ECONOMIC GROWTH AND DEVELOPMENT NOTES

ECONOMIC GROWTH AND DEVELOPMENT

Economic Development

Economic development is the quantitative and qualitative improvement in the economy. Economic development, therefore, involves increase in the Gross National product (economic growth) and improvement of the welfare of the people.

Indicators of economic development

1. Increase in income per capita.
2. High standards of living and low cost of living.
3. Decline in illiteracy levels.
4. Improvements in technology.
5. Fair income distribution.
6. Low death rate.
7. Advanced infrastructure.
8. Large percentage of GNP from the manufacturing sector.
9. Low or absence of social cost, such as environment pollution.
10. High life expectancy.
11. High consumption and investment.

• Therefore, economic development is a multi-dimensional concept; its indicators are economic, social and political in nature

Economic growth

Economic growth is the quantitative increase in the national output, that is, it is the increase in the volume of goods and services produced in an economy.

• Economic growth differs from economic development in the sense that it covers only the physical aspect of the economy, without considering the socio and political aspects of the economy, therefore, its indicators are only economic in nature.

  Indicators of economic growth
  

1. High growth rate of the Gross National Product
   
2. Improvement of the physical infrastructure
   
3. High income per capita
   
4. Increase in the manufacturing sectors (industrial) development
   
5. Expanding investments and consumption
   
6. Urbanization
   
7. Fall in unemployment
   

Determinants of Economic Growth

1. Availability of natural resources: If a country is gifted in natural resources, such as minerals and favourable climate, and they are well utilized, it can easily attain a high economic level, but if a country has less natural resources it will be difficult for the country to realize economic growth.
2. Size of the labour force: A country with enough and efficient labour force is able to increase its national output than a country with shortage of labour force.
3. Stock of capital: If a country has a large stock of capital goods, such as machinery, factories, buildings, infrastructures etc, it can easily achieve economic growth, unlike a country with limited capital goods.
4. Entrepreneur capacity: Entrepreneurs are the owners and investors of various economic enterprises. The growth of investment and the ultimate growth of the economy depend much on the number and efficiency of entrepreneurs. A country with a large number of efficient entrepreneurs may realize a rapid economic growth.
5. Political and social stability: The growth of investments and the resulting economic growth depend much on the social and economic stability of the country. A country with political instability and social unrest hardly achieve any meaningful economic growth.
6. Internal and External Market Size: A large growth of the economy depends much on the market for the goods produced. Producers are encouraged to increase production if there is a readily available market for the goods and services. In a situation when the market size is so small, producers are discouraged from increasing production; as a result, the country cannot achieve high economic growth.
7. Conducive Environment for Growth of Investments: Adequate and reliable infrastructure with good the government economic policies on issues, such as tax, stabilization and employment, attract both local and foreign investors in the country and, thus provide the necessary condition for economic growth.
   
   

Positive impact of economic growth

1. Raises the living standards: Economic growth leads to an increase in income per capita, which increases the ability of the people to purchase goods and services and, thus improve their living standards.
2. Creation of employment opportunities: Economic growth leads to more employment opportunities to the people
3. Development of infrastructure: Economic growth enables a country to promote the development of her social and economic infrastructure such as transport and communication, energy, health, education etc.
4. Industrial development: Economic growth provides the necessary conditions for the growth of the industrial sector such as market for industrial products. As a result, it increases the purchasing power of the people, establishment of infrastructure such as electrical power, transport and communication.
5. Economic stability: A country that is experiencing a high economic growth has a stable economy with low inflation rate, low unemployment and a high growth rate of the national income.
6. High Income per capita: Economic growth leads to the growth of the national income and, thus to an increase in the income per capita.
7. Increase in resource utilization: Economic growth precipitates an increase in the utilization of the available resources such as capital and land.
8. Growth of towns: Economic growth leads to an increase in the economic activities in certain areas, such as industrial production, which attracts immigrants of people to the areas, hence construction of more residential buildings and infrastructure such as roads, electricity, tap water system, recreation centres etc, which are the prerequisites for the growth of towns.
   
