What are the factors of economic development

Economic Growth

Until the 1960 economic growth and economic development were used as synonyms

Economic growth of a given period is the measure of how much more the economy produced during that period as against what was produced in the preceding year.

Economic development is when economic growth is considered also with progressive changes that determine the welfare of the people within the economy.

Before we discuss the factors of economic development lets us see how does economic development work?


When you pay taxes – local or state levied – you are helping fund economic development. These taxes are used by the Government in their efforts to bring about welfare in the community through infrastructure and subsidy’s. Taxes paid on that cup of tea, those new pair of shoes or even real estate go towards development projects or other such government initiatives which aid the sustained development of the economy.

As per the new approach Charles P. Kindleberger and Bruce Herrick observed that

Economic development is generally defined to include improvements in material welfare, especially for persons with the lowest income, the eradication of mass poverty with its correlates of illiteracy, disease and early death, changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agricultural towards industrial activities, the organisation of the economy in such a way that productive employment is general among the working age population rather than the situation of a privileged minority and the correspondingly greater participation of broadly based groups in making decisions about the directions, economic and otherwise, in which they should move to improve their welfare.

To put it in simple terms generally economic development is the prerogative of the federal, state and local authorities. They are the ones in charge of improving the standard of living of the people by creating job opportunities, support innovations, encourage creation of wealth and create a better quality of life for the populous of the nation.

Economic development can also be defined on the basis of the objectives it wishes to achieve. These objectives may include the building or upscaling the infrastructure by creating better roads, fly-overs, bridges etc.; improving education facilities; fortifying public safety through better administrative services like police and fire departments; or supporting start-ups and new businesses and local entrepreneurs.

Economic development can be broken down into 3 key areas:

  1. Governments working towards accomplishing larger economic goal such as building a strong economy through policies and regulations that meat the end requirement of uplifting the different sectors of the economy that contribute to the GDP. The Government does this by enacting and enforcing laws, policies, industries regulations, and revenue (tax) concessions.
  2. Infrastructure projects that are aimed at strengthening the economy and benefiting the human resource of the present and the future. Examples of these projects are the building of highways that connect the urban and rural areas, new educational institutions, public libraries, recreation centres, building hospitals and initiating health and hygiene initiatives for community well being, crime prevention initiatives etc.
  3. Creating jobs opportunities and sustaining businesses through workforce development programs that empower people with the skills and education needed for performing their jobs successfully. This also includes the development of small business by supporting small entrepreneurs with the financial assistance and helping them to connect with businesses of larger scales along with their own counter parts to build a strong network.

Economic development in itself relies on a lot of other factors that are governed by scarcity and those which may not be in absolute control of the economy. All plans and policies of economic development must be chalked with the knowledge and framework of these factors in mind.

These factors include scarce natural resources and skilled man power that have the ability to positively contribute to the economic development. These are economic conditions or the current economic environment that has to be used in the best possible manner to further the development objectives of the economy.

Simply put these factors can influence the economic development i.e. the objectives of enhancing the standard of living of the economy.

Factors affecting economic development

Factors are not the only thing the influence economic development but they are important for a planning stand point as by understanding these factors we can gauge whether the economy can develop on its own or are certain modifications to the policy framework required.

The role of economic factors in a country’s economic development are decisive. For most economies the rate of capital accumulation and stock of capital are enough to determine the economic development for formulate a plan for the same. But in today’s economies are complex as agendas for growth are constantly clashing with those of sustainability. Therefore along with the factors of capital and stock, natural resources, energy resources, education etc. also need to be analysed to determine economic development.

Lets discuss some important factors affecting economic development:

economic development factors

Natural Resources

According to recent studies economists have realised that along with the human, financial and physical capital the natural resources are an important asset to any business. However, the services derived from natural resources are different from those derived from conventional capital. Natural resources have the ability to provide inputs for business and are also able to absorb waste. Considering the ecological services that these resources provide and their scarcity brings up the question of sustained development while achieving the goals of an overall economic development. These natural resources are necessary to sustain human life which is at the heart of any economy. To make matters worse using them aggressively for business purposes may have dire consequences on the future generations. Therefore the use of natural resources call for special compensation rules so that the businesses of today do not hamper the ability of the future generations sustainability. It is understood that environmental degradation at a point may yield good results for the economy but as we move forward there is bound to be a substantial decrease in the conditions of living.

