Common Characteristics of Developing Countries | Economics

Following are some of the basic and important characteristics which are common to
all developing economies:
An idea of the characteristics of a developing economy must have been gathered from the
above analysis of the definitions of an underdeveloped economy. Various developing
countries differ a good deal from each other. Some countries such as countries of Africa do
not face problem of rapid population growth, others have to cope with the consequences of
rapid population growth. Some developing countries are largely dependent on exports of
primary products, others do not show such dependence, and others do not show such
dependence.

Some developing countries have weak institutional structure such as lack of property rights,
absence of the rule of law and political instability which affect incentives to invest. Besides,
there are lot of differences with regard to levels of education, health, food production and
availability of natural resources. However, despite this great diversity there are many common
features of the developing economies. It is because of common characteristics that their
developmental problems are studied within a common analytical framework of development
economics.

Characteristic # 1. Low Per Capita Income:

The first important feature of the developing countries is their low per capita income.
According to the World Bank estimates for the year 1995, average per capita income of the
low income countries is $ 430 as compared to $ 24,930 of the high-income countries including
U.S.A., U.K., France and Japan. According to these estimates for the year 1995, per capita
income was $340 in India, $ 620 in China, $240 in Bangladesh, $ 700 in Sri Lanka. As against
these, for the year 1995 per capita income was $ 26,980 in USA, $ 23,750 in Sweden, $
39,640 in Japan and 40,630 in Switzerland.

It may however be noted that the extent of poverty prevailing in the developing countries is
not fully reflected in the per capita income which is only an average income and also includes
the incomes of the rich also. Large inequalities in income distribution prevailing in these
economies have made the lives of the people more miserable. A large bulk of population of
these countries lives below the poverty line.

For example, the recent estimates reveal that about 28 per cent of India’s population (i.e.
about 260 million people) lives below the poverty line, that is, they are unable to get even
sufficient calories of food needed for minimum subsistence, not to speak of minimum clothing
and housing facilities. The situation in other developing countries is no better.

The low levels of per capita income and poverty in developing countries is due to low levels
of productivity in various fields of production. The low levels of productivity in the developing
economies has been caused by dominance of low-productivity agriculture and informal
sectors in their economies, low levels of capital formation – both physical and human
(education, health), lack of technological progress, rapid population growth which are in fact
the very characteristics of the underdeveloped nature of the developing economies. By
utilising their natural resources accelerating rate of capital formation and making progress in
technology they can increase their levels of productivity and income and break the vicious
circle of poverty operating in them.

It may however be noted that after the Second World War and with getting political freedom
from colonial rule, in a good number of the underdeveloped countries the process of growth
has been started and their gross domestic product (GDP) and per capita income are
increasing.

Characteristic # 2. Excessive Dependence on Agriculture:

A developing country is generally predominantly agricultural. About 60 to 75 per cent of its
population depends on agriculture and its allied activities for its livelihood. Further, about 30
to 50 per cent of national income of these countries is obtained from agriculture alone. This
excessive dependence on agriculture is the result of low productivity and backwardness of
their agriculture and lack of modern industrial growth.

In the present-day developed countries, the modern industrial growth brought about structural
transformation with the proportion of working population engaged in agriculture falling
drastically and that employed in the modern industrial and services sectors rising enormously.
This occurred due to the rapid growth of the modern sector on the one hand and tremendous
rise in productivity in agriculture on the other.

The dominance of agriculture in developing countries can be known from the distribution of
their workforce by sectors. According to estimates made by ILO given in Table 4.1 on an
average 61 per cent of workforce of low-income developing countries was employed in
agriculture whereas only 19 per cent in industry and 20 per cent in services. On the contrary,
in high income, that is, developed countries only 4 per cent of their workforce is employed in
agriculture, while 26 per cent of their workforce is employed in industry and 70 per cent in
services.

In India at the time of independence about 60 per cent of population was employed in
agriculture and with six decades of development the percentage of population engaged in
agriculture has fallen to around 50 per cent in 2011-12. However, it is significance to note that
the increase in population in non-agriculture sector has found employment not in organised
industry and services sector but in informal sector where labour productivity is as low as in
agriculture.

Besides, it is important to note though at present (2011-12) agriculture employees 50 per cent
of workforce, it contributes only 13 per cent to its GDP. This shows labour productivity in
agriculture and informal sector in the Indian economy, as in other developing economies, is
due to the fact that the employment in organised industrial and services sector has not grown
at a rate commensurate with the increase in population despite recording a higher growth rate
in output.

This is due to use of capital-intensive technologies in the organised industrial and services
sectors. With the growth of population in the last few decades the demographic preserve on
land has increased resulting in fall in land-labour ratio. With this agricultural holdings have
become sub-divided into small plots which do not permit the use of efficient methods of
cultivation.

In developing countries today, despite their modern industrial growth in the last four decades
not much progress has been achieved towards structural transformation in the occupational
structure of their economies. Due to the use of highly capital-intensive techniques very few
employment opportunities have been created in their organised industrial and services
sectors.

When increasing population cannot obtain employment in the modern non-agricultural

occupations, such as industry, transport and other services, then the people remain on land
and agriculture and do some work which they are able to get. This has resulted in disguised
unemployment in agriculture. During the last some decades because of population explosion
the pressure of manpower on land in the developing countries has largely increased.

Characteristic # 3. Low Level of Capital Formation:

The insufficient amount of physical and human capital is so characteristic a feature in all
undeveloped economies that 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 rate of capital formation is also very
low. In the early 1950s in most of developing countries investment was only 5 per cent to 8
per cent of the national income, whereas in the United States, Canada, and Western Europe,
it was generally from 15 per cent to 30 per cent.

Since then there has been substantial increase in the rate of saving and investment in the
developing countries. However, the quantity of capital per head is still very low in them and
therefore productivity remains low. For example, in India rate of investment has now (2012-
13) risen to about 35 per cent but it still remains a poor country with low level of productivity.
This is because as a result of rapid population growth, capital per head is still very low.

