January 22, 2010

Characteristics of underdeveloped countries - Indian Economy Topic - chapter -5

Characteristics of underdeveloped countries

The terms "underdeveloped", "less developed", "backward", and

"poor" and "developing" are generally used to refer to low income

countries. The countries which have low standard of living because of

their low per capita incomes are known as underdeveloped countries.

Countries are classified into developed and underdeveloped countries

according to their per capita income. For example, in 1949, high income

countries with 18% of world population enjoyed 67% of world income,

whereas low income countries which had 67% of world population got

only 15% of world income. The rich countries include United States,

Canada, Western Europe and Australia. The poor counties cover most

of Asia, Africa, south eastern Europe and Latin America. And there were

middle income countries with a population of 15% which got 18% of

world income. They consisted of countries such as Argentina, South Africa,

Israel and former soviet Russia. The poor countries are collectively

referred to as the Third World.

Even in 1973, the Third World with 77 percent of the world population

subsisted on only 22 per cent of the world income. Even the meagre

income is maldistributed within these countries and the bulk of the

population live in abject poverty. According to Meier and Baldwin, an

underdeveloped country has six basic economic characteristics. They

are : (1) it is primary producing ; 2) it faces population pressures ; 3) it

has underdeveloped natural resources ; 4) it has an economically backward

population ; 5) it is capital deficient and 6) it is foreign trade oriented.

1) Primary production: The UDCs produce mostly raw materials

and foodstuffs. A majority of the population will be engaged in agriculture.

Some poor countries depend upon non – agricultural primary production

(eg. minerals like tin, copper, aluminium and petroleum). And agricultural

productivity is low. So rural incomes are low. There is pressure of

population on land.

2) Population pressures: Generally, there is over – population in

many poor countries. Population pressures take many forms. First, for

example, they have rural underemployment. This is sometimes referred

to as disguised unemployment. That is, there will be more number of

people working on the farm that what is really necessary. The marginal

productivity of the extra hands will be almost zero. Second, high birth

rates create a large number of dependent children and lastly falling death

rates with high birth rates will bring about a large increase in population.

3) Underemployment: Natural resources in poor countries are

underdeveloped. They are unutilized, underutilized or misutilized.

4) Economic Backwardness : The economic backwardness of the

population in the poor countries is reflected in low labour efficiency, factor

immobility, lack of entrepreneurship, economic ignorance and so on. The

population is ruled by customs and traditions. And people are not

"economically motivated". The tax system is marked by inefficiency in

collection and there is tax evasion. The governments in these countries

are generally "weak, incompetent and corrupt".

5) Capital Deficiency : Capital deficiency is an important

characteristic of poor countries. Capital formation or investment is low

in these countries. According to Ragnar Nurkse, low capital formation is

one of the basic causes of poverty in these countries. Low capital formation

leads to low productivity. Low productivity results in low incomes and

low incomes result in low savings and low savings lead to low capital

formation. Thus, it forms a vicious circle of poverty.

6) Foreign Trade Orientation : Some of the poor countries depend

heavily upon foreign trade. For example, in 1952, cotton contributed

about 90 percent of foreign exchange earnings of Egypt. A risk involved

here is if there is some serious economic problem in the importing nation,

the country which depends on export of one or two commodities will be

affected badly. And in the early stages of development, UDCs depended

upon imports.

India as UDC : India, has most of the typical characteristics of an

underdeveloped country. Nearly 65 to 70 percent of its population

depends upon agriculture. And agricultural productivity is low. There are

population pressures. There is underdevelopment of natural resources

and economic backwardness. Until recently, there was capital deficiency.

That is why, we had to borrow heavily from foreign countries and

international institutions like I.M.F. and World Bank. So we may describe

India as a typical underdeveloped country. Nowadays, they call it a

developing economy.

Role of the State in Economic Development

The State plays an important role in the economic development of

nations. Japan, after 1870 and soviet Russia after world war I are good

examples. But the economic development of the U.K. and the U.S.A.

took place under a system of market economy and laissez faire policy.

For underdeveloped countries, laissez faire policy is a luxury. The State

has to play the role of an entrepreneur in the underdeveloped countries.

Nowadays, it is agreed that the governments in these countries have to

play a dominant role in implementing plans for economic government. In

fact, government is regarded as a factor of production in poor countries.

For example, India is a mixed economy with a public sector and private

sector. Until recently, the public sector played a major role in economic


Through Five Year Plans, the State has been making attempts to

achieve the goals of increasing economic growth, rapid industrialization,

expansion of employment opportunities and reduction of inequalities of

income and wealth.

The government plays a very big role in the field of social services

like education and health. Investment in education and health promote

human capital formation, which is as important as physical capital

formation. Education and health increase productivity of labour.

These are the days of globalization, liberalization and privatization.

We invite foreign investment on a large–scale. But they want good physical

infrastructure like good transportation, postal and telecommunications,

power facilities, and water supply. All these things are referred to as

social overhead capital. The government has to make huge investment in

these things. Not only that, there is shortage of entrepreneurs in these

countries. So the government has to encourage them.

There is shortage of foreign exchange in UDCs. The government has

to take steps such as promotion of exports, making investment attractive

for foreigners through fiscal measures.

If development is left to market forces, there will be not be balanced

regional development. So the government formulates policies and

programmes in such a way that there is a balanced regional development.

And the State has to regulate and control monopolies. Thus, the State

has to play a dominant role in economic development.



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