There has also been a converse hypothesis that environmental degradation may decrease as the per capita income rises, this is called the Kuznets curve (EKC).

Kuznets curve (EKC) has made a lot of attempts to establish an “inverted U” shaped relationship between the different indicators of environmental pollution / environmental degradation and the levels of per capita income.

Moreover, recent economic theories has raised the question that whether underdeveloped countries that supposedly have an abundance of natural resources have a rapid or better rate of development than developed countries that are struggling with their impact on the environment. There may be a possibility that the underdeveloped countries do not invest the revenue generated from exploiting these resources into productive assets that would intern generate revenues on a larger scale. Conversely there is also a chance they may be directing the resources into the innovative sectors rather than the productive ones. This is what gives rise to the “boom and bust” pattern of economic development. In Latin America, there is evidence of this pattern with regards to their economic development.

We might have understood the role natural resources play in development economics but there is much more to learn in them of their extent of usage. While the environment depletion and degradation is the most apparent concern there are other concerns such as the lack of proper management of the natural resources by underdeveloped countries to achieve that economic ‘take 0ff’. Also, “underpricing” and “undervaluing” due to lack of policies to ensure that natural resources are compensated with comparable rents that can be further used for investments in productive assets, is another major barrier for economic development.

Energy resources

Energy is what drives the economy and hence is a crucial ingredient for economic development. With increase in both agricultural as well as the industrial sector the demand for energy is ever increasing. Economics have gone on to suggest that greater access to energy will help enhance the lives of the poor and contribute to the development of the economy on the whole. That is why economies are making provisions so that energy can reach a greater percentage of the populous. As a result individuals, firms and governments are being given access to energy and in case of small business energy is being given at incentivized rates to motivate financial as well as livelihood interests. But how energy plays a pivotal role in the development of economics is still not clear.

A survey done by David I. Stern, energy and environmental economist, targeting the factors that affect the linkage between energy and economic growth attempts to answer this question.

The production function denotes the conversion of economic inputs such as capital, labor, and various forms of energy such as oil, coal etc. into economic output in the form of manufactured good & services. Any function in economics accepts certain inputs to yield the consequential output. But in the case of energy, to determine the relationship between energy and economic growth we need to carefully study the effect of the various forms of energy as inputs to the aggregate output e.g. gross domestic product.

There are many factors that influence energy as an input these include; substitution of energy by other inputs, technological advances, changes in the compositions of the types of energy, changes in the mix of other inputs, shift in the economy from capital intensive to labour intensive etc.

Energy and capital both have complementary and substitutable capabilities which changes the results of the production function. Studies have shown that certain manufactured metals can be successfully substituted for a wide range of major metals that are non – renewable forms of resources. Other studies have shown that there is little or zero substitutability for certain specific metals. According to David I. Stern “On the whole it seems that capital and energy act more as substitutes in the long-run and more as complements in the short run, and that they may be gross substitutes but net complements”.

From the standpoint of factors affecting economic development the study considered mostly non-renewable energy therefore it was also necessary to study the physical interdependency between manufactured capital vis-a-vis natural capital. The study revealed the effects of substituting capital for fuel in the US forest products sector with the capital obtained from the indirect energy produced from other economic sectors. It was shown that the years 1958 to 1984 most of the indirect energy costs of capital was able to offset a significant fraction of the direct fuel savings and that in some years these costs were greater than the direct fuel savings.

Another study revealed that the use of materials used in other sectors to produce capital and labor in the rest of the economy by the receiving sector lowers the long-run growth of the economy. This substitution decreases the investment and/or consumption in the rest of the economy.

Capital Accumulation

Capital plays a vital role in the modern business. Producing any good or services without the intervention of capital is virtually impossible. A business needs capital for everything including purchase of raw material, tools, machinery and labour to produce finished goods, warehouses to store these goods and for hiring personnel to sell these goods..

Without the means to production man would have to work with his bare hands which would yield very little and businesses would not be able to cater to the masses. This is evident from the fact that even in the primitive stages of life, man used some tools for gathering and hunting.

The development in technology and specialisation has also made accumulation of capital a complex task that requires advance skills. Capital has made economies of large scale possible. In fact, the greater productivity capabilities of developed nations like the US is due to their capacity of rallying capital and amass machineries, tools or implements used for productive processes of larger scale. Capital increase the productivity of the workforce exponentially and hence it is very important for economic development as a whole.

