CHAPTER TWO

CHARACTERSTICS OF
THE DEVELOPING
ECONOMIES:
DIVERSITY WITH IN
COMMONALITY
CHAPTER TWO: CHARACTERSTICS OF THE DEVELOPING ECONOMIES: DIVERSITY WITH IN COMMONALITY .

There are important historical and economic

communalities among developing countries
that have led to their economic development
problems. But they still are very diverse group
with different challenge.
 1. LOWER LEVELS OF LIVING AND
PRODUCTIVITY.

 There is a vast gulf between developed and

developing countries. At very low levels, a Vicious
Cycle may set in, i.e.; low income leads to low
investment and low productivity and economic
stagnation. This in turn leads to Poverty Trap or what
is known as Circular and Cumulative Causation.
 The LDCs group itself is very diverse in these regard.
For example the following characteristics are
observed among them:
 South Korea, Taiwan and China are star performers.
 East Asia has shown rapid growth.
 Sub Saharan Africa has shown stagnation
 Intermediate level growth seen in the rest.
 Question. How can we ignite and sustain economic
growth?
 Is there necessary correlation between country size
in population or area and Economic Development?

 Each has different advantage and disadvantage that

often offset each other.
 The 12 most populous countries include
representatives of all four categories of low, lower-
middle, upper=middle and high income.
 The 12 least populous include primarily lower middle
and upper middle income countries.
 2. LOW LEVELS OF HUMAN CAPITAL.
(Health, Education and Skill)

 Much of the developing world has lagged in its

average levels of nutrition, health (as measured by
life expectancy) and education (measured by
literacy). Under five mortality is still 15 times higher
than in high income countries.
 There is clear synergy between progress in health and
education. Example can be seen in mothers’
education and under 5 mortality.
 Some development economists contend that a
country’s level and distribution of education is the
most fundamental determinant of future development
prospects.

 Question: What are the major problems of the Human

Capital formation in LDCs?
 3. HIGHER LEVELS OF INEQUALITY AND
ABSOLUTE POVERTY.
 The poorest 20 % receive 1.5% of the world income
and 1 Billion people live in extreme poverty on less
than $1 per day at PPP.
 Bringing the incomes of those on less than $1 per day
up to this minimal poverty line would require less
than 2% of the incomes of the world’s wealthiest
10%. This would show that the scale of global
inequality is immense.
 Huge global economic disparities is not the only
reality but also with in an individual LDCs between
the rich and the poor citizens. Particularly in Latin
America, Sierraleon, Lesotho, South Africa are
amongst the highest level of inequality in the world.

 Indeed in many cases, inequality in LDCs is

substantially higher than in most developed countries.

 Question: Is inequality higher in developed or

developing countries? Why?
 Inequality varies greatly among developing countries
with generally much lower in Asia.

 The varying and rising levels of inequality underlie

that we cannot confine our attention to averages; we
must look with in nations at how income is
distributed to ask who benefits from economic
development and why?

 Question: What is the reality in this regard in

Ethiopia? Who benefits from economic development
and why?
 Lower average levels show that a large majority of
the extreme poor live in the low income developing
countries of SSA and South Asia.

 Question: Why extreme poverty? Exclusion, social,

political and other sorts of deprivations lie behind
extreme poverty.
 Great progress has been made to reduce the number
of people living below a $1.25 a day but much still
remains to be done.
 Qn. How many people are below poverty line in
Ethiopia?
 The magnitude and extent of poverty in any country
depends on two factors:
 The average levels of National Income.
 The degree of inequality in its distribution.
 Absolute poverty is a concept representing a specific
minimum level of income needed to satisfy the basic
physical needs of food, shelter and clothing in order
to insure continued survival.
 The WB estimates of the share of the population
living less than the poverty line a day is:

 9.1% in East Asia.

 8.6% in Latin America and Caribbean.
 1.5% in the Middle East and North Africa.
 31.7% in South Asia.
 41.1% in SSA..(.WB: 2007)
 Poverty and inequality can lead to slower growth.
 4. HIGHER POPULATION GROWTH RATES.
 The world population figures were 1Billion in 1800,
1.65 Billion in 1900 and over6 Billion by 2000. The
growth has been skyrocketed since the beginning of
the Industrial era.
 Rapid population growth began in Europe and other
developed countries; but in recent decades it has been
centred in the developing countries. 5/6 th of the world
population lives in developing countries.
 The developed countries have birth rates near or
even below replacement (i.e. Zero population growth
level.) But population dynamics is another area of
variation among the developing countries.
 Developing countries averaged 1.5% of population
growth in 2005. From 1990 to 2005 the figures stood
at:

 For low income group, 2% per year.

