Understanding Economy


1. High Rate of Population Growth:

Another common characteristic of developing countries is that there is a population pressure because of the higher population growth rate. On one side the birth rate is reading and on the other side, the death rate is decreasing due to better health facilities. The population growth rate in most of the developing countries is 2.5% per annum.

2. Unemployment and Disguised Unemployment:

Factors of production are not fully employed in the production process. Various sectors of the economy are underdeveloped due to the shortage capital. There is unemployment in the economy. In the agricultural sector and the public sector in is disguised as unemployment which has decreased per capita income.

3. Import of Consumer Goods:

There is a demonstration effect among people. Large amounts of savings are spent on the import of consumer goods which increases the incomes of the foreign countries and the national industry remains underdeveloped and provides less employment and low incomes to the people.

4. Poor Currency and Credit System:

At present times, the role of banks has increased in developing countries because they increase savings and investment. But in Pakistan the structure of the banking mechanism is weak and there is a shortage of organized financial institutions that can increase the domestic savings by giving different incentives.

5. Hoarding:

In developing countries like Pakistan, people have the habit of hoarding precious metals, stones, and currency. Gold and silver are used as ornaments instead of productive purposes.

6. High Capital Output Ratio:

Capital output ratio is the relationship in a given economy or in an industry for a given time period to the output of that economy or industry for a similar time period. Capital output ratio in developing countries is very high because of the uneconomic use of capital resources.

7. Unorganized Money Market and Capital Market:

The money market is unorganized. They are not channelizing savings into investments efficiently. Due to unorganized market sale and purchase of the shares, securities bonds are not up to the mark.

8. Imperfect markets:

The imperfect markets restrict the transfers from less productive to more productive employment. Due to imperfect markets factors of production are not mobile. Labor has stuck to the agriculture sector and rural sector, the organization is limited to only some developed areas.

9. Limited Use of Technology:

In developing countries, people cannot use modern technology due to a shortage of capital. Labour is unskilled, untrained and uneducated. Modern means of production are not used due to which the industrial and agricultural sectors are underdeveloped.

10. Basic Infra-Structure:

In Pakistan, basic infrastructure is weak, which is the basic cause of the underdevelopment of the agriculture and industrial sector. So the per capita income in these sectors is low which has decreased the saving capacities.

11. Vicious Circle of Poverty:

Another major cause of economic backwardness is the vicious circle of poverty. Due to backwardness there is not the optimum use of resources and due to this reason goods are not produced on the principle of specialization and division of labor and hence production remains low. A low level of production is due to imperfect markets. Therefore, the level of income of the people is low and hence, the level of savings is low. Low level of savings is the response for a low level of investment as a result capital formation rate remains low and the problem of shortage of capital arises in these countries and therefore, shortage of capital is the major cause of their underdevelopment.

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