Developing countries

1. Definition of developing countries

2. Characteristic of the developing countries
– Standard of living
– Human development
3. Obstacles to economic development
– Environment and culture
– Economic system
– Vicious circles of underdevelopment
4. Importance of developing countries in the world economy
Developing countries - definition
Kofi Annan, former Secretary General of the UN – “A developed country is one that allows
all its citizens to enjoy a free and healthy life in a safe environment”
But according to the UN Statistics Division
• There is no established convention for the designation of "developed" and "developing"
countries or areas in the UN system
• The designations "developed" and "developing" are intended for statistical convenience
and do not necessarily express a judgment about the stage reached by a particular
country or area in the development process.
The UN also notes:
• In common practice, Japan in Asia, Canada and the United States in northern America,
Australia and New Zealand in Oceania, and Europe are considered "developed" regions
or areas.
• In international trade statistics, the Southern African Customs Union is also treated as a
developed region and Israel as a developed country
• Countries emerging from the former Yugoslavia, except for Slovenia, are treated as
developing countries
• Countries of eastern Europe and the Commonwealth of Independent States in Europe are
not included under either developed or developing regions
Developing countries - definition
According to the classification from IMF – all the countries of Eastern Europe as well as the
former Soviet Union countries in Central Asia and Mongolia, were not included under either
developed or developing regions, but rather were referred to as “countries in transition”;
however they are now widely regarded (in the international reports) as "developing countries".
The IMF uses a flexible classification system that considers:
• per capita income level
• export diversification – so oil exporters that have high per capita GDP would not make the
advanced classification because around 70% of its exports are oil
• degree of integration into the global financial system
The World Bank classifies countries into four income groups (year on July 1):
• Low income countries had GNI per capita of US$975 or less.
• Lower middle income countries had GNI per capita of US$976–$3,855.
• Upper middle income countries had GNI per capita between US$3,856–$11,905.
• High income countries had GNI above $11,906.
The World Bank “The use of the term is convenient; it is not intended to imply that all
economies in the group are experiencing similar development or that other economies have
reached a preferred or final stage of development. Classification by income does not
necessarily reflect development status.”
Developing countries – classification
developing country –nation with a low level of material well-being
developed country – nation with a high level of material well-being

Distinction according to some criteria (mainly economic) – lack of consensus:

• Income per capita
• Industrialization
– tertiary sector of the economy (service sector, service industry) is one of the three economic
sectors, the others being the secondary sector (approximately the same as manufacturing) and
the primary sector (agriculture, fishing, and extraction such as mining)s in which the tertiary
and quaternary sector of industry dominate would thus be described as developed.
– quaternary sector of the economy is a way to describe a knowledge-based part of the
economy which typically includes services such as information generation and sharing,
information technology, consultation, education, R&D, financing planning, and other
knowledge-based services
• Human Development Index (HDI):
– national income
– life expectancy
– education
 Developing countries characteristics

Graph. Developed and developing countries in the world

Advanced economies
Emerging and developing economies (not least developed)
Emerging and developing economies (least developed)
Developing countries – characteristics
The developing countries are characterized by:
• inadequate living and housing conditions – low income level
• poverty
• low health standard: high infant mortality, low life expectancy
• High income inequality
GDP p.c.
life infant Fertility
PPP,const. HDI literacy rate
Country expectancy mortality rate Decile ratio
prices (2007) (2007)
(2008) rate (2008) (2008)
(2008)
Bangladesh 1 233 0,543 53,5 65,7 42,9 2,3 6,25

