Determinants of Economic Development

- Economic development is not determined by

economic factors alone. There are non-economic
factors that affect economic development, and they
have greater influence than the economic ones.
- Example of economic factors are capital, technology
and market.
- Example of non-economic factors are government,
religion, education, social structure, values, culture,
etc.
- Clearly, solving economic problems with economic
solutions only is inadequate.
Example. The planning and implementation of an
irrigation system does not only involve money and
method but also the attitudes of those who will
implement the project.
Capital
- It refers to finished goods which are being used to
produce other goods.
- These are the machines, buildings, tools, equipment,
etc. These are also specifically called physical capital.
- In the case of money, it is financial capital. People
are classified as human capital.
- Machines accelerate the production and distribution
of goods.
- Work can be done in lesser time and effort. This also
reduces the unit cost.
- During the ancient times, people relied on men and
animals for their production and construction.
Example. The temples and pyramids were built by
thousands of workers, mostly slaves.
- It took them years to finish their projects.
- Unfortunately, there are still many parts of the world
which are using primitive methods of production and
construction. These situation contribute to their slow
pace of development.

- The rich countries, like the United States, Japan and

those in Western Europe, have been using modern
machines in agriculture, industry and service
organizations.
- As a result, they have become efficient in their economic
activities.
- They produce better goods at lower cost. In the world
markets, their products are more preferred.
- On the other hand, the less developed countries do
not have even enough funds for road construction,
electrification, communication, irrigation and other
vital projects for economic development.
- Their incomes from selling raw materials and crops
to the industrial nations, together with taxes, are not
sufficient.
- In most cases, the less developed countries depend
on foreign loans and investments to develop their
economies.
- In Latin America, most of the imposing buildings and
impressive machines are owned and managed by
foreign corporations – the multinational
corporations. Most of these giant enterprises belong
to the United States.
- Despite of the presence of these profitable
businesses, the countries and people in the region
are very poor.
Example. Sao Paulo in Brazil is the largest and
fastest growing urban community in the Western
hemisphere. In spite of its rapid growth, most of its
people live in poverty and squalor.
Technology
- It generally refers to better techniques or methods of
production.
- It can also be applied in other fields like public
administration, educational or social work.
Example. Social technology is concerned with the
improvement of attitudes and values of the people.
- Public administration technology deals with the
improvement of social goods in order to maximize the
satisfaction of social wants.
- Research has contributed much to the development
of technology.
- The discovery of a new technique is invention,
according to Schumpeter. He pointed out that the
practical application of an invention to production
for the market is innovation.
- Not all innovations are for the markets.
Example. Political or social innovations are
intended for improving conditions in the government
or society.
- Research and development require big funds.
Through these better ways of doing things or
producing goods are discovered.
- The rich countries can afford to undertake necessary
and expensive research and development projects.
- They give high priority to such undertakings because
their future economy greatly depends on them.
- Among the rich countries, both the government and
the business sector are actively engaged in research
and development.
- The less developed countries merely copy or imitate
Western technology.
- Such practice is cheaper. They are spared from
spending millions of money for researchers,
scientists, laboratories, buildings, and equipment.
Technology for the less developed countries
- There is nothing wrong with the importation of
technology. It saves both money and time.
- The imported technology should be suitable to local
conditions.
- The economic, social, cultural, political, and
managerial aspects have to be taken into
consideration in the application of a foreign
technology.
Example.
Many years ago, Japan was a notorious imitator
of Western technology. Immediately after eliminating
its feudal economy, Japan completely copied the
agricultural technology of the United States and
England and applied these in its farms.
- The result was a dismal failure. The individual farm
units of Japan are small and the imported
machineries are not appropriate.
- These are only proper for large farms like those in
Europe and the United States.
Another example
A poor country bought a giant machine from Russia.
This was used in constructing a huge dam in the
countryside. While the giant machine was in the process
of excavation, thousands of unemployed people were
watching with admiration the wonderful job of the
machine.
- Evidently, a poor country with a very large population of
unemployed should give first priority to labor-intensive
technology.
- The jobless people should work in the construction of
the dam – not the expensive imported machine.
- Professor Gunnar Myrdal, author of Asian Drama,
noted that Western technology has been adopted in
Southeast Asia without proper consideration of the
local climate and soil conditions. Naturally, this has
an adverse effect on production.
- Being poor countries, their scarce resources should
not have been wasted by the improper application
of technology.
• In the case of the industrial countries, they use machines
or capital-intensive technology, because labor is scarce
and therefore expensive.
- It is more economical for them to use machines rather
than employ workers.
- For the poor countries, they have an oversupply of
unemployed and underemployed individuals.
Unemployment – involuntary idleness of workers.
- The total number of people who do not have jobs in a
particular place or area.
Underemployment - it is the condition in which people
in a labor force are employed at less than full-time or
regular jobs or at jobs inadequate with respect to their
training or economic needs.
2 Elements of Unemployment
1.) Avoidable Unemployment – there are persons who are willing
and able to apply for a job except that there are no jobs available.
It is also known as “Deficient-Demand” Unemployment.
2.) Unavoidable Unemployment – there are jobs available but
people don’t get employed.
a.) Frictional Unemployment – people change jobs, temporarily
unemployed.
b.) Structural Unemployment – mismatched by their jobs,
mismatched by their skills, and problems of geography.
c.) Seasonal Unemployment –it occurs when there is not enough
demand for labor on a certain period of time.
Cyclical Unemployment – it occurs when output is
below its full employment level, and is mainly
brought about by the operation of the business
cycles.
Ex. After an upsurge in the production of goods and
services, business firms now begin to count on their
inventories and start reducing their work force.
Determinants of Unemployment:
1. Level of economic activity
2. Transmission of information
3. changes in occupation
4. Institutional restrictions and barriers
5. Structural changes
6. technological changes
7. Restrictions to entry by labor unions
8. seasonal industries
- They should therefore use labor-intensive
technology(more labor and less machines).