The low level of capital formation in a developing country is due both to the weakness of the
inducement to invest and to the low propensity and capacity to save. The rate of saving in
developing countries is low primarily because of the low level of national income. In such an
economy, the low level of per capita income limits the size of the market demand for
manufacturing output which weakens the inducement to invest. The low level of investment
also arises as a result of the lack of dynamic entrepreneurship which was regarded by
Schumpeter as the focal point in the process of economic development.

At the root of capital deficiency is the shortage of savings. The level of per capita income
being quite low, most of it is spent on satisfying the bare necessities of life, leaving a very little
margin of income for capital accumulation. Even with an increase in the level of individual
incomes in a developing economy, there does not usually follow a higher rate of accumulation
because of the tendency to copy the higher levels of consumption prevailing in the advanced
countries. Nurkse has called this as “demonstration effect”. It is usually caused through media
like films, television or through foreign visits.

Generally, there exist large inequalities in the distribution of incomes in developing countries.
This should have resulted in a greater volume of savings available for capital formation. But
most often the sector in which the greatest concentration of incomes lies is the one which
derives its income primarily from non-entrepreneurial sources such as unearned incomes of
rents, interests and monopoly profits.

The attitudes and social values of this sector are often such that it is prone to use its income
for ‘conspicuous consumption’, investment in land and real estate, speculative transactions,
inventory accumulation and hoarding of gold and jewellery. If these surpluses are channelled
into productive investment, they would tend to increase substantially the level of capital
formation.

Characteristic # 4. Rapid Population Growth and Disguised Unemployment:

The diversity among developing economies is perhaps nowhere to be seen so much in
evidence as in respect of the facts of their population in respect of its size, density and growth.
While we have examples of India, Pakistan and Bangladesh with their teeming millions and
galloping rates of population growth, there are the Latin American countries which are very
sparsely populated and whose total population in some cases numbers less than a single
metropolitan city in India and China. In several newly emerging countries of Africa too and in
some of the Middle Eastern countries the size of their population cannot be regarded as
excessive, considering their large expanse. The South- East and Eastern Asia, on the other
hand, have large populations.

However, there appears to be a common feature, namely, a rapid rate of population growth.
This rate has been rising still more in recent years, thanks to the advances in medical sciences
which have greatly reduced the death rate due to epidemics and diseases. While the death
rate has fallen sharply, but there has been no commensurate decline in birth rate so that the
natural survival rate has become much larger. The great threat of this rapid population growth
rate is that it sets at nought all attempts at development in as much as much of the increased
output is swallowed up by the increased population.

One important consequence of this rapid rate of population growth is that it throws more and
more people on land and into informal sector to eke out their living from agriculture, since
alternative occupations do not simultaneously develop and thus are not there to absorb the
increasing numbers seeking gainful employment. The resultant pressure of population on land
and in informal sector thus gives rise to what has been called “disguised unemployment”.

Disguised unemployment means that there are more persons engaged in agriculture than are
actually needed so that the addition of such persons does not add to agricultural output, or
putting it alternatively, given the technology and organisation even if some of the persons are
withdrawn from land, no fall in production will follow from such withdrawal. As a result,
marginal productivity of a wide range of labourers employed in agriculture is zero.

It will be seen from Table 4.2 that in 2009, population of the world was estimated at 6,775
million in 2009 and its annual population growth in 1990-2009 was 1.3 per cent. The
population growths in low-income developing countries have been 2.3 per cent per annum
during 1990-2009 and of middle income developing countries as a whole has been 1.3 per
cent per annum. As against this, population growth rate in high income countries (i.e.,
developed countries) was 0.7% per annum. That is, population in developing countries has
been growing at a much faster rate as compared to the developed countries.

In Table 4.2, we have given the dependency ratio on the working population. Both children
and boys below the age of 15 years (i.e., young ones) and the old people above the age of
65 years and above represent dependency burden as they are unproductive members and
are financially dependent on the working population.

The bad effect of this dependency burden for developing countries is that it reduces saving
rate of the community and therefore adversely affects economic growth. It will be seen from
Table 4.2 that the dependency burden of young persons (i.e., below the age of 15 years) in
case of low-income countries is very high at 69%, whereas the dependency burden of old
people on the working population is much lower, only 6 per cent. As against this, for high
income countries dependency burden of old persons is relatively very high being 23 per cent.

Underutilization of Natural Resources:

The natural resources in an underdeveloped economy are either unutilised or underutilised.
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 utilised due to various difficulties such as shortage of capital, primitive
technology and the small size of the market.

Characteristic # 5. Lower Levels of Human Capital:

Human capital – education, health and skills – are of crucial importance for economic
development. In our analysis of human development index (HDI) we noted that there is great
disparity in human capital among the developing and developed countries. The developing
countries lack in human capital that is responsible for low productivity of labour and capital in
them.

Lack of education manifests itself in lower enrolment rate in primary, secondary and tertiary
educational institutions which impact knowledge and skills of the people. Lower levels of
education and skills are not conducive for the development of new industries and for
absorbing new technologies to achieve higher levels of production. Besides, lack of education
and skills makes people less adaptable to change and lowers the ability to organise and
manage industrial enterprises. Further, in countries like India, advantage of demographic
dividend can be taken only if the younger persons can be educated, healthy and equipped
with appropriate skills so that they can be employed in productive activities.

The data of various education indicators is given in Table 4.3. It will be seen from this table
that as compared to high income countries enrolment in secondary and tertiary educational
institutions was 38% and 63% of person of relevant age group in 2009 as compared to 100
per cent in high-income developed countries.

Similarly, enrolment rate in tertiary educational institutions which impart higher liberal,
managerial and technical education in developing countries of low income and lower middle
income is 6 per cent and 19 per cent respectively of the relevant age group as compared to
67 per cent in high-income developed countries. It will be seen from Table 4.3 that in India
enrolment for secondary education is 60 per cent and in China 78 per cent of relevant age
group.

