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 CONTENTS

Factors affecting Economic Growth and

Economic Development
Vicious circle of poverty with respect to
Capital, Labour, Technology.
ECONOMIC GROWTH
 The former is primarily to study how countries can
advance
their economies.
 An increase in the amount of goods and services produced per
head of the population over a period of time.
 Measured as the percent rate of increase in real gross domestic
product, or real GDP
 Growth is usually calculated in real terms – i.e.,
Inflation- adjusted.
 Measurement of economic growth uses national
income accounting.
 Economic growth is generally distinguished from development
economics.
 ECONOMIC DEVELOPMENT

 Economic development is the sustained, concerted actions of

policy makers and communities that promote the standard of living
and economic health of a specific area.
 Also be referred to as the quantitative and qualitative changes
in the economy.
 Such acts can involve multiple areas including development
of human capital, critical infrastructure,
regional competitiveness, social inclusion, health, safety, literacy,
and other initiatives.
Economic growth and Economic
development
Economic growth Economic
 development
Increase in the economy's real  Changes in income, savings and
output of goods and services in the investment along with progressive
country. changes in socio-economic structure
 Gradual increase in one of the of country.
components of Gross Domestic  Growth of human capital indexes, a
Product: consumption, government decrease in inequality figures, and
spending, investment, net exports. structural changes that improve
 Brings quantitative changes in the quality of life in developing nations.
economy . i.e. Increases in real GDP.  HDI, gender- related index (GDI),
 More relevant metric for progress in Human poverty index (HPI), infant
developed countries. mortality, literacy rate etc.
 Widely used in all countries.  Brings qualitative and
 Growth is a necessary condition for quantitative changes in the economy.
development.
Factors influencing Economic Growth
and Development
Factors of Economic
Growth and
Development

Non-Economic
Economic factors factors

1. Capital Formation
2. Natural resources 1. Human resources
3. Marketable surplus of 2. Technical know-how
agriculture general
andeducation
4. Conditions in 3. Political freedom
foreign trade 4. Social organization
5. Economic system 5. Corruption
6. Desire to develop
 ECONOMIC FACTORS
1. Capital formation
 The strategic role of capital in raising the level of production
 It accelerate the pace of growth, increase the income savings ratio and rises the
level of investment.
2. Natural resources
 The principal factor affecting the development of an economy is the
natural resources.
 The existence of natural resources in abundance is essential.
 A country deficient in natural resources may not be in a position to develop rapidly.
 Ex: Japan and India are the two contradictory examples.

3. Marketable surplus of agriculture

 The excess of output in the agricultural sector over and above what is required
to allow the rural population to subsist.
 With the development of an economy, the ratio of the urban
population
increases and increasing demands are made on agriculture for food grains.
 These demands must be met adequately; otherwise the consequent scarcity of
food in urban areas will arrest growth.
4. Conditions in foreign trade
 Foreign trade has proved to be beneficial to countries which have been able to set-up
industries in a relatively short period.
 These countries sooner or later captured international markets for their industrial
products.
 Developing countries should specialize in production of primary products as they
have comparative cost advantage in their production.
 The developed countries, on the contrary, have a comparative cost advantage in
manufactures including machines and equipment and should accordingly specialize
in them.
5. Economic system
 Vast economic system across the world. The Third World countries finds their own
path of development. They cannot adopt a laissez faire economy. Further, these
countries cannot raise necessary resources required for development.
 The latest experiments in economic planning in China have shown impressive
results.
 Therefore, from the failure of economic planning in the East European socialist
countries it would be wrong to conclude that a planned economy has built-in
inefficiencies which are bound to arrest economic growth.
NON-ECONOMIC FACTORS
1. Human resources
 Man provides labour power for production to a country.
 If labour is efficient and skilled, its capacity to contribute to growth will be high.
 The productivity of illiterate, unskilled, disease people is generally low and does not
provide any developmental work in a country.
 Human resources remain either unutilized or the manpower management remains
defective. The same people will become burden to the economy.

