ASSIGNMENT ON

PAKISTAN ECONOMY
Course Instroctor:Mr Shahid Zaheer

Roll No:59
BSPA 3rd Year
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TABLE OF CONTENT
Define the main majors of economic development
INCREASE IN REAL GNP………………………………………………………………………………………………3
INCREASE IN REAL PER CAPITA INCOME……………………………………………………………………3
RISE IN OVERALL WELLBEING OF THE PEOPLE………………………………………………………….3
BASIC NEEDS APPROACH…………………………………………………………………………………………….3
HUMAN DEVELOPMENT INDEX…………………………………………………………………………………..3

Define economic growth and economic development?

ECONOMIC GROWTH…………………………………………………………………………………………………..4
ECONOMIC DEVELOPMENT…………………………………………………………………………………………4

Define economic growth and explain the benefits of economic growth?

ECONOMIC GROWTH…………………………………………………………………………………………………..5
BENEFITSOF ECONOMIC GROWTH……………………………………………………………………………………………………...5

Define economic development and explain the benefits of development?

ECONOMIC DEVELOPMENT…………………………………………………………………………………………5
BENEFITS OF ECONOMIC DEVELOPMENT…………………………………………………………………..5
BENEFIT ELEMENTS…………………………………………………………………………………………………….5
BENEFIT ANALYSIS……………………………………………………………………………………………………...6

Describe the characteristics of under-develop countries?

GNP PER CAPITA…………………………………………………………………………………………………………..6
CONSUMPTION OF WORDS OUTPUT, UNUTILIZED OR UNDERUTILIZED
RESOURCES, VICIOUS CIRCLE OF POVERTY, POPULATION,………………………………………..7
LIFE EXPECTANCY, SECONDARY SCHOOL ENROLLMENT,………………………………………….7
PERCENTAGE OF POPULATION IN URBAN AREAS,……………………………………………………..7
POPULATION BELOW THE POVERTY LINE,…………………………………………………………………7
VOICELESSNESS & POWERLESSNESS OF THE PEOPLE, DEBTS…………………………………...7
SOCIAL OVER HEAD CAPITAL, INEQUALITY IN INCOMES, MARKET ECONOMIES,……..8
INFORMATION TECHNOLOGY……………………………………………………………………………………..8

What are the determinant of economic development?

ECONOMIC DEVELOPMEN, FACTORS OF DEVELOPMENT…………………………………………..8
NATURAL RESOURCES, CAPITAL FORMATION. …………………………………………………………………….9
HUMAN RESOURCES,.POWER,THE MEANS OF TRANSPORT AND COMMUNICATION..10
EDUCATION AND TRAINING PROBLEM OF HUMAN, CAPITAL FORMATION IN LDC’S..11
NON ECONOMIC FACTORS SOCIAL FACTORS,……………………………………………………………..11
POLITICAL FACTOR, ADMINISTRATIVE FACTOR…………………………………………………………12

What is meant by capital formation

CAPITAL FORMATION SOURCES OF CAPITAL FORMATION INDIVIDUALSAVINGS,
BUSINESS SAVINGS, GOVERNMENT SAVINGS, PUBLIC BORROWING,DISGUISED
UNEMPLOYMENT………………………………………………………………………………………………………..13

Describe the main obstacle to economic development in developing countries like

Pakistan……………………………………………………………………………………………………………………..14
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Q1. Define the main majors of economic development?
Ans. There are number of measures which have been used to estimate the economic development of a
country of a country. These measures in brief are:

a) INCREASE IN REAL GNP: Before 1970’s economic development was regarded as an increase in real
national product of a country over a long period of time. A long run expansion in production was to be
achieved by rapid industrialization of the country at the expense of agriculture and rural development. The
growth development at that time mainly meant the growth of material production.

b) INCREASE IN REAL PER CAPITA INCOME: Another traditional measure of economic development
was an increase in real per capita income of a country. It was considered at time that if the growth of
income per capita increases over a long period of time, it would indicate that the country was moving
towards higher standard of living and achieving economic goals. The increase in real capita per income can
be achieved if the nation has the ability to expand its output at a rate faster than the changes in price level
r = y/p where r = real income, y = money and p = price level.

c) RISE IN OVERALL WELLBEING OF THE PEOPLE: According to this measures, if the citizen of
country are able to get and consume more goods and service than before, people will be considered better
off. The welfare of the people will rise. In the words of Okun and Richardson, “economic development is a
sustained and secular improvement in the material well being which is reflected in increase in goods and
services.

