Characteristics of an Underdeveloped /Developing Economy

The general nature of an under-developed economy may be gathered from common economic
characteristics of such an economy. It may be too much to talk of the common economic
characteristics of under-developed countries in view of the wide diversity of among under-
developed countries as revealed by numerous case studies that have been made. While it would
be very difficult to locate a representative under-developed country, it is much easier to bring out
some fundamental characteristics common to under-developed countries. These main
characteristics of under-developed countries are given below.

1. Low per Capita Income:
The per capita income in under-developed countries is extremely low. The average annual
income in under-developed countries like India Pakistan and Srilanka is nearly $130 per head as
compared with $6640 in the USA. Low per capita income is an out standing feature of an under
developed economy and is a significant measure of a countrys development.

2. Deficiency of Capital Equipment:
The insufficient amount of physical capital in existence is also a characteristic feature of all
under-developed economies. Hence they are often called simply capital poor economies. One
indication of the capital deficiency is the low amount of capital per head of population. Not only
is the capital stock extremely small but the current of capital formation is also very low. In most
under-developed countries investment is only 5 percent to 8 percent of the national income,
where as in the USA, Canada and Western Europe it is generally from 15 percent to 18 percent.
The low level of capital formation in the under-developed country is due both to the weakness of
inducement to invest and to the low propensity and capacity to save. In under developed
economy at the root of capital deficiency is the shortage of savings. The per capita income being
quite low most of it is spent in satisfying the bare necessaries of life, leaving a very low margin
of income for capital accumulation. Even with an increase in the level of individual incomes,
there does not usually follow a higher rate of saving because of the tendency to emulate the
higher levels of consumption prevailing in the advanced countries.

3. Excessive Dependence on Agriculture:
Most under developed countries are predominantly agricultural. A great majority of their
population are engaged in agriculture and allied occupations. This excessive dependence on
agriculture is due to the fact that non-agricultural occupation have not grown at a rate of
commensurate with the increase in population for lack of sufficient investment outside
agriculture. The labour-land ratio being high agricultural holdings have become sub-divided into
small plots, which do not permit the use of modern mechanical methods of production.

4. Rapid Rate of Population Growth:
Although there is diversity among under-developed economies in respect of their population,
there appears to be a common feature namely a rapid rate of population increase. This rate has
been rising still more in recent years. Thanks to the advances in medical science which have
greatly reduced the mortality due to epidemics and diseases. While the death rate has thus fallen
phenomenally, birth rate does not yet show any significant decline so that the natural survival
rate has become much larger. In countries like India, Pakistan, Burma a veritable population
explosion is faced.

5. Unemployment and Under-employment:
An important consequence of rapid rate of population growth without a corresponding increase
in the level of economic development is that there is large scale unemployment in urban areas
and disguised unemployment in rural areas. More and more people are thrown on land, since
alternative occupations do not develop simultaneously to absorb surplus population. It means
that there are more persons engaged in agriculture than are actually needed, so that the addition
of such persons does not add to lands productivity. Even if some of the persons are withdrawn
from land no fall in production will follow from such withdrawal.

6. Under-utilization of Natural Resources:
The natural resources are an under-developed economy is either unutilized or under-utilized.
Generally speaking under-developed countries are not deficient in land, water, mineral, forest or
power resources, though they may be untapped. In other words they constitute only potential
resources. The main problem in their case is that such resources have not been fully and properly
utilized due to various difficulties such as the deficiency of capital equipment, the inaccessibility
of natural resources, primitive techniques and the small extent of the market.

7. Foreign Trade-Orientation:
An under-developed economy is generally foreign trade-oriented. They export raw materials
instead of utilising them at home and import manufactures instead of making them at home.
Since in some cases like Srilanka Burma and Thailand, they export a significant proportion of
their national output, they may be termed export economies. Excessive dependence on export
makes these economies precarious and unstable and affects adversely their terms of trade. The
marginal propensity to impart too is high in such countries.

8. Low Levels of Technology and Skills:
The under-developed countries employ primitive methods of production and inferior and less
productive techniques. There is also a terrible death of skilled personnel. Poor techniques and
lower skills result in inefficient and insufficient production, which cause general poverty.