2. Technical know-how and general education

 As the scientific and technological knowledge advances, man discovers more and
more sophisticated techniques of production which steadily raise the productivity
levels.
 Schumpeter attributed much to the capitalist development.
 Since technology has now become highly sophisticated, still greater attention has to
be given to Research and Development for further advancement.
3. Political Freedom

 The process of development and underdevelopment are interlinked with the

political freedom.
 Under-development countries like India, Pakistan, Bangladesh, Sri Lanka,
Malaysia, Kenya and a few others, which were in the past British colonies,
was linked with the development of England.
 England recklessly exploited them and appropriated a large portion of their
economic surplus.
 Dadabhai Naoroji explained in his classic work ‘Poverty and Un-British
Rule in India’ that the drain of wealth from India under the British was the
major cause of the increase in poverty.
 India during that period, which in turn arrested the economic
development of the country.
4. Social organization

 People show interest in the development activity only when

they feel that the fruits of growth will be fairly distributed.
 Mass participation in development programs is a pre-condition
for accelerating the growth process.
 Whenever the defective social organisation allows some groups
to appropriate the benefits of growth, masses will participate in
the development projects undertaken by the State.
 The new agricultural strategy has given rise to a class of rich
peasantry creating widespread disparities in the countryside.
5. Corruption
 Corruption is a negative factor in their growth process.
 Until and unless countries root-out corruption in their administrative system,
it is most natural that the capitalists, traders and other powerful economic
classes will continue to exploit national resources in their personal interests.
 The regulatory system is also often misused
 The licenses are not always granted on merit.
 The art of tax evasion has been perfected in the less developed countries by
certain sections of the society.

6. Desire to develop
 Development activity is not a mechanical process.
 The pace of economic growth in any country depends to a great extent on
people’s desire to develop.
 If in some country, the level of consciousness is low and the general mass of
people has accepted poverty as its fate, then there will be little hope for
development.
 And like all human enterprises, its outcome will depend finally on the skill,
quality and attitudes of the men who undertake.
Vicious Circle
ofPoverty
 Vicious circle of poverty
In economics, the cycle of poverty is the “Set of factors or events
by which poverty, once started, is likely to continue unless there
is outside intervention“. The poverty cycle can be called the
“Development trap" when it is applied to countries.
OR
The factors which lead to underdevelopment and poverty in a
country such as deficiency of capital, underutilization of natural
resources high rates of population growth , low rate of saving and
investment etc., these are closely interconnected that they are said
to form a Vicious Circle of Poverty.
 Define Vicious circle of poverty
According to R. Nurkse:
“The less developed countries remain poor due to domestic
obstacles. These obstacles act and react upon one another in
such a way that they form a vicious circle. They keep the
country in a perpetual low level of development.”
According to Meier and Baldwin:
“A country is poor and remains poor because its human and
natural resources remain unutilized. People in less developed
countries are mostly technologically backward. They are
illiterate, lack initiative and entrepreneurial ability. The
absence of skilled and trained labor leads to under-utilization
and even mis-utilization of natural resources. A country is
poor because it is caught up in under-development trap.”
Explanation:
            Now we can say a country is poor because it is poor. Vicious
circle of poverty can be explained with the help of a simple example to
prove that a country is poor because it is poor.       
Simple Example:
A poor man may not have enough to eat, being under-fed, his health
may be weak, being physically weak, his working capacity is low, this
will give him less return which means that he is poor, all this means that
he will not have enough to eat and so on.
How is Vicious Circle of Poverty Created?
Accordingly, a country is poor because it is poor. Being poor, a country
has little ability to save. The low level of saving leads to low level of
investment and to deficiency of capital. When the productivity is low,
the income will be low and so there is poverty and the vicious circle is
complete.
 Vicious circle of poverty
classification

 Vicious circle of poverty- Capital

 Vicious circle of poverty- Labour
 Vicious circle of poverty- Technology
Vicious circle of poverty- Capital
Vicious circle of poverty- Capital
 Classification of vicious circle of poverty under capital.
 In some countries poverty refers to low real income .Real
income remains low due to low level of capital which is
because of low level of saving and low investment.
 Reduces the capital formation in the nation.
 Finally leads to low economic growth.
 Slow economic growth chains to the lack of education, standard
of living, health in the society.
 The production activity also declines with the low development
activities.
 The phase of economic growth and economic development
declines gradually which is called as underdeveloped economy.
Vicious circle of poverty- Labour
Vicious circle of poverty- Labour
 Starting with low income of the labour in a family give raise
to child labour.
 Child labour is the crucial factor which increases all other
activities such as low education of child; hunger, disease,
death rate, etc.
 Low satisfaction of basic necessities like water, food,
shelter.
 Inefficiency in the workers, poor job perspectives,
low
standard of living.
 They are the small contributors to the economy.
 This effects the economic growth and economic
development.
 This leads to low Gross Domestic Product(GDP) and low
Gross Domestic Product(GDP) per-capita income.
Vicious circle of poverty- Technology
Low
income
level

