Structural features of developing countries

 It is important to
mention from the start that developing countries are characterized by a number
and varied features. Moreover, we should remind that developing countries are
homogenous and as such do not exhibit similar features in their totality.
However, what we intend to do in this unit is to focus on a number of features
that are more or Tess common to developing countries.

Structural features of developing countries

As
a way of recasting our thoughts on the current topic reference is made to
Thirwall (2006) who maintains that there cannot be an increase in living
standards and the eradication of poverty without an increase in output per head
of the working population, or an increase in labour productivity. For Thirwall, this is a since
qua non of development. He goes on to argue that rich developed countries
have high levels of labour productivity; while poor developing countries have
low levels of labour productivity. 

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p style=”line-height: 150%; text-align: justify;”>The questions that naturally arise are: what
are the major causes of productivity, and what are the primary sources of
productivity growth? In this article, therefore, we outline some of the
distinguishing characteristics of developing countries that contribute to the low levels of labour productivity and
poor economic performance. The following are some of such features:  

·     
The dominance of
agriculture and petty services

·     
Low level of capital
accumulation

·     
Rapid population growth

·     
Exports dominated by
primary commodities

·     
The curse of natural
resources

·     
Weak institutional
structures

The Dominance of Agriculture and Petty Services

One
of the major distinguishing characteristics of poor countries is the fact that
their economies are dominated by agriculture and petty service activities.
There is very little by way of manufacturing industry. This therefore means
that most of the population in developing countries finds employment in the
agricultural sector. Available statistics (Thirwall 2006) indicate that 65 per
cent of the labour force still relies on agriculture to make a living. This
compares with just under30 per cent in the middle income countries and 5 per
cent in the high-income countries.

Furthermore,
most of the people employed in agricultural production in third world countries
either operate at a subsistence level, or they are tenant farmers, or landless
labourers. However, this is not to say that there is a lack of commercial
farming or commercial agriculture. Commercial agriculture does exist, but it is
only a tiny fraction of the entire agricultural sector. This being the case
then, it is important to mention that the dominance of agriculture has certain
implications. What are these? They include the following:

·     
Agriculture is a diminishing
returns activity

·     
On the demand side, the
demand for most agricultural products (and other

primary
products derived from the land) is Income elastic.

Low
level of Capital Accumulation

A
second major distinguish characteristic of developing countries is their low
level of capital accumulation — both physical and human. Physical capital
refers to the plant, machinery and equipment used in the production of output.
Human capital refers to the skills and expertise embodied in the labour force
through education and training. (The role of education in the development
process will be discussed later in the unit). 

Low levels of capital
accumulation are a cause of low productivity and poverty, but are also a
function of poverty, because capital accumulation requires investment and
saving and it is not easy for poor societies to save. The process of
development can be described as a generalized process of capital accumulation,
but the levels and rates of capital accumulation in poor countries are low. 

The
amount of physical capital that labour has to work with in a typical developing
country is no more than one-twentieth of the level in Europe and North America.
This reflects the cumulative effect over time or much higher savings and
investment ratios in the rich countries.

Domestic
investment can differ from domestic saving owing to investment from abroad. The
figures for low-income countries are distorted by China, which is 2002 saved
over 40 per cent of its national income. If we exclude China the savings ratio
of the low-income countries is less than half that of the middle- and
high-income countries, although their investment ratio is still relatively high
because of capital inflows from abroad. These are not always stable, however.

The
distinguish development economist, Sir Arthur Lewis, once described development
as the process of transforming a country from a net 5 per cent saver and
investor to a 12 per cent saver and investor. Rostow, in his famous book The
stages of Economic Growth (1960), defines the take-off stage of self-
sustaining growth in terms of critical ratio of savings and investment to
national income of 10-12 per cent. 

What is the significance of this ratio? It
has to do with a very simple growth formula, which originally came from the
growth model of the famous British economist (Sir) Roy Harrod. The formula is
the growth of output is the savings ratio (S/Y) and is the incremental capital
– output ratio – that is, how much investment needs to take place in order to
increase the flow of output by one unit. Substituting these definitions of s
and c into (3.1) shows that in an accounting sense the formulation is an
identity since in the national accounts.

Now,
for the level of per capita income to rise, output growth must exceed
population growth. If population growth is 2 per cent per annum, output growth
must exceed 2 per cent per annum. It can be seen that how much saving and
investment as a proposition of national income is required for growth depends
on the value of the incremental capital — output ratio. It 4 units of capital
investment are required to produce a unit flow of output year by year over the
life of the investment, then c = 4, so s must be at least 8 per cent for the
growth of output to exceed 2 per cent. 

A net rate of saving and investment to
national income of at least 8 percent or more is therefore necessary if there
is to be sustained growth of per capita income. In most developing countries,
the net savings and investment ratio is above this critical magnitude, but the
fact remains that a major cause of low productivity and poverty in developing
countries in the low level of capital that, labour has to work with. In case example
3.1 the difference in the savings and investment climate between India and
China is highlighted and discussed.

 Rapid Population Growth

A
third distinguish feature of most developing countries is that they have a much
faster rate of population growth than developed countries, and faster than at
any time in the world’s history (see Chapter 8 for a full discussion). This can
confer advantages but it also imposes acute problems. 

Population growth in the
low-income countries as a whole average 1.8 percent per annum, resulting from a
birth rate of 29 per 1,000 population (or 2.9 per cent) and a death rate of 11
per 1,000 population (or 1.1 per cent). The rapid acceleration of population
growth compared with its historical trend is the result of a dramatic fall in
the death rate without a commensurate fail in the birth rate. Population growth
in developed countries averages no more than 0.7 per cent per annum.

It
takes 10 permits to start a business in India against six in China, while the
median time it takes is 90 days in India against 30 days in China. A typical
foreign power project requires 43 clearances at central government level and
another 57 at a state level. These obstacles are far smaller in China.

In
restriction on the hiring and firing of workers, India ranked 73^rd
out of 75 countries in the Global Competitiveness Report for 2001. China ranked
23^rd. Bankruptcy is almost impossible for large business. Sixty per
cent of liquidation processes before the Indian High Court have continued for
more than 10 years. Public administration is also poor. It takes an average of
10.6 days to clear goods at customs into India, against 7.8 into China.

As
important as regulatory barriers to competition is India’s poor infrastructure.
Paved roads are only 56 percent of the total, against over 80 per cent in
China. Shipping a container of textiles to the US costs 35 per cent more than
from China. Because of power shortages, 69 percent of Indian companies have
their own generator, compared with just 33 per cent in China.

These
comparisons are bad news for India in one way, but good news in another. If
India can sustain growth of 6 per cent a year when so much does not work very
well, imagine what could be achieved if it did.

Rapid population
growth, like low capital accumulation, may be considered as both a cause of
poverty and a consequence. High birth rates are themselves a function of
poverty because child mortality is high in poor societies and parents wish to
have large families to provide insurance in old age. High rates also go hand in
hand with poor education, lack of employment opportunities for women and
ignorance of birth control techniques. Population growth in turn helps to
perpetuate poverty if it reduces saving, dilutes capital per head and reduces
the marginal product of labour
in agriculture.