Economic Development and Planning - Business Studies Form 4 Notes

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Economic Growth

  • This is an increase in country's productivity which can be determined by a continued rise in national income over a period of years

Economic Development

  • This is the qualitative change in national income. It is associated with an increase in a fairly distributed national income such that more people are able to lead better lives.

Structural Changes which may take Place when a Country is Experiencing Development

  • Shift from agricultural to manufacturing sectors
  • Reduction in illiteracy
  • Increase in skilled non power
  • Improvement in health facilities
  • Increase in technology and improvement in entrepreneurial ability
  • Increase and improvement of institutions that handle new methods of productive economic activities.

Differences Between Economic Growth and Economic Development

Economic Growth Economic Development
i) An increase in size of the country’s National income i) An increase in the size and quality of the country’s National income
ii) Number of people living in absolute poverty can increase despite the increase in national income ii) Number of people living in absolute poverty does not increase
iii)Increase in national income could be due to increase in income of only few people iii) Increase in national income is attributed to general increase of incomes of majority of the people in the country
iv) No tendency to bridge the gap between the rich and the poor iv)Tends to bridge the gap between the rich and the poor


Under - Development.

  • Underdevelopment is growth in the negative direction which can be associated with uneven distribution of wealth and also decrease in quality or quantity of factors such as land, labour, capital and technology.

Characteristics of Under-development.

  1. High level of poverty
    - An underdeveloped country is poverty ridden such that majority of its people are living below poverty level and the per capita income especially when compared with those of developed countries is very low.
  2. Disparity in income distribution
    - Income is not evenly distributed because few rich people owns majority of the country's wealth while many other people are living below poverty line.
  3. Low level of savings and investments
    - When the per capita income is low it makes people have very little or nothing to save leading to low investments.
  4. High population growth rate
    - There is always high population growth rate in underdeveloped countries. Population explosion increases the number of people living at or below the poverty line and also increases the dependency ratio.
  5. Dominance of subsistence sector
    - Traditional subsistence sector tend to dominate the modern industrial sector.
  6. Problem of unemployment
    - There is always high rate of unemployment in underdeveloped countries because of the high population .The population is always higher than the available jobs in the country,
  7. Underutilization of natural resources
    - Natural resources in underdeveloped economies, remain under - exploited due to lack of either capital or appropriate technology.
  8. Dependence on the developed countries
    - Most underdeveloped countries are unable to financially sustain themselves. As a result they keep on relying on the developed countries for financial aid.
  9. Low labour productivity
    - Labour productivity in underdeveloped countries is extremely low compared with that of developed countries. This due to lack of complimentary factor inputs such as physical capital and skilled management.

Goals of Development

  • Elimination or reduction of poverty
  • Provision of important human basic needs such as food, shelter, health and protection
  • Reduction of disparities in income distribution
  • Provision of opportunities in areas as employment and self-advancement

Factors Hindering Development

  1. Low Natural Resource Endowment
    - Inadequacy or absence of significant quantities of natural resources such as raw materials, fertile land, favorable climate and good terrain maybe a barrier to development.
  2. Inadequate capital
    - If capital is either lacking or not adequate there may be a problem in activities such as exploitation of resources, industrialization and creation of employment opportunities.
  3. Poor technology
    - Where technology use is low or backward, productivity is also low
  4. Poor human resource Endowment
    - If there is a shortage of skilled man power it can lead to a barrier in development as the skills to needed for exploitation of the resources is not there
  5. Unfavorable Domestic environment
    - The quality of social political and economic environment determines the growth of entrepreneurships that in turn determines the rate at which resources are utilized and capital accumulated

Development Planning

- The policy objectives to be achieved in the long run established by the government include:

  • Eradication of illiteracy in the country
  • Improving its peoples health
  • Raising peoples standard of living
  • Reducing the economy's foreign dominance.

Importance of Development Planning

  1. Appropriate resource allocation
    - Planning enables resources to be used efficiently by not being wasted and used for wrong purpose or left idle.
  2. Stimulation of effort
    - Well laid out development plan may help the government to stimulate the efforts of the people in the desired direction.
  3. Support foreign Aid bargain
    - A country with a well laid out development plan is better equipped when soliciting for foreign aid as it is able to use the plan in convincing the donors.
  4. Project evaluation
    - Projects became possible to evaluate at various stages of implementation to assess whether they are in line with the expected outcomes. Where there are deviations they are noted and corrective measures taken before it‟s too late.
  5. Long term Decision making
    - A development plan provides a long term view for making decisions in various sectors.
  6. Avoiding duplication of industries
    - It helps in avoiding duplication of industries. Duplication of industries might happen if similar industries are located in different parts of the country. Through planning, different industries in different parts are set thereby ensuring balanced development in the country.
  7. Promoting balanced in Regional Development
    - Planning helps in distributing industries to various part thereby achieving balanced regional development.

Problems Encountered in Development Planning

- These problems are divided into two

  • Problems encountered at the plan formulation stage
  • Problems encountered at the implementation stage

Problems encountered at the plan formulation stage

  1. Lack of accurate of detailed data
    - The quality of development plan is greatly reduced when the data on which is based on is either inaccurate, unreliable or simply not existing.
  2. Existence of a large subsistence sector
    - The large substance sectors in less developed countries makes planning unrealistic.
  3. Lack of qualified personnel
    - Due to lack of locally qualified personnel, many less developed countries rely on foreign experts, who may not be having adequate knowledge about the local economies they are planning for.
  4. Transfer of inappropriate development plan
    - Transferring development plans which have worked in developed countries with assumption that they will work in developing countries always end up failing because they may be inappropriate.

Problems encountered at the implementation stage.

  1. Reliance on donor funding
    - Most of the development plans in developing countries are based on aids from developed countries, if such aid is not released the implementation of the plan becomes difficult.
  2. Lack of domestic resources
    - Limited domestic resources such as; skilled personnel, finance and capital equipment may hamper implementation of a well laid out development plan.
  3. Failure to involve local people in planning
    - If the local people who are expected to implement plans are left out during the plan formulation stage, they may fail to support the plan at implementation stage.
  4. Natural calamities
    - Natural calamities affect implementation of development plan either directly or directly as the funds set aside for the implementation of the development plan may be diverted to cater for the effects of the natural calamity such as floods, or outbreak of diseases.
  5. Over –ambitious plans
    - Unrealistic plans which are over ambitious to impression donors are so that they releases funds are difficult to implement.
  6. Lack of co-operation among the executing parties
    - Lack of co-operation among the experts who are expected to implement the plan may bring it down. For example, if there is conflict between the ministry of finance and the planning agencies, the plan may not take off.
  7.  Inflation
    - If prices are rising too rapidly, the resultant change in planned resource costs may negatively affect its implementation.
  8. Lack of political will
    - No matter how good the development plan is, if there is no political will or commitment to implement it, then it will never take off.

Past KCSE Questions on the Topic

Paper 2

  1. Discuss five principles of taxation
  2. Highlight distinguishing features between developing and developed countries.
  3. Explain five obstacles in the implementation of development plans in the developing countries
  4. Every third world country aspires to develop but it is faced with some obstacles.Explain five of such obstacles to economic development
  5. Explain five factors that have frustrated economic development in a developing country like Kenya for the last few decades
  6. The national budget is drawn before the beginning of every financial year by the government discuss five functions it plays as a planning tool
  7. Explain five challenges that Kenya is facing in the implementation of her development plans
  8. Explain five changes that may take place when a country is experiencing economicdevelopment
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