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Managerial Economics

The Features of an Under-Developed Economy

The main features of an under-developed economy, from low per capita income and dependence on agriculture to low capital formation, poverty, dualism and poor infrastructure.

By 9 min read

For any nation across the world, an under­de­vel­oped econ­omy can be a major con­cern. It reflects the finan­cial capa­bil­ity, sta­tus of cit­i­zens, their liv­ing and health con­di­tions, and sim­i­lar other things that are closely asso­ci­ated with the econ­omy.

The econ­omy plays a fun­da­men­tal role in every nation. Sev­eral coun­tries have worked their way out of under-devel­op­ment, and under­stand­ing what under-devel­op­ment means helps us see the hard­ships it brings.

The com­mon char­ac­ter­is­tics of this form of the econ­omy are low liv­ing stan­dard and per capita income, high rate of unem­ploy­ment, exces­sive pop­u­la­tion growth, lack of cap­i­tal and advanced infra­struc­ture, and lack of edu­ca­tion. These fea­tures sep­a­rate economies into two groups, devel­oped and under­de­vel­oped.

The economies that have high per capita income and sup­port a high stan­dard of liv­ing are referred to as devel­oped econ­omy and, on the other hand, economies that have low per capita income result­ing in a low stan­dard of liv­ing are referred to as under­de­vel­oped economies.

  • Devel­oped Economies:

In such an econ­omy there is a lower rate of poverty inci­dence, ser­vice and indus­trial sec­tors are thriv­ing. There are a suf­fi­cient amount of resources and tech­no­log­i­cal advance­ment sup­port­ing a high rate of pro­duc­tion. Most impor­tantly, there is a minor gap between the poor and the rich.

  • Under­de­vel­oped Economies:

There is a sig­nif­i­cant amount of poverty and the pri­mary sec­tor like agri­cul­ture is in a lead­ing posi­tion. The resources in this form of the econ­omy are not judi­ciously utilised and there is a high rate of depen­dency on tra­di­tional approaches which results in a low rate of pro­duc­tion. Most impor­tantly, there is a sig­nif­i­cant amount of dif­fer­ence between the rich and the poor. In such an econ­omy, the state or the coun­try fails to meet the nec­es­sary stan­dard of liv­ing for the major sec­tion of a pop­u­la­tion. This leads to mate­ri­al­is­tic depri­va­tion, mis­ery, hunger, dete­ri­o­ra­tion of health and over­all liv­ing stan­dard.

While talk­ing about what is an under­de­vel­oped econ­omy, it is first impor­tant to under­stand the con­cept of under­de­vel­op­ment. It is a rel­a­tive con­cept as it com­pares the qual­ity of life through the econ­omy that cre­ates the dif­fer­ence between a devel­oped pop­u­la­tion and an under­de­vel­oped pop­u­la­tion. The con­cept refers to the sus­te­nance of absolute poverty which refers to the kind of poverty, where peo­ple are unable to ful­fil their basic needs, like, food, cloth­ing, shel­ter and sim­i­lar things as such. There is a con­stant strug­gle among peo­ple to sur­vive.

Thus, the mean­ing of absolute poverty is equiv­a­lent to the mean­ing of an under­de­vel­oped econ­omy. Some of the com­mon char­ac­ter­is­tics of the under­de­vel­oped econ­omy are low per capita income, eco­nomic inequal­i­ties, the slow growth rate of per capita, low-pro­duc­tiv­ity labour and lower level of liv­ing, rudi­men­tary tech­niques of pro­duc­tion, low rate of cap­i­tal for­ma­tion, lack of resource uti­liza­tion and sim­i­lar things as such.

An under­de­vel­oped nation is one whose real per capita income is lower than that of rich nations like those of West­ern Europe, Canada, and the US in gen­eral. The world of today depicts the use of con­trast. Even though there are only a few coun­tries, some of them are extremely wealthy.

On the other hand, a large part of the world's pop­u­la­tion, liv­ing mostly in Asia, Africa, Latin Amer­ica and East­ern Europe, can barely make ends meet. The major­ity of peo­ple in these nations endure mis­ery, hunger, and squalor. When we con­sider that these poor nations account for 70% of the world's pop­u­la­tion and have a 15% share of global income, the con­trast seems even more strik­ing. On the other hand, the wealth­ier nations account for more than sev­enty per­cent of global income, despite hav­ing only one-sixth of the world's pop­u­la­tion.

A devel­op­ing nation is usu­ally thought to be capa­ble of a sig­nif­i­cant improve­ment in income.