The basic defects with these definitions are that if an increase in the goods and service produced have been
created at the expense of too much hard work, or unequal distribution of wealth or at the expense of
health, safety and comfort or at the expense of dignity etc.

d) BASIC NEEDS APPROACH: it is also called physical quality of life. Approach uses only three indicators
for measuring economic development in a country. These indicators are (i) life expectancy and age (ii)
infant mortality and (iii) literacy.

The basic need approach is considered superior as it spells out in detail the human needs in terms of
health, nutrition, shelter and education etc. it is also devoid of the flaws which exist in per capita, GNP
measure. However the approach is criticized on the ground that it does not include security, justice and
human rights which are important measures of quality of life.

e) HUMAN DEVELOPMENT INDEX: the modern economists are not satisfied with GNP, per capita
income or national income as the principal measures of economic progress. According to them the issue is
not only how much growth but what king of growth. They formulated human development index
(HDI). There were number of measures which were included in this index. However to keep the HDI
simple and manageable the following main variables were included in it (a) life expectancy was chosen as a
measure of long life (b) literacy as an index of knowledge and (c) real GDP per person.

f) OTHER DIVERSE INDICATORS: In addition to real GDP per person, the modern economist measure
the level of country’s development from the following indicators

1) The percentage of income originating from agriculture in GDP. The higher the income originating from
agriculture, the less developed is the economy of a country.

2) Per capita consumption of energy. The higher the per capita consumption energy, the more developed is
the industry and economy of the country.

3) Percentage of starches in total calories consumed. If there is high percentage of starches consumed in
total calories consumed by the people, the economy will be considered as underdeveloped.

4) Degree of urbanization, high school enrolment ratio. If the ratio of school enrolment, the degree of
urbanization and life expectancy is rising in a country, they are considered to be positively related to
economic development.
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5) Infant mortality and density of population. If in a country the infant mortality and density of population
are high, it is considered to be negatively related to economic development.

Economic development includes not only economic growth but also a political, social and cultural change
of society which contributes to better living standard.

Q2. Define economic growth and economic development?

ECONOMIC GROWTH: “A positive change in the level of production of goods and services by a country
over a certain period of time. Nominal growth is defined as economic growth including inflation, while real
growth is nominal growth minus inflation. Economic growth is usually brought about by technological
innovation and positive external forces.”

Another definition of economic growth is: “Increase in a country's productive capacity, as measured by
comparing gross national product (GNP) in a year with the GNP in the previous year. Increase in the
capital stock, advances in technology, and improvement in the quality and level of literacy are considered
to be the principal causes of economic growth. In recent years, the idea of 'sustainable development' has
brought in additional factors such as environmentally sound processes that must be taken into account in
growing an economy.”

ECONOMIC DEVELOPMENT: “Economic development is the increase in the amount of people in a

nation's population with sustained growth from a simple, low-income economy to a modern, high-income
economy. Its scope includes the process and policies by which a nation improves the economic, political,
and social well-being of its people.”

The University Of Iowa’s Center for International Finance and Development states that:

"'Economic development' or 'development' is a term that economists, politicians, and others have used
frequently in the 20th century. The concept, however, has been in existence in the West for centuries.
Modernization, Westernization, and especially Industrialization are other terms people have used when
discussing economic development. Although no one is sure when the concept originated, most people
agree that development is closely bound up with the evolution of capitalism and the demise of feudalism."
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Q3. Define economic growth and explain the benefits of

economic growth?
ECONOMIC GROWTH: “A positive change in the level of production of goods and services by a country
over a certain period of time. Nominal growth is defined as economic growth including inflation, while real
growth is nominal growth minus inflation. Economic growth is usually brought about by technological
innovation and positive external forces.”

BENEFITS OF ECONOMIC GROWTH:

Economic Growth means an increase in real GDP. This increase in real GDP means there is an increase in
the value of national output / national expenditure. The Benefits of economic growth include:
1. Higher Incomes, This enables consumers to enjoy more goods and services
2. Lower unemployment with higher output firms tends to employ more workers creating more
employment.
3. Lower Government borrowing. Economic growth creates higher tax revenues and there is less need
to spend money on benefits such as unemployment benefit.
4. Improved public services. With increased tax revenues the government can spend more on the NHS
and education etc
5. Money can be spent on protecting the environment It is necessary to spent on natural resources
so they can contribute their share in development of a country.

