Developed and Developing Economies
Economic Development
Economic development is the process of improving economic well being of people and
their living standards. Quantitative measure of development is GDP per head and
qualitative measure is the living standards.
A country with high GDP capita and improved living standards is referred as highly
developed economy.
However, a country with improving living standards and improving GDP per capita is
referred as developing economy. And a country with low living standard and low GDP
per capita is referred as less or under developed country.
Different countries and regions are at very different stages of economic development.
Some countries and areas have very low levels of economic development. These are
less developed economies. Incomes and wealth, health care and life expectancy,
education and literacy, employment and industry, and living standards, all vary greatly
between less developed and developed economies.
Stages of Development
A developed economy, advanced economy or industrialized economy, has a relatively
high average income per person, a well-developed road and rail network, modern
communications systems, produces a wide variety of goods and services, has a stable
government and legal system and a healthy and educated population.
A less developed economy or developing economy has a low level of economic
development, low average income per person, under-developed transport and
communications systems, relies on agriculture for many jobs and incomes, and has low
levels of health care and education provision.
Countries that are quickly developing their industries, workforce skills and living
standards, but are not yet developed, are rapidly developing economies or emerging
economies. Examples include Brazil, China and India.
Difference in Living Standards between countries
Developing countries are more dependent on primary sector. Primary sector includes
agriculture and extractive industries like oil extraction and coal mining. In developing
economies agriculture contributed 30% to 60% of output according to the figure of
1990s. In such economies a drought can quickly lead to famine.
These countries are also exporting agricultural products, so any drought will lead to fall
in export earnings dramatically. But on the other hand, developed countries have 5%
or less than this proportion of GDP from agricultural sector. These countries mainly rely
on secondary or tertiary sectors. Secondary sectors include manufacturing and
construction while tertiary sector relates to the service industry. Population growth in
developing economies is very high.
In the mid of 2000 world population was estimated approximately 6.06 million and this
population was increasing by 75 million people per year. Developing economies were
contributing 95% of this growth and only 5% approximately was from developed
economies.
Developed economies are enjoying recent technology and better output but developing
economies are still relying on retired methods of production. High birth. and death rate
is observed in developing economies but developed economies have controlled birth
and death rates.
Malnourishment and famine are the depressing characteristics of most of the
developing countries. Developing countries mainly rely on the foreign debts and they
have to pay large amounts of money for debt servicing which results in a depressed
standard of living.
Developing economies have a large number of very young people because of high
birth rate. So, dependency ration is also very high over there. Child labor is also
observed in these countries. Medical facilities and educational facilities are not easily
available to the people. These countries also face the balance of payment problems.
Most of the time it goes into deficit. But developed countries enjoy the surplus in their
balance of payment.
Poor infrastructure is one of the common features of developing economies. There is
also a wider income gap (disparities) in developing countries. On the other hand,
developed countries have very strong infrastructure and more even distribution of
income.
In developed countries, higher tax based and taxable incomes allow governments to
invest in infrastructure and welfare programs. In developed countries, provision of
health and educational facilities is the responsibility of the government, so people enjoy
these merit goods.
Development Indicators
A large number of indicators are used to measure and compare living standards and
economic welfare in different countries and regions of the world.
The main indicator used is Gross Domestic Product (GDP) per capita. GDP per
capita, or per head, measures average income per person but therefore takes no
account of what people can buy with their income, or the distribution of income within a
country. People in a country with a relatively high average income may be no better off
than people in another country with lower average income if prices in the first country
are so much higher.
The distribution of income is very unequal. Some people may be very rich while most of
the population are poor and lack access to good quality health care, education, water
and housing.
Improve Living Standards
Less developed countries often need help from other countries to improve their living
standards and economic welfare. This assistance can take many forms.
Measures to promote economic development
There is ongoing debate about the best approach to promoting economic
development—whether to rely on government intervention or market forces. One
government-led strategy is import substitution, where domestic industries are protected
from foreign competition. This aims to allow domestic industries to grow, eventually
replacing imports with locally produced goods, potentially increasing domestic output
and improving trade balances. However, this strategy can also lead to higher prices,
reduced consumer choice, and economic inefficiencies if industries become too reliant
on protectionist policies.
Export Promotion and Market Efficiency
An alternative approach is promoting exports by exposing domestic firms to
international competition. Without government support, firms must become more
efficient to compete globally. The success of this strategy depends on the ability of
domestic firms to compete with established foreign competitors who may benefit from
economies of scale. This strategy can drive innovation and efficiency but also exposes
domestic industries to greater risks.
Infrastructure Development and Foreign Investment
Improving a country's infrastructure, capital stock, education, and healthcare systems is
another strategy for economic development. When domestic resources are insufficient,
attracting multinational companies (MNCs), foreign loans, or aid can help. MNCs can
contribute to development by creating jobs, improving infrastructure, and transferring
technology. However, they may also exploit lower wages, deplete resources, and
influence government policies in ways that could harm long-term development.
Risks of Foreign Borrowing
Borrowing from abroad can be effective if funds are used productively, leading to higher
living standards and the ability to repay loans. However, high interest rates and the risk
of unsuccessful projects can lead to debt accumulation. Misallocated funds, particularly
in unproductive or prestigious projects or due to corruption, can further exacerbate the
economic challenges of borrowing.
Causes of Differences in Development
Economic development is the sustainable increase in living standards for a country,
typically characterised by increases in life span, education levels, & income
Two indicators used to compare development are the real GDP & the Human
Development Index (see: 5.1.1 Indicators of Living Standards)
Countries are all at different points of development & economists distinguish between
them using different criteria
E.g. HDI has five categories of development based on the HDI score
Low human development (<0.550)
Medium human development (0.550–0.699)
High human development (0.700–0.799)
Very high human development (>0.800)
There are numerous reasons for these differences including differences in income,
productivity, population growth, size of primary, secondary & tertiary sectors, saving &
investment, education & healthcare.
Causes of Differences in Development
Factor Explanation
Differences in Countries with a higher GDP/capita tend to be more
income developed
Even with high GDP/capita, there may be
significant inequality in the distribution of
income resulting in poor living standards for many
Differences in Differences in skills result in difference in
productivity productivity
Higher levels of productivity are rewarded
with higher wages, which leads to a better standard
of living
Differences in More densely populated countries or cities face more
population growth challenges
A larger population can mean higher tax
revenues for the government but at the same time,
government expenditure on services is spread across
more people
Poorer economies are characterised by less
government spending/capita
Differences in Economies with a larger proportion of secondary &
economic sector tertiary activity tend to be more developed due to
sizes the wages associated with each sector
Primary sector workers are usually paid low wages
due to the unskilled nature of the job & the fact that
raw materials often generate the lowest profits in the
production chain
Secondary sector workers add value to the raw
materials & these products sell for higher profits.
Therefore wages tend to be higher than primary sector
wages
Tertiary sector workers are paid the highest. Their
jobs often require highly valued skills that take years
to acquire & the products they sell or services they
provide can be complex & expensive e.g. artificial
intelligence coders
Differences in saving Higher savings result in higher investment &
& investment economic growth. It is believed that as economies
develop, savings increase
Increased savings → increased investment → higher
capital stock → higher economic growth → increased
savings
If the dependency ratio is high it means there is less
money available for savings & investment
Differences in These directly influence the level of skill in an
education economy
Improved skills results in higher productivity &
wages
Differences in The level of health directly impacts productivity of
healthcare labour
Productivity influences output & income
Developed economies tend to have healthy
workforces
The less developed the economy, the more sickness
& disease there is