Similarly, Table 4.3 reveals that adult literacy rate (percentage of population of ages 15 and
older that can read and write a short simple statement in their everyday life) is much lower
(62% in low income and 80% in lower middle income developing countries) in 2009 as
compared to 98% in high income developed countries. In India adult literacy rate is only 63
per cent in 2009 whereas it is much higher in China (94 %) and Brazil (90 %) as compared to
98% in high-income developed countries.

It is evident from above that educational and skill levels in developing countries are much
lower as compared to developed countries. This lowers the quality of the people of developing
countries as productive agents and wealth creators.

Health:
Likewise, health, the other important human resource, is a key factor that determines
efficiency or productivity of the people. The people who are undernourished and malnourished
often suffer from sickness cannot be efficient and therefore cannot contribute much to the
increase in productivity.

Besides, health enjoyed by the people is good in itself as it directly increases the happiness
and welfare of the people, Lower health of the people of developing countries is manifested
lower life expectancy at birth, higher mortality rate of children under 5 years age,
undernourishment and malnourishment (i.e., underweight children) of the people and access
to improved sanitation facilities. Though health conditions in developing countries have
greatly improved in the last some decades of development, there are still important
differences between them and developed countries. The data of various health indicators is
given in Table 4.4.

It will be seen from Table 4.4 that life expectancy at birth in low income (LIC) and lower middle
income countries (LMC) is 57% and 68% respectively in 2009 as against 80% in high income
developed countries. Health conditions in South Asia and Sub-Saharan Africa are highly
deplorable and they continue to suffer from problems of acute undernourishment,
malnourishment and children’s mortality rate. Mortality rate of under 5 years age children per
1000 live births in 2009 was 118 in low income countries (LIC) and 57 in lower middle income
countries (LMC). In India which is a lower middle income country, under 5-years mortality rate
in 2009 was relatively high at 66 as against only 8 per 1000 live births in the United States
and United Kingdom.
Two types of statistical data regarding nutrition are given in Table 4.4. First, undernourished
persons in a country as per cent of population, undernourishment refers to dietary energy
consumption that is continuously below minimum requirement for maintaining healthy life so
as to carry out light physical activity with an acceptable minimum weight. Second, Child
nutrition which is here measured by malnourishment of children under 5 year’s age who are
underweight. This un-nourishment impairs the working capacity of the individuals and also
makes them unable to acquire education and skills needed for high productivity job.

It will be seen from Table 4.4 that percentage of under-weight persons to total population is
very high in developing countries 31 per cent in low income countries (LIC) and 15 per cent
in lower middle income countries whereas it is very low at 5% in high income developed
countries in the year 2009. In India the percentage of undernourished persons to total
population was high at 21 per cent but Brazil has succeeded in lowering it to 6 per cent of the
population.

As regards the prevalence of malnourishment, the condition in India is shocking as it has the
highest, 43.5%, of children less than 5 years age whereas it is only 1.3% in 2009. The same
is the case with regard to access to improved sanitation facilities. It will be seen from Table
4.4 that in India 31 per cent of population has access to improved sanitation facilities as
against 100 per cent in the United States and United Kingdom.

Characteristic # 6. Dualistic Structure of the Underdeveloped Economies:

An important feature of developing economies, especially those which are marked by surplus
labour is that they have a dualistic structure. This dualistic character of these economies has
been held to be the cause of unemployment and underemployment existing in them. Keeping
in view this dualistic structure of less developed economies, important models of income and
employment have been propounded.

Famous Lewis model of economic development with unlimited supplies of labour and Fei-
Ranis model of “Development in a Labour Surplus Economy” explain how in dualistic
economies, the unemployed and underemployed labour in the traditional sector is drawn into
a modern high productivity sector.

The concept of dualism was first of all introduced into the development analysis by Dr. J.H.
Boeke but he emphasised the social dualism, according to which there is sharp contrast
between the social systems characterising the two broad sectors of the economy, one in
which the original social system with its subsistence or pre-capitalist nature, limited wants,
non-economic behaviour and low level of economic and social welfare prevails, and the other
where imported capitalist system with its modern system of industrial organisation, wage
employment, unlimited wants and positive behaviour to economic incentives exists.
However, it is technological dualism rather than Boeke’s social dualism which has an
important bearing on the problem of economic growth and surplus labour in the developing
countries. According to the concept of technological dualism, the important difference
between the traditional and the modern sectors lies in the difference between the production
techniques or technologies used. In the small modern sector consisting of large-scale
manufacturing and mining which provides wage employment, highly capital-intensive
techniques imported from the developed countries are used.

On the other hand, in the large traditional sector covering agriculture, handicrafts and allied
activities, in which there exist extended family system and self-employment, labour-intensive
technology is generally used. As a result of the difference in technologies used, the labour
productivity and levels of earnings in the modern sector are much higher than those in the
traditional sector.

Moreover, since the technology used in the modern sector is highly capital-intensive, the
growth of this sector has not absorbed adequate amount of labour in high productivity and
high wage employment. With the explosive rate of growth of population and labour force and
the limited creation of employment opportunities in the modern sectors because of the highly
capital-intensive technology, surplus labour has emerged in the agriculture and services. It
has been possible for agriculture to contain the surplus labour because of the prevalence of
extended family system in which both work and income are shared by the family members.

We thus see that the problem of unemployment and underemployment in less developed
economies has been intensified by the technological dualism caused by the use, in the
modern manufacturing and mining, of capital-intensive technology imported from abroad
which is wholly unsuitable to the factor endowments of these less developed economies with
abundant labour and small capital.

The unemployment and underemployment in these less developed economies are not only
due to the slow growth of capital or low rate of investment, it is also due to the highly capital-
intensive techniques used in the modern sector. This technological dualism with the fact that
modern sector has limited labour-absorptive capacity contains important implications for
development strategy to be framed for less developed countries like India with surplus labour.
Need for Development:
There is a very urgent need for economic development in the underdeveloped or poor
countries. Economic development is needed so that living standards of their people may be
raised. What is more important is that economic development of the poor countries is
necessary from the point of view of the richer countries. What do we find today? The world is
divided into two parts- one of the poor and the other of the rich which is continuously becoming
richer.