Rwanda 949 0,460 64,9 49,7 71,6 5,4 16,88

Sierra Leone 723 0,365 38,1 47,3 123,4 5,2 12,76

Poland 16 418 0,880 99,3 75,5 5,8 1,4 8,98

India 2 721 0,612 66,0 63,4 52,3 2,7 8,55

China 5 515 0,772 93,3 72,9 17,8 1,8 13,25

UK 34 204 0,947 100,0 79,3 4,9 1,9 13,81

USA 42 809 0,956 100,0 79,1 6,7 2,1 15,89

Low standard of living
Ilateracy
Health conditions
Fertility
Income inequality
Developing countries – characteristics
• On the production side of gross national product:
– Mainly the primary sector,
– mainly agricultural,
– exploitation of natural resources
• The primary sector contributes high to total national income and employment
• Agriculture has a relative low productivity and is often economically discriminated
against in favor of manufacturing
• Frequently the agricultural production is concentrated on few products
• Far too often, the natural resource sector represents an export enclave – it is not
intensively linked to the rest of an economy, and therefore does not exert noticeable
economic spillover effects
• If the industry accounts for half or more of GDP, the industry or manufactured export do
not generate a high national income or strong enough price on the world market to move
the country to higher income levels (Democratic Republic of Congo with 56% of
industry, Angola with 65%, and Nigeria with 49%, Bangladesh with 89%)
Developing (least developed) countries – characteristics
• Often the high share of industry is based on some processing activities of the primary
sector (i.e. oil refinery) which in a dual economy does not have a spillover effect on the
rest of the economy. In the least developed countries, especially domestic commerce and
public services bind many employees
• The expenditures of the majority of the population are directed towards the necessities of
life
• Too often poor countries remain subsistence economies. Due to low incomes, it is
alleged that savings are nearly impossible. This, however, is not correct since few low
income countries have high savings rates. If there are savings at all, they frequently flow
into capital export. Very often the desire to be an entrepreneur is missing due to a lack of
social acceptance for private sector
 Period China India Japan Korea South USA World
Average GDP rate of growth (%)
1970-1979 7,44 2,93 5,28 8,29 3,33 4,08
1980-1989 9,75 5,69 3,71 7,68 3,06 3,02
1990-1999 9,99 5,63 1,50 6,25 3,13 2,72
2000-2007 10,11 7,22 1,74 5,18 2,52 3,19
Average investment rate (% GDP)
1970-1979 30,52 18,08 35,06 28,33 19,90 24,96
1980-1989 36,00 21,89 30,12 30,40 19,70 23,26
1990-1999 39,05 23,60 29,16 35,39 18,19 22,33
2000-2007 40,70 30,24 23,81 29,88 19,08 21,49
Average savings rate (% GDP)

1990-1999 37,77 22,98 31,51 36,65 16,33 ---

2000-2007 43,71 29,19 27,18 32,59 15,03 ---
Export (% GDP)
1970-1979 4,71 5,29 11,91 24,57 7,47 15,84
1980-1989 12,91 6,00 12,83 33,90 8,46 18,48
1990-1999 21,56 9,97 9,98 30,84 10,55 20,64
2000-2007 31,73 17,08 12,66 40,84 10,37 25,54
Import (% GDP)
1970-1979 4,81 5,68 11,04 30,78 7,65 15,99
1980-1989 13,52 7,97 10,92 33,43 10,28 18,88
1990-1999 19,12 10,94 8,43 29,92 11,86 20,54
2000-2007 27,37 18,94 11,29 38,64 15,09 25,58
 Korea
Period Indonesia Malesia Phillipines Singapur Tajland Taiwan
South
Average GDP rate of growth (%)
1960-1969 3,74 8,25 6,55 5,06 9,45 7,82 ---
1970-1979 7,82 8,29 7,73 5,79 9,23 7,51 ---
1980-1989 6,38 7,68 5,88 2,01 7,54 7,29 8,18
1990-1999 4,83 6,25 7,25 2,78 7,55 5,28 6,15
2000-2007 5,05 5,18 5,60 5,13 5,93 5,01 4,07
Average investment rate (% GDP)
1960-1969 9,80 19,77 17,64 22,27 20,90 21,09 ---
1970-1979 21,62 28,33 22,94 26,78 40,49 25,81 ---
1980-1989 28,58 30,40 27,76 22,17 42,55 29,44 ---
1990-1999 27,57 35,39 36,30 22,41 35,23 36,29 24,60
2000-2007 23,90 29,88 23,09 16,97 22,97 26,16 20,56
Average savings rate (% GDP)
1990-1999 30,42 36,65 40,65 14,89 47,05 35,22 26,82
2000-2007 27,68 32,59 43,00 19,55 47,92 32,06 25,81
Exsport (% GDP)
1960-1969 9,93 8,34 41,71 17,53 --- 16,38 ---
1970-1979 22,37 24,57 44,13 21,51 --- 19,03 ---
1980-1989 25,41 33,90 57,25 24,66 --- 25,85 ---
1990-1999 30,08 30,84 91,24 38,09 --- 43,02 40,04
2000-2007 33,73 40,84 113,15 49,10 219,67 69,18 52,71
Import (% GDP)
1960-1969 12,24 18,77 37,95 18,20 --- 18,30 ---
1970-1979 19,02 30,78 39,97 23,62 --- 22,59 ---
1980-1989 22,41 33,43 54,76 26,26 --- 28,83 ---
1990-1999 27,48 29,92 86,89 44,27 --- 44,05 34,32
2000-2007 27,40 38,64 93,24 51,07 195,07 63,76 46,29
Obstacles to development