 Middle income 1.1%
 High income 0.7% (Both Births and Immigration.)
 SSA 40 per 1000
 Ethiopia 35-39 per 1000. (WB. 2005)
 The overall death rate for developing countries is
8/1000 but in developed world it is 10/1000. This is
because the population is young in developing
countries. But developing countries have higher death
rates in each age bracket.

 Children under age 15 make 32% of the total

population. Active labour force has to support twice
as many children as it does in richer countries.
 By contrast, the proportion of population average of 65 is
much larger in developed nations. Both older people and
children are Economic Dependence Burden as they are non
productive group b/n age 15 to 64.

 The overall dependence burden represents 1/3rd of developed

countries population but almost 40% of population of less
developed nations. Of the dependents 85% are children in
poor countries and; 53% are children in the rich countries.
44% of SSA population is under 15 age.

 Dependency ratio varies across developing nations as well.

Not only are developing countries characterized by higher
rates of population growth, but they must also contend with
greater dependency burdens.
 5. GREATER SOCIAL FRACTIONALIZATION.

 Low income countries more often have ethnic,

linguistic and other forms of social divisions
sometimes known as Fractionalization. This is
sometimes associated with civil strife, and violent
conflicts. This needs political accommodations if not
national consolidations.
 Ethnic fragmentation can explain underdeveloped financial
system, insufficient infrastructure; political instability and
low schooling in SSA. The greater the internal conflict such
as Ethnic, tribal and religious conflicts; the more likely it is
that there will be political instability.
 Most successful recent development experiences- South
Korea, Taiwan, Singapore and Hong Kong have occurred in
culturally homogenous societies.
 Ethnic and religious diversity need not necessarily lead to
inequality, turmoil or instability. In the US, diversity is often
cited as a source of creativity and innovation. The broader
point is that the Ethnic and religious diversity leads to
conflict or cooperation can be important determinant of the
success or failure of development efforts.
 6. LARGE RURAL POPULATION BUT RAPID
RURAL URBAN MIGRATION.

 Economic development is a shift from agriculture to

manufacturing and services. In developing countries,
a much higher share of population lives in rural areas.
Rural areas are poorer and tend to suffer from missing
markets.
 7. LOW LEVELS OF INDUSTRIALIZATION AND
MANUFACTURING EXPORTS.
 The so called G-7 is widely named as industrialized
countries. Industrialization is associated with high
productivity and incomes and has been a hall mark of
modernization and national economic power.
 Agriculture accounts for 1% employment in US and UK
but it still provides a substantial share of employment in
Africa and Asia. There is higher dependence on primary
exports in LDCs. Hence, diversifying exports is a
requirement.
 8. ADVERSE GEOGRAPHY.
 This would lead to problem of agriculture, public health
and comparative underdevelopment. Developing countries
are tropical or sub tropical with tropical pests and parasites
such as malaria, water resource constraints and extreme
heat problems. Global warming is projected to have its
greatest negative impact on Africa and South Asia.
 Land locked economies often have lower incomes than
coastal economies.
 The most favourable physical resource endowment is the
oil rich Persian Gulf States. High mineral wealth is not
guarantee of development success E.g. Congo. Any way
geography is not a destiny. High income Singapore lies on
the equator.
 9. UNDERDEVELOPED FINANCIAL AND
OTHER MARKETS.
 Imperfect market and incomplete information is the
characteristic of LDCs. Legal and institutional
foundations are absent or weak.
 LDCs have weak legal system that enforces property
rights.
 Currency is not stable and trustworthy as there are no
well developed banking and insurance industries.
The formal credit markets are weak.
 The market information system for consumers and
producers about prices, qualities and quantities of
products is minimum.
 10. RELATIVE IMPORTANCE OF THE PUBLIC
AND PRIVATE SECTOR AND CIVIL SOCIETY.
 Most LDCs have a mixed economic system with
greater emphasis on public sector activities. Non
Governmental Organizations for non profit are not yet
developed. Relevant economic policy and political
structure is essential.
11. LINGERING COLONIAL IMPACTS.
 This has led most of LDCs to external dependence.
Having avoided formal colonialism is no guarantee of
development success. Ethiopia, Liberia and
Afghanistan can frequently be stated examples for not
being colonized.
High Dependence on Agriculture

Agriculture is the main occupation in developing countries. More than

70 percent of active labour force is engaged in this primary sector.
Population increases and the increased labour stick to agriculture
thereby overburdening the firm size. There is low output per head.

