07 Structures of Developing Countries by wanghonghx



Structures of Developing Countries
Developing Countries: Differences and Commonalities

Countries differ to each other due to their size, population, climate, culture, resources and
economic conditions. For example large countries like India (with more than 1 billion
population) has complex problem of national integration, administration. However, due
to large size, it has benefits of large domestic market and divergent resources. In contrast,
small countries have limited domestic market, shortage of skill, scarce resources, weak
bargaining power, increased foreign dependency and export incentive.

OECD Approach: Countries can be classified into groups due to variance in per capita
income. According to this approach countries can be classified as under:
Low Income Countries (LIC) = Per Capita Income < 755 US$
Lower Middle Income Countries (LMC) = Per Capita Income <2995 US$
Upper Middle Income Countries (UMC) = Per Capita Income < 9265 US$.
High Income Countries (HIC) = Per Capita Income > 9266 US$
Due to this classification all countries (LIC/LMC/UMC) except HIC are developing
countries. HIC with deficiencies in education and health system (like Kuwait, Qatar,
UAE) are excluded from HIC. All other HIC, the member states of OECD, are classified
as developed countries. (Todaro, Page 34)
World Bank Approach: World Bank (WB) also uses foreign indebtedness as a criterion
for classifying countries into groups. According to this approach countries can be divided
into severely, moderately and less indebted countries.
UNDP Approach: This approach uses a “Human Development Index (HDI)”.

The above-mentioned criteria for classification are useful for analysis and policy purpose,
but they should not be over-generalized. There may be huge economic difference within a
group of countries (for example LIC of sub-Saharan Africa and South Asia)


Common Problems: Common problems among developing countries include poverty,
unemployment, inequality, low productivity, rural-urban disparities, environmental
decay, inappropriate education and health systems, balance of payment and debt problem,
dependence on foreign technologies, institutions and values, etc.

Common Goals: Similarly, common goals of developing countries include reduction of
poverty, inequality and unemployment, improving facilities for health, education,
housing and food, broadening socioeconomic opportunities, etc.
Structures of Developing Countries

Basic components of structure:
   1. Size of the country (area, population, income)
   2. Economic history (historical/colonial background)
   3. Endowment of physical and human resources
   4. Ethnic and religious composition
   5. Importance of public and private sectors
   6. Nature of industrial structure
   7. Dependence on external factors (economic/political, etc.)
   8. Distribution of power (institutional and political structures)

   1. Size of the country: Countries differ due to their geographical area, population,
      and income. Large countries have complex problems of national integration,
      administration. However, they have benefits of large domestic market and
      divergent resources. In contrast, small countries have limited domestic market,
      shortage of skill, scarce resources, weak bargaining power and increased foreign
   2. Economic history: Most developing countries have colonial background. The
      colonial powers of Western Europe introduced private property, taxation and
      money economy in the colonies, eroded the autonomy of local communities and
      exploited their resources for own interest.
   3. Endowment of physical and human resources: Potential of growth is influenced
      by the availability of physical (land, water, minerals and other raw materials) and
      human resources (population, work force, skill, etc.). For human resources
      cultural outlooks, attitudes toward work, access to information, willingness to
      innovate and desire for self-improvement, etc. also play important role. Similarly,
      nature and level of organization and administrative skill may strongly influence
      structure of production.
   4. Ethnic and religious composition: Ethnic and religion often play important role in
      development process. The greater the ethnic and religious diversity in a country,
      the more likely there will be political instability. Some of recent development
      experiences occurred in culturally homogeneous societies like South Korea,
      Taiwan, Singapore and Hong Kong. On the other hand culturally heterogeneous
      countries like Afghanistan, Sri Lanka, Iraq, India, Sudan and Yugoslavia recently
      faced severe problems. However, ethnic and religious diversity need not
      necessarily lead to instability, if the minorities can be successfully integrated on
      socioeconomic basis. (for example in Malaysia)
   5. Relative importance of public and private sectors: Due to certain historical and
      political circumstances the sizes of public and private sectors as well as share of
      foreign capital in private sector of developing countries differ from each others. In
      Latin America and Southeast Asia relative shares of private sector and foreign
      capital are significantly large, whereas, in Africa and South Asia public sector
      dominates. A large foreign-owned private sector creates certain opportunities and
      problems. Economic policies like those designed to promote more employment
      differ for public and private sectors. For public sector direct government
      investment projects and rural works programs may have precedence, whereas, for
      private sector tax allowances designed to induce private business to employ more
      workers might be more common.
   6. Industrial structure: Majority of developing countries are agrarian in terms of
      labor force and national output. Nevertheless, there are great difference in
      agrarian structures and land tenure systems. Moreover, production structure and
      the share of industrial sector in national output vary among developing countries.
      Most of Latin American countries had relatively advanced industrial sector than
      in Africa and Asia, but recently countries in Southeast Asia made great effort to
      accelerate growth in manufacturing. Among developing countries India has the
      largest manufacturing sector in size, but small in relation to population.
   7. External dependence: The degree to which a country is dependent on foreign
      economic, social, and political forces is related to its size, resource endowment,
      and political history. For most developing countries, this dependence is
      substantial. Many of them extensively import capital-intensive technologies.
      Along with economic dependence these countries also influenced by foreign
      institutions including education and governance, values, pattern of consumption,
      and attitude toward life and work.
   8. Distribution of power: Political structures and vested interests and allegiances of
      ruling elites (e.g. large landowners, urban industrialists, bankers, big traders,
      foreign manufacturers, military and trade unionists, etc) determine what strategies
      are possible. Most developing countries are ruled by small and powerful elites to a
      greater extent than the developed nations are. Effective social and economic
      change requires change of elite attitude or elite power should be offset by more
      powerful democratic forces. A real societal change requires changes in land
      tenure system, forms of governance, educational structures, labor market relation,
      property rights, distribution and control of physical and financial assets, laws of
      taxation and inheritance and provision of credit.