9. Economic Backwardness:
The people of under-developed countries are economically backward. The economic
backwardness manifests itself in lower efficiency, illiteracy, poverty, factor-immobility, lack of
enter preneurship and ignorance in economic matters. Their value structure and social structure
reduces incentives for economic change.

10. Inequitable Distribution of Wealth and Income:
Like most underdeveloped countries the distribution of income and wealth in India is inequitable.
The gap between the haves and the have-nots over the years has actually widened and there has
been concentration of wealth and economic power in the hands of a few to the detriment of the
common people.
This is not surprising because private ownership of the means of production inevitably leads to
concentration of wealth in a few hands. Income inequalities result from the concentration of
wealth and capital.
Economic growth in a capitalist economy has a tendency to increase disparities in income
distribution. The various estimates made by different committees indicate that the inequalities of
income and wealth have widened rather than narrowed as a result of planned economic
development in India. The problem of mass poverty is a corollary to income inequalities.

11. A Dualistic Economy:
All the underdeveloped countries including India have a dualistic economy. One is the market
economy and the other is the subsistence economy.
One is in the urban areas and the other is in the rural areas. One is developed and the other is
undeveloped. The modern or the developed part contains mainly the large scale industry, mines
and plantations.
It is well organised and highly monetised. It uses the modern techniques of production. Workers
and employers in this sector are well organised. Monetary and fiscal measures of regulation are
quite effective. This advanced sector of the economy accounts for a small part of the whole
economy.
The primitive part mainly comprises agriculture and is confined to rural areas. This is very
backward and money does not play an important part in this sector. There is a high degree of
self-sufficiency and people do very little buying and selling as most of the transactions are of a
barter type.
A large part of the credit is supplied by the traditional money-lenders. Monetary and fiscal
measures of regulation are not very effective. Indian peasant is born in debt, lives in debt and
dies in debt. Income of the people of this inorganised sector is very low. Thus, the Indian
economy is characterised by economic dualism.

[Link] Backwardness:
The state of technology in the underdeveloped countries is backward. On account of the absence
of technological development, India has continued to use old, outdated and primitive methods of
production which were discarded by the developed countries long ago.

Deficiency of capital hinders the process of scrapping the old techniques and equipment and its
replacement with modern techniques, etc. Illiteracy and absence of skilled labour are the other
major hurdles in the spread of techniques in the backward economy.

However, it is gratifying to note that the level of technology is rapidly increasing in the country
and India has the largest number of technically qualified personnel in the third world countries

13. Political Instability :-
In the under developed countries political condition is also not favorable. For example in
Pakistan the rate of development remained low due to political crises. Uncertain conditions
creates many problems for the investors.

14. Deficit Balance of Payment :-
The less developed countries are producing and exporting the primary commodities while these
are importing the finished and capital goods. In the international market the prices of raw
material are very low while the prices of capital goods are high. So balance of payment remains
unfavorable , due to this reason.

[Link] Home Market :-
In the less developed countries like Pakistan, the purchasing power of the people is low.
Producer is unable to increase the supply of various goods due to low demand. So limited market
is also an obstacle in the way of economic development.

16. Burden of Debt :-
It is an important characteristic of the under developed countries. All these countries receive
foreign aid of their development program. For example Pakistan spends a huge amount of
foreign exchange for the repayment of debt interest every year. It is an obstacle in the way of
economic development.

[Link] Forces :-
The rate of economic growth in the third world has also been adversely affected by the advanced
countries economic policies. The advanced countries are not ready to transfer technology in these
countries.

18. Inflation :-
The rate of inflation is high in all the less developing countries which affects the economic
performance. In these countries level of prices is rising which is creating the problems for
producer and consumer.

[Link] of Market :-
In the under developed countries prices of commodities vary from shop to shop and place to
place. Labour and capital are less mobile in search of higher returns. So imperfection of market
is an obstacle in the way of development.

[Link] Performance of Industrial Sector :-
In the under developed countries there is hold of few families on the industrial sector. The small
scale industry has also been ignored. There is also a shortage of entrepreneur.

[Link] Circle of Poverty :-
A poor country is trapped in its own poverty. In the less developed countries production, per
capita income, saving and investment is low. So low investment leads to low production.

22. Unproductive Expenditure :-
In the under developed countries a huge capital is used for unproductive purpose which increases
the rate of inflation and affects the rate of economic development, adversely