Introduction

Girl with a pail

The Economics of Developing Countries

There is considerable income inequality among countries. The richest 20% of the world’s population receive about 83% of the world’s income. Countries can also be classified into two main groups.
1. Industrially advanced countries (IACs) are characterized by well-developed market economies based on large stocks of capital goods, advanced technology for production and well-educated workers. Among these 26 high-income nations are the United States, Canada, Japan,Australia, New Zealand and most of the nations of western Europe. These countries averaged $24,930 per capita income in 1995.

2. Developing countries (DVCs) are poor, not highly industrialized, heavily dependent on agriculture, have high population growth and have low rates of literacy. These countries comprise about three-fourths of the world’s population. Of the 107 DVCs, 68 are middle-income countries with an average income per capita of $2,390; 49 low-income countries have an average income per capita of $430. This latter group is dominated by India, China and most of the sub-Saharan nations of Africa.

There are disparities in the growth rates of nations resulting in sizable income gaps. Some DVC nations have been able to improve their economic conditions over time and become IACs. Other DVCs are now showing high rates of economic growth, but still other DVCs have experienced a decline in economic growth and standard of living. If growth rates were the same for high and low-income nations, the gap in per capita income would widen because the income base is higher in high-income nations. The human implications of extreme poverty are important. Compared with IACs, DVCs have not only lower per capita incomes but also lower life expectancies, higher infant mortality, lower literacy rates, more of the labor force in agriculture, and fewer nonhuman sources of energy.

As the new millennium begins, developing countries face the challenge of how to reap the benefits of globalization. Countries that succeed will derive significant benefits – improved living standards, lower unemployment, faster growth, and expanded trade. Nations that struggle to keep up will fall further behind.

Most developing nations face daunting obstacles as they attempt to compete in the global economy. An obvious problem in many developing countries is the low level of income. While the per capita output of the United States economy is about $30,000, in some countries the figure is only about 1% of that.

Many other problems, such as poor health and illiteracy, often go hand in hand with low per capita income. The World Bank reports, for example, that while life expectancy at birth was 79 years for a female born in the US in 1997 (an even longer for those born in countries such as Canada, Japan and Norway), it was only about ½ as long in countries such as Sierra Leone and Uganda. More than ½ of children under 5 in countries such as Bangladesh and India suffer from malnutrition, compared with 1% in the US. Moreover, in many countries the adult illiteracy rate is more than 50%.

In addition, labor productivity is low, not only because of low education levels, but also because of a low level of capital investment. According to the World Bank, The US had more than 14,000 tractors per 1,000 agricultural workers; in many countries around the world, the figure is zero or 1 per 1,000 farm workers. Because of low productivity levels, many countries employ the majority of their labor force in agriculture (it takes more than ½ the labor force just to produce the country’s food. In contrast, less than 3% of the US labor force works in agriculture, freeing up 97% to produce non-food goods and services.)

Clearly, the priorities are to improve education and skills to increase the level of capital investment. However, they face the problem of “brain drain,” ((brightest young people go or are sent abroad to a college or university and find the higher living standards abroad too attractive to resist and decide to not return home. Also, where will the savings needed to finance investment come from if people need to consume their entire income merely to subsist?

[Classification ] [ LDC's]

[ Possible Solutions ] [Rostow's Five Stages of Development]

[Barriers to Growth in Most Developing Countries ]