Underutilized Natural Resources

Most of the developing countries are rich in natural resources.

However, their exploration and exploitation is limited. Sometimes,
foreign companies control them. Generally, raw products are exported
at low prices.
Lack of Capital and Technology

Capital deficiency is another common problem of

developing countries. Because the countries are poor, they
save less which results in low capital formation. They
possess less investment capital. In addition their existing
technology is old and unproductive.

Lack of Basic Infrastructures

The factors that help for development are called

infrastructures. Good road system, highways, telephone,
services, big dams and canals, banks and financial services
are some examples of the necessary infrastructures.
 Socio-cultural Characteristics

Different kinds of social groups reside in a country. They differ in

terms of religion, castes, and creeds, cultures and customs, languages
and beliefs, etc. Such social and cultural values have deep impact in
the economy of a nation.

Dualistic Economy

All the sectors of economy have not been developed in developing

countries. Employment opportunities or activities exists in urban areas
whereas traditional production method is used in rural areas.
Employment opportunities are less. Hence, these countries have
dualistic economy which results in various problems with formulating
economic policies.
Burden of Internal and External Debts

Most of the developing countries of the world are

depending on foreign economic loans. An amount of
foreign loans is increasing as the years pass.
 Unemployment
An outstanding problem of developing countries is their high
rate of un-employment, under-employment and disguised-
unemployment.

Deficit in Balance of Payment

Third world countries have to import some finished and
capital goods to make economic development, on the other
hand they have no products to export but raw material.

Deficiency of Capital
Shortage of capital is another serious problem of poor
nations. Lack of capital leads to low per capita income, less
saving and short investment.
 Limited Foreign Trade
Due to backwardness, developing countries have to export
raw material because the quality of their products is not
according to international standard ISO etc. Lower
developing nations have to import finished and capital
goods
Vicious Circle of Poverty
According to vicious circle of poverty, less developed
nations are trapped by their own poverty. So, rate of
capital formation is very low results in “a country is poor
because she is poor”.
 Underdeveloped Labour, Financial, and Other Markets
 Markets and institutions in developing countries are quite
different from markets and institutions in developed countries.
Markets and institutions are largely informal in developing
countries.
 Informality of these markets can largely be traced to
informational and incentive constraints and limits to
contractual enforcement.
Poor Health and Diseases
Many people in developing countries fight a constant battle
against malnutrition, diseases and ill health”.
 Brain Drain
An outflow of the best, brightest and talented student
from poor nations to rich nations is called brain drain.
There is less reward for the talent, which causes an
outflow of best brain in the backward countries.

Inadequate Infrastructure
Adequate infrastructure is needed which is not
available in poor economies to enhance the process
of economic development. Roads, transport,
telecommunications, sanitation, health and education
facilities are not at their best level in these nations
 High Degree of Illiteracy

Illiteracy rate is very high in poor countries while it is

almost zero in rich countries. There is lack of
technical education and training centres, which is
necessary for economic growth and development.
Literacy rate in Pakistan is 57.7 % during 2010-11.
Expenditure on education sector is just 1.8 % of GDP.
 Un-productive Expenditures
Population of developing nations mostly copies the styles
of population of developed nations due to demonstration
action in poor economies. Their consumption activities
not only move around their income but also depend upon
the relatives, friends and locality. They spend more on
birth, death, marriages and various other ceremonies etc.
which reduces their savings and investment.
Political Instability
There is political instability in the most of the developing
countries. There are a lot of clashes between government
and the opposition that is a cause to reduction in domestic
as well as foreign investment. Political instability keeps
the level of economic development low.
 Backward State of Technology

Use of modern techniques of production is not

adopted in developing countries. It may cause further
unemployment. Use of advanced technology is
impossible due to shortage of capital, lack of skill and
training, high cost of production and lack of foreign
exchange reserves. Backward state of technology
results in low production, high cost and wastage of
time.
 Dependence on External Resources
The international trade, political activities and other
economic activities are under the influence of other
advanced countries in less developing countries.
Their development plans are financed by the loan
giving countries; these plans are made to serve the
interests of foreign countries.
So, poor nations are loans and grants receiving
nations.
 Dominance of Informal Sector –
One very important feature of the developing
countries is the dominance of informal sector in
economic activities. The main characteristics of the
informal sector jobs are: (i) low skill, (ii) low
productivity, (iii) self employment (iv) lack of
complementary inputs particularly capital, (v) small
scale measured in terms of sales, assets, employment
etc., (vi) favoured by recent migrants, (vii) ease of
entry for employers and workers, and (viii) lack of
formal contractual agreements.
 2.2. The Diverse Structure of Third World
Economies

