity of capital.
It will be seen from Table 6.1 that Denison in his empirical study of sources of US economic growth that between 1929-1982, technological progress contributed 28 per cent of increase in labour productivity as against 19 per cent by capital formation and 14 per cent by education per worker.
It is now widely accepted that technological change raises productivity and that a continuous technological change will enable the economy to escape from being driven to the stationary state or economic stagnation. Classical economists like Ricardo and J.S. Mill expressed fear that the increase in the stock of capital will sooner or later, because of the operation of diminishing returns, land the economy into stationary state beyond which economic growth will come to an end. Classical economists remained occupied with the idea of a stationary state because they underplayed the importance of technological progress that could postpone the occurrence of a stationary state and ensure sustained economic growth. Indeed, if technological progress continuously takes place, demon of stationary state can be put off indefinitely.
Embodied and Disembodied Technological Change:
The two types of technological changes should be distinguished:
(1) Embodied technological change.
(2) Disembodied technological change.
Disembodied technological change is one which permits more output to be produced from unchanged inputs without investment in new capital goods such as machines. Disembodied technological change is organisational in nature and not dependent on capital accumulation and assumes that productivity of all vintages of capital goods rises equally. On the other hand, embodied technological change refers to technological improvements that can be introduced into the production system by investment in new capital goods (i.e., machines or equipment).
The process of technological progress is inseparably linked with the process of capital formation. In fact, both go hand in hand. Technological progress is virtually impossible without capital formation. It is because the introduction of superior or more efficient techniques requires building up of new capital equipment which incorporates new technology. In other words, new and superior technology can contribute to national product and its growth if it is first embodied in the new capital equipment. The new capital investment has, therefore, been called the vehicle for the introduction of new technology into the economy.
It may be noted that Adam Smith viewed technological progress as a rise in productivity of workers as a result of increase in division of labour and specialisation. The rise in productivity leads to the growth in national income. But it was J.A. Schumpeter who laid great stress on the role of technological innovations in bringing about economic growth. He laid stress on the introduction of technical innovations in bringing about economic progress. It is the entrepreneur who carries out the innovations and organises the production structure more efficiently. As, according to Schumpeter, innovations occur in spurts rather than in a smooth flow, economic progress is not a smooth and an uninterrupted process. The pace of economic progress is punctuated by the pace of innovations.
Productivity of worker depends upon the quantity and quality of capital tools with which the labourers work. For higher productivity the instruments of production have to be technologically more efficient and superior. The technological options open to an economy determine the input-mix of production. A commodity can be produced by various technologies. The quantity and quality of capital, skills and other factors required for production is directly dependent on the efficiency of the technique of production being used. Also, the managerial and organisational expertise has to be in tune with the technological requirements of production. Viewed thus, technology is an indispensable factor for accelerating economic growth.
The new inventions and innovations lead to new and more efficient techniques of production and new and better products. As is well known, it is the inventions and innovations in cotton textile industry that led to the industrial revolution in England. In the olden times inventions were the work of some individuals and innovations were introduced into the production process by the private entrepreneurs. Keeping in view the importance of technological progress in the economic growth of a country, the governments of various countries are spending a lot of money on “research and development” (R & D) which is carried on in various laboratories and institutes to promote technological progress.
Developing countries are using the technology imported from the developed countries because they have not yet made sufficient progress in technology, nor have they developed to adequate extent capital goods industries which produce capital goods, embodying advanced technology. But imitation and use of the technology of the advanced countries by these underdeveloped countries has produced one unfavourable result. It is that the technology of the advanced countries is not in accordance with the factor endowments of these developing countries, since they have abundance of capital while the developing countries have surplus labour.
As a result of the use of the capital-intensive technology, enough employment opportunities have not been created by the large-scale industries using imported technology. As a result, unemployment in developing countries like India has been increasing despite the progress in industrialisation of the economy. In view of this not so happy experience in’ regard to the creation of employment opportunities by industrial growth, an eminent English economist, Prof. Schumacher, has recommended the use of intermediate technology or what is also known as appropriate technology by the developing countries like India.
