The document discusses several key economic and non-economic factors of development: natural resources, population growth, capital formation, foreign investment, and technological progress. It notes that while natural resources were once seen as dominant for growth, many resource-poor nations have grown rapidly through innovation. Population growth can either help or hinder development depending on whether resources increase arithmetically or geometrically relative to population. Capital formation is important for development as it allows for investment in innovation to increase productivity and output. Foreign investment can increase investment but may also undermine domestic policy and competition. Technological progress, especially labor-augmenting technologies, is a major source of economic growth in developing nations.

1. Chapter 5:1
Factors of Development:
Economic and Non-Economic Factors
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2. Natural resources
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1. Natural resources
• How important are natural resources for the economic growth?
• In the classical theory, natural resource endowment has a
dominant position for economic growth. That is, assuming
producers are efficiently utilizing their factors of production
available to them, further growth largely depends on the natural
endowment the country owns.
• However, what explains the fast growth of natural resource-poor
countries, e.g. Switzerland, Hong Kong, Singapore, etc.? Here
vitally important is technological and institutional innovation.
• On the other hand, poverty has a negative impact on natural
resources.
• Discuss the impact of poverty on environment, and the
relationship between economic growth and environmental
resources.

4. Population growth
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2. Population growth
Population is the key determinant factor for
development.
• A purse
“A growing population is the most important factor
for the increase in the income of nation.” Adam Smith (in
Wealth of the nations)
• Boserup believed that people have the resources of knowledge and
technology to increase food supplies
• or a curse?
• “Population grows at a geometric rate and Food
supplies increase only at an arithmetic rate, leading
negatively affect growth” Malthus

6. The Demographic Transition
• Stage I: High birthrates and death rates
• Stage II: Continued high birthrates,
declining death rates
• Stage III: Falling birthrates and death
rates, eventually stabilizing
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7. Capital formation
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3. Capital formation
• What is “capital”?
– Capital accumulation results when some proportion of income
is saved and invested to augment future output and income.
Different types of capital include:
– physical capital- machinery, factories, materials…
– infrastructural capita- road, electricity, communication…
– human capital- educated and productive labor force
Capital can be formed from domestic investment or from foreign
investment.
. How important is capital formation in the development process?
Low investment restricts development and use of new innovation
and hence low labor productivity and low output growth.

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Capital formation
• Vicious cycle of capital formation in a poor economy
LP Labor productivity
I Investment
S Saving
Y Output

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Capital formation

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Foreign Investment as a source of capital
Advantages:
• Increase of investment
• use of domestic inputs and labor employment
opportunity (depend on the investment level and
linkage of investment to domestic economic conditions)
• Increase foreign currency in the economy
• “know-how” effect (technical, organizational, marketing,
information)

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Foreign capital
Problems
• Foreign investors possibly undermine domestic
economic policy and politics (depending on volume,
power and sense of responsibility)
• competition in the market for qualified labor
• development of dualistic structures
• “excessive”, not verifiable profit transfer abroad
• pushing domestic firms with labor intensive production
our of market

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Foreign capital
It is difficult to make a definite judgment about foreign
investment. Important determinants are:
• The positive aspects with regard to the level of
integration, “know-how”-effect and effects on
growth/employment on one side, and
• the negative aspects of profit distribution, dualistic
structure effect and political/economic influence on the
other side.

14. Technological Progress
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4. Technological Progress
• The most important source of economic growth is
technological progress- resulted from new and improved
ways of production. Three types of technological progress:
– Neutral TP- higher output with the same quantity and
combination of inputs
– Labor saving TP (higher level of output with the same
quantity of labor) or capital saving TP (higher level of
output with the same quantity of capital)
– Labor augmenting TP (e.g., upgrading skill of labor) or
capital augmenting TP (improving the quality of the
physical capital)
• In poor countries, where labor is abundant and capital is
scarce, developing labor-intensive but capital- saving
technologies is economically and socially desirable.
• Note: Technological change also result in shift in
the production possibility frontier outwards-
expansion of production for the society at large.

16. Growth Accounting Approach for Total Factor
Productivity (TFP)
• In understanding the different components and
definitions of TFP, there are different types of
estimation technique for sectoral TFP. The growth
accounting approach; regression approach, parametric
and semi parametric approach are mentioned in
literature.
• the growth accounting approach in order to reap the
benefits derived from taking into account all
compositions of TFP. Abramovitz (1956) and Solow
(1956) introduced TFP for the first time, which
refined by Denison (1967).
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17. • TFP growth accounting approach includes
technological progress, technical
efficiency, and allocation efficiency, scale
effects and the like. The residual factor in
GDP growth rate captures the TFP, not
explained by growth in capital, land and
labour.
• According to this approach, there are two
distinct sources of growth: input-driven
(increasing factor accumulation) and TFP-
driven (increasing factor productivity).
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19. Thank you
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