- Schumacher, author of “Small is Beautiful”,

suggested an intermediate technology for the less
developed countries.
- This type of technology is between a primitive
technology and modern technology. It is more
efficient than a primitive technology and less
expensive than a modern technology. Such
technology is labor intensive.
Market
- The growth of markets reflects an expanding
economic development. For as long as the various
sectors of the economy are equitably benefited,
economic growth is real and enduring.
- A flourishing market which enriches only the
foreigners and the very few local elite only
aggravates the problems emanating from the
maldistribution of wealth and income. Such
condition is widespread in the less developed
countries.
- Transportation, communication and electricity
greatly help in the growth of markets.
- Such external economies of scale reduce cost for
both producers and traders.
- In addition, contact between sellers and buyers is
easier and more convenient.
- Capital and technology are directly involved.
Machines and other physical facilities are needed to
accelerate production, processing and distribution.
- Technology improves production, processing, and
distribution.
- A more modern production and marketing system
saves cost and improves the quality of the products.
- Goods with lower cost of production and distribution
have generally lower prices.
- This increases the purchasing power of the buyers and
so demand for the products also increases.
- A market becomes bigger when more people buy
more goods. This stimulates investments and
production.
- It is only expected that businessmen are willing to
produce more if there is a good demand for their
products.
- The same situation applies to farmers. They are
encourage to raise crops that have favorable markets.
* A practical and rational way of convincing people to
produce more goods is the presence of a favorable
market.
- The industrial countries have considerable
advantages in both local and foreign markets. Their
products are of better quality.
- Their prices are lower, if there are no taxes or tariffs
imposed on them.
- The less developed countries are excellent markets
for their products.
- The colonial mentality of the people further bolster
the lucrative business of the multi-national
corporations.
Social Structure
- A society which has a more equitable distribution of
wealth and income, and economic freedoms, provides
a more fertile environment for economic
development.
- Members of society are induced to pursue their own
individual interests, be it economic, social, cultural, or
political.
- Opportunities for improvement are open to all
members of society.
- A society whose wealth and income belong to very
few families does not encourage economic
development.
- Since the fruits of development do not go to the
people, they have no enthusiasm to participate in
any government development program.
- It is even worst, if it is a close society. People who
belong to the lowest social class cannot move to
higher social structure because it is the written law.
- Such situation only breeds poverty and ignorance.
The poor have more desire to work hard and study.
The Family System
- Family members in Western societies like the United
States are more individualistic and self-reliant.
- Adult children are financially independent from their
parents.
- They are free to pursue their economic inclinations
anywhere.
- Considering the security of the parents, their family
obligations are minimized. Unlike in the less developed
countries, especially among Asians, the children have to
take personal care of their poor old parents.
- An extended family system which is common in the
Philippines and other developing countries is good in
the sense that there is unity, and the welfare of the
old and the young members are protected by the
stronger adult members.
- Extended family system has dominant features
which are not favorable to economic development.
Example. Manny married children live with their
parents. In case their parents can afford to support
them, the children are likely to lose their self-reliance.
- They do not work hard and just depend on their
parents.
- Close family ties hamper labor mobility and the
choice of better economic opportunities.
- Their grandparents or parents do not like their
children to work in far places, especially if they are
women.
- In the Philippines, many poor marriageable children