   

Negative Impacts of Economic Growth

1. Environment Degradation: Economic growth stimulates the levels of industrialisation, which often result to environment pollution, such as air pollution and water pollution, by emitting poisonous gases to the atmosphere. Also, economic growth may result into an increase in the demand for agricultural raw materials. This gives pressure to the farmers to cultivate more land areas and clear more natural forests, hence cause land degradation.
2. Over-exploitation of Resources: Economic growth results to excessive demand for a lot of resources, such as minerals, soil, water, therefore, leads to the exhaustion of these natural resources.
3. Rural to Urban Migration: Economic growth may lead to economic imbalances between the rural areas and the urban areas. These imbalances between the rural areas and the urban areas may be in the form of unequal employment opportunities and unequal across to the social and economic services such as health, electricity and education. As a result, people may be attracted to migrate to the urban areas.
4. Income inequalities: If the income is not fairly distributed and economic resources are owned by few individuals. Economic growth may result to income inequalities.
5. Opportunity cost

Underdevelopment

This is a comparative term. It applies to countries which are developing but are lagging behind in their process of development. Underdevelopment does not mean absence of development. It applies to countries which are industrially, technologically, and scientifically and economically less developed. Examples of countries with underdevelopment are Tanzania, Kenya, Albania, Brazil and Bangladesh.

Indicators of Underdevelopment
(i) Low Income per Capita: In the underdeveloped countries, the income per capita is low due to the low volume of production.

(ii) Low contribution of the manufacturing sector to the Gross National Product: In the less developed countries, the contribution of the manufacturing sector is too low. The economy is more dominated by the subsistence agricultural sector.
(iii) Low technological development: In the underdeveloped countries, the level of technology is very low; most of the production activities are done by using backward technology.
(iv) Underutilization of resources: There is underutilization of resources in the less developed countries due to the poor technology and lack of capital to fully utilize the available resources.
(i) High death rates and short life expectancy: In the less developed countries, the rate of deaths, especially infant mortality rate, is so high and the life expectancy is short due to the poor health services and poor nutrition.
(vi) High illiteracy rate: Due to lack of adequate education facilities, many people in developing countries lack education especially disabled people.

Causes of underdevelopment
(i) Limited stock of factors of production: lack of the factors of production, such as labour, capital, land and entrepreneurs, and poor organisation of these factors in the process of productio lead to underdeveloment.

(ii) Poor technological development: If a country lacks the necessary technology to utilize the available resources, such as minerals, soils, forests and water, its level of development will be low.
(iii) Political instabilities: If a country is faced with political instabilities, due to wars and civil conflicts, investors will be discouraged from investing in such a country. Also, many of the country’s resources will be used for non-productive expenditures, such as buying weapons, instead of investing in the productive sectors such as the industries and the economic services.
(iv) Poor infrastructures: Underdevelopment is caused by lack of well developed infrastructure, such as roads, electricity, transport and communication, which are very important for attracting of investments.
(v) Wastage of resources: Underdevelopment may also be caused by rampant corruption of the government officials, and poor economic planning, in which the government may allocate oresources in non-profitable public enterprises.
(vi) Unfavourable terms of trade: Underdevelopment in the less developed countries ist, caused by unfavourable terms of trade such that the goods which are produced by these countries ha lower prices in comparison to goods which are produced by the developed countries. This results to a fall in the national income of those less developed countries.
(vii) Population Pressure: In the less developed countries, the rate of population growth is very high compared to the rate of economic growth. This leads to poor living conditions given the low capacity of the economy and the government to provide enough goods and services to the people.
(viii) Debts burden: Most of the less developed countries, due to low income, are forced to borrow money from internal and external creditors. However, most of the money borrowed is not used in productive projects, as a result, the governments of these countries fail to get enough funds to pay back the debts, and therefore the debt burden increases.

Economic Dependency

This is a situation in which a country depends on other nations or donor institutions to achieve its economic goals.

Types of Economic Dependencies

Economic development is divided into the following types:

(i) Trade dependence: This is a kind of dependency in which a country depend on international trade to obtain goods and services

(ii) Capital dependence: A country depends on foreign capital to enable her to run her economic activities.