Although economists do not agree on the causes of persistent poverty, there are few
decisive issues that have to be fulfilled:
• If a country wishes for sustained economic growth, it must increase:
– stock of physical capital (factories, machinery, equipment)
– human capital (health, education)
• If this is to be done without massive foreign assistance, the country must be able to
produce an output that exceeds the subsistence needs of the population
• Some group of people, whether they are private entrepreneurs, government leaders or
foreign colonialists, must mobilize that surplus towards productive ends (building
factories, schools, roads etc.) rather than allowing it to dissipate on extravagant
consumption, military advantages, civic monuments or capital flight

Countries that remain poor are those that fail to generate a sufficient investment surplus or
those that fail to invest it in productive activities
Environment and culture
Some countries stick in the underdevelopment trap because of conditions that are difficult to
overcome:
• Geography
• Environment
• Culture
1. The average developing country must use each square kilometer of its arable land to feed
more than three times as many people as the average industrial country – it is difficult to
generate an investable surplus of output above the subsistence needs of the population
2. Most of developing country, and very little of industrial world, is located in a band
around the equator that stretches from the Tropic of Capricorn to the Tropic of Cancer:
– heavy rain vs. desert
– Except in high-attitude areas, temperature range from hot to very hot, placing a strain on
human bodies, electronic equipment and automotive radiators
3. Through much of the region that is not covert by jungle, desert, excessive heat has
burned away the organic matter of the soil and excessive rain has washed away elements
that are important for growing crops
4. The tropical climate and poor sanitation fosters the reproduction of insects, parasites, and
pests that attack people, plants and animals
Religion and culture
1. With the exception of Japan, all high-income countries are predominately Christian and
all Protestant countries have high incomes
2. Few Islamic countries have advanced beyond the lower-middle income without help of
petroleum exports, such as Malaysia and Turkey
3. According to cultural determinants, patterns such as these can be explained by religious
and cultural attitudes toward freedom, conformity, competition, equality, honesty, work,
science, education, birth control, and wealth accumulation.
4. As a result in some developing countries the entrepreneurship might be missing, for
several reasons, such as:
– The role of entrepreneurship is not highly valuated in societies
– Value orientation does not assign a special importance to achievement
– No entrepreneurial tradition, because of its educational system.
Religion and culture – cultural determinism
Latin America is relatively poor and North America is relatively rich because of
differences between their Spanish and British colonial heritages

