Comprehensive Study Notes on Developed and Developing Economies

Basic Characteristics of Underdeveloped Countries

• Introduction to Underdevelopment: Underdeveloped countries exhibit a variety of economic and social indicators that distinguish them from advanced nations. There are fourteen primary characteristics used to identify these economies.

• Characteristic 1: Low Level of Income:

  • Underdeveloped countries maintain very low income levels compared to developed nations.
  • Per capita incomes are extremely low, creating a significant gap between these groups.
  • Inequality in the distribution of income, coupled with low overall levels, leads to disastrous economic situations.

• Characteristic 2: Mass Poverty:

  • Poverty in these nations is chronic and mass-scale, rather than a temporary economic maladjustment.
  • It stems from orthodox production methods and entrenched social institutions.
  • Factors increasing poverty include: rising population sizes, growing income inequality, and increasing price levels.
  • Statistical Context: Approximately $76.8\%$ of the world’s population resides in underdeveloped or developing countries, yet they enjoy only $15.6\%$ of the total world GNP. The majority of this population lives below the poverty line.

• Characteristic 3: Lack of Capital Formation:

  • Low per capita income results in poor rates of savings.
  • Poor savings lead to low rates of investment and capital formation.
  • Comparison: The rate of investment in India and Pakistan is often lower than $10\%$, while developed countries like the USA and Canada see rates between $15\%$ and $30\%$.

• Characteristic 4: Heavy Population Pressure:

  • These countries experience high natural growth rates due to high birth rates and falling death rates.
  • Population often increases by $2\%$ to $3\%$ per annum.
  • Results: Low standard of living, reduction in average land holding size, scarcity of agricultural land, food crises, and unemployment.

• Characteristic 5: Agricultural Backwardness:

  • The agricultural sector remains underdeveloped despite its vital importance.
  • Economies depend heavily on agriculture: $60\%$ to $70\%$ of the population depends on it, and it generates $30\%$ to $40\%$ of the total GNP.
  • Technique: Agriculturists largely follow traditional methods with very limited application of modernized techniques.

• Characteristic 6: Unemployment Problem:

  • Excessive population and lack of alternative occupations in secondary and tertiary sectors force people into the agricultural sector.
  • This results in widespread disguised unemployment and underemployment.
  • Educated unemployment is also rising due to a lack of industrial development.

• Characteristic 7: Unexploited Natural Resources:

  • Countries often possess sufficient land, water, minerals, and forests but fail to utilize them.
  • Difficulties in exploitation include: regional inaccessibility, shortage of capital, primitive technology, transport bottlenecks, and small market extent.

• Characteristic 8: Shortage of Technology and Skills:

  • Production is inefficient and insufficient due to poor technology and a shortage of skilled manpower.
  • Sophisticated technology is required in both agricultural and industrial sectors but is hindered by a lack of capital and training facilities.

• Characteristic 9: Lack of Infrastructural Development:

  • Backwardness is evident in transportation, communication, electricity generation/distribution, and credit facilities compared to developed nations.

• Characteristic 10: Lack of Industrialization:

  • Industrial growth is low due to poor capital formation, lack of machinery, and a lack of entrepreneurial initiative. Development is often restricted to limited geographic areas.

• Characteristic 11: Lack of Proper Market:

  • Markets suffer from inadequate information, lack of diversification, poor connection between markets, and low demand.

• Characteristic 12: Mass Illiteracy:

  • High illiteracy rates foster superstition and conservatism, discouraging individual initiative.

• Characteristic 13: Poor Socio-Economic Conditions:

  • Development is obstructed by factors such as the joint family system, universal marriage, costly social customs, and specific laws of inheritance.

• Characteristic 14: Inefficient Administrative Set Up:

  • The absence of sound administrative structures leads to mismanagement, lack of economic organization, and poor investment decisions.

Main Characteristics of Less Developed Countries (LDCs)

• Characteristic 1: Low Per Capita Income and Widespread Poverty:

  • Per capita GNP is extremely low, leading to severe hardships regarding food, medical care, and education.
  • Gap Analysis (2006 Data): India's per capita GNP was $820 USD$; the USA was $44,970 USD$; Norway was $66,530 USD$; Switzerland was $57,230 USD$.
  • Low-income countries averaged $650 USD$ compared to $37,529 USD$ for high-income countries (World Development Report 2008).