Any portrayal of the structural diversity of

developing nations requires an examination of seven
critical components:

1. The size of the country (geographic area, population,

and income)
2. Its historical and colonial background
3. Its endowments of physical and human resources
 [Link] relative importance of its public and private
sectors.
5. The Nature of its Industrial Structure
6. Its degree of dependence on external economic and
political forces.
7. The distribution of power and the institutional and
political structure within the nation.
 Size and Income Level
 The sheer physical size of a country, the size of its population,
and its level of national income per capita are important
determinants of its economic potential and major factors
differentiating one Third World nation from another.
 Of the 145 developing countries that are full members of the
United Nations, 90 have fewer than 15 million people, 83 fewer
than 5 million.
 Large and populated nations like Brazil, India, Egypt, and
Nigeria exist side by side with small countries like Paraguay,
Nepal, Jordan, and Chad.
 Large size usually presents advantages of diverse resource
endowment, large potential markets, and a lesser dependence on
foreign sources of materials and products
 But it also creates problems of administrative control,
national cohesion, and regional imbalances.
There is no necessary relationship between a country's
size, its level of per capita national income, and the
degree of equality or inequality in its distribution of that
income.

Even excluding the wealthy OPEC states, India, with a

1993 population of over 900 million, had a 1990 per
capita income level of $350, while nearby Singapore,
with fewer than 3 million people, had a 1990 per capita
income of over $12,300.
 Its Historical and Colonial Background

Historical Background: Most African and Asian

nations were at one time or another colonies of
Western European countries, primarily Britain
and France, Belgium, the Netherlands, Germany,
Portugal, and Spain.

The economic structures of these nations, as well

as their educational and social institutions, have
typically been modelled on those of their former
colonial rulers.
 Endowment of Physical and Human Resources.
 A country's potential for economic growth is greatly
influenced by its endowments of physical resources
(its land, minerals, and other raw materials) and
human resources (both numbers of people and their
level of skills).
 The extreme case of favourable physical resource
endowment is the Persian Gulf oil states. At the other
extreme are countries like Chad, Yemen, Haiti, and
Bangladesh, where endowments of raw materials and
minerals and even fertile land are relatively minimal.
 Relative Importance of the Public and Private Sectors
 Most Third World countries have mixed economic systems,
featuring both public and private ownership and use of
resources. The division between the two and their relative
importance are mostly a function of historical and political
circumstances.
 Thus, in general, Latin American and Southeast Asian
nations have larger private sectors than South Asian and
African nations.
 The degree of foreign ownership in the private sector is
another important variable to consider when differentiating
among LDCs. A large foreign-owned private sector usually
creates economic and political opportunities as well as
problems not found in countries where foreign investors are
less prevalent.
 Industrial Structure
 The vast majority of developing countries are agrarian in
economic, social, and cultural outlook. Agriculture, both
subsistence and commercial, is the principal economic
activity in terms of the occupational distribution of the
labour force, if not in terms of proportionate contributions
to the gross national product.
 It is in the relative importance of both the manufacturing
and service sectors that we find the widest variation
among developing nations.
 In spite of common problems, therefore, Third World
development strategies may vary from one country to
the next, depending on the nature, structure, and
degree of interdependence among its primary,
secondary, and tertiary industrial sectors.
 The primary sector consists of agriculture, forestry,
and fishing; the secondary, mostly of manufacturing;
and the tertiary, of commerce, finance, transport, and
services.
 External Dependence: Economic, Political, and
Cultural

The degree to which a country is dependent on

foreign economic, social, and political forces is related
to its size, resource endowment, and political history.
For most Third World countries, this dependence is
substantial. In some cases, it touches almost every
facet of life. Most small nations are highly dependent
on foreign trade with the developed world.
This fact alone exerts an extraordinary influence on
the character of the growth process in these dependent
nations.
 Political Structure, Power, and Interest Groups.

 In the final analysis, it is often not the correctness of

economic policies alone that determines the outcome of
national approaches to critical development problems.

 The political structure and the vested interests and

allegiances of ruling elites (e.g., large landowners,
urban industrialists, bankers, foreign multinationals).
 Effective social and economic change thus requires
either that the support of elite groups be enlisted
through persuasion or coercion or that the elites be
pushed aside by more powerful forces.