Common Characteristics of Developing Countries:

   1.   Low living standard
   2.   Low level of productivity
   3.   High rates of population growth
   4.   Dependence on agrarian and primary products
   5.   Imperfect markets and limited information
   6.   Foreign dependency

   1. Low living standard: It constitutes low income, inadequate housing, poor health,
      limited education, high infant mortality, low life/work expectancies, etc.
      Collective per capita income of LIC and MIC average is one-twentieth the per
      capita income of rich countries. Switzerland had 403 times the per capita income
      of one of the world’s poorest countries, Ethiopia, and 114 time that of one of the
   world’s largest nation, India. Per Capita Income (GNP) can be exaggerated by the
   use of official exchange rates to convert national currency into US $. By using
   Purchasing Power Parities (PPP) one may rectify this problem. PPP is defined as
   the number of units of a foreign currency (like US$) required to purchase
   identical quantity of goods and services in national market. Generally prices of
   non-traded services are much lower in developing countries due to low wages.
   (Page 48-49, Tables).
   Additionally, although the difference between richest and poorest 20 Percent at
   global level more than doubled 1960-2000 (P. 52, Table 2.6), distribution of
   income is more unequal in developing countries than in developed countries. The
   magnitude and extent of poverty in any country depend on two factors, the
   average level of income and the degree of inequality in its distribution.
   One method of measuring poverty is absolute poverty line. Considering basic
   needs like food, clothe and shelter, one US$ per day (370 US$/year) was
   considered as a minimum existence level in 1993. According to this measure 1,2
   billion people (1/5 of global population) and more than 40 % of population in
   South Asia and sub-Saharan Africa is living below poverty line. (P. 54, Table 2.7)
   An other sphere of low living standard is health. Life expectancy in LDC is only
   48 years, comparing to 63 years in other developing countries and 75 years in
   developed countries. Similar is the case of infant mortality rates. From each 1000
   newly born children 4 children die before the age of 5 years in Japan, 91 in
   Pakistan and 150 in Afghanistan. (P. 55, Table 2.3) Lack of access to clean
   drinking water and water borne diseases like typhoid, cholera and diarrhea. In
   developing countries ratios of medical facilitations are quite low or even
   Similarly, in LDC literacy rate is about 45% of population. The ratio of illiteracy
   by women is more than 60%. It is estimated that 325 millions children have
   dropped out of primary and secondary school. Many of them quit school, because
   they have to support their family.
   UNDP has developed Human Development Index (HDI) to measure relative
   development and poverty in different countries. In this Index 0 denotes lowest and
   1 highest level of human development. By determining the level of development
   factors like life expectancy at birth, adult literacy, and per capita income in term
   of PPP. Using this formula countries are divided in three categories, i.e. countries
   with low HDI (0,00 to 0,49), medium HDI (0,5 to 0,79) and high HDI (0,8 to 1,0).
   HDI can be measured on regional, gender and ethnic level. (For calculating HDI
   see page 57ff.)
2. Low level of productivity:
   In developing countries productivity in general and particularly labor productivity
   is quite low. Principle of diminishing marginal productivity states that if
   increasing amounts of a variable factor (labor) are applied to fixed amounts of
   other factors (capital, land, materials), the extra or marginal product of the
   variable factor (labor) declines beyond a certain number. Low levels of labor
   productivity can therefore be explained by the absence or severe lack of
   “complementary factor inputs such as physical capital or experienced
   management. (p. 64). To raise productivity, according to this argument, domestic
   saving and foreign finance must be mobilized to generate new investment to
   buildup physical and human capital. This requires institutional changes may
   include measures like land tenure reform, corporate tax, credit and banking,
   honest and efficient administrative structure, education and training programs.
   Moreover, a system of motivation should be evolved to influence attitude of
   worker and management, adaptability, willingness to innovation and experiment,
   discipline, authority, etc. It is difficult to improve productivity without developing
   human resources and organization of production. Workers low productivity in
   large part may be due to physical lethargy and the inability, both physical and
   emotional, to withstand the daily pressures of competitive work. (John
   Strauss/Duncan Thomas, Journal of Economic Literature 36, 1988: Gunnar
