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Characteristics of Developing Economies

Characteristics of Developing Economies – 6 Common Characteristics | Development Economics

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Concept of Developing Economies

Both traditional economics and political economy are enriched by development economies. Development economics, although necessary to address efficient resource allocation and steady growth of aggregate output over time, is mainly concerned with the economic, social, and institutional mechanisms necessary to improve the living standards of the masses of poor in developing countries rapidly and significantly. Therefore, development economics needs to be concerned with the formulation of public policies that will facilitate major economic, institutional, and social transformations in a short amount of time. As a result, the gap between aspiration and reality will continue to widen. For this reason, in development economics the public sector plays a much greater and more influential role than in neoclassical economics.

Underdeveloped countries and economic development are two aspects of the economic development. Throughout the history of economic development, economists have studied it from Adam Smith to Marx and Keynes, however they were more interested in problems that were largely static in nature and closely related to the social and cultural institutions in Western Europe. Economics only began to analyze the problem of underdeveloped countries and formulate theories and methods of development and growth in the 1940s and specifically after the Second World War.

A country’s real national income increases over time as a result of economic development. It is the process of utilizing the available resources to increase the production of goods and services per capita in a region or county. An increasing flow of goods and services can be considered a reflection of economic development, which is a sustained improvement in well-being. Man’s development is not only concerned with his material needs, but also with improving his social circumstances. Therefore, development entails more than just economic growth, but also changes in social, cultural, and institutional factors.

Common Characteristics of Developing Economies

These are some of the characteristics of developing economies:

1) Living Standards are Low

For the vast majority of people living in developing nations, the general standard of living is very low. Poor living conditions are manifested quantitatively and qualitatively through low income (poverty), inadequate housing, poor health, a limited education, high infant mortality, a lack of work and life experiences, and in many cases a general feeling of malaise. Low living standards in developing countries are characterized by the following characteristics:

  • National income levels are low and growth rates are slow. Per capita real income growth is stagnant due to low levels and stagnant growth rates.
  • Income distribution is highly skewed, with the top 20% receiving 5 to 10 times more income than the bottom 40%.
  • Approximately 13 billion people live on subsistence incomes of less than $370 per year at purchasing power parity in developing countries.
  • It has high infant mortality rates that are 10 times greater than those in developed nations, and large segments of the population suffer from ill health, malnutrition, and debilitating diseases.
  • Low literacy rates, high school dropout rates, and inadequate, often irrelevant educational curricula and facilities are some of the problems facing education.

2) Productivity is Low

The productivity of the labour force in developing countries is relatively low, in addition to low living standards and deprivations in human development. For societies to provide for their material needs, a production function is often used to describe how they relate outputs to different combinations of factors inputs. Besides managerial competency, access to information, motivation of workers, and institutional flexibility, this concept also encompasses other inputs.

Compared with developed countries, labour productivity in developing countries is extremely low. For productivity to increase, domestic savings and foreign finance must be mobilized to invest in physical capital goods and to build up human capital (management skills) by investing in education and training. Taking advantage of this new physical and human investment requires institutional changes as well.

Even with the economic opportunities for self-improvement, development may be difficult in underdeveloped nations without the appropriate institutional and structural arrangements. Having low productivity results in low income, which results in a limited ability to buy nutritious food, which leads to a limited capacity to work, resulting in a low level of productivity.

3)  Dependency burdens and high rates of population growth

More than half of the world’s 6 billion people lived in less developed countries in 2000. There are striking differences in both birth and death rates between two groups of countries. There are generally 30-40 births per 1000 people in less developed countries. It is rare for a less developed country to have a birth rate below 20 per 1000, and no developed country to have a birth rate above it. Even though death rates are higher in developing countries than in developed nations, such differences are significantly smaller than the differences in birth rates, due to improved health conditions and the control of major infectious diseases.

A developing country’s population grows by 1.6% a year on average, compared to a high-income country’s 0.7%. The proportion of older people in developed countries is also much higher. As nonproductive members of society, older people (65+) and children (below 15) are often referred to as economic dependency burdens requiring financial support from the country’s labor force. In developed countries, dependency burdens account for only about 33% of the population, but for almost 45% of the population in less developed countries.

4) Substantial Dependence on Agricultural Production and Primary Product Exports

Rural areas are home to the majority of people in low developed countries. Rural areas account for more than 65% of the workforce, while economically developed countries account for less than 27%. Agriculture employs 58% of the total labor force in developing nations, compared with only 5% in developed nations. In developing nations, agriculture contributes about 14% of the gross national product (GNP), but only 3% in developed nations.

At low income levels, people’s first priorities are food, clothing, and shelter, which is why agricultural and other primary production activities are centralized in developing countries. LDC agriculture is often characterized by primitive technologies, poor organization, and limited physical and human capital inputs, which leads to low agricultural productivity due to the large number of people compared to available land.

5) Prevalence of Imperfect Markets & Incomplete Information

It is common for LDCs to lack or have extremely weak legal and institutional foundations. These seven factors are very essential for the nation development.

  • An enforceable legal system where property rights are validated and contracts are enforced;
  • Currency that is stable and trustworthy;
  • Transport and communication infrastructure that facilitates interregional trade by reducing transport costs;
  • Banking and insurance systems that are well developed;
  • In addition to formal credit markets, consumers and producers need substantial information about product prices, quantities, and qualities, as well as credit worthiness of potential borrowers.
  • Successful long-term business relationships are based on a set of behavioral norms.

6) Dominance, Dependence and Vulnerability in International Relations

In many less developed nations, the unequal distribution of political power between rich and poor nations contributes to the persistence of low living standards, high unemployment, and growing income inequality. As a result of these unequal strengths, rich nations are more effective than developing nations at controlling international trade patterns and dictating terms for transferring technology, foreign aid, and private capital.

Poor nations may also be inhibited by other equally important aspects of the international transfer process. An issue widely recognized as the international brain drain – the migration of professional and skilled personnel (doctors, nurses, scientists, engineers and computer programmers) to developed nations – is also influenced by the dependence and penetration of rich-country attitudes, values and standards.

Thus, all these factors create an environment of vulnerability among developing nations, where forces largely beyond their control can have decisive and dominating influences on their economic and social conditions. There are many small countries with little chance of becoming self-sufficient as their economies are dependent on other countries.

Smirti
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