Q4. Define economic development and explain the

benefits of development?
ECONOMIC DEVELOPMENT: “Economic development is the increase in the amount of people in a
nation's population with sustained growth from a simple, low-income economy to a modern, high-income
economy. Its scope includes the process and policies by which a nation improves the economic, political,
and social well-being of its people.”

BENEFITS OF ECONOMIC DEVELOPMENT:

Benefit Elements:
Growth and Diversification of Revenue Base. Jurisdictions have a vested interest in realizing
expected direct benefits of economic development through revenues from development activity.

Multi-jurisdictional Benefits. The full benefit of the economic development project may not be
captured solely by the local jurisdiction. An analysis of project benefits should take into account other
jurisdictions and the project impact.

Assessing Intangible Benefits. Other project benefits may be incurred by the local jurisdiction that,
while not exactly quantifiable, can be estimated for the purpose of providing the jurisdiction’s decision
makers with the most thorough information. Examples of these intangible benefits include donated
facilities or infrastructure, quality of life amenities, community prestige or pride, and corporate
citizenship.
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Benefit Analysis:
Net Present Value Consideration. Determining the benefit of a project requires assumptions about
the timing of benefit streams that will take place in the future and are based on conditions like
employment, occupancy, etc.
These benefits will most likely be received in a period other than the one in which the costs are incurred,
requiring the calculation of the net present value of the project. For example, a public investment may be
required at the onset of a project with annual commitments to operational costs. To make appropriate
comparisons between the costs and benefit streams, a net present value analysis should be performed. The
analysis should contain a clear description of the adjusted impact for the jurisdiction, the constructed
methodology, and the assumptions employed. It is important to acknowledge the strengths, weaknesses,
and limitations of results so that decision makers are fully informed.

Q # 5 Describe the characteristics of under-develop

countries?
CHARACTERISTICS OF UNDER DEVELOPING COUNTRIES VERSUS DEVELOPING COUNTRIES

The total population in world in 2007 wll reaches over 6.2 billion people. Above three forth of world
population is living in developing countries and remaining one forth in developed countries. There is a
marked difference in the standard of living of the people living n advanced industrial countries and those
living in developed countries from the developing countries are in brief as under.

1. GNP per capita

One of the crude index of measuring the level of national well being of the people across the world is GPA
per capita .in the advance companies of the world, the GPA per capita far exceeds that of low and middle
income economies. The economic inequalities between the developed and under developed countries are
not only large but the gap between them is increasing as the year pass. According to the World
Development Report 2006, the GPA per capita of USA is as high as $41400, Germany$30120, France $
30090 where as it is around $510 of low income countries.GNP per capita income of selected developed
and underdeveloped countries is given below:

GNP Per Capita In USA Dollar

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2. Consumption of Words output

The developed nation account for about one quarter of the world population but they are estimated to
consumed about three quarters of the world’s output. The developing countries with three fourth of
population thus consumed one forth of world income. The result is that people living in developing
countries have limited income. Their per capita income is near to the subsistence level.

3. Unutilized or underutilized resources

In developing countries most of the resources of the country remain unutilized or underutilized due to
limited savings, unproductive use of funds, inappropriate investment decisions, shortage of skilled
professionals, availability of low development technology etc. wher as the advance nation make full use of
the resources available to them. The advanced countries have substantial resources, efficient and
productive technology to make the best use of resources for production.

4. Vicious Circle Of Poverty

The developing countries are finding difficulty to come out of the vicious circle of poverty due to limited
saving, low level of investment. The advance countries of the world are making full use of human and
physical capital for the development and progress of their countries.

5. Population
Birth rate and death rate are strikingly different between developing countries and advanced industrial
countries. Birth rates in LCD’s are generally at very high level on the order of 30 to 40 per thousand;
whereas n developed countries it ranges from 6 to 12 per thousand. The crude death rate in developing
countries is estimated at 10 to 20 per thousand; whereas in developed nations it ranges from 4 to8 per
thousand.

6. Life expectancy
The life expectancy in low income countries is about 60 years (Pakistan 64 years). In industrial advance
countries , the life expectancy is around 77 years.

7. Secondary school enrollment

The secondary school enrollment in developing countries is about 40% of the population. In developed
countries, it is about 95% of the population (Pakistan 46%).

