According to the United Nations experts, an under-developed country is one
"in which per capita real income is low when compared with the per capita real incomes
of the U.S.A., Canada, Australia and Western Europe." This definition, though it
focuses attention on a very important characteristic of under-development, viz.,
poverty, can by no means be considered adequate. A country may be poor and yet not
under-developed in relation to its resources, if the resources happen to be scanty or
inadequate. It may have fully developed its resources and yet be among the poorest
countries in the world.
According to Prof. Ragnar Nurkse, 'underdeveloped' countries are those which
compared with the advanced countries, are under-equipped with capital in relation to their
population and natural resources." As Nurkse himself points out "Economic development
has much to do with human endowments, social attitudes, political conditions and historical
accidents. Capital is necessary but not a sufficient condition of progress."
The Indian Planning Commission defines in under-developed country as one "which is
characterised by the co-existence, in greater or less degree, of unutilized or under-utilized
manpower, on the one hand, and of unexploited natural resources on the other."
Hence, an economy will be considered underdeveloped:
(a) if its per capita income is low.
(b) if the natural resources and manpower in the country remain unutilised or underutilised on account of lack of economic development; and
(c) if it is possible to raise its level of national income and per capita income by properly
utilising its natural resources and manpower.
Prof. Viner observes: "A more useful definition of an under-developed country is that it
is a country with good potential prospects for using more capita or more labour or more
available natural resources, or all of these to support its present population on a higher
level of living."
From the above discussion, it is obvious that defining an under-developed country is by
no means a simple task. In current discussion, all low-income countries are generally
classified as under-developed. In general, all those countries with per capita income less
than 1.90 dollar per day are included among under-developed countries.
The World Bank classifies countries into four income groups. These are set each year on
July 1. As of July 1 2019, the new thresholds for classification by income are:
i. Low income countries had GNI per capita of US$1035 or less.
ii. Lower middle income countries had GNI per capita between US$1036 and
iii. Upper middle income countries had GNI per capita between US$4046 and
iv. High income countries had GNI above US$12,535.
CHARACTERISTICS OF UNDER-DEVELOPED ECONOMIES
The general nature of an under-developed economy may be gathered from the common
economic characteristics of such an economy. It is much easier to bring out some fundamental
characteristics common to under-developed countries, which are considered below:
i. Deficiency of Capital. The insufficient amount of physical capital in existence is so
characteristic a feature in all under-developed economics that they are often called
simply 'capital-poor' economics. One indication of the capital deficiency is the low
amount of capital per head of population. Shortage of capital is reflected in the very
low capital-labour ratio in the low-income countries.
Not only is the capital stock extremely small, but the current rate of capital formation
is also very low. In most under-developed countries, investment is only 5 per cent to
8 per cent of the national income, whereas in the United States, Canada, and Western
Europe, it is generally from 15 per cent to 18 per cent. The low level of capital
formation in an underdeveloped country is due both to the weakness of the inducement
to invest and to the low propensity and capacity to save. In such an economy, the low
level of per capita income limits the size of the market demand for manufactured
output, which weakens the inducement to invest. The low level of investment also
arises as a result of the lack of dynamic entrepreneurship.
ii. Excessive Dependence on Agriculture. Most under-developed countries are
predominantly agricultural. A great majority of population, usually between 70 and 80
per cent, are engaged in agriculture and allied occupations, whereas in the developed
countries 15 per cent or even less draw their sustenance from agriculture. This excessive
dependence on agriculture is due to the fact that non-agricultural occupations have not
grown at a rate commensurate with the increase in population owing to lack of sufficient
investment outside agriculture. Hence, a growing labour force has had to be absorbed in
agriculture. The labour-land ratio being high, agricultural holdings have become
subdivided into small plots, which do not permit the use of modern mechanical
methods of production. Under-developed countries produce relatively large
proportion of their national income in the agricultural sector. However, the share of
agriculture in the national income is considerably smaller than its share in the total
employment in the economy, reflecting low productivity per man in the agricultural
sector. Thus, though under-developed countries are predominantly agricultural, they
are nonetheless much less efficient in agriculture than are the industrial countries.
iii. Inequalities of Income and Wealth. Another distinguishing characteristic of the
under-developed economies is the disparities in income and wealth enjoyed by the rich
and poor of society. The lower national income of the economically backward
countries is more inequitably distributed than in the advanced countries. Although, in
the under-developed countries, there is concentration of incomes in a few hands, yet in
absolute terms such incomes are too small to meet, the requirements of the economy.