(iii) Technological dependence: A country depends on foreign experts to provide technical
which can be used in the productive sectors of her economy.

(iv) Financial dependence: Financial institutions of foreign countries handle financial affairs
of a country, such as banking, insurance, etc.

(v) Direct dependence: Foreigners directly engage in the production activities in the dependent country. This takes the form of multinational investments in the major sectors of the economy, such as mining, tourism, agriculture, transport etc.

Effects of Economic Dependency

1. Dependency may increase the debt burden of a country.
2. Dependency, on foreign aid may harm the economic, political and social interest of a country.
3. Due to the dependency on assistance from other countries, a country may be given goods of poor quality or which have side effects.
4. Dependency on foreign technology and capital may discourage local initiatives from inventing and discovering new local technology.
5. It leads to a good political and social relations between the donor country and the dependent country

Theories of Economic Development
An Overview
Development theories have to deal with two challenges. On one hand, development theories analyze the economic phenomena of Underdevelopment and development.
On the other hand, they should be based on problem analysis, and offer strategies for development opportunities. The focus of these different approaches is on economic, social, political or cultural factors. These theories are divided into classical and modernization theories.

1. Classical Theories. Classical theories include;
(a) Harrod-Domar model
(b) Dual sector model
(c) Marxist theory
(d) Dependency theory

(a) Harrod – Domar Model
The model was developed independently by sir Harrod in 1939 and Eusen Domar in 1946. This model is used in development economics to explain an economy’s growth rate in terms of the level of savings and productivity of capital also Harrod domar consider capital accumulation as a key factor in the process of economic growth.

Capital accumulation (Net investment) it generates income and increase production capacity of an economy. Example New factory generates income to those who supply labour and this income increase total capital stock and production capacity of the economy.

necessary condition of economic growth is new demand must be adequate enough to absorb the output generated.

It suggests that there is no natural reason for an economy to have balanced growth. According to the model, there are the following three concepts of growth:
– Warranted growth

– Natural growth

– Actual growth

Warranted growth – This is growth rate of output at which firms believe they have the correct amount of capital and therefore do not increase or decrease investment, given expectation of future demand

Natural rate of growth The rate at which labor forces expands, as the larger aggregate output increases. If labour force increases at lower rate the only way to maintain the growth rate is to bring labour saving technology, under this condition the long term growth rate will depend on growth rate of labour force and the rate of progress in labour saving technology Harrod calls this growth rate as natural growth rate.

Actual growth – The Actual aggregate output change.

Assumptions of the Model
Harrod-Domar model makes the following priori assumptions:

1. Economic growth depends on the amount of labour and capital, expressed as: Y = F(L, K), output is a function of capital stock and labour.
2. The marginal product of capital is constant, and the production function exhibits constant returns to scale. This that implies the marginal and average products are equal.
3. Capital is a very necessary input in the process of production
4. The product of the savings rate and output is equal to savings which is equal to investment, S=I
5. The change in capital stock equals investment, less the depreciation of capital stock.

• In summary, the saving rate times the marginal product of capital, minus the depreciation rate, equals the output growth rate. Increasing the saving rate, increasing the marginal product of capital or decreasing the depreciation rate, increases the growth rate of output. These are the means of achieving growth on Harrod-Domar model

Its implication was that;

1. growth depends on the quantity of labour and capital.
2. More investment leads to capital accumulation which generates economic growth.
3. The model also had implications for the less economically developed countries, where labour is in plentiful supply but physical capital is not, thus slowing the economic growth.
4. The less developed countries do not have sufficient average income to enable high rate of savings and, therefore a slow accumulation of capital stock for making investments.
5. The model implies that economic growth depends on policies for increasing investments, by increasing saving and using that investment more efficiently through technological advancements.

• The model concludes that an economy cannot find full employment and stable growth rates naturally, similar to Keynesian beliefs.

