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.
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.
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 73rd out of 75 countries in the Global Competitiveness Report for 2001. China ranked 23rd. 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 oflabour in agriculture.
The pressure of numbers may also put a strain on government expenditure, lead to congestion and overcrowding, impair the environment and put pressure on food supplies, all of which retard the development process, at least in the short run. In the longer run, population growth may stimulate investment and technical progress, and may not pose such a problem if there are complementary resources and factors of production available, but the short run costs may outweigh the advantages for a considerable time.
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