   Myrdal, Asian Drama, 1968)
3. High rates of population growth:
   In developing countries crude birth rate is higher than in richer countries. The
   yearly numbers of live birth per 1000 citizens in each group of countries are 20-40
   and 10-20 per 1000 respectively. Similarly, average rate of population growth in
   developing countries is more than doubled (1.6%) to developed countries (0.7%).
   A major implication of that in developing countries is high ratio of children under
   15 years (40%) to total population. Both children and old people are referred to
   dependency burden of a society. Higher ratio of children significantly raised the
   dependency ratio of developing countries to 45%, whereas this ratio is only 1/3 of
   total population of developed countries.
4. Dependence on agricultural production/primary products:
   Over 65% of population in LDC is living in rural area comparing to ¼ of rural
   population in developed countries. Similarly about 60% of labor force is engaged
   in agriculture in former countries than less than 5% in later countries. Agriculture
   contributes 14% and 3% of GNP of these countries respectively. (Tab.2.12, P. 67)
   Average productivity of agricultural labor in USA is 35 times greater than in
   Africa and South Asia. Main reasons for that are primitive technologies, poor
   organization and limited physical and human capital inputs. Agriculture there is
   predominantly noncommercial peasant farming. Peasant often do not own but rent
   land for cultivation. Due to land tenure system there exist lack of incentive for
   improvement of land and production. Moreover, primitive technologies like hand
   plows, drag harrows and animal are used in small holdings of 5-8 hectares (12-20
   Dependency on agricultural/primary products:
   Majority of developing countries mainly export primary commodities, whereas
   developed countries are predominantly exporters of manufactured products or
   services. Export of primary products typically account for more than half of
   annual flow of foreign currency into the developing countries. Unfortunately,
   export earning from primary products except mineral oil is even not sufficient to
   pay debt service on foreign debts.
5. Imperfect markets and limited information:
   Since 1980s many developing countries are moving toward market economy with
   or without the help of international organizations. However, the presumed
   benefits of market economy heavily depend upon existence of institutional,
      cultural and legal prerequisites, which may exist in industrial societies, but not
      necessarily in developing countries. In later such structures are often missing or at
      least underdeveloped including a legal system that enforces contracts and
      validates property rights, a stable currency, infrastructure of road and utilities to
      facilitate interregional trade, integrated system of banking and credit to allocate
      loanable funds on the basis of economic profitability and rules of repayment,
      sufficient market information for consumers and producers about prices, quantity
      and quality of products. Moreover, there exist economies of scale in major sectors
      of the economy, limited (internal) market for many products, widespread
      externalities (external costs and benefits) in production and consumption and
      common property resources. Information is limited and costly to obtain that
      causes misallocation of goods, finance and resources. All these factors contribute
      toward imperfection of market.
   6. Foreign dependency:
      Distribution of income and wealth in international economic relations is highly
      uneven. On the basis of this strength rich nations as well as rich classes of
      developing countries can influence these relations in their own interest. Similarly,
      values attitudes, institutions and standards of behavior are often exported from
      developed to developing countries. For example colonial transfer of educational
      structure, curricula, school system, Western-style trade union, organization of
      services like health with curative rather than preventive method, importation of
      inappropriate structures. Such attitudes often lead to corruption and economic
      plunder by a privileged minority. The net effect of all these factors is to create a
      situation of vulnerability among developing nations, where outside forces have
      decisive influence on their economic and social well-being.

Economic and social forces, both internal and external, are responsible for
underdevelopment, poverty, inequality and low productivity in developing countries.
Development requires appropriate formulation/implementation of appropriate
policies/strategies within developing countries and modification of present international
economic order.

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