By Intermediate or appropriate technology is meant the technology which is labour-intensive and yet highly productive so that with its use enough employment opportunities are created along with more production. But in order to find out this appropriate technology for several industries, a good deal of research and development (R & D) activity is required to be carried out.
The Growth of Population and Labour Force:
The growth of population is another factor which determines the rate of economic growth. The growing population increases the level of output by increasing the number of working population or labour force provided all are absorbed in productive employment. This is because labour is a factor of production and is an essential input in the production function of various commodities. We saw above that according to estimates of Denison, increase in the quantity of labour contributed to the extent of 32 per cent to economic growth of output in the USA during 1929-1982.
Moreover, the increase in population leads to the increase in demand for goods. Thus, growing population means growing market for goods which facilitates the process of growth. When market for goods is enlarged, they can be produced on a large scale and thus economies of large-scale production can be reaped. The economic history of U.S.A. and European countries shows that the population growth contributed greatly to the increase in their national output.
But what has been true of U.S.A. and European countries may not be true in case of the present- day developing countries. Whether or not the growth of population contributes to economic growth depends on the existing size of population; the available supplies of natural and capital resources, and the prevailing technology. In the United States, where supplies of natural and capital resources are comparatively abundant, the growth in population raises national output by increasing the quantity of labour. In India where supplies of other economic resources, especially capital equipment, are relatively scarce, increase in population leads to the increase in unemployment of workers.
Labour is combined with capital to produce goods and services. Therefore, increase in the quantity of labour force will contribute to economic growth when the cooperating-factor capital is also increasing and technology used is not labour saving. In the modem times workers need machines, tools and factories to work. Since a developing country such as India has a lot of surplus labour but relatively a small stock of capital workers cannot be absorbed in productive activities. We thus see that a rapidly growing labour force by itself is no guarantee of economic growth.
Increase in national output, that is, economic growth is possible only when the supplies of capital and other resources are increasing adequately along with the growth of labour force. If on the other hand, when the supplies of capital and the other resources are meager, the increase in the labour force (or population) will merely add to unemployment and will not bring about increase in national output.
As stated above, economic growth requires increasing supplies of capital goods. Increasing supplies of capital goods become possible only with higher rate of investment. And a higher rate of investment, in turn, is possible if rate of saving is high. Now, increase in population by adding to the number of mouths to be fed tends to raise consumption and, therefore, lowers both saving and investment.
In other words, increase in population raises the dependency ratio of the households which tends to lower their savings. Thus rapid growth of population by causing lower rate of saving and investment tends to hold down the rate of economic growth in developing countries. Thus, under conditions like those in India population growth actually impedes economic development rather than facilitates it.
It is worth noting here that changes in total GDP which are used to measure rate of economic growth are not a good measure of economic well-being. For the purpose of evaluating changes in economic well-being or living standards of the people of a country GDP per capita is more important for it tells us the amount of goods and services that is available for consumption for an individual in the economy.
But growth in population or labour force adversely affects growth in GDP per capita. The reason is that rapidly increasing labour force forces the economy to spread more thinly the other cooperating factors, especially capital and land over many more workers. As a result, capital or land per worker declines causing decline in productivity of workers.
Further, rapid population growth nullifies our efforts to raise the living standards of our people. In other words, a high rate of increase in population swallows up a large part of the increase in national income so that per capita income or living standard of the people does not raise much.
This is precisely what has happened during the planning era in India. This is while the gross national income of India went up by 7.6 per cent in the Tenth Plan period and 8 per cent in the Eleventh Plan period per annum, per capita income rose by only 5.9 per cent and 6.3 per cent per annum respectively. The relatively slower rate of rise in per capita income has been due to rapid population growth.