Under development economy

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Definition of an Under-Developed Economy: It is not easy to define an under-developed economy.

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 under￾utilised 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.


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 under￾development 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 coun￾tries 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.


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

it financially.

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


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3 years ago


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3 years ago

Very good article. Underdeveloped countries are characterized by some economic features such as a relatively important agricultural sector, less developed industrial sector, insufficient number of skilled workers, relatively low standard of living and low gross national product per capita.

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