  Criticisms against Theory

1. The model explains economic boom the highest stage of economic activities by the assumption that investors are only influenced by output (known as accelerator Principle), which is widely believed to be false.
2. In terms of development, critics claim that the model considers economic growth and development as the same, whereas in reality, growth is only a subset of development.
3. The model implies that poor countries should borrow money in order to finance investment which leads to economic growth. However, history has shown that this often causes repayment problems later.
4. According to the model, saving is the most important endogenous parameter. But the challenge is; can the parameter be easily manipulated by policy makers? It depends on the much control that the policy maker has over the economy. In fact, there are several reasons to believe that the rate of savings may itself be influenced by the overall level of per capita income in the society, not to mention the distribution of that income within the population.

(b) Dual Sector Model
The dual sector model, in development economics, explains the growth of a developing economy in terms of labour transition between two sectors; the traditional agricultural sector and the modern industrial sector.

Surplus labour, from the traditional agricultural sector, is transferred to the modern industrial sector which promotes industrialization and stimulates a sustainable development

In the model, the traditional agricultural sector is typically characterized by low wages, abundance of labour and low productivity, through labour intensive production process.

In contrast, the modern manufacturing sector has higher wage than the agricultural sector, higher marginal productivity and demand for more workers. Also, the manufacturing sector is assumed to use the production process that is capital intensive. So investment and capital formation in the manufacturing sector is possible, since the capitalists profits are reinvested in the capital stock.

Improvement in the marginal productivity of labour in the agricultural sector is assumed to be a low priority, as the hypothetical developing nation’s investment goes towards the physical capital stock in the manufacturing sector. Since the agricultural sector has a limited amount of land to cultivate, the marginal product of an additional farmer is assumed to be zero since the law of diminishing marginal returns has run its course due to the fixed land. As a result, the agricultural sector has a number of farm workers who do not contribute to the agricultural output, since their marginal productivity is zero.

The group of farmers, that are not producing any output, is termed surplus labour. Since this group could be moved to other sectors without any effect on agricultural output, therefore, due to wage differential between the agricultural sector and the manufacturing, workers will tend to move from the agricultural sector to the manufacturing sector, overtime, to get the reward of higher wages.

If a number of workers move from the agricultural sector, equal to the quantity of surplus labour in the agricultural sector regardless of who actually transfers, general welfare and productivity will improve. Total agricultural product will remain unchanged while total industrial product increases, due to the additional labour, but the additional labour may also drive down marginal productivity and wages in the manufacturing sector overtime, as this transition continues to take place and investment results in increase in capital stock, the marginal productivity of workers in the manufacturing will be driven up by capital formation and driven down by additional workers entering the manufacturing sector which is equal to workers leaving the agriculture while changing productivity and wages in manufacturing.

The end result of this transition process is that the agricultural wage equals the manufacturing wage, the agricultural marginal product of labour equals the manufacturing marginal productivity of labour and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to move.

Criticism against the Dual Sector Model
This theory is complicated in reality by the fact that surplus labour is both generated by the introduction of new productivity, enhancing technology in the agricultural sector. Also, the migration of workers from the agriculture sector to industry sector is an incentive towards those two phenomena as the relative bargaining power of workers and employers varies and thus raises the cost labour.

The wage differential between industry and agriculture needs to be a sufficient incentive for the movement between the sectors and, whereas the model assumes any differential will result in a transfer of workers from rural agricultural sector to manufacturing sector.

The model assumes rationality (being consistent), perfect information and unlimited capital formation in industry. These do not exist in practical situations, however, the model don’t provide a good general theory on labour transition in developing economies.

Practical application
The model has been applied quite successfully in Singapore

(c) Marxist Theory by Ernest Mandel
According to the Marxist school of thought, human societies have passed through five stages of development, namely, primitive communalism, slavery, feudal, capitalism and socialism. Theory is analysed by Ernest Mandel as follows

(c) Marxist Theory by Ernest Mandel
According to the Marxist school of thought, human societies have passed through five stages of development, namely, primitive communalism, slavery, feudal, capitalism and socialism. Theory is analyzed by Ernest Mandel as follows:

PRIMITIVE COMMUNALISM

This also called communal mode of production, it marks the rise of society from sheer animal to human society. Labor were crude productive force in this stage and not well developed which cause primitive man, unable to engage in production alone without the help of other, ownership were communal ownership, Relationship of production were collective, people lived together and jointly conduct their activities for survival, there where low labor productivity, No surplus, equal distribution of products and wealth, No classes and therefore No state, Kingdom and people organized themselves in clan or family in this stage level of development were very low / no.

