Process of Economic Development of Less Developed Countries | Economics Optional Notes for UPSC PDF Download

Myrdal and Kuznets on Economic Development and Structural Change

• Simon Smith Kuznets, an American economist and statistician, was honored with the Nobel Memorial Prize in Economic Sciences in 1971. His significant work on the economic growth of nations commenced around 1950, marking the beginning of his extensive project in this field.
• Nevertheless, even in his earlier studies during the late 1920s, Simon Smith Kuznets demonstrated a keen interest in the topics of growth and structural shifts within economies.
• An essential motivation for Kuznets’s studies was that structural change is a conflictive process that requires individual and societal adaptations. This is especially in the early stages of development.
• Here, a large reallocation of the population from rural traditional places to the modern urban ones.
• These changes require mechanisms for conflict resolution. Kuznets regarded the State as having often been the arbitrator among group interests and a mitigator of the adverse effects of economic change.
• Unlike many of his contemporaries, Simon Smith Kuznets was one of the few economists who did not embrace a clear distinction between the terms "growth" and "development." Instead, he delved into the analysis of structural changes over time in advanced countries, highlighting their integral role in the overarching process of Modern Economic Growth.
• Kuznets varies the secular retardation at the sectoral level “with our belief in the fairly continuous march of economic progress” and asked an important question of why not balanced growth?
• The answer combines demand effects and technological change and the progress of technology makes new goods available, however, eventually, demand reaches saturation, the pace of technical change reduces, new goods emerge, and possibly also the competition from younger nations.
• Karl Gunnar Myrdal was a Swedish economist and a sociologist. In 1974, Myrdal was awarded the Nobel Memorial Prize in Economic Sciences.
• Myrdal’s work on development and underdevelopment made three essential contributions. He came up with a cumulative causation approach in opposition to the dominant one, which he stated as the stable equilibrium approach.
• He debated the existence of a body of economic thought which is objective in the sense that it is value-free. Myrdal believed that ‘the argument moves on a general and methodological plane in the sense that the theory is discussed as a complex of broad structures of thought’.
• Into the general vision, the specific features of the development process of every economy can be efficiently fitted.
• Myrdal used the expressions ‘approach’, ‘theory’, and ‘general theory’ as equivalents. However, In his subsequent writings, he mainly referred to it as ‘approach’, explaining it as something containing, among other things and theories.
• Dealing with development processes, Myrdal (1957, pp. vi and 39) moved from the belief that reality shows that inequalities within the same economy or among different economies. It tends to persist and increase.
• He said, the ‘facts of life’ represented at the time a fundamental cause of the international tensions. But, they were not at the center stage in most of the literature on development, which was ruled by the belief that the operation of competitive market forces conduces to eliminate inequalities.
• Also to bring about movements towards the equilibrium positions that are identified by the efficient allocation of the available resources and the exploitation of growth potential of the economy.

Role of Agriculture in Economic Development of Less Developed Countries

The agriculture sector is the backbone of an economy which provides the basic ingredients to mankind and now raw material for industrialisation.
Therefore, the role of agriculture for the development of an economy may be stated as below:

1. Contribution to National Income

• The lessons drawn from the economic history of many advanced countries tell us that agricultural prosperity contributed considerably in fostering economic advancement. 
• It is correctly observed that, “The leading industrialized countries of today were once predominantly agricultural while the developing economies still have the dominance of agriculture and it largely contributes to the national income. In India, still 28% of national income comes from this sector.

2. Source of Food Supply

• Agriculture is the basic source of food supply of all the countries of the world—whether underdeveloped, developing or even developed. Due to heavy pressure of population in underdeveloped and developing countries and its rapid increase, the demand for food is increasing at a fast rate. 
• If agriculture fails to meet the rising demand of food products, it is found to affect adversely the growth rate of the economy. Raising supply of food by agricultural sector has, therefore, great importance for economic growth of a country.
• Increase in demand for food in an economy is determined by the following equation:
  D = P + 2g
  Here,
  D stands for Annual Rate of Growth in demand for food.
  P stands for Population Growth Rate.
  g stands for Rate of Increase in per Capita Income.
  2 stand for Income Elasticity of Demand for Agricultural Products.

3. Pre-Requisite for Raw Material:

• Agricultural advancement is necessary for improving the supply of raw materials for the agro-based industries especially in developing countries. The shortage of agricultural goods has its impact upon on industrial production and a consequent increase in the general price level. 
• It will impede the growth of the country’s economy. The flour mills, rice shellers, oil & dal mills, bread, meat, milk products sugar factories, wineries, jute mills, textile mills and numerous other industries are based on agricultural products.

4. Provision of Surplus:

• The progress in agricultural sector provides surplus for increasing the exports of agricultural products. In the earlier stages of development, an increase in the exports earning is more desirable because of the greater strains on the foreign exchange situation needed for the financing of imports of basic and essential capital goods.
• Johnson and Mellor are of the opinion, “In view of the urgent need for enlarged foreign exchange earnings and the lack of alternative opportunities, substantial expansion of agricultural export production is frequently a rational policy even though the world supply—demand situation for a commodity is unfavorable.”