postpone their marriages in order to fulfill first their
obligations to their parents and other immediate
relatives.
• In the highly developed countries, the governments
take care of the aged and the jobless. So children of
poor families are believed of the burden of
supporting their close relatives.
- They have more opportunities to work for their
future.
Cultural Values
- Some cultural values have negative effects on
economic development. They retard the growth of
the economy.
Example. In the Philippines, cultural values such as
bahala na, manana habit, ningas cogon and other
similar values are not conducive to economic
development.
- According to Professor Myrdal, industrialization
requires efficiency, mobility, discipline and
punctuality.
- In his ten years field research in Asia, he observed
that many Asians do not have these. In our country
we have the familiar Filipino time.
- Another characteristics of the Asians is to say yes
when they really do not mean it. The idea is to please
or not to embarrass the other person who makes
the request or invitation.
- It is really very different in Western culture. They are
efficient, punctual and responsible.
The desire to imitate
- Many people in the less developed countries admire
the consumption habits of the Americans and the
Europeans.
- They take extreme pride in eating their foods,
wearing their clothes, and using their appliances and
tools.
- This is colonial mentality, pure and simple. They love
the products of their former colonial masters.
- Such misplaced cultural values do not encourage at
all the production of local goods. They do not help
the development of the local industries.
- People do not take pride and appreciation in their
own products and industries.
- In the case of Japan, despite its adoption of Western
technology in the beginning of its economic
development, it has never lost its own culture and
tradition.
- Whenever an underdeveloped country attains rapid
industrial growth through foreign investments or
through its own resources.
- Some of its cultural values which are not favorable
for economic development do not change.
Political Conditions
- Political conditions have considerable impact on
economic development. Political stability and fair
economic policies stimulate economic development.
- These attract local as well as foreign investments.
- The major role of the government is to provide a
high standard of living for its people.
- This can be attained through higher levels of
investments which generate employment and
production, and through the equitable distribution of
wealth and income.
- Plans, policies and programs are tools of economic
development. These can only operate efficiently
under a regime of good and honest public
administration.
*But if governments keep on changing very often,
economic programs and projects are likely to suffer.
- This is a waste of scarce resources. Not a few
countries in Africa and Latin America have very
unstable governments.
- Coup d’etat has become a common spectacle. There
were cases that only a sergeant in the army, together
with his followers toppled an existing government.
- Such frequent political disorders and changes do not
inspire economic development and this is one major
cause why the countries in such regions are generally
poor.
Coup d’etat - A sudden decisive exercise of force in
politics;
- Violent overthrow or alteration of an existing
government by a small group.
- Singapore is a small state and has scarce resources.
But it is very affluent and progressive compared with
most Asian countries.
- The principal keys to its economic growth are foreign
investments and tourism.
- These have been very successful in Singapore because
there is an excellent political stability and a very
efficient and honest public administration.
- In fact, Singapore has put up a modern
infrastructure for computer technology. It intends to
transform its place into a computer center of the
world.
- This would attract more international institutions to
invest in Singapore.
*More investments mean more employment,
production and income.
- Singapore is one of the few countries which can
handle foreign investments effectively without
sacrificing the interests of its people and society.
Corruption in Public Administration
- According to an economics professor in Singapore,
government corruption is the number one obstacle
to economic development in Southeast Asia.

