Developing Economy: Definition, Characteristics, Importance and Problems

What is a Developing Economy?

A developing economy, also called an underdeveloped or less developed economy, is characterized by a low human development index, meager per capita income, and a predominant reliance on agriculture-based activities rather than industrialization and commerce. These economies grapple with many challenges, including population growth, unemployment, poverty, inadequate infrastructure, and a generally diminished quality of life. They exhibit a low level of industrialization, technology, and business trade, often relying heavily on natural resources for revenue. The progress of developing economies is frequently influenced by globalization, which aids in enhancing their income levels and infrastructure. Examples of developing economies encompass nations marked by persistent issues such as war, malnutrition, disease, and poverty. The classification of a country as a developing economy is determined by factors such as income per capita, industrialization, standard of living, and technological infrastructure.

Geeky Takeaways:

• A developing economy shall be characterized by a low human development index and meager per capita income.
• Predominant reliance on agriculture over industrialization and commerce.
• Issues like poverty, inadequate infrastructure, population growth, unemployment, and low quality of life.
• Low industrialization, technology usage, business/trade, heavy reliance on natural resources.

Definitions of Developing Economy

According to the UN, a developing country is a country with a relatively low standard of living, undeveloped industrial base, and moderate to low Human Development Index (HDI). This index is a comparative measure of poverty, literacy, education, life expectancy, and other factors for countries worldwide.

Walt Rostow, in his “Stages of Economic Growth” model, defines developing economies as those in the early stages of transitioning from traditional societies to modern industrialized economies. He identifies stages such as traditional society, preconditions for take-off, take-off, drive to maturity, and age of high mass consumption.

Characteristics of Developing Economy

1. Low Per Capita Real Income: In developing economies, the presence of low per capita real income creates a domino effect, leading to reduced savings and limited investments. This economic condition contributes to a persistent cycle of poverty, making it arduous for a substantial portion of the population to elevate their financial well-being. The lack of financial resources hampers the ability of individuals and communities to break free from economic hardships and achieve sustainable growth.

2. High Population Growth Rate: Developing economies grapple with high population growth rates, presenting challenges in resource allocation and the development of essential infrastructure. The rapid expansion of the population intensifies the demand for necessities, putting pressure on the government to implement effective policies that can sustainably manage the increasing needs of the growing populace.

3. High Rates of Unemployment: The prevalence of high unemployment rates in developing economies amplifies issues related to poverty and social unrest. A lack of employment opportunities leads to a significant portion of the workforce struggling to secure stable incomes, hindering economic progress and exacerbating societal challenges. This unemployment challenge underscores the need for targeted policies to spur job creation and economic growth.

4. Agriculture-Based Economy: Many developing economies heavily depend on agriculture for both livelihoods and revenue, often at the expense of industrialization and diversified business trade. This overreliance on the agricultural sector poses risks to economic stability, limiting opportunities for technological advancements and diversification. It underscores the importance of fostering a balanced economic approach to promote sustainable development.

5. Poor Quality of Life: The overall quality of life in developing economies is hampered by inadequate infrastructure, low standards of living, and widespread poverty. Limited access to essential services, such as education, healthcare, and sanitation, further compounds the challenges faced by citizens. Addressing these issues requires comprehensive efforts to improve infrastructure, enhance living standards, and alleviate poverty, ultimately fostering a better quality of life for the population.

Importance of Economics in Developing Countries

1. Economic Growth as a Catalyst: Economic growth stands as the foremost tool for poverty reduction and enhancing the quality of life in developing nations. The imperative for rapid and sustained growth is vital to expedite progress towards achieving the Millennium Development Goals, fostering a positive trajectory for societal well-being.

2. Job Creation as a Key Outcome: Integral to economic growth is job creation, a pivotal factor in poverty reduction and elevating living standards in developing countries. A flourishing job market contributes significantly to enhancing the overall economic landscape and improving the livelihoods of the populace.

3. Strategic Trade Policy: Developing countries face the challenge of reducing reliance on foreign trade taxes while avoiding economic disincentives, particularly in enhancing revenue through personal income tax. Policymakers in these nations must adeptly prioritize policies and fortify tax administrations to facilitate the necessary changes without hindering economic incentives.

4. Global Integration for Mutual Benefit: As trade interactions between developing and industrialized nations increase, coupled with rising cross-border capital mobility, developing countries wield a growing impact on the global economy. This increased integration presents opportunities for mutual benefits, fostering economic growth on a global scale.

5. Imperative for Infrastructure Development: Inadequate infrastructure, limited credit access, and a scarcity of basic resources pose formidable challenges to economic growth in developing countries. Vital to overcoming these hurdles is a substantial investment in infrastructure development, a crucial foundation for sustained economic growth and overall development.