1. Heavy depen­dence on the pri­mary sec­tor

The major­ity of devel­op­ing nation's economies are dom­i­nated by agri­cul­ture. Agri­cul­ture requires a larger work­force due to its lack of tech­no­log­i­cal advance­ment. This is because there is a lack of cap­i­tal for­ma­tion and sec­ondary and ter­tiary sec­tors that are less pro­gres­sive. How­ever, com­pared with farm work­ers in devel­oped nations, each farm worker in a devel­op­ing nation pro­duces far less. In under­de­vel­oped nations, agri­cul­ture employs 60 to 80 per­cent of the pop­u­la­tion on aver­age. Due to the inabil­ity of agri­cul­ture to sus­tain­ably employ all of its pop­u­la­tion, coun­tries that rely solely on agri­cul­ture are likely to be unpro­gres­sive. Both the agri­cul­tural sec­tor and the indus­trial sec­tor would ben­e­fit from one anoth­er's devel­op­ment, which would also accel­er­ate eco­nomic growth.

2. Low cap­i­tal for­ma­tion

Cap­i­tal scarcity is a per­sis­tent prob­lem in devel­op­ing nations. One of the rea­sons for the low per capita income is this lack of cap­i­tal. Cap­i­tal poor, low sav­ings, and low invest­ment economies are all terms that can be used to describe under­de­vel­oped nations. A weak capac­ity to save and the absence of strong incen­tives to invest are the root causes of this low level of cap­i­tal for­ma­tion. The fam­i­ly's capac­ity to save money is impacted by high pop­u­la­tion growth. As a result, the under­de­vel­oped econ­omy is unable to make invest­ments in social over­head cap­i­tal, open­ing new indus­tries, or mod­ern­iz­ing agri­cul­ture. As a result, the econ­omy remains prim­i­tive. Peo­ple liv­ing in under­de­vel­oped nations gen­er­ally lack entre­pre­neur­ial spirit.

3. High poverty and mal­nu­tri­tion

The per­va­sive­ness of mal­nu­tri­tion and poverty is one of the most impor­tant char­ac­ter­is­tics of under­de­vel­oped nations. Rural areas, where more than 70% of the pop­u­la­tion lives, are more likely to expe­ri­ence poverty and mal­nu­tri­tion. In these labour-inten­sive economies, fam­ily income per head is pulled down because many mem­bers depend on a few low earn­ers. Lower pur­chas­ing power is a result of lower income. When com­pared to devel­oped nations, women and chil­dren in devel­op­ing nations have sig­nif­i­cantly higher rates of nutri­tional ane­mia. Nutri­tional ane­mia has been made worse by eat­ing fewer calo­ries than needed. As a result, chil­dren and adults alike appear stunted, and the mor­tal­ity rate is quite high. India, Bangladesh, Pak­istan, Bhutan, and Nepal, among other less devel­oped nations, have higher mater­nal mor­tal­ity rates than devel­oped nations.

4. Under-util­i­sa­tion of nat­ural resources

Nat­ural resources are sub­stan­tial in a lot of under­de­vel­oped nations world­wide. How­ever, many of these resources have not been prop­erly used, so they have either remained untapped or under­uti­lized. The east­ern part of India is rich in min­eral resources, and Africa has a lot of poten­tial for hydropower. Sim­i­larly, the poten­tial of Africa's forests has not been fully used. It is said that Indi­a's poten­tial for irri­ga­tion would be increased if river projects were pri­or­i­tized.

5. Under-util­i­sa­tion of labour

Under­de­vel­oped nations typ­i­cally have a sur­plus of labour. The major­ity of labor, par­tic­u­larly in rural areas, is under­em­ployed, unem­ployed or in dis­guised unem­ploy­ment, as in agri­cul­ture. Despite their will­ing­ness to work, peo­ple do not get enough days of work. Per capita income is affected by under­em­ploy­ment and dis­guised unem­ploy­ment. The women and chil­dren of many agri­cul­tural and casual labour­ers are unable to receive even the most fun­da­men­tal health care and edu­ca­tion because of their extreme poverty.

6. Dual eco­nomic struc­ture

Dual­ism, in which the tra­di­tional sub­sis­tence sec­tor and the mod­ern sec­tor coex­ist, is another impor­tant fea­ture of under­de­vel­oped nations. Urban areas are home to the mod­ern sec­tor, while rural areas are home to the tra­di­tional sub­sis­tence sec­tor. Tech­nol­ogy rarely moves from the mod­ern sec­tor to the tra­di­tional sec­tor. Regional dual­ism and cul­tural dual­ism are two other types of dual­ism that are preva­lent in these nations. The dual­ism in ques­tion is a road­block to progress. Dual­ism is a fac­tor in inequal­ity in devel­op­ing nations.