FEUDALISM

This also called feudal mode of production. It was based on primitive property of land and feudal estates were the man’s source of wealth, it consist of two classes, the land owners and the serfs , landlords exploited the serfs and required to offer their labor force in order to get – rent. This were classes between them which make serfs struggled to free themselves from his exploitative relationship struggling and growing class lead to disintegration of feudalism.

However there is development in this stage in Agriculture, rapid increase as production due to improvement in food, growth of towns as production centers, development of traders and land owner enjoyed both political and military autonomy.

CAPITALISM

This emerged as the result of the industrial revolution in Europe, land as a major failure in capitalist replaced by capital and serf man replaced by wage labor, this lead to emergence of commodity production, relationship in production is exploitative, owner of means of production exploit workers, working class exploited by selling their labor cheaply. During this period weaker farm collapse and societies were well developed using modern tools and land to development. However contradiction between capital and labor leads to downfall of capitalism.

SOCIALISM

This established after overthrown of the capitalist system, socialism establishes the dictatorship of the working class, all means of production were in hand of working class, and relationship of production was non antagonistic / non exploitative relations. According to Marx socialism is the logical stage of social development after mature capitalism.

CRITICISM OF MARXIST THEORY

Marxist theory is often criticized by modern in theorists for concentrating too much on conflict, class struggle and changes as a factor for development and gives less concentration on what produce stability in society.

Marxist analysis does not make critical analysis of African’s unique situation for the resistance, what kinds of classes existed in Africa the Nature of class struggle in Africa etc. This argue Marxist theory as incomplete, this argued by new Marxist theory this attempts to provide answers to the prevailing state of under development and backwardness of third world.

However it’s important to emphasize that Marxist theory remain significant this because;

Fist Marxist’s ability to highlight the exploitative nature of the capitalist economic system and how this gives rise to classes and conflicts.

Marxist theory is able to provide a descriptive and predictive of social life, the theory is able to provide a descriptive picture of social economic for motions, especially that of capitalist economic system.

It is main strength lies in its analysis of social relations that a rise in the process of production and the conflicting social class that are eventually the motive force of development.

(d) Dependency Theory
Underdevelopment is seen as the result of unequal relationships between the rich developed capitalist countries and the poor developing ones. As it observed during colonialism there is inequality between the colonial powers and their colonies.

When the colonies became independent, the inequalities did not disappear. Powerful developed countries, such as the US, Europe and Japan, dominate the dependent powerless LDCs via the capitalist system that continues to perpetuate power and resources inequalities.
Dominant developed countries have technological and industrial advantage that ensures the global economic system works in their own self-interest.

Organisations such as the World Bank, the IMF and the WTO have agenda that benefits the firms, and consumers of the developed countries freeing up world trade. One of the main aims of the WTO is to benefit the wealthy nations that are most involved in world trade.

In this model, the lack of development within the less developed countries rests on the developed countries. Advocates of the dependency theory argue that only substantial reform of the world capitalist system and a redistribution of assets will ‘free’ the less developed countries from poverty cycles and enable development to occur.

Measures that the developed countries could take would include the elimination of world debt and the introduction of global tax such as the Tobin Tax. This is tax on foreign exchange transactions, named after its proponent, the American Economist, James Tobin, and would generate large revenues that could be used to pay off debt or fund development projects.

Problems

• Power is not easily redistributed as countries that possess it are unlikely to surrender it
• It may be that it is not the governments of the MDCs that hold the power, but large multinational enterprises that are reluctant to see the worlds resources being reallocated in favor of the LDCs

• The redistribution of assets globally will result in slow rates of growth in the developed countries and this might be politically unpopular.