No Research
No Economic
Vicious and
Development
Development circle
of
poverty

Low Inventions
Slow Economic
and no
Growth
infrastructure
 Vicious circle of poverty- Technology
• Low per capita income of the economy effects the technological
change in the nation.
• The nation will lag behind in the technology.
• Low research and development.
• No word of inventions by the people.
• No advanced infrastructure in the country
• Low human development index, physical standard of living and
other measures of economic growth and development.
• Slow economic growth
• Negative economic development.
Combination of vicious circle of
poverty
 Causes of Poverty
 Low productivity rates
 Low salary
 Low infrastructure and corrupt governance
 Business failure
 Ignorance, lack of skills and technology
 Unhealthy or diseases
 Disaster
 Inability to access to resources such as land, finance,
 information, technical assistances, etc.
 No on-going education
MEASURES TO REMOVE
VICIOUS CIRCLE OF
POVERTY
 ECONOMIC MEASURES
1- Raising the Stock of Capital and Foreign Exchange
There is deficiency of saving, investment and foreign exchange reserves in Pakistan.
To increase the saving and investment, various steps of government are required.
Increase in saving, investment and foreign exchange reserves will lead to capital
formation; it results in removal to vicious circle of poverty. Domestic saving is 9.9 %
of GDP; total investment is 16.6 % of GDP and foreign exchange reserves are $ 15.0
billion in Pakistan.
2- Control on rapidly growing Population
Pakistan is facing a serious problem of backward over population.  Control on
rapidly growing population is another measure to break the vicious circle of
poverty. Total population of Pakistan is 169.94 million, its fast growth rate is 2.05 %
and Pakistan is at 6th number at the chart of most populous nations.
3- Use the Advanced Technology
Most of the developing countries use backward techniques of production. To make
rapid economic development, it is necessary to adopt advanced technology. To
break the vicious circle of poverty, we should use the modern methods of
production in all the sectors of economy.
 ECONOMIC MEASURES
4- Check the Inflation
Due to inflation, the purchasing power of people decreases, it leads to increase in the
consumption proportion and decrease the saving. This whole situation causes to
create vicious circle of poverty. In developing countries like Pakistan, the purchasing
power of the people is low due to high rate of inflation. Rate of inflation is 13.3 % in
Pakistan.  To break the vicious circle of poverty, there should be price stability.
5- Optimum Use of Natural Resources
No doubt, natural resources are available in developing countries. But it is not possible
for them to use these resources in the best way. The best possible use of natural
resources is necessary to remove the vicious circle of poverty. Contribution of natural
resources to GDP is just 0.8 % and forest area in Pakistan is 4.21 % of the total area in
Pakistan.
6- Reduce the Burden of Internal and External Debts
Government has to pay a huge amount for services charges on internal and external
debts in developing nations. Due to external debts, the development plans and polices
are under the influence of external forces. Accordingly, self-reliance policy should be
adopted and we should reduce the dependence on debts. Today, the burden of total
internal debts on Pakistani economy is Rs. 8160 billion and external debts are $ 53.9
billion.
 ECONOMIC MEASURES
7- Balanced Growth Strategy
Balanced growth strategy refers to the growth of the various sectors at the same time. Vicious
circle of poverty operates over all the sectors of an economy. Development of any one sector
cannot remove the vicious circle of poverty. Balanced growth strategy is compulsory to
remove the vicious circle of poverty. There is inter-relationship between agriculture and
industrial sector. So, growth and development of both is necessary to check the vicious circle
of poverty.
8- Enhance the Economic Growth Rates
Vicious circle of poverty can be checked through increasing the economic growth rates.
Increase in economic growth rate refers to the growth and development of economy.
Economic growth and development will cause progress and prosperity in the country. All this
results in removal of vicious circle of poverty. At present, real GDP growth rate of Pakistan is
just 4.1 %.
9- Surplus in Balance of Payment
Since partition, Pakistan is facing the deficit in its balance of payment (but only in five years)
that is also caused in creation of vicious circle of poverty. To break the vicious circle of poverty,
surplus in balance of payment is needed. By increasing exports and decreasing imports we
can achieve surplus in balance of payment. During July-March 2010, exports are $ 14.162
billion and imports are $ 25.107 billion in Pakistan. Accordingly, deficit in balance of payment
is $ 10.945 billion.
 ECONOMIC MEASURES
10- Reduction in Unemployment
The major reason of poverty is unemployment. Government should start those
projects and install those industries, which are labour intensive. Maximum job