• Characteristic 2: Shortage of Capital:

  • There is a deficit in private capital (factories, mills) and social overhead capital (roads, schools).
  • Poor populations have a high propensity to consume and a low propensity to save.
  • Ragnar Nurkse’s Vicious Circle: "A country is poor because it is poor." Low income leads to low saving, which leads to low growth, circling back to low income.

• Characteristic 3: Population Explosion and High Dependency:

  • Based on T.R. Malthus’s 1798 predictions, the "population bomb" has exploded due to falling death rates and constant birth rates.
  • Growth is often $2\%$ annually. Inelastic input supply makes the land-labor ratio unfavorable, creating an army of surplus labor and a heavy dependency burden.

• Characteristic 4: Massive Unemployment:

  • The traditional agricultural sector cannot absorb the rising population, leading to disguised unemployment.
  • Migration to urban areas occurs, but industrial growth is insufficient to provide jobs.

• Characteristic 5: Predominance of Agriculture:

  • Income Contribution: Agriculture contributes $30\%$ to $50\%$ of national income in LDCs, compared to $2\%$ to $8\%$ in developed countries.
  • Employment: $55\%$ to $75\%$ of the workforce is in agriculture and extractive industries (mining, fisheries, forests), while only $10\%$ is in the secondary sector.

• Characteristic 6: Unproductive Investment:

  • LDCs typically save less than $15\%$ of GDP, while advanced countries save more than $35\%$
  • Available savings are often misused for unproductive assets like hoarding, black marketing, gold, and jewelry (e.g., decorating temple artifacts).

• Characteristic 7: Low Levels of Productivity:

  • Productivity is low across land, labor, and capital due to institutional, technological, and natural reasons.
  • Laborers often lack food and medical care, which hampers their ability to work hard and gain technical skills.

Limiting Factors of Acceleration in Underdeveloped Countries

• Factor 1: Technique of Production: In backward economies using handicraft methods, the acceleration effect is zero because current consumption calls for no capital deepening or "roundabout" production. Excess capacity is a common feature in small-scale industries.

• Factor 2: Non-Economic Considerations: Capital outlay is often driven by political, welfare, or exogenous factors rather than changes in income level. Social overhead investments are made by governments regardless of immediate consumption trends.

• Factor 3: Financial Market Imperfections: The accelerator requires an elastic supply of bank credit. In LDCs, credit is often unavailable or carries very high interest rates, and high prices for industrial inputs slow growth.

• Factor 4: Capacity and Capital Intensity: High unutilized capacity in consumer goods industries reduces the stimulus for new investment. Low-income countries have narrow technological bases, meaning a rise in consumer demand causes a smaller rise in investment spending compared to developed nations.

• Factor 5: Foreign Trade Leakages: Dependence on foreign trade causes profits and interest to flow abroad. High marginal propensity to import machinery and high income elasticity for imports dampen local acceleration effects.

• Factor 6: Variable Proportions in Agriculture: Additional labor can be added to family-sized agricultural units easily. While output expands, per capita income falls. However, intensive capital stock use can increase the marginal productivity of capital, creating some favorable acceleration effects.

Comparison and Differences Between Developed and Developing Countries

• UN Classification Categories: Countries are divided based on economic status, GDP, GNP, per capita income, industrialization, and standard of living.

• Comparison Chart (Developed vs. Developing):

  • Meaning: Developed countries have effective industrialization and high individual income. Developing countries have slow industrialization and low per capita income.
  • Unemployment/Poverty: Lower in developed; higher in developing.
  • Demographics: Developed have low birth/death/infant mortality and high life expectancy. Developing have high birth/death/infant mortality and low life expectancy.
  • Revenue Source: Developed generate more revenue from the industrial sector (post-industrial economies rely heavily on services). Developing often generate revenue from the service sector relative to their early stage industrial sector.
  • Growth: High in developed; developing rely on developed nations for growth.
  • Income Distribution: Generally equal in developed; unequal in developing.
  • Resource Utilization: Effectively utilized in developed; ineffectively utilized in developing.

• Examples:

  • Developed: Australia, Canada, France, Germany, Italy, Japan, Norway, Sweden, Switzerland, United States.
  • Developing: Colombia, India, Kenya, Pakistan, Sri Lanka, Thailand, Turkey, Indonesia, Brazil, and most African countries.

Definitions and Classification of Underdeveloped Countries

• Eugene Staley: Defined it by mass chronic poverty and obsolete production methods, noting that poverty is not due to poor natural resources.

• United Nations Experts: Used the term to refer to countries where per capita real income is low compared to the USA, Canada, Australia, and Western Europe.

