Defining the Developing World

The most common way to define the developing world is by per capita income. Several
international agencies, including the Organization for Economic Cooperation and Development
(OECD) and the United Nations, offer classifications of countries by their economic status.

But in the World Bank’s classification system, 213 economies with a population of at least
30,000 are ranked by their levels of gross national income (GNI) per capita. These economies are
then classified as low-income countries (LICs), lower-middle-income countries (LMCs), upper
middle-income countries (UMCs), high-income OECD countries, and other high-income
countries. (Often, LMCs and UMCs are informally grouped as the middle-income countries.)
With a number of important exceptions, the developing countries are those with low-, lower-
middle, or upper-middle incomes.

World Bank An organization known as an “international financial institution” that provides

High-income countries that have one or two highly developed export sectors but in which
significant parts of the population remain relatively uneducated or in poor health, or social
development is viewed as low for the country’s income level, may be viewed as still developing.
Examples may include oil exporters such as Saudi Arabia and the United Arab Emirates.

Newly industrializing countries (NICs); Countries at a relatively advanced level of economic

Least developed countries; countries with low income, low human capital, and high economic
vulnerability.

Human capital; Productive investments in people, such as skills, values, and health resulting
from expenditures on education, on-the-job training programs, and medical care.

Basic Indicators of Development: Real Income, Health, and Education

In accordance with the World Bank’s income-based country classification scheme, gross national
income (GNI) per capita, the most common measure of the overall level of economic activity, is
often used as a summary index of the relative economic well-being of people in different
nations.

Per capita GNI comparisons between developed and less developed countries are, however,
exaggerated by the use of official foreign-exchange rates to convert national currency figures
into U.S. dollars. This conversion does not measure the relative domestic purchasing power of
different currencies. In an attempt to rectify this problem, researchers have tried to compare
relative GNIs and GDPs by using purchasing power parity (PPP) instead of exchange
rates as conversion factors.
Purchasing Power Parity (PPP); Calculation of GNI using a common set of international prices
for all goods and services, to provide more accurate comparisons of living standards.
Human Development Index (HDI) An index measuring national socioeconomic development,
based on combining measures of education, health, and adjusted real income per capita.

Absolute poverty The situation of being unable or only barely able to meet the subsistence
essentials of food, clothing, shelter, and basic health care.

Dependency burden The proportion of the total population aged 0 to 15 and 65+, which is
considered economically unproductive and therefore not counted in the labor force.

(Both older people and children are often referred to as an economic dependency burden in the
sense that they must be supported financially by the country’s labor force)

Infrastructure Facilities that enable economic activity and markets, such as transportation,
communication and distribution networks, utilities, water, sewer, and energy supply systems.

Underdeveloped Markets

Imperfect markets and incomplete information are far more prevalent in developing countries.
In many developing countries, legal and institutional foundations for markets are extremely
weak.

Some aspects of market underdevelopment are that they often lack (1) a legal system that
enforces contracts and validates property rights; (2) a stable and trustworthy currency; (3) an
infrastructure of roads and utilities that results in low transport and communication costs so as
to facilitate trade; (4) a well-developed and efficiently regulated system of banking and
insurance, with broad access and with formal credit markets that select projects and allocate
loanable funds on the basis of relative economic profitability and enforce rules of repayment; (5)
substantial market information for consumers and producers about prices, quantities, and
qualities of products and resources as well as the creditworthiness of potential borrowers; and
(6) social norms that facilitate successful long-term business relationships.

Moreover, information is limited and costly to obtain, thereby often causing goods, finances,
and resources to be misallocated.

Brain drain The emigration of highly educated and skilled professionals and technicians from the
developing countries to the developed world.

Brain drain not only represents a loss of valuable human resources but could also prove to be a
serious constraint on the future economic progress of developing nations.

For example, between 1960 and 1990, more than a million high-level professional and technical
workers from the developing countries migrated to the United States, Canada, and the United
Kingdom. By the late 1980s, Africa had lost nearly one-third of its skilled workers, with up to
60,000 middle- and high-level managers migrating to Europe and North America between 1985
and 1990. Sudan, for example, lost 17% of its doctors and dentists, 20% of its university
teachers, 30% of its engineers.
Free trade Trade in which goods can be imported and exported without any barriers in the
forms of tariffs, quotas, or other restrictions.

Research and development (R&D); Scientific investigation with a view toward improving the
existing quality of human life, products, profits, factors of production, or knowledge.

Divergence; A tendency for per capita income (or output) to grow faster in higher-income
countries than in lower-income countries so that the income gap widens across countries over
time (as was seen in the two centuries after industrialization began).

Convergence; The tendency for per capita income (or output) to grow faster in lower-income
countries than in higher-income countries so that lower-income countries are “catching up”
over time.

If the growth experience of developing and developed countries were similar, there are two
important reasons to expect that developing countries would be “catching up” by growing faster
on average than developed countries. The first reason is due to technology transfer. The second
reason to expect convergence if conditions are similar is based on factor accumulation. Today’s
developed countries have high levels of physical and human capital; in a production function
analysis, this would explain their high levels of output per person.

Given one or both of these conditions, technology transfer and more rapid capital accumulation,
incomes would tend toward convergence in the long run as the faster-growing developing
countries would be catching up with the slower-growing developed countries.