8. Percentage of population in urban areas

The Percentage of population in urban areas in LCD’s is about 27%; where as in advance countries it is
about 80% (Pakistan 50%).

9. Population below the poverty line

The Population below the poverty line varies from country to country. In Pakistan 2203% of the people live
below the poverty line. In India 28.6% of the people fall below the poverty line. In USA, U.K, Spain, South
Africa, Saudi Arabia Italy, Ireland France, Austria, the persons fall below the poverty line are Nil.

10. Voicelessness & powerlessness of the people

In developing countries, there is lack of voice, power and independence of the people. Their voicelessness
subjects themselves to rudeness, in human treatment and exploitation at the hands of the institutions of
the state and the society. In advance countries of the world, people are not mal treated at the hands of
institutions. They have full liberty to rise their voice against any unjustice. The people, therefore, work
with, peace and security and engage themselves wholeheartedly in rising their living standards and
reaching new heights.

11. Debts
During last two decades, the developing countries are heavily burdened with international loans and also
domestic loans,=.it is feared that many debtor nations may default on their outstanding loans. The
advance countries have brought the heavily indebted poor nations in their complete hold. The developed
nations must recognize the helplessness of the poor nations to repay the debts. These debts should be
written off or reduced to soft loans for attacking poverty of the people living in LCD’s.
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12. Social over head capital
The developing countries are often burdened with inadequate social overhead capital, ranging from poor
public health, and sanitation facilities to inadequate roads, telephone, air services etc. As these social
overhead are expensive to provide, therefore, the developing countries, are not able to provide on large
scale. The industrial advance countries, have huge resources at their disposal have spread a net work of
social overhead in their own countries for accelerating the rate of economic development and rising the
standard of their citizens.

13. Inequality in incomes

As the year pass the income gap between the developed and developing countries is widening. The
developed countries should, therefore, open market opportunities to poor nations to build up their assets
and break the vicious circle of poverty for coming closer to the advance nations.

14. Market economies

The industrial advance countries have developed market economies based on large stock on capital goods,
advance production technology and well skilled labor force and well knit market. Whereas the developing
countries suffer marketing deficiency like that of infrastructure deficiencies, weak bargaining position of
the producers etc. the unskilled labor force, low production technology force productivity to low level.

15. Information technology

There is a rapid advancement in information technology in advance countries of the world. the revolution
in information technology in all the sector of the economy has brought potential benefits to them. It has
helped them in expanding goods and services at the national and international level, decreasing the cost of
production, reduce inventories, reduce transportation cost, expediting access to information etc. the
developing countries are far behind them in learning and adoption of information technology for rapid
growth of the country.

Q # 6) What are the determinant of economic

development?
ECONOMIC DEVELOPMENT
Development – can be defined as the improvement of economic wealth of countries or regions for the
well-being of its people.

FACTORS OF DEVELOPMENT
1. International trade is the exchange of capital goods and services across international borders or
territories
2. Affected by trade barriers
3. Cultural Pattern –specific cultures foster economic values.
China (work ethics), Japan (Industry & Discipline)
4. Political and Economic Institutions-Laws that can protect property rights
-Stable Financial institutions.
5. Human Resources- skilled, knowledgeable, and disciplined labor force contribute to progress.
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1. Natural resources
The natural resources is the principal factor which affects the development of an economy. If a country is
rich in natural resources, it is then able to make rapid progress in growth. In case a country is deficient in
forest wealth, mineral resources, water supply, fertility of land etc., it is then normally not in a position to
develop rapidly.
The pity with the most of LCD’s is that their natural resources are under-utilized, unutilized or misutilized.
This is one of the reasons for their backwardness. It may here be noted that presence of rich resources is
not a precondition for economic development. There are countries in the world which do not have
abundant resources, yet they have made rapid progress in growth by superior technology, new researches
and higher knowledge. Japan, Switzerland, South Korea are resource poor countries, yet they have made
rapid progress in economic growth through advanced technology and new discoveries.

