In recent literature economically less developed or underdeveloped countries are politely known as “developing countries” as contrasted with the developed countries, which have achieved a high level of economic development. The first question is, where to draw the line between the developing developed economies. It has been suggested that 25% of the per-capita income of the United States should represent this line.
What Is Underdevelopment?
According to Michal P. Todaro
“The underdeveloped country is that in which people have low level of living (i.e. poverty, poor health low educational standards an the poor social services); low self-esteem (low respect, honor, dignity) and limit freedom (freedom from external influence freedom of choice etc.). All these three facts work in a commutative cause and effect process and increase underdevelopment”.
According to Prof. Stanley
“A country is said to be underdeveloped which characterized by the co-existence in greater or less degree of unutilized or underutilized manpower on the one hand and of unexploited natural resources on the other characteristics of an underdeveloped economy”.
According to Prof. Nurkse
“Underdeveloped countries are those which when compared with the advanced countries are under-equipped with the capital in relation to their population and national resources”.
The term developing countries usually refers loosely to countries or regions with the level of real income and capital per head of population which are low by the standards of North America, Western Europe and Australia. In underdeveloped countries, there is no large-scale agriculture and industry; subsistence production is generally important, and markets are comparatively narrow, and the manufacturing industry is usually comparatively unimportant.
Following are the basic characteristics or features of developing countries:
Low Level of Living:
In developing nations general level of living tends to be very low for the vast majority of people. These low levels of living are manifested quantitatively and qualitatively in the form of low income. Poverty, inadequate housing, poor health, limited or no education, high infant mortality, low life and work expectancy, and in many cases a general sense of malaise and hopelessness.
Low Per Capita National Income:
Another characteristic of developing countries is that real per capita income is low because real national income is low and population growth rate is high. (Per capita Income is equal to Real National income divided by population).
Poor Health Facilities:
In addition to struggling on low income, many peoples in developing countries fight a constant battle against malnutrition, disease and ill health. In the least developed countries of the world, life expectancy has risen from 55 years to 67 years,
Low Levels of Productivity:
In addition to low levels of living, developing countries are characterized by relatively low levels of labour productivity, Low levels of living and low productivity are self-reinforcing social and economic phenomena in third world countries as such, are the principal manifestations of and contributors to this under development.
The basic reason for the concentration of people and production in agricultural and other primary production activities in developing countries is the simple fact that at low income levels the first priorities of people are for food, clothing, and shelter.
Agricultural productivity is low not only because of the large numbers of people in relation to available land but also because L.D.C’s agriculture is often characterized by primitive technologies, poor organizations and limited physical and human capital.
Dependence on Primary Products & Raw Material Exports:
Most economics of less developed countries are oriented towards the production of primary products as opposed to secondary (manufacturing) and tertiary (service) activities. These primary commodities form their main exports to other nations.
Unfair Economic and Political Power:
For many less developed countries, a significant factor contributing to the persistence of low levels of living, rising unemployment, and growing income inequality is the unfair distribution of economic and political power between the rich and the poor nations.
Dualism means social and economic division in the economy. Developing countries are characterized by dualism. In developing countries both market economy which is well developed and subsistence economy which is primitive and backward exist side by side. Per capita income in market economy is high while it is low in subsistence economy.
There is a shortage of natural resources in the developing countries and those are under utilized due to shortage of capital, skill, knowledge and technology.
Lack of Organizational Abilities:
In developing countries due to low level of education, experience and training there is a shortage of leadership and organizational abilities.
Shortage of Capital:
Another common characteristic of developing countries is that there is a shortage capital because of low level of incomes, low rate of saving, low rate of investment and unfair distribution of wealth.
High Rate of Population Growth:
Another common characteristic of developing countries is that there is a population pressure because of higher population growth rate. On one side birth rate is creasing and on other side death rate is decreasing due to better health facilities. Population growth rate in most of the developing countries is 2.5% per annum.
Unemployment and Disguised Unemployment:
Factors of production are not fully employed in the production process. Various sectors of the economy are underdeveloped due to shortage of capital. There are primitive technologies, poor organizations and limited physical and human capital. In LDC, agriculture counts for major portion of G.D.P. and provides employment to 50% and contributes 66% of expert earnings 60% of total rural population directly or indirectly is involved in agriculture.
Dependence on Primary Products & Raw Material Exports:
Most economies of less developed countries are oriented towards the production of primary products as opposed to secondary (manufacturing) and tertiary (service).
Import of Consumer Goods:
There is a demonstration effect among the people. Large amounts of savings are spent on the import of consumer goods which increases the incomes of the foreign countries and national industry remains underdeveloped and provides less employment and low incomes to the people.
Poor Currency and Credit System:
At present times, role of banks has increased in developing countries because they increase the savings and investment. But in LDCS the structure of banking mechanism is weak and there is a shortage of organized financial institutions which can increase the domestic savings by giving different incentives.
In developing countries, people have the habit of hoarding precious metals, stones and currency. Gold and silver arc used as ornaments instead of productive purposes.
High Capital Output Ratio:
Capital output ratio is the relationship in a given economy or in an industry for a given time period to the output of that economy or industry for similar time period, Capital output ratio in developing countries is very high because of uneconomic use of capital resources.
Unorganized Money Market and Capital Market:
The money market is unorganized. They are not channelizing savings into investments efficiently. Due to unorganized markets sale and purchase of the shares, securities bonds is” not up to the mark.
The imperfect markets restrict the transfers from less productive to more productive employment. Due to imperfect markets factors of production are not mobile. Labour has stuck to agriculture sector and rural sector, organization is limited to only some developed areas.
Limited Use of Technology:
In developing countries people cannot use modem technology due to shortage of capital. Labour is unskilled, untrained and uneducated. Modern means of production are not used due to which industrial and agricultural sectors are underdeveloped.
In LDC basic infra-structure is weak which is the basic cause of under development of agriculture and industrial sector, so the per capita income in these sectors is low which has decreased the saving capacities.
Vicious Circle of Poverty:
Another major cause of economic backwardness is the vicious circle of poverty. Due to backwardness there is not optimum use of resources and due to this reason goods are not produced on the principle of specialization and division of labour and hence, production remains low, Low level of production is due to imperfect markets.
Therefore, the level of income of the people is low and hence, level of savings is low. Low level of savings is responsible for low level of investment as a result capital formation rate remains low and problem of shortage of capital arises in these countries and therefore, shortage of capital is the major cause of their underdevelopment.