Economic development cannot be attained without the use of industrial machinery tools and machinery, mechanised agricultural equipment and implements, building of dams, bridges, factories, roads, railways, airports, ships, ports, harbours, etc., which are all capital goods and speak directly to the productivity of the workforce.

Therefore, increase in the accumulation of capital goods every year is important for increasing the national product and subsequently the national income. Capital accumulation is necessary to provide the work force with the necessary tools that will optimise their skills and help increase their productivity.

Imagine a situation where population goes on rising and there is no change in the net capital accumulation, without comparable capital accumulation the workforce will not be able to meet the demands of the growing population due to the lack of production of large scale. This is not only hamper the economic development but will escalate to a dire economic crisis.

Besides productions of large scale capital accumulation makes it possible for a 360 degree improvement and optimisation of the productivity.

Technological Resources

Technology encompasses the entire body of knowledge and tools that make the use of economic resources easier and increase the efficiency of production and simultaneously pave the way for innovation. Therefore, technological resources are necessary for economic development as the more advanced the technology the better the scope for quality production with lesser turnaround time which translates into quicker local and global economical improvement. Technology’s role in economic development can be further broken down as under.

Technology can reduce the time taken for producing a good or delivery of services, this saves cost and contributes to the overall profitability of the business.

A business that uses the latest technology is more efficient in terms of business output and this allows it to produce on larger scales meeting the demand of the market.

Division of the labour force and specialisation of jobs within a business can be achieved with technology, such effective segregation of labour increase the efficiency of business.

Today, businesses are required not only to make profits but also to be see to it that wile doing so the needs of the future generations are not hampered. Technology has the ability to govern how businesses process natural resources and aid them in assisting waste management while optimising their operations.

Due to the technological advances the labour force is able to increase its efficiency which translates into an increase in total output this leads to better profits and increase in economic development.

Technology paves the way for research into every sector of business and science. It helps advance businesses through innovation that help profits while decreasing their impact on the environment.

Education and Training

Globalization and international trade has pitted economies of different countries against each other. In order to succeed and further the growth of the global economies healthy completion between these economies is necessary. Developed countries hold a competitive and comparative advantage in the global economy but rarely does any country specialise in a particular industry. Simply put every economy will be made up of different industries that have their own advantages and disadvantages in the global market.

The education and training of a country’s labour force is what will determine how the country’s economy will fare in such a competitive global market.

The study of economics development is influenced by training and education involves the analysis of the entire labour economy in terms of the employers and workforce. Education and training are the two major factor the affect the wage rate of the labour force i.e. workers with better education, training and experience tend to earn more that those with poor skills and knowledge.

Many countries have therefore put in efforts to build a robust education system that can produce a workforce that can be inducted into existing as well as new industries, especially in the fields of technology and science. This is partially because the older industries are becoming less competitive in the global markets and would be unable. to dominate the world’s industrial landscape. In addition, efforts to improve the basic education of the masses will help the social causes of right to education and better the lives of people.

In economic terms education does not mean the acquiring of college degrees. Education of the purpose of economics is broken down into three categories according to the levels of education:

  1. Primary : Or elementary school as referred to in the US
  2. Secondary : includes middle schools, high schools and preparatory schools
  3. Post-secondary : universities, community colleges and vocational schools

A country’s economy becomes more and more productive as the number of educated workforce join the labour market. This workforce is able to think more effectively in terms of cost efficiency, profits and sustainability and they also have the ability of critical thinking and reasonability. As stated above, a better-educated work force tends to be more productive than those with lesser or no education under their belt. However, there is cost to higher education. In fact the cost rises as the level of education rises. But there is no thumb rule that a country needs to invest in a network of universities that offer higher education for developing the economy. Based literacy programs also benefit the economy and go a long way in economic improvement of the country.

According to UNESCO and the United Nations Human Development Programme, the ratio of the number of children of official secondary school age enrolled in school, to the number of children of official secondary school age in the population (referred to as the enrollment ratio), is higher in developed nations than it is in developing ones. These numbers differs from education spending from the GDP of the country and does not always correlate strongly with how educated the population of a country is.

Other factors

Apart from the above factors of economic development many other factors such as corruption, political freedom, social organisations, desire to develop etc. also play an vital role in the growth of a particular economy. Through prevalent in every economy these factors differ from country to country.

An economy’s ability to adapt to these factors determine its growth prospective.