Developing Economy Countries

Sri Lanka stands as a stark example of a developing economy grappling with formidable challenges. Once thriving, its growth was anchored in a robust tourism industry, contributing significantly—approximately 12% to 15%—to its annual revenue. However, the nation faced a severe economic setback due to factors such as high import rates, terrorist attacks, and communal riots before the pandemic, dealing a critical blow to its tourism sector and contributing significantly to its economic decline. In contrast, countries such as India, China, Brazil, Mexico, Indonesia, Turkey, Iran, Egypt, Nigeria, and Pakistan have demonstrated remarkable growth since the 1980s, ushering in industrialization initiatives that have substantially boosted their GDP. Despite these advancements in infrastructure, these emerging market economies continue to grapple with various challenges that demand concerted efforts for resolution. Concurrently, nations like Ukraine and Honduras are actively revising their monetary policies, aiming to transition toward becoming developed countries. While currently displaying characteristics typical of developing economies, these nations aspire to overcome existing challenges and progress toward heightened economic development, signifying a strategic commitment to a more prosperous future.

Economic Problems of Developing Countries

1. High Levels of Debt and Limited Fiscal Space: Developing countries grapple with elevated levels of debt, constraining their fiscal space and impeding investments in critical social infrastructure and economic development. This limited financial flexibility becomes a hurdle for sustained economic growth.

2. Trade Restrictions and External Shocks: Developing nations face challenges navigating trade restrictions and adhering to sanctions, both diplomatic and economic. These restrictions, combined with vulnerability to external economic shocks, such as global commodity market fluctuations, can significantly impact their economic stability, exports, employment, and government revenue.

3. Export Dependence, Low Income, and Unemployment: Many developing countries heavily depend on primary commodity exports, exposing them to vulnerabilities in global crises and volatile markets. Concurrently, low per capita real income perpetuates a cycle of poverty, while high rates of unemployment contribute to social unrest, posing substantial challenges to economic development.

4. Energy Poverty, Climate Vulnerability, and Poor Infrastructure: Energy poverty poses a significant challenge to certain developing countries, impacting industrial and economic development. Additionally, these nations often face high vulnerability to the impacts of climate change, resulting in substantial economic and social consequences. Coupled with poor infrastructure and limited access to credit and basic resources, these factors collectively hinder the overall economic growth and development of these economies.

How to Develop the Economy?

1. Fostering Enterprise and Entrepreneurship: Governments play a pivotal role in fostering enterprise and entrepreneurship, acting as indispensable drivers of capitalist growth. By creating an environment conducive to business innovation and development, governments can stimulate economic activity and contribute to sustained growth.

2. Trade Liberalization and Global Integration: Integration into the global economy emerges as a potent strategy for countries aiming to foster economic growth, development, and poverty reduction. Opening up economies to international trade has proven essential for many developing nations, facilitating accelerated growth and enhanced poverty alleviation by tapping into global markets.

3. Infrastructure Development for Economic Prosperity: Investment in infrastructure development emerges as a cornerstone for economic growth. The increasing trend towards private sector involvement and the potential expansion of infrastructure investment in developing economies present new opportunities for exports from industrialized countries. Robust infrastructure acts as a catalyst for economic development, enhancing connectivity, and creating a conducive environment for trade and commerce.

4. Strategic Debt Management: Effective management of debt levels is paramount for sustainable economic development. High debt levels pose limitations on fiscal space and impede the ability to invest in critical social infrastructure and economic development. Implementing prudent debt management strategies ensures that countries can navigate financial challenges while fostering an environment conducive to economic growth.

Difference between Developed Countries and Developing Countries

Basis	Developed Countries	Developing Countries
Economic Development	Advanced industrial base, higher economic development.	Less developed industrial base, lower economic development.
Human Development Index (HDI)	Higher HDI, reflecting better overall well-being.	Lower HDI, indicating lower overall well-being.
Gross Domestic Product (GDP)	Higher GDP per capita, indicating higher economic output per person.	Lower GDP per capita, indicating lower economic output per person.
Poverty	Lower poverty rates	Higher poverty rates
Infrastructure	Better infrastructure (roads, bridges, utilities)	Inadequate infrastructure
Education and Healthcare	Better education and healthcare systems	Limited access to education and healthcare services
Government Policy	More stable and effective governments	Challenges such as corruption and weak institutions
Foreign Trade	More integrated into the global economy, more trade partners	Limited trade opportunities
Natural Resources	Fewer natural resources	Abundant natural resources that can be exploited
Debt	Lower levels of debt	Higher levels of debt due to limited resources and economic challenges

Frequently Asked Questions (FAQs)

What is meant by a developed economy?

A developed economy refers to a region, often a country, endowed with abundant wealth and resources accessible to its residents or citizens. Developed economies typically exhibit superior performance on measurement indexes, which gauge both economic and non-economic aspects of a country.

Why is it referred to as a developing economy?

In general, a developing economy characterizes a region where the standard of living is lower and industries are less developed compared to other countries. However, this classification is relative and acknowledges the ongoing growth and progress within such economies.

What challenges does a developing economy face?

Various factors influence the economic landscape of developing nations beyond those outlined earlier. Additional considerations encompass vulnerability to external shocks, limited access to credit, political instability, poverty, and the availability of social safety nets.

What are the pivotal qualities of development?

The pivotal qualities are: 

• Development should be an ongoing and consistent process. 
• Growth in the development process should vary among individuals based on factors such as genetic characteristics, health, and dietary habits. 
• Finally, development should follow a discernible pattern from infancy to death.

What are the four dimensions of development?

Development encompasses environmental, cultural, economic, and institutional dimensions. While economic development holds significance, other dominant dimensions include cultural development, forming a comprehensive perspective on overall progress.