Such a situation threatens the economic and political stability of the world. Unless the poor
countries are enabled to share the general prosperity, their condition will become more and
more difficult. It is the relative difference between the rich and poor countries which will make
the poor countries discontented. Ever-increasing discontent in the poor countries is bound,
sooner or later, to aggravate the already explosive situation in the world.

As the gulf between the rich and poor countries widens, the tension in the world will grow.
The poor countries will agitate more and more for a share in prosperity and, consequently,
their demand on the richer countries will grow louder and louder in volume and intensity.
There is ample evidence in the world of the fact that when nations cannot solve their domestic
problems, their governments plunge them into war with their neighbours who may be
prosperous. It is thus in the interest of world peace and harmony that the poor countries are
enabled to remove or reduce their poverty.

There is a growing and legitimate desire of the poor nations to eradicate poverty. The desire
to develop is keenly felt by different sections of their population. Their desire to develop is
natural and understandable because they experience acute physical sufferings as a result of
appallingly miserable economic conditions in which they live. The masses in the poor
countries constantly face hunger, illiteracy, sickness and are forced to eke out a life of extreme
poverty.

Note that, according to the new view as made popular by Amartya Sen economic
development is needed mainly for two reasons:
(1) The removal of poverty,

(2) Enlargement of human capabilities and freedoms.

For the removal of poverty capabilities of the poor should be enhanced so that they should
be able to meet their minimum basic needs which include getting adequate food, health,
clothing and shelter. To achieve these economic growths is necessary but not sufficient.
Therefore, for removal of poverty, direct anti-poverty measures such as generation of enough
employment opportunities are taken.

Secondly, as emphasized by Amartya Sen, development is needed so that people should

enjoy freedom and life of valued functioning. To quote Amartya Sen, “The valued functioning
may vary from elementary ones, such as being adequately nourished and being free from
avoidable diseases to very complex activities or personal states such as being able to take
part in the life of community and having self-respect”. Thus, according to Amartya Sen,
freedom of choice, and control of one’s own life are central aspects of well-being for which
true development is needed.

Times are gone when people believed in their destiny or kismet. They are no longer prepared
to reconcile to their poverty as resulting from fate. They have now realized that the solution
of the problem of poverty lies in economic development. This realization has been further
strengthened by the ever-increasing contacts and communications between such countries
and the developed countries. The awareness of the possibilities of development is growing
every day. Already, the upper sections of society in developing countries are imitating the
living standards prevalent in the rich countries.

The desire for development has followed the political freedom of the many poor countries
from foreign rule. It has now been realised that political freedom without economic freedom
and prosperity has no meaning. Political independence has naturally raised expectations of
the people in the economic sphere. No wonder that people of these countries which have won
freedom from the colonial rule aspire to develop economically and that in the shortest possible
time.

Classification of Developing Countries:

We began with the general classification of the countries of the world into three groups,- First
World Countries, Second World Countries and Third World countries. Then we discussed four
more specific classifications. These are,-
1. The U.N. Classification System: This is a classification of the Third world (developing)
countries which were U.N members in 1992. The classification was based on per capita GNP
and there were three major classes. These are,-
1. “Least Developed”: 44 poorest members of U.N comprised this group,
2.“Developing Nations”: This class included 88 non-oil-exporting countries,
3.Organization of Petroleum Exporting Countries (OPEC): This group included 13 countries
whose national income increases dramatically in the 1970s.
2. World Bank Criterion: This classification involves both developed and developing countries.
132 countries with population size larger than 1 million were classified into 4 groups according
to per capita income. The classes are,-
1. Low Income,
2. Middle income,
3. Upper-Middle Income,
4. High Income.

108 mostly developing countries fell in the first three groups while 19 developed and 5
developing countries fell in the High Income group.

3. UNDP Criterion: This classification by the United Nations Development Program is the
most ambitious attempt to classify the countries of the world (both developed and developing).
This classification was based on Human Development Index (HDI) rather than the per capita
income criterion. HDI is a measure of development and in addition to per capita income it also
incorporates longevity, measured by life expectancy at birth and knowledge, measured by a
weighted average of literacy and mean years of schooling. The HDI criteria is superior to the
per capita income criteria because it incorporates both economic and non-economic factors
that determine the quality of life. There are three classifications based on this criterion.
1. High Human Development Countries (HDI ³ .80),
2. Medium Human Development Countries (.51£ HDI £ .79) and
3. Low Human Development Countries ( HDI £ .50).

4. OECD Criterion: OECD stands for Organization for Economic Cooperation and
Development. This criterion provided a classification of third world countries and included
countries which are not in the U.N system. The Classifications are,-
1. LIC (Low Income Countries),
2. MIC (Middle Income Countries),
3. NIC (Newly Industrialized Countries), and
4. OPEC (Countries belonging to OPEC).
Note: Carefully study table 2.1 and make yourself familiar with countries which belong to NIC
and OPEC.
Since there are about 145 countries which belong to the third world, it is understandable that
these countries would be very diverse in terms of culture, economic conditions, social and
political structures, etc. At the same time, since these countries all are developing countries,
they sure would share some common traits. In order to study development, it is very important
that we study the differences and similarities among the developing countries. In the process
we should be able to identify some major characteristics, the presence or absence of which
may help or retard development process. The majority of this chapter deals with the
similarities and differences among the developing countries. (Note: You should thoroughly
read this chapter. Later, when you would read the country studies, you should try to see if you
can relate to what you have learnt in this chapter to what is being documented about those
developing countries).

Structural Differences Among Developing Countries:

Developing countries are considered to be different from one another on 8 broad categories.
These are,-
1. Size of the country: A country can be large in terms of its physical size, its population
or by the level of its national income. When you study this subsection, try to identify
the advantages and disadvantages of being large in size.