Besides, such incomes are usually diverted to non-economic investments such as
jewellery and real estate or they are dissipated in unproductive social expenditure, e.g.,
on marriages and are, therefore, not available to finance economic development.
iv. Dualistic Economy. The under-developed countries present sharp contrast in all walks
of life. There is the old and new, developed and underdeveloped, the educated and the
illiterate, the rich and poor existing side by side. It is both a bullock cart and motor
car economy. There are pockets of extra rich and ultra modern people and vast masses
t. This means that they have the potentia-
ignorance regarding market trends, static
social structure, lack of specialisation, etc. It is due to market imperfections that
productive efficiency in these countries is low, the resources are either unutilized or
under-utilized and the resources are misallocated. In the under-developed countries, it is
found that the workers are engaged in occupations where their marginal productivity is
zero (e.g., in disguised unemployment in agriculture). Even then they do not move out
into industries where they can earn higher wages. Similarly, there is misallocation of
capital in the under-developed countries, various customs, habits and social inhibitions
stand in the way of free mobility of labour and capital. Poverty also impedes mobility of
labour from one place to another or from one industry to another, Lack of employment
opportunities and ignorance about the market trends are also responsible for market
imperfections. The manufacturers and entrepreneurs too are ignorant of the market trends
in domestic and world markets.
iii. Low Rate of Saving and Investment: Another main reason of the poverty and underdevelopment of the under-developed countries is that the rate of saving and investment
in these countries is very low. In these countries, only 5-8 per cent of the national
income goes into savings, whereas the rate is 15-20 per cent and even more in the
developed countries. When the rate of saving in a country is low, the rate of investment
is bound to be low and the rate of capital formation is low too. Since capital per man
is low, the productivity is also low. Productivity being low, the per capita income and
the national income too are low. It is truly said that the under-developed countries are
caught up in a vicious circle of poverty. This vicious circle of poverty is the greatest
obstacle in the way of their economic development.
iv. Demonstration Effect: The under-development of the economically backward
countries is also due to what has been called the 'demonstration effect'. The
demonstration effect increases propensity to consume which reduces the rate of
savings and investment. A very important principle has been propounded regarding
consumption, viz., that an individual's consumption does not merely depend on
individual's own income but it is very much influenced by the standard of living or
consumption of his friends and relations.
The international demonstration effect reduces the savings of underdeveloped countries and in this way hinders their economic growth. Television, movies, radios, foreign
travel, expansion of education and traveling facilities are such powerful media which
extensively advertise new articles or propagate new higher standards of living and thus
increase propensity to consume.
v. Rapidly Growing Population: In the under-developed countries, rapid population
growth is the greatest obstacle to economic growth. A rapid population growth is an
impediment to economic growth in as much as it slows down the rate of capital
formation. A rapidly growing population increases consumption expenditure. It
becomes difficult to increase the rate of saving and investment which is so essential
for economic growth. Unemployment is another very serious problem created by rapid
increase in population.
SOCIAL AND POLITICAL OBSTACLES TO GROWTH
There are several other factors which have retarded the economic growth of under-developed
countries. Among these we may mention the following:—
i. Inefficient Agrarian System. In the underdeveloped countries agriculture has been carried
on in a very inefficient manner. Excessive dependence on agriculture and lack of
adequate irrigation facilities and fertilizers, primitive agricultural practices, poverty of
the peasant, out-moded systems of tenure, uneconomic holdings are some of the reasons
for the backwardness of these countries.
ii. Shortage of Entrepreneurial Ability and Spirit of Experimentation and Innovation. The
underdeveloped countries are generally wanting in dynamic entrepreneurship. No
wonder trade and industry have been conducted at a very low level and few new grounds
have been broken.
iii. Scarcity of Skills. Economic development requires an army of trained and skilled
personnel who serve as instruments of economic progress. The under-developed
countries lack skill workers and consequently remain backward.
iv. Lack of Technical Knowledge. The use of modern techniques in the field of agriculture,
trade and industry is indispensable for economic progress. But industrialists and
businessmen in underdeveloped countries are blissfully ignorant of such techniques and
thus feel terribly handicapped in the economic race.
v. Inadequacy of the Transport and Credit Systems. It is obvious that if a country is to
develop, it must have sound infrastructure in the form of means of transport and
communication to facilitate trade, and industry and an efficient banking system to assist
vi. Social Structure. Not only have the economic factors handicapped economic progress
of the under-developed countries but social factors, too, have played their part to keep
them economically backward. Social structure has proved inimical to economic
In addition to the economic and social factors enumerated above, there are the political
factors which have retarded economic growth in under-develop countries.
Adverse International Factors. Economic relations with the advanced countries have also
kept the under-developed countries in a state of under-development. In other words,
international trade has worked to the disadvantage of the under-developed countries and
perpetuated their poverty.
Foreign trade has a very limited spread-effect on developing economies. That is,
developing economies are not exposed to the beneficial effect of foreign trade in terms
of economic development. On the other hand, developing economies are often exposed
to the cyclical effects of foreign trade which inevitably results in economic instability and
thus impedes economic growth. During prosperity, most of the earnings of these
countries are frittered away on consumption goods which are mainly imported. The
excess spending creates inflationary situation which also is inimical to economic
growth. Thus export earnings are generally not used for economic betterment.
Conclusion: Thus, various factors, economic and non-economic, i.e., social, political
and international, have conspired to retard economic growth of the under-developed