- He pointed out that very precious scarce resources,

like money are not properly utilized for development
due to graft and corruption.
- Government corruption is present in any society. Based
on observations, such corruptions are more rampant in
the less developed countries like those in Asia.
- Professor Myrdal stated that corruption has reached
even the higher levels of government officials and
politicians.
- He cited the various government offices which have been
corrupt such as the public works departments,
government purchasing agencies and those involved in
the collection of taxes, customs duties and export and
import licenses.
- Myrdal also mentioned that corruption has not spared
even the courts of justice and the universities.
- In dealing with government offices, bribery has been a
common practice. There has been a need to bribe
government personnel to expedite applications or
approvals.
- Myrdal further observed that through the use of
middlemen, businessman have bribed high government
officials.
- It has been difficult to prove that such middlemen really
gave the money to said officials.
- The policemen and government clerks have gained the
reputation of accepting bribes in full view of the public.
- It has become an ordinary practice. Their low pay
encourage them to commit petty corruption.
- Asian government have taken measures and actions
to weed out inefficient and corrupt employees and
officials.
- In the Philippines, the present political leadership has
restructured some government institutions and
removed the corrupt ones.
- The task of cleaning the government is a long and
difficult process, considering our Oriental values
and depressed economic conditions.
- Corruption has become an institution. It cannot be
eradicated overnight.
- Laws and punishments are not enough to remove
corruption.
- It is more important that economic conditions of
minor employees be improved and the moral values
of government officials be changed.
- The honesty and integrity of top government
officials can serve as a good example for their
subordinates.
 Religion
- During the Biblical times, materialism and the pursuit of
wealth were despised and discouraged. Similar attitudes
were shown during the time of the Ancient Greek
philosophers and the Scholastics led by Aquinas.
- In fact, the Bible contains many statements against wealth
or materialism.
Example. It says that the poor are blessed for they shall
inherit the kingdom of heaven.
- It is harder for a rich man to enter the gate of heaven than
for a camel to pass through the eye of a needle.
- Such religious concepts and teachings against
materialism are not favorable to economic development.
- When people shy away from the pursuit of wealth,
economic growth tends to be slow and primitive.
- There is no need for them to work harder and to search
for innovations.
- They are just contented with their simple living.
*Many hate economic progress because of its bad effects
such as pollution, traffic congestion and the destruction
of the natural beauty of the environment.
- Max Weber, author of the Protestant Ethics and the
Spirit of Capitalism, claimed that the Protestant
countries are more progressive.
- He (Max Weber)proved his theory by pointing out the
presence of dominant values like thrift, industry, and
entrepreneurial spirit among Protestant nations.
- He pinpointed the rise of Protestantism as the cause
of the growth of the capitalist order in Europe.
Example. China with an older civilization and richer
natural resources was not the birthplace of the
Industrial Revolution.
Protestant Work Ethic
- It is the view that a person’s duty and responsibility is
to achieve success through hard work and thrift.
- It is an ideological principle stemming from the
Protestant Reformation of the sixteenth century and is
associated with the religious reformer John Calvin.
- Calvin preached a doctrine of salvation that later proved
to be consistent with the principles of a capitalist system.
- According to Calvin and Puritan ministers in early New
England, hard work, diligence and thrift are earthly signs
that individuals are using fully the talents given to them
by God for his overall purposes.
Puritan - A member of a Protestant group in England and
New England in the 16th and 17th centuries that opposed
many customs of the Church of England.
-A person who follows strict moral rules and who believes
that pleasure is wrong.
- Salvation is associated with achievement on this earth.
- Work and economic gain have come to have a moral
value.
- According to this view, it is good for the soul to work;
rewards on this earth go to those who achieve the
most.
- Salvation in the world to come is a reward that is in
direct proportion to a person’s contribution during
life.
• The Calvinist doctrine of work and salvation became
an integral part of the ideology of capitalism.
- The hard work of merchants and traders often
produced profits, and their thrift led to saving and
investment.
- Saving is the heart of the Protestant work ethic. With
Adam Smith’s idea of parsimony (or frugality) and
Nassau Senior’s idea of abstinence, it was
established that saving multiplied future production
and earned its own reward through interest.
- Former colonies of Spain are Catholics. They inherited
their religion from their former colonial master.
- Most of these countries belong to the less developed
countries.
- Many of the countries in South and Central America
were former territories of Spain.
- Professor Myrdal classified the cultural and religious
values of the Philippines as similar to Latin America.