2. Historical Background: Try to understand why the colonial background of a country

is important. Colonial rule usually has a large influence on the pre-existing institutions
and culture of a colonized country. Some of these influences were good but some
were very harmful. Once the colonial rule ended, it took a long time for the newly
independent countries to find its own foot hold. Therefore, it is very important to know
when a country has become independent or whether at any point of time it was under
colonial rule or not.

3. Physical and Human Resources: The amount of physical resources, which includes
land, minerals and other raw materials, available to a country can make a huge
difference in the life style of its population. The countries in the developing world differ
very much in terms of owning these physical resources. Not only this, they also differ
a lot in terms of their human resources. Some countries may have a small but highly
skilled, educated and innovative population. While some countries may have a very
large but mainly very low skill population with very little or no education. Yet there can
be countries which may have large population with average to high levels of skill and
education.

4. Ethnic and Religious Composition: The more diverse a country is, in terms of ethnic
and religious composition, the more will be internal strife and political instability. These
internal strife and political instability can lead to violent conflicts and even self
destructive wars which would cause waste of valuable resources which could definitely
be used to promote other valuable development goals. E.g., Afghanistan, Sri Lanka,
Bosnia, Zaire, etc. In general, the more homogeneous a country is the easier it is for
that country to become successful in their development effort. E.g., Korea, Taiwan,
Singapore, Hong Kong.
 5. Relative Importance of Public and Private Sectors: The relative importance and
size of public and private sector varies a lot in the developing countries. Countries
where there are severe shortage of skilled human resources usually used to have
large public sectors and state owned enterprises, on the assumption that limited skilled
manpower can be best used by coordinating rather than fragmenting administrative
entrepreneurial activities. The widespread failure of a number of countries with large
public sectors to show any improvement at all, raised questions regarding the validity
of these claims. Economic policies to promote same development objectives would be
different in countries with different compositions of public and private sectors.

6. Industrial Structure: Developing countries also differ a lot in terms of the size and
quality of their industrial structure. The size and type of the industrial sector depends
on the policies adopted in the past which again may have to do a lot with the history
of the country.

7. External Dependence: External dependence can be of economic, political or cultural

in nature. Developing countries being mostly small and underdeveloped, have to
depend a lot on the developed countries for trade, technology and training. The extent
of dependence vary among countries and is influenced by the size, history and the
location of the country.

8. Political Structure, Power and Interest Groups: The developing countries also vary
in terms of the size of the vested interest group and its influence on the political power
structure. Although interest groups are seen to be present in every society, most
developing countries are ruled directly or indirectly by small and powerful elite to a
greater extent than the developed nations are. Effective social and economic change
thus requires either that the support of elite groups be enlisted or that the power of the
elite be offset by more powerful democratic forces.

Common Characteristics of Developing Nations:

The similarities among developing countries can be classified into seven broad categories.
These are,-
1. Low Levels of Living: Since the developing countries are poor, it is understandable
that the levels of living would be quite low compared to the levels of living in the
developed countries. It is, however, surprising to see the extent of the differences in
living standards between a developed and a developing country. A comparison of the
living standards between these two groups of countries is presented in the subsection
of the book under the same heading. The difference in the levels of living has been
 portrayed in terms of Per Capita National Income (note: make sure to review the
concept of “Purchasing Power Parity” and its advantage over “Exchange rate” in
comparing living standards), Relative Growth Rates of GNP, Distribution of National
Income, Extent of Poverty (Note: “absolute poverty” and “international poverty line” are
important concepts with which you should become familiar), Health and Education. A
measure of health is provided by infant mortality rate, population with consumption
below caloric requirements and the nature and extent of human health deprivation in
the third world. (Note: information reflected by following tables and figures are to be
noted,- Table 2.3, 2.6 and 2.7, Figures 2.4, 2.5, 2.6 and 2.7).

2. Low Levels of Productivity: Productivity of labor is low in developing countries. The

reason being lack of physical capital (principle of diminishing marginal productivity)
and the quality of labor. We also discussed idea of “circular cumulative causation” by
Gunner Myrdal. Productivity of labor can be raised in two ways. First, by mobilizing
domestic savings and foreign finance to generate new investment in physical capital
goods and second, by building up human capital through investment in education and
training.

3. High Rates of Population Growth and Dependency Burdens: Birth rate and death rate
are both higher in developing countries compared to developed countries. This also
contributes to high dependency burden in the developing countries. (Note: definition of crude
birth rate and crude death rate are important.).

4. High and Rising Levels of Unemployment and Underemployment: We discussed the

difference between the reported unemployment figures and the actual unemployment
situation in the developing countries. In the process we talked about discouraged workers
and different ways in which a person can be underemployed.

5. Substantial Dependence on Agricultural Production and Primary Product Exports:

Most developing countries have a very large agricultural sector and most of their exports are
usually primary agricultural products. Agriculture is not only a profession but a way of life in
the developing countries. The reliance on agriculture is a result of the subsistence nature of
the rural economy in the developing countries. The type of agriculture in the developing
countries is also very different from that in the developed countries. Agriculture in the
developing countries is primarily small scale and highly labor intensive. Later in the course
we shall categorically see the disadvantages a developing country would face when they try
to specialize in the production and export of a primary commodity.
6. Prevalence of Imperfect Markets and Incomplete Information: The success of a
developed market economy depends heavily on the existence of certain institutional, cultural
and legal prerequisites. E.g., strong judiciary, clearly defined property rights, stable currency,
infrastructure of roads and utilities, functional transport and communication system, free flow
of information. While in the industrial societies most of these are taken for granted, in the
developing countries a lot of these legal and institutional foundations are either absent or
extremely weak. The result is misallocation of resources.