5. Shift of Manpower

• Initially, agriculture absorbs a large quantity of labour force. In India still about 62% labour is absorbed in this sector. Agricultural progress permits the shift of manpower from agricultural to non-agricultural sector. 
• In the initial stages, the diversion of labour from agricultural to non-agricultural sector is more important from the point of view of economic development as it eases the burden of surplus labour force over the limited land. Thus, the release of surplus manpower from the agricultural sector is necessary for the progress of agricultural sector and for expanding the non-agricultural sector.

6. Creation of Infrastructure

• The development of agriculture requires roads, market yards, storage, transportation railways, postal services and many others for an infrastructure creating demand for industrial products and the development of commercial sector.

7. Relief from Shortage of Capital

• The development of agricultural sector has minimized the burden of several developed countries who were facing the shortage of foreign capital. If foreign capital is available with the ‘strings’ attached to it, it will create another significant problem. 
• Agriculture sector requires less capital for its development thus it minimizes growth problem of foreign capital.

8. Helpful to Reduce Inequality

• In a country which is predominantly agricultural and overpopulated, there is greater inequality of income between the rural and urban areas of the country. To reduce this inequality of income, it is necessary to accord higher priority to agriculture. 
• The prosperity of agriculture would raise the income of the majority of the rural population and thus the disparity in income may be reduced to a certain extent.

9. Based on Democratic Notions

• If the agricultural sector does not grow at a faster rate, it may result in the growing discontentment amongst the masses which is never healthy for the smooth running of democratic governments. For economic development, it is necessary to minimize political as well as social tensions. 
• In case the majority of the people have to be kindled with the hopes of prosperity, this can be attained with the help of agricultural progress. Thus development of agriculture sector is also relevant on political and social grounds.

10. Create Effective Demand

• The development of agricultural sector would tend to increase the purchasing power of agriculturists which will help the growth of the non-agricultural sector of the country. It will provide a market for increased production. In underdeveloped countries, it is well known that the majority of people depend upon agriculture and it is they who must be able to afford to consume the goods produced.
• Therefore, it will be helpful in stimulating the growth of the non- agricultural sector. Similarly improvement in the productivity of cash crops may pave the way for the promotion of exchange economy which may help the growth of non-agricultural sector. Purchase of industrial products such as pesticides, farm machinery etc. also provide boost to industrial dead out.

11. Helpful in Phasing out Economic Depression

• During depression, industrial production can be stopped or reduced but agricultural production continues as it produces basic necessities of life. Thus it continues to create effective demand even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country

• Most of the developing countries of the world are exporters of primary products. These products contribute 60 to 70 per cent of their total export earning. Thus, the capacity to import capital goods and machinery for industrial development depends crucially on the export earning of the agriculture sector. If exports of agricultural goods fail to increase at a sufficiently high rate, these countries are forced to incur heavy deficit in the balance of payments resulting in a serious foreign exchange problem.
• However, primary goods face declining prices in international market and the prospects of increasing export earnings through them are limited. Due to this, large developing countries like India (having potentialities of industrial development) are trying to diversify their production structure and promote the exports of manufactured goods even though this requires the adoption of protective measures in the initial period of planning.

13. Contribution to Capital Formation

• Underdeveloped and developing countries need huge amount of capital for its economic development. In the initial stages of economic development, it is agriculture that constitutes a significant source of capital formation.
• Agriculture sector provides funds for capital formation in many ways as:
  (i) agricultural taxation,
  (ii) export of agricultural products,
  (iii) collection of agricultural products at low prices by the government and selling it at higher prices. This method is adopted by Russia and China,
  (iv) labour in disguised unemployment, largely confined to agriculture, is viewed as a source of investible surplus,
  (v) transfer of labour and capital from farm to non-farm activities etc.

14. Employment Opportunities for Rural People

• Agriculture provides employment opportunities for rural people on a large scale in underdeveloped and developing countries. It is an important source of livelihood. 
• Generally, landless workers and marginal farmers are engaged in non-agricultural jobs like handicrafts, furniture, textiles, leather, metal work, processing industries, and in other service sectors. These rural units fulfill merely local demands. In India about 70.6% of total labour force depends upon agriculture.

15. Improving Rural Welfare

• It is time that rural economy depends on agriculture and allied occupations in an underdeveloped country. The rising agricultural surplus caused by increasing agricultural production and productivity tends to improve social welfare, particularly in rural areas. 
• The living standard of rural masses rises and they start consuming nutritious diet including eggs, milk, ghee and fruits. They lead a comfortable life having all modern amenities—a better house, motor-cycle, radio, television and use of better clothes.

16. Extension of Market for Industrial Output

• As a result of agricultural progress, there will be extension of market for industrial products. Increase in agricultural productivity leads to increase in the income of rural population which is turn leads to more demand for industrial products, thus development of industrial sector.
• According to Dr. Bright Singh, “Increase in agricultural production and the rise in the per-capita income of the rural community, together with the industrialisation and urbanisation, lead to an increased demand in industrial production.” In this way, agricultural sector helps promote economic growth by securing as a supplement to industrial sector.