2. Capital formation
The transfer of savings from households and governments to the business sector, resulting in increased
output and economic expansion.
.Individual savings: It is that part of income of individual which is not consumed on consumers good.
The saving is a directly proportional function of income .i.e.S = f(Y). The level of savings in a country
depends upon the power to save and the will to save. The higher the level of income, the greater will be the
amount of savings.
.Business savings: Business enterprises save when they do not distribute whole of their profits but
retain a part of them in the form of undistributed profits which are used for investment in real capital.
.Government savings: The government savings constitute the money collected as taxes and the profits
of public sector. The greater the amount of taxes collected and profits made, the greater will be the
government savings. These can be used by the government for holding up new capital goods like factories,
machines, roads etc or it can lend them to private enterprise to invest in capital goods.
.Public Borrowing: It is an important source of capital formation. It acts as an anti-inflationary
measure by mobilizing surplus resources to productive channel.
.Deficit Financing: It is newly created money and is an important source of capital formation in a
developing country. It is the method on which the government can fall back to obtain funds but it may lead
to inflationary pressures in the economy.
.Disguised unemployment: The surplus agricultural workers can be transferred from the agricultural
sector to the non-agricultural sectors without diminishing agricultural output. These un-productive
workers can be employed in various capital creating projects such as roads, buildings, canals, health
centers etc.

How to increase capital formation

In developing countries, the capital formation is around 5%. It should be raised to the of at-least 20% by
adopting the following measures:
.Since voluntary saving is not forth- coming in llow income countries, the government should resort to
forced saving. The various methods of forced saving are (a) taxation (b) deficit financing (c) borrowing.
.Obtaining of external resources in the form of loans and grants for development progress.
.Increasing export and reducing imports can also provide funds for capital Formation.
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2. Human resources
Human resource of the country is an important factor in economic development. If the population of the
country is educated, efficient, patriot, skilled healthy, it makes significant contribution to economic
development.
On the other hand, if a country is overpopulated, labor force is unemployed, uneducated, unskilled,
unpatriotic, it can put serious hurdles on the path of economic development. The goal of human resources
development is to promote the well-being of all people in the region through economic growth and
development. HRD has an important role to play in achieving the liberalization and facilitation of trade
and investment which was emphasized in the development.
Conducts work programs to develop human resources on issues ranging from education to labor to
capacity building. The group derives its mandate from taskings & conducting its work program through
three networks,
- Capacity Building Network
- Education Network
- Labor and Social Protection Network
Among human resource development priorities, quality basic education; improved labor market
information and analysis; enhancing skills in key sectors; lifelong learning; improved curricula, teaching
methods and instructional materials; mobility; and enhanced quality, productivity, efficiency of the labor
force.

3. Power
Power resources are the foundation of the economic development. They are derived mainly from two types
of sources (1) commercial and (2) non – commercial. Commercial resources of power are (a) oil, gas, coal,
hydel, thermal and nuclear electricity. Non commercial sources include animal power, fuel, wood, cow
dung.
The power sources are vital to economic growth of a country. Its importance has been changing with the
passage of time. Before industrial resolution, the energy for operating the machine was mainly supplied by
animal, human power and wind. With the scientific advancement, coal, oil, gas and watere falls are used as
the principal sources of energy. In developed countries pof the world, the nuclear power and solar energy.
In development countries of the world the nuclear power and solar energy are being increasingly used for
generating electricity.
The various sources of energy are helpful in;
Giving an initial push to the raising of production in all sectors of the economy.
Quickly bridging the development gap.
Providing economies of scale.
Ensuring high quality standard.
Reducing aterial wastage in all sector of the economy.
The high income oil exporting developing countries like Saudi Arabia & Bahria etc are producing energy
according to their needs from their own cheap sources i.e. oil
The other developing countries are giving highest priority to energy. Their main stress is on (a) accelerated
exploitation of coal, oil, hydel and nuclear power etc (b) intensification of exploration for oil & gas (c)
energy consideration.

4. The means of transport and communication

The means of tansport and communication have an important bearing on the economic growth of a
country. If a country is well connected with rail road, sea ports and has a developed means of
communication including information technology, it then helps in improving thte productive capacity of
the various sectors of the economy. An efficient transport and communication network contributes to
improving the quantity and quality of goods due to competition and reduction in production costs.
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5. Education and Training
Human capital formation. Education and training is a factor of considerable importance to economic
growth. According to Schultz, there are five methods of developing human resources (a) increasing
expenditure on health facilities (b) providing on the job trainings (c) organizing education at the primary
and secondary levels (d) providing opportunities to individuals and families to adjust to changing job
opportunities. The expenditure on the above items is named as investment in human capital. However, in
the narrow sense, the expenditure on education ant training is termed as investment in human capital.
The modern economists are of the view that the expenditure on education and training is most valuable of
all the capital. In the words of Gallbraith, “we now get the larger part of our industrial growth not from
more capital investment but from investment in men and improvements brought about by improved
man.” In the less developed countries (LDC’s), the expenditure on the spread of education knowledge and
know how is small compared to the other sectors of the economy. Therefore, they are faced with twoi
diverse manpower problems i.e. (1) they lack the critical skills needed for industrial sector and, (2) they
have a surplus labor force. The expenditure on education and training on human capital formation aim at
solving these problems by creating the necessary skill in man as a productive resource and providing him
gainful employment.