7. Dominance, Dependence and Vulnerability in International Relations: In international

relations, the developing countries frequently have to deal with the rich and powerful nations.
They have to depend on the developed countries for trade, technology, foreign aid and
expertise. This dominance of the rich industrial nations and the dependence of the developing
countries on them often leads to the adoption of inappropriate technologies, educational
structures and cultural values in the developing countries. The influence of the rich lifestyle of
the developed countries can lead to elite lifestyle, private accumulation of capital, brain drain
and transfer of capital all of which retards economic development in the developing countries.

DETERMINANTS OF ECONOMIC GROWTH:

The economic growth of a country is the increase in the market value of the goods and
services produced by an economy over time.

Economic Growth Definition

We define economic growth in an economy by an outward shift in its Production Possibility
Curve (PPC). Economic growth is measured by the increase in a country’s total output or
real Gross Domestic Product (GDP) or Gross National Product (GNP). The Gross Domestic
Product (GDP) of a country is the total value of all final goods and services produced within
a country over a period of time. Therefore an increase in GDP is the increase in a country’s
production.
Growth doesn’t occur in isolation. Events in one country and region can have a significant
effect on growth prospects in another. For example, if there’s a ban on outsourcing work in
the United States, this could have a massive impact on India’s GDP which has a robust IT
sector dependent on outsourcing.

Most developed economies experience slower economic growth as compared to developing

countries. For example, in 2016, India had a growth rate of 7.1% while the American economy
was only growing at 1.6%. This statistic can be misleading because India’s GDP was $2.264
trillion in 2016, while the US was $18.57 trillion. It would be more appropriate to compare their
economic growth rates during similar periods in their history.
Economic Growth is not the same as Economic Development. Development alleviates people
from low standards of living into proper employment with suitable shelter. Economic Growth
does not take into account the depletion of natural resources which might lead to pollution,
congestion & disease. Development, however, is concerned with sustainability which means
meeting the needs of the present without compromising future needs.

Why is Economic Growth Important?

Economic growth is one of the most important indicators of a healthy economy. One of the
biggest impacts of long-term growth of a country is that it has a positive impact on national
income and the level of employment, which increases the standard of living. As the country’s
GDP is increasing, it is more productive which leads to more people being employed. This
increases the wealth of the country and its population.
Higher economic growth also leads to extra tax income for government spending, which the
government can use to develop the economy. This expansion can also be used to reduce the
budget deficit.

Additionally, as the population of a country grows, it requires the growth to keep up its
standard of living and wealth.

Economic growth also helps improve the standards of living and reduce poverty, but these
improvements cannot occur without economic development. Economic growth alone cannot
eliminate poverty on its own.

Six Factors That Affect Economic Growth

The follow six causes of economic growth are key components in an economy.
Improving or increasing their quantity can lead to growth in the economy.

1. Natural Resources
The discovery of more natural resources like oil, or mineral deposits may boost economic
growth as this shifts or increases the country’s Production Possibility Curve. Other resources
include land, water, forests and natural gas.
Realistically, it is difficult, if not impossible, to increase the number of natural resources in a
country. Countries must take care to balance the supply and demand of scarce natural
resources to avoid depleting them. Improved land management may improve the quality of
land and contribute to economic growth.

For example, Saudi Arabia’s economy has historically been dependent on its oil deposits.
2. Physical Capital or Infrastructure
Increased investment in physical capital such as factories, machinery, and roads will lower
the cost of economic activity. Better factories and machinery are more productive than
physical labor. This higher productivity can increase output. For example, having a robust
highway system can reduce inefficiencies in moving raw materials or goods across the
country which can increase its GDP.

3. Population or Labor
A growing population means there is an increase in the availability of workers or employees,
which means a higher workforce. One downside of having a large population is that it could
lead to high unemployment.

4. Human Capital
An increase in investment in human capital can improve the quality of the labor force. This
would result in an improvement of skills, abilities, and training. A skilled labor force has
a significant effect on growth since skilled workers are more productive. For example,
investing in STEM students or subsidizing coding academies would increase the availability
of workers for higher-skilled jobs that pay more than investing in blue collar jobs.

5. Technology
Another influential factor is the improvement of technology. Technology could increase
productivity with the same levels of labor, thus accelerating growth and development. This
means factories can be more productive at lower costs. Technology is most likely to lead to
sustained long-run growth.

6. Law
An institutional framework which regulates economic activity such as rules and laws. There
is no specific set of institutions that promote growth.

Six Factors that Limit Economic Growth

1. Poor health and low levels of education

People who don’t have access to healthcare or education have lower levels of productivity.
This means the labor force is not as productive as it could be. Therefore, the economy does
not reach the productivity it could otherwise.
2. Lack of necessary infrastructure
Developing nations often suffer from inadequate infrastructures such as roads, schools, and
hospitals. This lack of infrastructure makes transportation more expensive and slows the
overall efficiency of the country.

3. Flight of Capital
If the country is not delivering the returns expected from investors, then investors will pull out
their money. Money often flows out the country to seek higher rates of returns.

4. Political Instability
Similarly, political instability in the government scares investors and hinders investment. For
example, Zimbabwe has been plagued with political uncertainty and laws favoring indigenous
ownership. This has scared off many investors who prefer smaller but surer returns
elsewhere.

5. Institutional Framework
Often local laws don’t adequately protect rights. Lack of an institutional framework can
severely impact progress and investment.

6. The World Trade Organization

Many economists claim that the World Trade Organization (WTO) and other trading systems
are biased against developing nations. Many developed nations adopt protectionist strategies
which don’t help liberalize trade.

Types of Economic Growth

There are primarily four types of economic growth:

1. Boom and Bust Business Cycles

If economic growth is high-speed and inflationary, then the level of growth will become
unsustainable. This could lead to a recession like the Great Recession in 2008. However, this
type of growth is typical of a business cycle.

2. Export-led
The Japanese and Chinese economy have experienced export-led growth thanks to a high
current account surplus. This is because they have significantly more exports than imports.
3. Consumer
The US economy is dependent on consumer spending for economic growth. As a result, they
also have a higher current account deficit.