7. Tech­no­log­i­cal back­ward­ness

Eco­nomic back­ward­ness is a direct result of tech­no­log­i­cal back­ward­ness in devel­op­ing nations. Due to a lack of edu­ca­tion, tech­ni­cal train­ing, and expe­ri­ence, many devel­op­ing nations still suf­fer from very low lev­els of tech­no­log­i­cal capa­bil­ity. Devel­op­ing nations remain depen­dent on out­side knowl­edge and exper­tise as a result of this low level of tech­no­log­i­cal capa­bil­i­ties, which slows the rate of tech­no­log­i­cal change and eco­nomic expan­sion.

8. Unchecked pop­u­la­tion growth

An under­de­vel­oped nation's eco­nomic devel­op­ment is impacted by rapid pop­u­la­tion growth. Another char­ac­ter­is­tic of pop­u­la­tion growth in devel­op­ing nations is that it is higher in rural areas and among those with lower incomes than in urban areas and among those with higher incomes. Because the pop­u­la­tion grows so fast, a large share of resources in these nations goes into con­sump­tion rather than into invest­ment and cap­i­tal for­ma­tion. Under­de­vel­oped nation’s income, employ­ment, and cap­i­tal for­ma­tion sce­nar­ios are impacted by over­pop­u­la­tion.

9. Urban­i­sa­tion and envi­ron­men­tal degra­da­tion

Rural to urban migra­tion accounts for the major­ity of urban­iza­tion and pop­u­la­tion growth in devel­op­ing nations. Some social sci­en­tists call it the trans­fer of rural poverty to urban areas. This pop­u­la­tion, which has moved around unevenly, mostly lives in urban slums with few basic ameni­ties. Both the employ­ment sit­u­a­tion in urban areas and envi­ron­men­tal san­i­ta­tion suf­fer as a result of this. Money that could have gone into cap­i­tal for­ma­tion has to be spent on urban renewal instead.

10. Poor infra­struc­ture

Poor infra­struc­ture is a char­ac­ter­is­tic of coun­tries that are under­de­vel­oped. It refers to the poor qual­ity and quan­tity of infra­struc­ture, includ­ing roads, elec­tric­ity, drink­ing water, and so on. Devel­op­ment relies heav­ily on infra­struc­ture. Addi­tion­ally, cap­i­tal defi­ciency pre­vents many devel­op­ing nations from meet­ing their social infra­struc­ture needs, such as health and edu­ca­tion facil­i­ties. These nations are unable to make invest­ments in vital infra­struc­ture projects like hydro­elec­tric­ity and irri­ga­tion.

11. Polit­i­cal insta­bil­ity and poor gov­er­nance

Polit­i­cal insta­bil­ity is a fea­ture of many devel­op­ing nations. It is pos­si­ble to cite Pak­istan and Bangladesh as exam­ples from South Asia. Regional sep­a­ratism, eth­nic and reli­gious extrem­ism, and polit­i­cal insta­bil­ity all pose seri­ous threats to these devel­op­ing nations' devel­op­ment. Under­de­vel­oped nations fre­quently exhibit a lack of devel­op­ment-minded polit­i­cal and admin­is­tra­tive atti­tudes. In these nations, coali­tion pol­i­tics and the mul­ti­party sys­tem are also devel­op­ing slowly. Polit­i­cal sta­bil­ity, integrity and good admin­is­tra­tion are needed for rapid devel­op­ment. In these nations, polit­i­cal and bureau­cratic cor­rup­tion impedes devel­op­ment.

Com­mon ques­tions

What is an under­de­vel­oped econ­omy?

An econ­omy with low per capita income and a low stan­dard of liv­ing, marked by high unem­ploy­ment, rapid pop­u­la­tion growth, a lack of cap­i­tal and mod­ern infra­struc­ture, and poor edu­ca­tion.

What are the major dif­fer­ences between devel­oped and under­de­vel­oped economies?

Devel­oped economies have high per capita income, low poverty, strong indus­try and ser­vices, advanced tech­nol­ogy and a smaller gap between rich and poor. Under­de­vel­oped economies have low per capita income, wide­spread poverty, a dom­i­nant farm sec­tor, tra­di­tional meth­ods of pro­duc­tion and a wide gap between rich and poor.

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