Economics of Development Chapter 3

Characteristics of Underdevelopment

• Over half of the population in developing countries is engaged in agriculture, primarily as subsistence or tenant farmers.
• Labor productivity in agriculture is notably low, averaging less than $500 per year or $1.90 daily.
• Disguised unemployment is prevalent due to diminishing returns to labor in agriculture.
• Demand for agricultural goods is income inelastic, while industrial goods exhibit higher productivity and demand.

Employment Distribution by Sector

• Significant agricultural employment varies by region:
  • Sub-Saharan Africa (71.2% agriculture)
  • Southern Asia (67.5%)
  • Latin America and the Caribbean (43.3%)
• Industrial and service sectors represent a smaller percentage of employment in low-income countries compared to high-income nations.

Low Level of Capital Accumulation

• Economic development requires capital accumulation, but low savings and investment hinder growth.
• A savings-investment ratio exceeding 10% of GDP is needed for sustainable increases in per capita income.
• China's savings-investment ratio of over 30% is a key factor in its rapid growth.

Rapid Population Growth

• Developing countries experience population growth rates exceeding 2% annually, compared to 0.5% in developed nations.
• High population growth exacerbates poverty, leading to a cycle of diminished income per head.
• Young age distribution in developing nations poses challenges to resources and governance.

Dependence on Primary Commodities

• Reliance on primary commodities creates economic vulnerabilities including:
  • Long-term deterioration in terms of trade.
  • Balance of payments issues due to income elasticity disparities.
  • Price volatility resulting in macroeconomic instability.
• Countries dependent on natural resources often face slower economic growth.

Weak Institutional Structures

• Weak institutions are a fundamental cause of underdevelopment, affecting investment and entrepreneurship.
• Significant issues include poor governance, lack of rule of law, and corruption leading to civil strife in affected regions.

Other Dimensions of Development Gap

• High unemployment and underemployment levels are prevalent, with one-third of the labor force either fully or disguised unemployed.
• Disguised unemployment is common in both rural and urban settings, particularly in low-productivity sectors.
• Rural-to-urban migration worsens unemployment in cities, creating additional economic pressure.

Inequality: Vertical and Horizontal

• Income, wealth, and power distribution is markedly unequal, with two primary inequality types: vertical (income disparity across households) and horizontal (discrimination based on social categories).
• Vertical inequality initially increases with development, then declines, as represented by the Kuznets curve.
• Horizontal inequality is a significant contributor to conflict and hampers development.

Growth and Distribution

• Debate exists over whether economic growth benefits the poor relative to the rich, with inequality potentially harming overall growth prospects.
• Poverty-weighted growth rates offer a better perspective on welfare improvements by emphasizing income gains for the poor.

Stages of Development and Structural Change

• Few countries (e.g., Australia, New Zealand) have transitioned to wealth based solely on agriculture.
• Rostow’s stages of growth delineate a path from traditional agricultural economies to high mass-consumption societies, shifting towards manufacturing and services.
• Newly industrializing countries exhibit rapid growth through resource shifts and technological specialization.

Industrialization and Growth

• Strong correlations exist between manufacturing growth and overall GDP growth, emphasizing the role of manufacturing in productivity gains.
• Kaldor’s growth laws suggest significant positive relationships between growth in manufacturing output and GDP, manufacturing productivity, and productivity outside manufacturing.

Key Learning Objectives

• Understand common characteristics of underdeveloped countries including low productivity agriculture and weak institutions.
• Recognize the implications of high unemployment and inequality.
• Comprehend the relevance of industrialization and Kaldor’s growth laws in economic development.

This quiz explores the characteristics of underdevelopment and structural changes detailed in Chapter 3 of Economics of Development. Key topics include the dominance of agriculture, low capital accumulation, and the implications of rapid population growth. Additionally, delve into how inequality and institutional weaknesses contribute to the development gap.