- The more than three hundred years of Spanish rule in
the Philippines has tremendous effects on our
pervading attitudes and values.
- There are several Catholic practices which are not
consistent with the principles of economic
development.
Example. Barrio and town fiestas are celebrated to
honor their respective patron saints.
- Usually, these are expensive celebrations. Most
people, especially in the rural areas, spend all their
savings.
- In fact, many people even borrow money to feed
their hundreds of guests from neighboring barrios
and towns.
- Such expenditures are wasteful and misplaced,
especially for the poor.
- There are also celebrations which are religious in
nature, like marriages, baptisms, etc. In most cases,
these are also conducted in expensive style. They
always say that it is once in a lifetime.
- For the rich, there is nothing wrong. They can afford
to have lavish celebrations. But for the poor, it is
different. They become poorer and incur more debts
in trying very hard to comply with religious
traditions.
* Religion is only one of the factors of economic
development. It cannot totally influence economic
growth.
Population
- Population is both an advantage and a disadvantage in
economic development.
- It is an advantage if people are productive and
creative. They can support themselves by harnessing
the resources of their environment and by
manufacturing their raw materials for commerce.
- Some development economists are not in favor of
birth control. For them, people are the most
important resources in economic development.
- They have suggested the improvement of the
methods of production, especially food production.
- Developed countries that have insufficient number
of people encourage immigration of
aliens(foreigners).
- These people are needed to help them accelerate their
economic development.
- Other countries recruit specialists, technicians,
engineers, and skilled workers from other countries.
Example. In the case of the Middle East countries, it
takes time for them to develop their economies if they
rely only on their sparse population.
- Population is a great burden if the rate of population
growth is higher than the rate of production growth.
- Such situation is more serious if the resources of the
economy are not equitably distributed. These are
exactly the problems of the less developed
countries.
- Its population explosion growth exceeds its growth in
local production.
- Poor countries with high birth rates are advised to
adopt family planning programs. However, in general
such programs are not really successful due to
religious, cultural, and economic reasons.
- On the other hand, there are many countries with
abundant natural resources and with few people,
but they are poor. Brazil is a good example. The
problem is not population but production.
- Even if a country is overpopulated, if it has a very
high productivity, there is progress.
Example. Hongkong or Singapore
- There are many rich countries which are
overpopulated but they are prosperous.
Geography
- It refers to climate, soil, natural resources,
topography( ) and structure of the land.
- These have considerable influence on economic
development.
- Countries which are endowed with abundant
natural resources have greater potentials for
economic development.
- There are some countries with barren land but they
are rich in oil resources such as the middle East
countries.
- In the case of Africa, it is a giant continent, but only 7
percent of its land is arable and only 50 percent of the
arable land is used for food production.
- Such very limited agriculture land is further compounded
by floods and droughts. Rains are too much, too little or
none at all.
- Such natural hazards greatly impoverish the peoples of
Africa.
- Many die of hunger and disease. During prolonged
drought, crops die as well as their work animals.
- The agonies of the millions of Africans are also man-
made disasters like tribal slaughters, civil wars, banditry
and graft.
- There are countries with poor natural resources but
they were able to achieve remarkable economic
growth.
Examples. Japan and Israel
- In Japan, only about 16 percent of its total land area
is arable or can be farmed. During winter, one-half
of said farm area is covered with snow.
- Because of its meager natural resources, Japan
imports about 90 percent of raw materials for its
industries.
- Despite its geographical limitations, Japan has become
the fastest growing industrial society in the world.
- Through capital and technology, it has achieved
phenomenal economic growth.
- The same is true with Israel. Formerly, it was a barren
land. In the beginning, it had a pastoral economy.
- Today, Israel has a developed economy. Through modern
agricultural technology, its arid(very dry) land became
fertile and verdant(green with growing plants).
- It is now an exporter of farm crops, aside from industrial
goods.
- Transportation and communication are likewise
affected by geographical structure. The presence of
excellent harbors favors both local and international
trade.
- Great rivers help accelerate economic development.
In fact, the first civilizations emerged in the great river
valleys like Tigris, Euphrates, and the Nile
Mountainous countries pose obstacles to both
transportation and communication systems.
- In the case of the Philippines, it has more than 7,000
islands. Such geographical layout does not provide
good network of transportation and communication.

- Geographical disadvantages can be eliminated or

reduced through the proper use of technology and
capital.
End of the Chapter.