Spain was overpowered by the Moors (or Muslims) in the 8th century and, despite
centuries of civil war, did not fully regain its interdependence until 1492
Spain inherited an authoritarian culture from the Moors and the long process of reconquest
created an extremely orthodox and intolerant brand of Roman Catholicism
This intolerance led Spain to launch its Inquisition in 1480 and the expel all Jews from its
territory in 1942
Spanish corruption, authoritarianism, inequality, and intolerance were allegedly
transplanted in Latin America, where they have created of the background for economic
development

Northern America was colonalised by the British Empire: common law, education,
openness for colonies independence (?) USA, Canada, Australia
Religion and culture – cultural determinism
In Asia, rough cultural lines can be drawn between:
• the Muslim countries of the Middle East and Pakistan
• the Hindu countries of the south (India, Bangladesh and Nepal)
• the Confucian and Buddhist countries of the east (China, Asian Tigers)

Confucian work ethic has contributed to the successful growth of Japan and the East Asian
Gang of Four – Hong Kong, Singapore, South Korea and Taiwan

Hinduism have stopped allegedly retarded economic development in South Asia:

• caste system: limits on labor mobility, income equality and work incentives
• the law of karma, which says that one’s fate in this life is a reward or punishment for
action in a previous life, supposedly evokes a fatalist acceptance of the status quo
 Developing countries characteristics

Graph. Developed and developing countries in the world

Advanced economies
Emerging and developing economies (not least developed)
Emerging and developing economies (least developed)
Economic system
• Land tenure
• Market structure
• Labor market
• Financial markets
Economic system – land tenure & market structure
Several different systems of land ownership:
• In much of Africa and Asia (nomadic areas) the land is held in common with no
identifiable owner or controlled by a village, tribe, or extended family – the right to
use the best land is rotated among families – lack of incentives to engage in long-term
projects to irrigate and improve land – require the cooperation of an entire community.
• In most of Latin America, the land is held privately, but its distribution is very uneven.
With the exceptions of Mexico, Bolivia, Cuba, Nicaragua, the latifundios usually
constitute less than 5% of the farms, while holding more than 50% of the land – the
sharecroppers on latifundios have little incentives to improve land that they do not
own and the landlords have a poor record of investment. The small farms are barely
able to provide a living conditions for their owners

• In some countries, the market mechanism is operating at a primitive level. In Africa,

for example, about 25% of all economic activity was based on barter in the 1970, and
roughly 10% is still conducted outside the monetized sector.
• Barriers for market development:
– poor transportation and communication systems
– price control and state monopolies
Economic system – labor market
Dual structure of labor markets:
• modern sector, which typically involves capital-intensive industrial production in the
cities
• traditional sector, which involves labor-intensive agricultural production

Thus, urban wages are two of three times larger than rural incomes – skills cannot explain
these differences)

Few other factors are responsible for wages inequality:

• The urban workers are more likely to be unionized
• The urban workers more likely work for internationalized companies
• The urban workers more likely have the protection of legal minimum wage
• Business companies in the modern sector may pay relatively high wages to maintain a
stable force of experienced workers
The dual labor market structure promotes income inequality and attract number o people
in the cities, especially those who contribute to the unemployment
Economic system – financial market
• The limited quantity and quality of financial intermediation
• The entire financial system is usually organized around a few banks, which are heavily
regulated because they have excessive market power
• Securities markets are rudimentary or nonexistent, making it difficult to raise money
through stock or bond issues
• Few people channel their savings through life insurance companies
• Governmental taxation and control of interest rates frequently reduce the incentive to
save
Vicious circles of poverty
environmental, cultural and institutional factors explain some of the initial causes of
poverty
a number of vicious circles help to explain why the poor remain poor