Problem of human capital formation in LDC’s

The problems in almost all the developing countries are,
1. The expenditure on primary education is not providing solid base for higher education.
2. Priority is not being accorded to secondary education which in fact provides the critical skilled needed
most for economic development.
3. A number of universities are being opened in the country but these have not been able to improve the
standard of education.
4. As no restrictions are placed on higher education, therefore, the proportion of failures at the higher and
secondary level is high. It lead to wastage of human resources.
5. There is no man power planning resulting in unemployment in many skills.
6. Technical education provided to the students is obsolete and outdated.
7. No attention is paid to agriculture education in the rural sector.
8. There are no on the job training programs.
9. More amounts are being spent on providing buildings and equipments but fewer amenities to the
teaching staff. The real bottleneck to the human capital formation is the supply of qualified instructors and
teachers.

NON ECONOMIC FACTORS

Non economic factors are as much important as economic factors in economic development. It is rightly
pointed out by Nurkse, “Economic development has much to do with human endowment. Social attitudes,
political condition and historical accidents.
We, therefore, study the non economic factors in brief.

1. Social factors
Social attitudes, values and institutions strongly influence economic development of a country. In less
develop countries there are social attitudes, values and institutions which are deterrent to economic
progress. Religion for instance, emphasis more on purification of human character people are less prone to
hard work.
People in LCD’s are mostly conservative in their habits. They feel pride in their native culture and are
generally not receptive to new methods of production.
The joint family system, though on the decline, has no killed the sense of initiative and the incentive to
work. The Castle System functioning in terms of occupation, ( tailor, carpenters, gold smith etc) is
restricting the occupational and geographical mobility. The occupational classification which is mostly
village centered is also hampering the economic progress.
The people in LDC’s are mostly influenced by traditional customs. They place highg value on leisure and
participation in festival and ceremonies. The unnecessary expenditure on marriages, death, birth,
litigation, class pride etc. has reduced domestic savings and has adversely affected economic progress.
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About half of the population comprises woman folk. The social taboos and customs prevent them from
working with men and so improving their standard of living.
For raising the standard of living of the masses, it is necessary that the social attitudes, values and
institution should be changed or modified. The change should be introduced by stages. It should be
evolutionary and not revolutionary. Myrdal in his bookAsian Drama has advocated the adoption of
modernization of values or modernization ideals’ for the rapid economic progress of the LDC’s. The UN
report on Economic Development of underdeveloped countries has also laid emphasis on changes in social
attitudes, values and institutions for economic development. We do agree that the socio cultural factors
have impeded economic progress in LDC’s but we should not forget here also that the adoption of socio
cultural attitudes of the West have brought down the quality of life as well.

2. Political factor
Political factor is an important variable in the economic developmentof a country. If the government of a
country is stable, it can play an important role in encouraging economic activity. The state, for instance,
can bring changes in the socio cultural attitude of the people for economic uplift of the masses. It can
introduce reforms ion the system of land use and in the field of education. It can also initiate economic
growth by maintaining peace in the country by providing public utility services and by fostering new
industries, development of agriculture, banking institution.
A stable government can develop means of communication and transport for the expansion of the size of
market in a planned manner. It can also adopt approved monetary and fiscal policies for accelerating
economic development.
The LDC’s have mostly been under the colonial rule. Their independence have not yet led to national
consolidation. The political instability in these countries is not promoting capital formation to the desired
extent. The overnight change of governments, the imposition of martial laws etc are being hurdles in the
economic progress of the LDC’s.
In Pakistan, for instance, there are rapid changes of government since partition. Each government which
came in power condemned the planning work done by the previous governments. It formulated its own
plans, chalked out its own strategies of development and mostly left the claim without achieving the
targets of the plans. The slow development in Pakistan is mainly due to political instability.