• Indian Planning Commission: Defined it as the co-existence of unutilized horsepower/manpower and unexploited natural resources.

• Jacob Viner: Emphasized potential prospects for using more capital, labor, or resources to support the population at a higher living level.

• Ragnar Nurkse: Specified that these countries are under-equipped with capital relative to population and resources.

• Bauer and Yamey: Noted real income and capital per head are low by North American and European standards.

• M.P. Todaro: Defined it by low levels of living, absolute poverty, low consumption, poor health services, high death/birth rates, and foreign dependence.

• Gunnar Myrdal: Described it as a constellation of undesirable conditions regarding work, life, attitudes, and institutions.

• Simon Kuznets: Focus on the inability to utilize modern material and social technology to provide minimum subsistence.

• Oscar Lange: Stated that the available stock of capital is insufficient to employ the labor force using modern techniques.

• Classification of Definitions:

  1. Poverty and Low Income Based: Staley, Samuelson, Bauer/Yamey, Todaro, Myrdal, and UN.
  2. Under-utilized Resource Based: Viner and Indian Planning Commission.
  3. Capital Deficiency Based: Nurkse, Kuznets, and Lange.
  4. Human Development Based: Amartya Sen and Jean Dreze (focus on literacy, mortality, calorie intake).

Income Inequality and World Bank Classifications

• Classification by per capita Gross National Product (GNP) (2005 Data):

  • Low Income Countries: Per capita GNP of $875 USD$ and below.
  • Middle Income Countries: Per capita GNP between $876 USD$ and $10,725 USD$.
  • High Income Countries: Per capita GNP higher than $10,725 USD$ (mostly OECD members).

• Statistical Breakdown (2005):

  • Low Income: $2,353$ million people ($36.5\%$ of world population) but only $2.7\%$ of world GNI.
  • Middle Income: $48.0\%$ of world population and $16.5\%$ of world GNI.
  • Combined Developing: $84.0\%$ of population but only $19.0\%$ of world GNI.
  • High Income: $16.0\%$ of population and $79.0\%$ of world GNI.

• India Specific Data (2005): India holds $17.0\%$ of world population with only $1.8\%$ of world GNI. Per capita GNI was $720 USD$, compared to the world average of $6,987 USD$.

Economic Reforms and Structural Adjustment Programs

• Programs: Structural Adjustment Facility (SAF) (1986/87, 1988/89) and Enhanced Structural Adjustment Facility (ESAF) (1990/91, 1992/93).

• Policy Goals:

  1. Spur private investment via financial reform and deregulation.
  2. Facilitate public investment by raising revenue and curtailing government consumption.
  3. Protect purchasing power by reducing inflation.
  4. Improve human resource development via social programs.
  5. Promote labor-intensive production and diversification.

Questions & Discussion

• General Questions:

  • Question 1: Key indicators for classification? Answer: GDP per capita, industrialization level, and Human Development Index (HDI).
  • Question 2: Discuss the "poverty trap." Answer: A self-perpetuating cycle where lack of capital and education prevents investment, making escape from poverty impossible. Aggravated by poor governance and reliance on single commodities.
  • Question 3: Role of globalization? Answer: Offers market access and technology but often benefits developed countries more; developing nations may face exploitation without strong regulations.

• Applied Questions:

  • Question 1: Attracting FDI for manufacturing? Answer: Tax incentives and infrastructure investment, balanced with strong labor laws and local business partnership requirements.
  • Question 2: Addressing an aging workforce? Answer: Immigration of skilled workers, investment in Automation/AI, raising retirement age, and providing childcare subsidies.
  • Question 3: "Premature deindustrialization"? Answer: When manufacturing shrinks before high income levels are reached. Differs from post-industrial shifts as it leads to informal jobs and persistent poverty.

• Case Type Questions:

  • Case 1: Small Island Developing State (SIDS) & Climate Change: Vulnerable due to reliance on tourism and agricultural exports. Development needs include short-term coastal defenses and long-term diversification into sustainable fisheries and resilient infrastructure.
  • Case 2: Resource-Rich LDC: Faces the "Resource Curse" and "Dutch Disease". Recommendations include creating a Sovereign Wealth Fund, investing in human capital, and diversifying the economy to avoid over-reliance on minerals.
  • Case 3: Transitioning Socialist Economy: Faces challenges like the "J-Curve" effect and unemployment. Mitigation strategies include creating social safety nets, vocational training, and promoting SMEs.