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IIUI/IIIE/FS07/PZJ/DE1 Structures of Developing Countries Developing Countries: Differences and Commonalities Differences: 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) Commonalities: 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 dependency. 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 negligible. 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 acres). 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. Conclusion: 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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