MODERN THEORIES OF ECONOMIC DEVELOPMENT

These are theories used to summarize modern transfer nations of social life. These theories look at internal factors of countries can develop as modern countries. These theories assume with help “traditional” countries can develop in the some ways “modern” countries did.

Modernization theory believes that development requires the assistance of developed countries to aid the developing countries to learn from their development.

Modernization theorist believe many things are involved in the development process these includes market, resources, infrastructures, organization and entrepreneurship and investment all of which are related to one another.

Modern theories of development includes Rostow stage model, Regner Nurkse (viscous circle of poverty) theory of development of motive force, process and goal (J. Schumpeter) etc.

ROSTOW’S STAGES DEVELOPMENT THEORY

Rostow’s stage of development theory, is the theory used to explain about economic development, This theory developed by American Economic historian, W.W Rostow in his book called “The stages of Economic growth” in 1960, this theory create Rostow as a sole introduce of concept of stages of economic growth and development .

According to Rostow’s theory “it is logically and practically possible to identify stages of development and to classify society according to stages.

Rostow categorize development of a Nation by taking into account things like productive capacity and technological advancement, Accumulation of capital and resources utilization, saving and investment together with trade both domestic and international trade.

According to Rostow, all countries must pass through those stages of economic growth during the process of development.

There stages divided into five main categories / stages:-

1. Traditional society
   
2. The pre-conditions for takeoff (Transitional stage)
   
3. Take off
   
4. Drive to maturity
   
5. The Age of high mass consumption.
   

Stage 1.
THE TRADITIONAL SOCIETY

In this stage economy is dominated by subsistence activity where output is produced and consumed by producers rather than traded. Trade (if any) is carried out by barter trade where goods are exchanged directly for other goods. In traditional society there were limited production function based on technology. Agriculture is the most important industry or sector of an economy and production is labor intensive using only Limited tools or quantity of capital, families play great role in production and resources allocation is determined very much by traditional methods of production. Finally traditions, family and clan play role in social organization and there is limited change.

Stage 2.   THE PRE CONDITIONS FOR TAKE OFF (Transitional stage)

This is the second stage of growth which brings society in the process sensitive i.e. the period when pre conditions for takeoff are developed. During this period society tries to adopt changes and tries to foregone traditional and leads towards take off main characteristics of this stage, is changes in altitude from accepting that economic environment is beyond control to altitude that people may control economic situation by systematic procedures which lead to economic growth. Main features of this stage is increased specialization generate surplus for trading, there are emergence transport infrastructures to support trade, income, saving and investment grow, entrepreneurs emerge, international trade occurs through concentrating on primary products, during this period people start to improve technology and science and industrialization start

Stage 3.   TAKE OFF STAGE

The take off stage is the interval during which rate of investment and industrialization increases, thus changes initiated by change in technologies of production and disposition of income flows.

In this period shift from Agricultural section to industrial sector and growth concentrated in few region of the country.

According to Rostow take off stage is characterized by three main conditions (events), there are:-

1. Rate of investment rise from 5% to 10% and above of GNP / National income the growth is self-sustaining as investment lead to increasing incomes in terms of generating more saving to finance further investment.
   
2. The existence of one or more substantial manufacturing sector with high rate of growth.
   
3. Existence or quick emergence of a political sound and institutional framework which exploit the impulse to expansion to a modern sector and give to the growth /development process an ongoing character.
   

    
    

   Stage 4.THE DRIVE TO MATURITY
   

   During this period economy progressively grows and diversifying into new areas. There is technological innovation and progress which provide diverge range of investment opportunities, new industries established and people invest large percent of National income (up to 20%). Economy produce wide range of goods and services and find new place in international economy and goods exported. Also goods initially imported are produced and country reduces reliance on imports.
   

   Stage 5.THE AGE OF HIGH MASS CONSUMPTION
   

   This stage also called stage of high living” In this stage economy is geared towards mass consumption leading sectors shift towards durable consumer goods and services.
   

   According to Rostow free choices are expected to overcome scarcity and to result in progress through the automatic adjustment of free exchange in the markets. Therefore force of competition ensures economy to produces the goods which people desire and maximum output produced in the most efficient manner.
   

