Characteristics of Countries at Different Levels of Development

1. Why this topic matters

Having measured development in 10.3, this topic asks why it fails to happen. CIE questions ask candidates to compare the characteristics of developed and developing countries and to explain what obstructs progress.

The essential discipline is to treat the characteristics as interlocking rather than as a list. Low income causes low saving, which causes low investment, which causes low productivity, which causes low income. That circularity is why development is difficult, and describing it as a circle rather than a list is what earns analysis marks.

A second discipline: avoid treating developing countries as identical. They differ enormously in resources, institutions, population structure and growth rates, and the strongest answers say so.

2. Characteristics of developing economies

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2.1 Economic structure

• A large primary sector, with a high proportion of the labour force in agriculture, often subsistence agriculture with low productivity.
• A small manufacturing sector and limited value added, so exports are largely unprocessed commodities.
• A large informal sector, outside the tax system and official statistics, with no employment protection.
• Dual economies: a modern urban sector alongside a traditional rural one, with very different productivity and wages.

2.2 Population

• High population growth, arising from high birth rates alongside falling death rates as healthcare improves.
• A young age structure, so a high dependency ratio, meaning many dependants per worker.
• Rural to urban migration, often faster than urban job creation, producing informal settlement and urban underemployment.

The arithmetic matters. If output grows 3 per cent and population grows 2.8 per cent, output per head grows 0.2 per cent, so a respectable growth rate produces almost no improvement in living standards. This is why population growth is treated as a barrier rather than a neutral fact.

2.3 Capital and productivity

• Low capital per worker, so low labour productivity.
• Poor infrastructure: unreliable power, limited transport, weak communications, all of which raise costs for every firm.
• Low human capital: limited schooling, poor health, high infant mortality.

2.4 Financial and institutional

• Low saving ratios, because incomes are close to subsistence.
• Underdeveloped financial systems, so even available savings are not channelled into investment.
• Weak institutions: insecure property rights, unreliable contract enforcement, corruption.
• Narrow tax bases, limiting the state's ability to fund infrastructure and education.

2.5 External

• Dependence on a narrow range of primary exports, exposing the economy to volatile world prices.
• External debt and its servicing burden, discussed in 10.2.
• Limited access to developed country markets for processed goods.

3. The traps

3.1 The savings gap and the poverty trap

The central mechanism, and the one to reproduce carefully.

Low income means households consume almost all of it, so saving is low. Low saving means little finance for investment. Low investment means the capital stock grows slowly or not at all, so productivity stays low. Low productivity means low income, which returns to the start.

This is the poverty trap or vicious circle of poverty, and it is a genuine equilibrium: the economy is stable at a low level of income with no internal force lifting it.

Note that this is a different poverty trap from the benefit withdrawal one in 8.2. Be explicit about which you mean.

The Harrod-Domar reasoning underlying it: the growth rate depends on the savings ratio divided by the capital-output ratio. With a savings ratio of 5 per cent and a capital-output ratio of 4, growth is 5 divided by 4, which is 1.25 per cent. If population grows faster than that, income per head falls.

Raising growth therefore requires either raising the savings ratio, which is hard at subsistence income, or lowering the capital-output ratio through more efficient use of capital, or bringing in savings from abroad through aid, borrowing or foreign direct investment. That is the logic behind every policy in 10.5.

3.2 The foreign exchange gap

Development requires importing capital equipment, but export earnings from primary commodities are limited and volatile. The shortage of foreign currency constrains the imports needed to develop, independently of domestic saving.

3.3 Primary product dependence

Reliance on a narrow range of commodities creates several problems at once:

• Price volatility. Demand and supply for primary products are both price inelastic, so shifts in supply, driven by weather or disease, produce very large price swings. Export earnings, and therefore government revenue and import capacity, are unstable.
• Low income elasticity of demand. As world incomes rise, demand for food and raw materials rises less than proportionately, whereas demand for manufactures rises more than proportionately. Over time this tends to worsen the terms of trade for primary exporters, which is the Prebisch-Singer hypothesis.
• Limited value added, since processing and the profits associated with it occur elsewhere.

Worked illustration. A country exports one commodity. Supply falls 20 per cent after a drought. With price elasticity of demand of 0.4, price rises by approximately 20 divided by 0.4, which is 50 per cent. Revenue may rise this year and collapse the next when the harvest recovers. Planning public spending against such revenue is close to impossible.

