Lecture 1
CHARACTERISTICS OF DEVELOPING COUNTRIES

1. Low per-capita income

• Low income (GDP)
  • Low productivity (why?)
  • Low saving and investment
  • Old technology, inadequate infrastructure
• Large population
  • Socio-economic factors

2. Large-scale unemployment

• Underemployment
• Disguised unemployment
  • Addition of a worker does not raise output
  • Family consideration, not "profit maximization"
• Scant data on unemployment
  • Estimate: 8%-35%

3. Income distribution

• How do we measure income inequality?
  • Lorenz curve, Gini coefficient
• Severe income inequality, poverty
  • Leads to economic/political/social instability

4. Predominance of agriculture

• Low productivity
• Fragmented land ownership (what is the problem?)
• Old technology, lack of good seeds and fertilizers

5. International trade

• Exports of primary commodities (tea from Sri Lanka)
  • No control over terms-of-trade
• Imports of intermediate goods, capital goods
• Problem of debt service
• Fixed exchange rates
  • Official and black market rates

6. Financial markets

• Mainly commercial banks; small equity markets
• High reserve ratios, interest-rate ceilings
• Credit rationing

7. Dualism

• Urban and rural sector
• Rural: Small-scale, labor-intensive, low-wage sector
• Urban:
  • Formal sector: Modern, capital-intensive, high-wage industrial sector
  • Informal sector: Small-scale, merchants, low-wage

8. The government sector

• Large degree of government intervention
  • Active role in production
• Tax revenues:
  • Limited role of direct taxation (income taxes)
  • Reliance on import duties