Characteristics of Less Developed Countries: An Economic Analysis, Slides of Development Economics

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4120 Economic Development

Characteristics of Less Developed Countries

Characteristics of the Less-Developed Countries -1- ❖ (^) Low per capita real income, ❖ (^) Population size and high population growth rate, ❖ (^) ‘Population explosion’ ❖ (^) Large scale unemployment, ❖ (^) population pressure, ❖ (^) absence of jobs, ❖ (^) capital intensive production, ❖ (^) rigid wages, ❖ (^) Under-employment: ❖ (^) the type of employment has not much relation to the qualification of employees. ❖ (^) Disguised employment: ❖ (^) employment of an additional unit of labour does not add anything to production.

Characteristics of the Less-Developed Countries -3- ❖ (^) Predominance of agriculture in the national economy, ❖ (^) accounts for 45-90% of the total output and about 60-95% of total employment, ❖ (^) neglected agriculture to promote industrial development, ❖ (^) ‘urban bias’ ❖ (^) most developments accrue to urban rather than rural sector where the majority of the population live in LDCs. ❖ (^) Foreign trade, ❖ (^) makes a small part of national income, ❖ (^) export primary commodities and raw materials (agricultural goods), ❖ (^) import finished goods (industrial goods), ❖ (^) fluctuating earnings from exports, ❖ (^) geographic & commodity concentration, ❖ (^) low price and income elasticity for export goods, ❖ (^) deteriorating t.o.t.

Types of Markets in LDCs

❖ Efficient production where profits maximised, ❖ Pareto optimality, ❖ requires that the conditions of perfect competition are fulfilled. ❖ Are they? ❖ heterogeneity, ❖ market failures, ❖ imperfect information..

Labour Market

❖ high growth rates of population add to the flow of labour supply, ❖ labour supply tends to exceed demand, ❖ lack of skilled labour, ❖ level of wages does not bear the marginal productivity of labour, ❖ lack of proper educational facilities, poor health and standard of nutrition, paucity of both physical and social capital. ❖ low productivity..

Capital Market

❖ one of the most scarce and important inputs in LDCs,

❖ role of capital formation for economic growth:

❖ low income, low saving, low investment, low productivity, low income…

❖ duality:

❖ organised urban sector, using sophisticated means to borrow and lend

capital,

❖ unorganised rural sector remains outside the control of modern business

practices,

❖ financial dualism:

❖ organised sector uses modern banking and transaction methods,

❖ unorganised rural money markets are dominated by ‘landlords-cum-

merchants-cum-moneylenders’.

Commodity Market

characterised by duality,

barter forms of transaction,

estimation of the value of product becomes

difficult,

shadow prices (imputed prices)

weight of non-traded goods,

Growth & Development -1-

❖ Is per capita real income a valid index for measuring development of LDCs?

❖ Contrast Kuwait and USA,

❖ Kuwait has higher p c income,

❖ how about standard of living of an average Kuwaiti compared to an average

American?

❖ Fast growth rate in output indicates healthy performance of an economy.

❖ BUT IF population growth rate matches the economic growth rate then the pc

growth rate becomes negligible,

❖ growth without development!

❖ use of pc real income data, converted into foreign exchange rate, may not be

always an adequate index to measure development in a world of floating exchange

rates.

❖ societies characterised by dualism may perform growth without development,

❖ quality of life is an important index of development

A Yardstick: GNP

p c GNP: per head value of final goods and

services produced by the people of a country

over a given year.

captures the state of material well being of a

country,

but, development is not just about “income”.

Multidimensionality

Removal of poverty and undernutrition,

increase life expectancy,

access to sanitation, clean drinking water, and

health services,

reduction in infant mortality,

increased access to knowledge and schooling, and

literacy.

Economic development is fuelled by p c income,

but GNP is not always correlated with other

indicators.

World Income Distribution

Least Liveable Countries by HDI, 2004

Differences in Rate of Income Growth

Income Distribution in Developing Countries -1-

Enormous wealth coexisting with great poverty within developing countries,

Poorest 40% of the population earn, on average, around 15% of overall income, whereas the richest 20% earn around half of total income,

Intra - country vs. inter-country disparities,

the poor are twice cursed: (1) living in countries that are poor on average, (2) receiving end of high levels of inequality in those countries.