   In this stage productivity increase and produced goods which satisfy all society’s demand. Countries like USA, France, Japan, German, and Russia reach at this stage.
   

    CRITICISMS ON ROSTOW’S STAGES OF ECONOMICGROWTH THEORY

1. Most of critics on whether a valid and operationally meaningful distinction can be made between stages of development, especially between the transactional phase and take off stage and between take off and maturity. This mean’s Rostow fail to provide unique characteristics that may distinguish his different stages.
   
2. According to Kuznets it is difficult to make empirically. Testing of the theory which Rostow himself makes no attempt to do. I.e. there is no quantitative evidence for assertions made and some of characteristics of stages as analyzed by Rostow are not specific and sufficient to define the relevant empirical evidence even if data were available.
   
3. Another critic a rise on whether Rostow used scientific method and people criticized and said Rostow develop theory with using scientific method and use unscientific method and common practice of observing phenomenon, developing hypothesis on the basis of phenomenon, and using phenomenon to support the hypothesis.
   
4. Rostow’s view fail to explain well about Nature, causes and objectives of development, if tends to focus on constraints or obstacles (patricianly lack of capital) and theory show little input on natural resources on development.
   
5. Many development economists argue that Rostow’s model was developed with Western cultures in mind and not applicable to LDC’S like Tanzania.
   

    
    

VICIOUS CIRCLE OF POVERTY THEORY

Regner Nurkes was the prominent economist professor who attempted to examine problems of capital’s formation in underdeveloped countries. The theory express the circular relationship that effect both in demand and the supply side of problem of capital formation in economicall backward areas.

According to Nurkes “A society is poor because it is poor”

A society with low income has both low levels of saving and low level of consumption while the low levels of consumption means not enough market to induce investment even if the capital for investment were available. This low level of investment in turn means little ability of the society to expand its productive capacity or transform the quality of the productive force as whole. This in turn/finally leads to a continuation of low incomes in the economy and then circle begins again.

According to Nurkse the backward countries have failed to enjoy the stimulating effects of the manufacturing industries because of limitation of the market for manufactured goods and not the weakness of foreign capitalist

What is the way out of this circle The answer according to nurkse to enlarge the market, Application of capital must be made to a wide range of different industries, this will lead to enlargement of the market also Nurkse emphasize the doctrine of “balanced growth”.

Nurkse in 1953 made observation that on an underdeveloped economy, characterized by “Vicious circle of poverty” the investment programme must be both massive and balanced for growth to occur.

NURKSE’S VICIOUS CIRCLE OF POVERTY

THE RELEVANCE OF NURKSE’S VICIOUS CIRCLE THEORY

While there is no/little doubt that third world countries particularly those in Africa are locked in a vicious circle of poverty, the theoretical cause of poverty /historical cause of poverty are not underlined by vicious theory.

The reality way of this theory also ignored by Nurkses theory, theory ignores the reality of under developed countries characterized by dependent economics which make it impossible to create an environment for massive investment and balanced growth.

Nurkse was however not very optimistic about the role of foreign aid in developing countries and instead emphasis on domestic saving and the role of the state as important factors for balanced growth.

However, Nurkse’s theory succeeds in indicating the extend of poverty / backwardness of the developed countries through it thrown very little on owner understanding of the causes of poverty or backwardness.

SCHUMPETER’S THEORY OF MOTIVE FORCE, PROCESS AND GOAL

Prof. J. Schumpeter in his book, capitalism, socialism and Democracy also contribute to the development debate. Schumpeter theory hinges on three aspects motive force, process and goal as sources of development.

According to Schumpeter the action of creative entrepreneurs will produce spurts of industrial progress, even though innovation originated each other time in a particular industry, the monetary effects and other circumstances were such as to promote each time a wave of new application of capital over a whole range of industries. According to Schumpeter, Innovation makes profit and may trigger off new innovation in other fields.

According to Schumpeter’s model of development, entrepreneurs provide a generating force, the process is innovative and the goal is the establishment of a position of a wealth and power for entrepreneurs.