3.4 Debt

Servicing external debt diverts foreign exchange and government revenue from investment. Where the debt is foreign currency denominated, depreciation raises the real burden, which is the condition identified in 10.2.

3.5 Institutions and governance

Insecure property rights deter investment, because an investor who may be expropriated will not commit capital. Corruption acts as a tax on enterprise and misdirects public spending. Weak contract enforcement keeps firms small and transactions personal, preventing the growth of large scale organisation.

Economists increasingly treat institutional quality as the deepest determinant of development, because it conditions whether any of the other factors translate into growth.

4. Comparing developed and developing countries

CIE asks for this comparison directly, so prepare it as a structured contrast rather than a narrative.

4.1 The important qualification

The category "developing" spans enormous variation, from rapidly industrialising middle income economies to the least developed. Some have grown faster than developed economies for decades; others have stagnated. Any answer that treats them as homogeneous is weaker than one that distinguishes them, and noting that the fastest growth in recent decades has occurred in developing rather than developed economies is a useful corrective.

5. Population and development

The relationship is contested and both sides are examinable.

The case that high population growth obstructs development:

• output per head grows only by the excess of output growth over population growth;
• a high dependency ratio means fewer producers per consumer;
• capital must be spread across more workers, which is capital widening rather than capital deepening, so productivity does not rise; and
• pressure on land, housing, schooling and healthcare rises faster than the capacity to provide them.

The case that it need not:

• a larger population is a larger market, allowing economies of scale;
• a larger labour force can raise total output;
• a young population becomes a demographic dividend once fertility falls, since a large working age cohort supports few dependants for a period; and
• the historical relationship runs partly the other way, since development itself lowers birth rates through the demographic transition, as child mortality falls, women's education and employment rise, and children cease to be an economic asset.

The judgement is conditional: rapid population growth is a barrier where it outpaces capital accumulation and job creation, and an opportunity where the age structure is favourable and enough jobs exist.

6. Integrated analysis and common traps

6.1 A complete chain

A country has a savings ratio of 6 per cent, a capital-output ratio of 4 and population growth of 2 per cent.

Growth is approximately 6 divided by 4, which is 1.5 per cent. Population grows 2 per cent, so output per head falls by about 0.5 per cent a year. The country is getting poorer despite positive growth.

Escaping requires raising the savings ratio, which is very difficult at subsistence income because households cannot reduce consumption further; reducing the capital-output ratio through better technology or infrastructure; supplementing domestic saving with foreign capital; or reducing population growth.

Evaluation: foreign capital fills the savings gap but creates the GDP against GNI divergence of 10.3 and possible debt service obligations; reducing population growth works only over a generation. There is no quick route, which is precisely why the trap persists.

6.2 Common examination errors

• Presenting characteristics as an unconnected list rather than a reinforcing circle.
• Confusing the development poverty trap with the benefit withdrawal poverty trap of 8.2.
• Treating all developing countries as identical.
• Saying population growth is simply bad, without the demographic dividend qualification.
• Forgetting that inelastic demand and supply are what make commodity prices volatile.
• Claiming primary product dependence is bad without explaining income elasticity or volatility.
• Ignoring institutions, which are frequently the binding constraint.

7. Paper 3 and Paper 4 mastery

Paper 3 tests: identifying characteristics most commonly found in low income countries, reading a savings ratio and capital-output ratio to find a growth rate, and identifying why commodity prices are volatile.

Paper 4 asks candidates to compare countries at different levels of development or to assess whether population growth obstructs development. The strong structure sets out the vicious circle as a mechanism, applies it to the data given, and evaluates with the qualification that developing countries differ and that some have escaped.

Be ready to give the Harrod-Domar arithmetic. Producing a growth rate from a savings ratio and capital-output ratio turns a descriptive answer into an analytical one.

8. Final checklist

A fully prepared learner can:

• list the economic, demographic, capital, institutional and external characteristics of developing economies;
• explain the vicious circle of poverty as a self-reinforcing mechanism;
• calculate a growth rate from a savings ratio and capital-output ratio, and compare it with population growth;
• explain the savings gap and the foreign exchange gap;
• explain why commodity prices are volatile using elasticity;
• explain the income elasticity argument and the Prebisch-Singer hypothesis;
• explain how weak institutions and insecure property rights deter investment;
• tabulate the contrast between developing and developed economies;
• argue both sides of the population and development question, including the demographic dividend;
• explain the demographic transition and why development lowers birth rates; and
• qualify any generalisation by noting the diversity among developing countries.