4. Commodity exports
These economies are dependent on their natural resources like oil or iron ore. For example,
Saudi Arabia has a had a very prosperous economy thanks to their oil exports. However, this
can cause a problem when commodity prices fall, and there aren’t other industries to balance
things out.

Costs of Economic Growth

There are two problems associated with the economic growth:

1. Environmental Costs
Pollution and other negative externalities often accompany increased production or increased
economic growth. Economists usually associate an adverse impact on the environment with
rapid growth in developing economies.

2. Rising Income Inequality

Growth often leads to increased income inequality. Those not involved or related to the
growth-generating sector of the economy get left behind. Usually, the rural population suffers
the most.

Development Issues and Challenges in Nepal

Nepal is a small landlocked country having area 147181 square km with length about 500
miles and wide 100 miles, and population about 30 million with the annual population growth
rate of 2.37 percent. She has neighbors China in the north and India in the south, east and
west. Nepal is a developing country in the world with small size of the economy having Rs
550 billion GDP and $ 561 per capita income in FY 2009/10. The gross domestic savings
and investment are about 7 percent and 5 percent respectively, which are very low compared
to other nations. Nearly one third of the people live below absolute poverty line in Nepal.
Historically, Nepal hinges upon the foreign aid for its economic development. Because of the
lack of infrastructure, small domestic market, and limited natural resources, Nepal’s trade
deficit is very high and widening rapidly over time. As a developing nation, Nepal has been
facing several challenges in the path of economic development. There are so many
development issues entailed to be addressed as far as possible through economic policy
measures. These development issues and challenge can be outlined as follows.
 Mass Poverty and Inequality: Reducing the percentage of people below absolute poverty
line, narrowing the ever widening poverty gap between rich and poor with implementation of
the poverty reduction measures, at present, is one of the major development issues in Nepal.
Data reveals that 25.4 percent Nepalese people live below absolute poverty line in FY
2008/09 whereas inequality, measured by Gini coefficient, increased from 0.41 in FY 2004/05
to 0.46 in FY 2008/09. Alarming figure of extremely low per capita income and mass poverty
present an awful image of the overall economic condition. Low growth rate about only 2
percent in the last 50 years period reveals the presence of the structural bottlenecks in the
economy. Against this backdrop, one of the major development challenges to Nepal at
present is to break the vicious circle of poverty and underdevelopment through rapid
economic growth along with equitable distribution of the income.
 Lack of Physical Infrastructure: Inadequate and disproportionate development of the
physical infrastructure like transportation, communication, electricity is also a major
development issue which has retarded the overall development of the nation. Majority of the
rural areas in Nepal have not been integrated into the mainstream of the economy because
basic infrastructure including road, electricity, communication have not yet reached out to
these areas. We have been facing the severe problem of energy crisis including huge burden
of load shedding despite the huge hydroelectricity potential within the country. Failure to
match demand with adequate production and supply of electricity has adversely affected all
sectors of the economy. There is a lack of drinking water and inadequate development of the
irrigation system within the economy. One of the challenges to the economy is, thus, how to
develop adequate physical infrastructure in proportionate manner in the economy including
expansion of the agricultural roads, access of remote districts to the road networks,
production and supply of hydroelectricity as per the demand through the investment in this
area.
 Widespread Unemployment: Issue of unemployment, disguised unemployment, and
underemployment is also serious one. About 400000 workers are added annually in the labor
market in Nepal. But, the opportunities for entrepreneurship, quality skill development and
creation of employment opportunities are extremely low in the economy. We all know that
youth force is one of the major prospective resources of our country. Unfortunately, because
of the lack of employment opportunities within the nation Nepalese youth are compelled to
engage in painful foreign unemployment. Brain drain of the educated and trained manpower
is also alarming. Therefore, it has become a major challenge to generate employment
opportunity for the youths including those who are marginalized from the mainstream of
development and make all to participate in the process of development. In addition, the
challenges in this sector are: producing the skilled manpower capable of competing in the
international labor market, doing help and protection of workers going abroad for foreign
employment, increasing access to employment opportunities for marginalized groups like
women, Dalits, Tribes, Madhesis, disables etc, developing and creating the sector generating
more employment.
 Stagnation of Agriculture: One of the major identified causes of underdevelopment and
poverty is stagnation of agriculture. Despite agriculture sector being a source of employment
for about 68 percent of manpower, its contribution to GDP is only 34 percent. Poverty is
widespread among the people engaged in agriculture since the per capita output is low in
agriculture. Since majority of the Nepalese people are engaged in agriculture, poverty
alleviation is possible only when we are able to increase agricultural productivity and shift the
excess manpower from agriculture to other sectors of the economy by way of creating
opportunities of gainful employment. Agricultural production still remains capricious due to
high dependency on monsoon owing to weak irrigation facility. Nepalese agricultural sector
has low competitiveness in the international arena because of the dearth of fertilizer, seeds,
irrigation and other facilities necessary for raising productivity. Therefore, one of the prime
development challenge to Nepal is to push up the agricultural growth alongside the increased
agricultural productivity through various policy measures( like commercialization of the
agriculture, expanding irrigation facilities, road networks, storage, fertilizers and inputs etc)
and to sustain its competitiveness by giving continuity to emphasis on investment and subsidy
facilities being provided to this sector.
 Economic Dependency: Growing economic dependency of Nepal on foreign nation is
one of the grave issue entailing solutions as far as possible. The trade deficit has been
growing annually at an astronomical scale. We are importing not only capital goods but also
the basic goods of daily necessities at large scale. Imports exceed exports by about 6 times
resulting trade deficit of Rs 31352 crores. About 60 percent of total foreign trade has been
with India in the last 10 years suggesting poor country wise trade diversification and
excessively high dependency on India. In the national budget also, the huge portion is also
funded by the foreign aid due to meager mobilization of the domestic resources. For example,
about 10 percent of the budget in FY 2011/12 is expected to be funded through foreign aid.
Since the outstanding foreign debt is also very high and at an ever increasing state, the debt
servicing (principal repayment and interest) is in the growing trend. Balance of payment deficit