THE RELEVANCE OF SCHUMPETER’S THEORY

The Schumpeter’s theory does not satisfy the case of the less developed countries in fully obvious, entrepreneurs in most African countries is not the man’s driving force, innovation is not the most characteristics process (indeed it hardly to exist) and private enrichment is not the dominant goals. Hence the process of innovation and technological development remain outside the development process in most African countries. The goal of private enrichment for the African has yet “take off” as enrichment of multinational cooperative becomes the goal in most African countries.

Another weakness of Schumpeter is that he said development depend on innovations but development does not depend only on innovation but on whether adequate incentives for interpreters activity exist and he neglect the role played by consumption, saving and foreign aids technology, assistance and Non – credit sources of investment in development process.

However strength of the theory is that, it tries to show that development is generated within a society by its own member and development process cannot started or sustained by outside efforts. Theory tries to show important roles played by entrepreneurship embodied in person with innovation.

GROWTH POLICIES OF TANZANIA

Growth policies are those policies or strategies adopted in Tanzania economy by Tanzania government in order to accelerate economic growth and development in Tanzania economy.

In order to achieve high rate of economic adopt different growth politics or strategies all those grouped into the following policies:-

1. Poverty eradication policies / National development strategies poverty eradication policies include many policies adopted in order to eradicate poverty so as to create strong economic base and economic growth in this policies Tanzania government formulate strategies such as “MKUKUTA” MKURABITA, economic policies such as monetary and fiscal policies, external development management policies, external borrowing, employment policies, Youth empowerment and other strategies in order to accelerate high rate of economic growth and economic development.
   
2. Sectorial policies
   

   This is the policy of improving economic sector in Tanzania economy in this policy Tanzania government adopt strategies like establishment of strategies of improving Agricultural sector as a main sector in Tanzania economy. This police include improving Agricultural productivity, government formulate District Agricultural development plans (DADP’s and KILIMO KWANZA which is recent policy, also formation of policies for development of other sectors by providing subsidies.
   

    
    

3. Creation of sustainable development.
   

   Sustainable development include the use of National resource for current development without affecting future use of resources, in this policies, government of Tanzania enhance Biological diversity, protection and development on use of sea and ocean. Sustainable production and consumption. Also in order to protect sustainable development URT establish environmental management Act and other policies to ensure environmental sustainability.
   

4. Social justice and inclusion policy.
   

   In social policies and inclusion, government promote youth development, gender equality and empowerment of women, in this government gender equally in governmental school, employment and other areas such as political opportunities / leadership together with poverty reduction for development.
   

5. Development Cooperation and global partnership for development.
   

   In this policy URT establish Bilateral development Cooperation, external debt management, external borrowing, debt relief, also managing Aid relationship and formation of management development cooperation / economic cooperation and integration, which may help to accelerate economic growth even development.
   

6. Social progress policies
   

   These are policies of improving social services in an economic so as to improve economic growth and development, social policies include development of social services such as health services, education services, housing, water and sanitation in an economy.
   

    
    

   THE ROLES OF INTERNATIONAL TRADE AND FOREIGN
   AIDS IN ECONOMIC, DEVELOPMENT
   

   International trade is the trade among Nations while foreign aid is the assistance country get from developed countries and international organizations such as IFM, World Bank, etc.
   

   The following are roles or contribution of international trade and economic 1 foreign aid in process of development:-
   

7. International trade and Aid facilitate improvement in technology that may be used in utilization of resources and production process that may facilitate economic development in an economy.
   
8. International trade and aid encourage competition within domestic industries, which may aid as a catalyst for increase in production (output) and improvement of quality of goods and services.
   
9. International trade expand market for our industries which may facilitate exploitation of resources optimally which may bring development in an economy.
   
10. International trade and aids increase revenue and income due to tax and financial aids which may increase international income and used as a capital for investment and production.
    
11. International trade and Aid help to get income and assistance for improvement social services such as school, health services and for the development of a Nation.
    
12. Foreign Aid and international trade helps to improve economic infrastructures which may create conducive environment for economic activities and development of a Nation.
    
13. International trade and Aid help in financing budget which may be used to allocate expenditure so as to bring development in a country.