Characteristics of Developing Countries

Study Notes

Technological Backwardness: Production techniques are inefficient in developing countries due to a lack of research & development (R&D), weak communication systems between research institutes and industries, and a combination of abundant labor and scarce capital. Developing countries often import technology from developed countries, but this technology may not adapt to local conditions or reach producers effectively due to communication weaknesses.

Social Dualism: A clash between imported (e.g., capitalist) and indigenous (e.g., socialist) social systems that doesn't accelerate development.
Technological Dualism: The existence of distinct traditional rural and modern sectors. The traditional sector has variable technical coefficients, while the modern sector has fixed ones, leading to unemployment from rapid population growth as excess labor either seeks employment in the less productive traditional sector or is unemployed.
Economic and Financial Dualism: Parallels the division between peasant and manufacturing sectors. In the colonial period, underdeveloped countries had both domestic financial institutions and those focusing on export production. After independence, the development of modern, domestically-oriented financial institutions resulted in a more complex financial structure.

Developing countries are often perceived as relying heavily on foreign trade, but this belief is inaccurate. Simon Kuznets observed that the proportion of foreign trade to a country's total output is influenced by size, which must be accounted for when comparing trade participation. When these size effects are factored out, underdeveloped countries are found to have lower foreign trade participation than developed ones.

The process of underdevelopment in regions like Asia, Africa, and Latin America began with economic integration with the West European economies. These developing economies, while integrated into the world capitalist system, remained backward and were forced to specialize in primary production. The pattern of trade saw them importing most manufactured goods and industrial materials from developed countries while exporting only a limited number of primary products.

Sustenance: The ability to meet basic needs, including food, health, and protection, is fundamental for development. A lack of these basic needs leads to absolute underdevelopment.
Self-Esteem: A strong sense of worth and respect, where individuals are not exploited as tools, is a crucial component of a good life.
Freedom from Servitude: Freedom encompassing political freedoms (personal security, rule of law, freedom of expression, political participation), and equity of opportunities is important to overall development.

Government spending that doesn't increase overall aggregate demand can cause a commensurate drop in private sector spending and investment. Borrowing for government operations to fund projects or expenditures can increase interest rates, reducing private sector investment. High interest rates attract foreign capital, increasing the demand for domestic currency and leading to currency appreciation, which can reduce exports and increase imports.
Impact of Expansionary Fiscal Policy: Expansionary policies aiming to increase aggregate demand by increased government spending might lead to higher inflation due to increased money supply or currency printing, and/or time-lags between policy implementation and observed effects on the economy. Classical economists argued fiscal policy was less-effective due to these issues.