Vicious circles:
• Savings and investment
• Health and education
• Political instability
• Population growth
Vicious circles of poverty – Savings and investment, education
Savings and investment
• investment rate of low-income countries is lower than that of any other group of
countries
• the low rate of investment, contributes to their low rate of economic growth.
• Low savings cause small capital formation which implies that production remain low
• weak capital formation results in hardly any new technological knowledge being
realized
• little capital formation, throughout the only little abstinence from consumption, also
means that human capital formation does not sufficiently take place (training on the
job)
• low investment are caused by the low per capita income
• the income of inhabitant goes to fulfill the subsistence needs and not for economic
purposes
• if a government tries to finance its expenses through an inflation tax, the high inflation
will work against savings, since people escape into unproductive inflation-proof uses
of their income
• Low income cause law taxation and expenditure (private and public) on education
Vicious circles of poverty – political instability
• since 1948, the average developing country has had at least one coup attempt every five
years.
• Between 1825, when it gained independence, and 1985, when it established a stable
democratic system, Bolivia had more than 150 governments
• Short terms of office encourage rulers to undertake short-sighted economic policies, such
as inflationary creation of money
• Political instability discourages foreign investment, and encourages the flight of
domestic capital
• in Latin American countries with “the emergence at least of a stable government able to
exercise effective control of the country for an extended period”
• Corruption higher transaction costs. In developing countries are typically following
conditions:
– Narrow tax base – small share of labor force that can be taxed
– Weak tax administration
– Lack of accountability of policy-makers.
• In Sub-Saharan Africa, some countries are involved in internal civil wars, tribal conflicts,
and religious clashes
• In these conditions all economic decision (consumption, investment, human capital
formation, entrepreneurship) are taken on the wrong basis of uncertainty
Vicious circles of poverty – population growth
• growth of population are more than twice as high as in developing countries
• growth of population is more than three times as high in low income countries of South
Asia
• growth of population is four times as high in poor countries in Africa
• if the gross national product increases significantly, the growth of per capita income can
be low or even negative, due to rapid population growth
• The population of poor countries tend to grow rapidly because of their rural lifestyles
and their inability or unwillingness (for religious and other reasons) to practice birth
control
• Rapid population growth, in turn, makes difficult for a society to expand and maintain a
sufficient stock of housing, productive capital, natural resources, educational services,
medical facilities, and other elements of social structure.
• The poorest countries tend to have the highest dependency ratio – the percentage of the
population that is not of working age – 33% in the industrial countries, 38 in middle
income countries, and 43% in the low-income countries, excluding China
Vicious circles of poverty
A multitude of factors can keep developing countries on a low-income level. Strong of the
population, a low savings rate, a small stock of real capital, including infrastructure capital,
and human capital led to a small output, which itself does not allow a sufficient formation
of capital. High inflation rate and high foreign dept accelerate this vicious circle, which has
to be broken through for economic development to take off
High population Low income per
growth capita

Low taxation Low propensity to Low propensity to

potential save invest

Lack in Insufficient Low capital stock

infrastructure education system per worker

Low labor
productivity

Low technological
progress
 Importance of developing countries in the world economy
Developing countries in the world GDP
Source: World Bank, 2010
80% 78,6% 1990 GDP growth v.s GDP per capita growth, %, 1990-2008
70,0%
1995 6
60%
2000 5
4 3,6
40% 2005
27,4% 3 2,6
2009 5,3 5,1
17,4% 2
1,7 1,5
20%
2,9 0,9
4,0% 2,5% 0,5% 0,7% 1 2,3
0,8
0% 0
Developing Least-dev. Developed World Economies
economies economies economies in transition

GDP growth GDP per capita growth

30%
27% 26%
25% 24%
25%

20%

15% 13% 1990

9% 1995
10% 7% 7%
6% 5% 6% 6%
5% 5% 4% 4% 6% 5%
5% 2% 2% 3% 2000
1% 0% 1%
0% 2005
2009
 Developing vs. Developed countries
Developing countries share in:
• world population: 1950 – 67%; 2005 – 81%
• world GDP: 1960 – 15%; 2005 – 21.5%
• World trade:
– Export: 1965 – 14.4%; 2005 – 34.1%
– Import: 1965 – 14.1%; 2005 – 29.4%
• GDP per capita of DC (% of IC): 1960 – 5.3%; 2005 – 4.9%