was observed in FY 2009/10 for the first time in the previous eight years. It has resulted the
gradual depletion of the foreign exchange reserve and exerted the pressure with added
challenge of sustaining the external sector. Economic dependency is, thus, on rise in all
sectors. In the face of economic dependency and time of transition, it a major challenge for
Nepal to reduce such economic dependency and build nationally self-reliant economy.
 Political Stability and Good Governance: It is observed that corruption is rampant, in
various forms and from the lower to the upper level of the government machinery. Since Nepal
is in transition directed toward building a new constitution, she has suffered from the high
degree of political instability including frequent changes in government, programs and
policies, conflict due to presence of several interest groups. Problem of governance includes
weak institutions and procedures, lack of ownership of development projects and programs,
lack of accountability and mismanagement of the resources, deteriorating law and order,
absence of well functioning judicial system etc. Thus, the key challenge is to make peace
process reach logical conclusion by building a new constitution based on common consensus
and also in line with the aspirations of all class, caste, gender and the suppressed and
neglected communities and region. In addition, creation of corruption free environment to
ensure radical improvement in the public service delivery mechanism has become a
challenge.
 Low Level of Savings and Investment: Slight concern of most of policy makers goes to the
worst state of savings and investment. It is observed that Nepalese economy is slowly
becoming consumption oriented because of increased flow of remittance income and thereby
resulting hopeless drop in savings and investment rates. For example, consumption to GDP
ratio has been 93.3 percent in FY 2010/11, which has resulted savings rate down to 6.7
percent. Consumption oriented economy gradually leads to increased economic dependency
on others resulting scarcity of resources for investment. Thus, it is a challenge to create the
foundation of the economic growth through raising levels of savings and investment by
discouraging unnecessary consumption.
 Natural Resources Utilization: one of the key development issues in Nepal is how to
harness the natural resources available in the economy. We are rich in some resources such
as water, forest, minerals etc. Nepal has about 6000 rivers and rivulets. Theoretical potential
hydro power of Nepal is estimated to be about 83000 MW whereas sites those are technically
feasible for development could generate 44000 MW. However, Nepal has so far been able to
produce only a small fraction of this potential resource- only 697MW up to FY 2009/10. We
have also minerals deposits of Iron, limestone, Zink and others in many places in the
economy, but no detailed survey of these resources has been conducted yet. We have also
land with different altitudes capable of producing several type cash and food crops, medicinal
herbs, flowers, fruits; vegetables etc. Harnessing forest alongside bio-diversity could also
become a potential resource. We can harness water resources through hydroelectricity
generation and exporting it to India, and expanding irrigation and drinking water facilities.
Nepal has been a tourists’ paradise for many years because of incredible natural beauty and
man-made to some extent. Nepal can create tourists magnetic atmosphere and can earn
huge amount of foreign exchange if the government and private sector both take initiative in
constructing tourism infrastructure development. It is also a challenge of developing a country
as a tourist destination by conserving and expanding the existing tourists’ locations with
adequate publicity; and exploration, identification and expansion of the new tourist’s sites.
Thus, a major challenge to the economy is to harness available natural resources in optimum
manner and preserve the renewable as well as non-renewable resources for future
generation.
 Human Resources: Nepal has a huge potential of human resources, which, if utilized
effectively, can be a major source for the factor of development. But, large portion of the
people are still illiterate, and there is lack of skilled and trained manpower in the different field.
Human development indicators are also very worse compared to other nations in the south
Asia. Due to the lack of employment opportunities within the country, about 250000 people
leave the country for foreign employment and the number is on the rise. Even though foreign
employment is a major source of foreign exchange earnings and sustaining the BOP, we are
supplying only untrained, unskilled or semi-skilled workers for foreign employment. It is also
necessary to make this sector systematic and making institutional arrangement for imparting
training and skill for raising the demand for Nepalese workers at the international level. Now
it is a challenge of engaging the youths in the nation’s development by creating employment
opportunity within the country itself. Furthermore, one of the major challenges is to eradicate
illiteracy by ensuring production of efficient manpower to cope with the need of the time and
production and utilization of the manpower needed for the modern and developed economy.
 Benefiting from Globalization: The issue of taking advantage from liberalization and
globalization is also a prominent one. Privatization of public enterprises and liberalization of
the sectors like foreign trade, financial sector are in progress. Nepal is a member of WTO,
SAFTA and BIMISTIC. We cannot move ahead without the integration of our economy with
global economy. Trade liberalization in Nepal has become only import liberalization because
of the many reasons like poor infrastructure, low competitiveness of domestic products etc.
The export sector is in the severe problems due to lack of physical infrastructure, failure in
maintaining the set quality and standards in the production of exportable goods, failure to
identify niche products and niche markets for export promotion, low competitiveness in the
international market. There is lack of investment and trade friendly environments due to weak
peace and security situation, uneasy labor relations, and shortage of energy in the country.
Thus, raising the level of production and employment of the industrial sector by attracting
domestic and foreign investment through investment friendly environment has become also
a challenge. In the face of globalization, it is a challenge for our nation to take maximum
advantage of greater degree of liberalization and globalization by ensuring appropriate
policies, legal and structural reforms, adequacy of physical as well as administrative
infrastructures etc.
In addition to the above mentioned issues and challenges, there are so many development
challenges we are facing continuously in the path of building a well-advanced, egalitarian and
discrimination-free society. In the financial sector, we are facing a problem of weak
institutional governance of the financial institutions. Therefore, one of the challenges is to
build financial sector strong and stable alongside making institutional governance and self
regulatory system of the banks and financial institutions effective. Addressing the issue of
financial inclusiveness is also prominent one because of the difficulty in increasing access to
banking and financial services of the ultra poor, remote and rural areas. One additional
challenge is of simultaneously sustaining both monetary and demand management for
avoiding the undesired pressure on the price level. As a least developing country, Nepal has
several development changes in its way of economic development, which needs immediate
policy consideration and implementation from all Nepalese.