3. Administrative factor
The administrative factor has an important bearing on the economic progress of a country. If the
administration of the country is efficient, honest and strong, it can give a big push to the country economic
development.
In less developed countries (LDC’s) the administration is generally weak, inefficient and corrupt. The weak
administration has failed to perform its duties and thus has conspired to retard the economic growth.
After partition, in Pakistan, the newly selected government servants were assigned responsible duties.
They, due to lack of organizational skills, could not properly handle the onerous work of administration.
Most of the officers who had no technical training assigned and given the department for which they are
not professionally qualified. The departmental efficiency of such department is therefore adversely
affected. Further, there is centralization of power at the highest administrative level. It causes delay and
red-tapism in the planning and execution of the work. Corruption, lethargic attitude towards work is on
increase. The honest administrators are not being valued. The government servants have become tools in
the hands of politicians. All these factors combining together have adversely affected the economic
progress of the country.
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Q# 7 What is meant by capital formation?

CAPITAL FORMATION
The transfer of savings from households and governments to the business sector, resulting in increased
output and economic expansion.

SOURCES OF CAPITAL FORMATION

1. Individual savings It is that part of income of individual which is not consumed on consumers good.
The saving is a directly proportional function of income .i.e. S = f(Y). The level of savings in a country
depends upon the power to save and the will to save. The higher the level of income, the greater will be the
amount of savings.

2. Business savings Business enterprises save when they do not distribute whole of their profits but
retain a part of them in the form of undistributed profits which are used for investment in real capital.

3. Government savings The government savings constitute the money collected as taxes and the profits
of public sector. The greater the amount of taxes collected and profits made, the greater will be the
government savings. These can be used by the government for holding up new capital goods like factories,
machines, roads etc or it can lend them to private enterprise to invest in capital goods.

4. Public Borrowing It is an important source of capital formation. It acts as an anti-inflationary

measure by mobilizing surplus resources to productive channel.

5. Public Borrowing It is newly created money and is an important source of capital formation in a
developing country. It is the method on which the government can fall back to obtain funds but it may lead
to inflationary pressures in the economy.

6. Disguised unemployment The surplus agricultural workers can be transferred from the agricultural
sector to the non-agricultural sectors with out diminishing agricultural output. These un-productive
workers can be employed in various capital creating projects such as roads, buildings, canals, health
centers etc.
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Q7. Describe the main obstacle to economic development
in developing countries like Pakistan?
A common question in the development economics debate is “why are poor countries poor?” “They are
poor because they are poor”. Evidence from many developing countries shows that the major
characteristics of underdevelopment turn out to be the cause and consequence or underdevelopment.
There are a number of factors that inhibit economic development and they include.

The vicious circle of poverty:

This refers to a group of forces that tend to act and react upon one another in such a way as to keep a
country in a state of poverty operates on two fronts, that is the demand and supply sides , the demand side
is reflected in how productivity, ho income and law productivity. Similarly on the supply side, law
productivity leads to law income, law saving, law investment, capital deficiency and this in turn leads to
law productivity.

Human resources constraints:

Developing countries laics a source shortage of people possessing critical skills and knowledge required for
the development of the economy, underdeveloped human capital is manifested in law labour Productivity ,
limited specialisation in occupations, factor immobility, and in customary values and attitudes that reduce
the incentive for economic development.

Political factors:
Most developing countries are characterized by unable political conditions that inhibit
Economic Development. These unfavorable local and foreign investments, destroys social and economic
infrastructure, there by retarding growth and development. Countries that have had long periods to be
more economically progressive.

Law rates of capital formation:

According to the classical economist, capital formation is the most important factor of economic
development. Poverty in developing countries is the main cause of the shortage of capital. Poor countries
largely produce for subsistence, have law incomes law savings law investments leading to law rates of
capital formation. The major reasons for the law savings and investment include: political instability,
unstable monetary conditions, the extended family system, lack of continuity in economic life and
imperfect maintenance of law and order.

Social and cultural constraints:

Traditional beliefs and values are major obstacles to economic development. Negative social attitudes to
wards education tend to discourage the spread of modern learning and living,

Religion and kinship tend to encourage large families while culture tends to place high values on leisure,
contentment and participation in festivals and religions ceremonies using resources which would other
wise be invested in more profitable and useful economic ventures.