opportunities will be provided to population to remove the vicious circle of poverty.
Rate of unemployment in Pakistan is 5.5 %, under-employment is 16 % and
disguised unemployment is 20 %.
11- Denationalization
It is the common observation that in developing countries like Pakistan, the state
owned enterprises are facing the problem of continuous loss. These losses are due
to some internal problems. Those institutions, which are facing loss, should be
denationalized to increase the efficiency and to reduce the burden on economy.
Nationalization policy was adopted according to Nationalization Act of 1974.
 SOCIAL MEASURES
12- Islamic Economic System
Islamic economic system is the best economic system all over the world. Vicious circle
of poverty easily can be removed by adopting the Islamic economic system. This
system is very useful to reduce consumption, to increase investment, to remove
corruption and unequal distribution of income and wealth. 
13- Remove the Illiteracy
Literacy rate in Pakistan is only 57 %, which is almost 100 % in developed countries.
Due to illiteracy, we have shortage of skilled and trained people. To remove the vicious
circle of poverty, we have to increase the literacy rate.
14- Discourage the Joint Family and Caste System
Most of the population is connected with the joint family and caste system in
developing countries like Pakistan. Due to joint family system, people sometimes, do
not take interest in their separate business activities. People prefer only those jobs,
which are according to their caste in caste system. 
15- Reduction in Unproductive Expenditure
Unproductive expenditure is a social evil. In Pakistan, people not only spend more on
customs and traditions but also sometime they have to borrow to perform the
customs and traditions. People spend a large portion of their income on litigations,
marriage, birth and death occasion which reduces their savings.
 SOCIAL MEASURES
16- Reduction in Consumption
Due to international demonstration effect, our population wants to copy the life styles
of the rich nations. In this way, they allocate the huge portion of their income to adopt
the life styles of rich nations. In this way the consumption of population is very high
and saving is very low. To remove the vicious circle of poverty, it is necessary to reduce
the consumption.
17- Provision of Infrastructure
Basic infrastructure is necessary for economic development. Provision of roads,
transports, communications etc. will encourage the economic development. In this
way vicious circle of poverty can be broken. Government has allocated an amount of
Rs. 133 billion to improve the infrastructure.
18- Fair Distribution of Wealth
To remove the vicious circle of poverty, suitable income and wealth distribution is
compulsory. In developing countries, the gap between haves and haves not is
increasing day by day. Due to unequal distribution of wealth, poor population remains
away from economic activities and it results in creation of vicious circle of poverty. In
Pakistan, 50 % national resources are in the possession of 20 % population. On the
other hand 20% poor population has only 6.37 % national resources.
 CULTURAL AND POLITICAL MEASURES
19- Save the Resources from Litigations
Most of the population especially in rural areas is facing the problem of
litigations in developing countries like Pakistan. They are wasting
resources in litigations. It is unproductive use of income and reduction in
saving and investment. Saved resources from litigations can be utilized
to break vicious circle of poverty. 
20- Check on Out-flow of the Best Brain
To remove the vicious circle of poverty, expert staff, trained labour and
efficient management is required. But in developing countries, there is
an out-flow of the best and talented brain. A country has to check on
out-flow of the intelligent people to break the vicious circle of poverty.
21- Increase in the Efficiency of Entrepreneur
Spreading education and training institutions can improve efficiency of
entrepreneur. Efficient entrepreneur is helpful to break the vicious circle
of poverty.
 CULTURAL AND POLITICAL MEASURES
22- Political Stability
Political stability is essential for the development of any country. In
developing countries like Pakistan, there is political instability and the
policy instability of the stable government. To get free from the vicious
circle of poverty, political stability is needed.
23- Stable Fiscal Policy
To remove the vicious circle of poverty, stability of fiscal policy is
essential. Due to change in tax structure, consumption pattern of
people is affected. If government reduces the taxes, it will cause to
increase in real income, more saving and investment. It will cause to
remove the vicious circle of poverty.
 Conclusion
Vicious Circle of Poverty is the major obstacle in way
of economic development. Without its removal,
economic development is impossible. It can be
removed through adopting self-sufficient policy.
Government should adopt labour intensive
technologies to remove unemployment and poverty.
JAZAKALLAH