Economic Problems of Developing Areas

This article will focus on the economic problems of developing areas. This article will provide an overview of the United Nations' criteria for developing country classification as well as an analysis of different types of economic problems that affect developing areas. The economic problems of infrastructure, creditworthiness, corruption, and poverty will be described and analyzed. Economic problems will be discussed within their respective related cultural, social, political, and historical contexts. In addition, the issue of colonization's lasting influence on business climates in developing countries will be introduced.

Keywords Business Climate; Child Labor; Colonial Legacy; Corruption; Creditworthiness; Developing Country

Business & Public Policy > Economic Problems of Developing Areas

Overview

Developing areas, including developing countries and regions, have a unique set of economic problems and challenges to economic development. Developing countries, taken as whole, refer to countries characterized by an underdeveloped industrial base, low per capita income, and widespread poverty. Developing countries are often referred to as less-developed countries (LDCs) by international development organizations such as the United Nations and the World Bank. Less- developed countries have, by definition, small to medium-sized economies and structural handicaps that hinder economic development. In 2003, the United Nations' Economic and Social Council, along with the United Nations' Committee for Development Policy (CDP), formalized the use of the following three criteria for the identification of less-developed countries:

• Low-income: A three-year average estimate of the gross national income (GNI) per capita under $750.
• Human resource weakness: A low composite Human Assets Index (HAI) score based on indicators of nutrition, health, education, and adult literacy.
• Economic vulnerability: A composite Economic Vulnerability Index (EVI) based on the instability of agricultural production, the instability of exports of goods and services, the economic importance of nontraditional activities, the handicap of economic smallness, and the percentage of population displaced by natural disasters (Ghaus-Pasha, 2007).

According to the United Nations framework, less-developed countries may "graduate" from the less-developed countries list when they meet or exceed the thresholds for two of the three criteria in two consecutive reviews by the Committee for Development Policy. The less- developed countries list is fluid and dynamic. For example, in the early 2000s, Senegal was added to the less-developed countries list and Cape Verde ad Maldives qualified for graduation from the less developed countries category.

The United Nations, as of 2013, classifies the following countries as the least developed countries:

• Least developed countries: forty-eight countries including Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao People's Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Timor-Leste, Togo, Tuvalu, Uganda, United Republic of Tanzania, Vanuatu, Yemen, and Zambia.

The least developed regions and countries of the world experience economic problems caused and exacerbated by shared characteristics, structures, histories, climates, and practices. For example, developing countries tend to have high levels of income inequality, low life expectancies, small or limited industrial sectors, outward migration from rural to urban areas, market imperfections (or market absence), and a history of colonial rule. This list of shared characteristics, while not present in all developing countries, illustrates the complexity of economic problems in developing countries. Economic problems do not occur in isolation. Economic problems, which are products of particular historical events, patterns, and structures, are related to social, political, and cultural problems and practices.

The following sections describe economic problems in their respective cultural, social, political, and historical contexts. The economic problems of child labor, creditworthiness, corruption, and poverty will be described and analyzed. In addition, the issue of colonization's continued influence on business climates in developing countries will be introduced.

Applications

Economic Problems of Child Labor, Creditworthiness, Corruption, & Poverty

Economic problems refer to factors that hinder the functioning and growth of an economy. Economic problems of all kind, including structural, fiscal, and cultural, affect economic development efforts by national governments, corporations, and international development organizations. Economic development must address a wide range of programs and strategies aimed at promoting growth in a part or whole of an economy. Developing countries with limited economies or economies in transition are particularly sensitive to economic problems of child labor, creditworthiness, corruption, and poverty and its related conditions.

Child Labor

Exploitative child labor, which refers to any economic activity performed by a person under the age of fifteen, is a major economic and social problem in developing countries. The International Labor Organization (ILO) estimates that there are about 250 million children between the ages of five and fourteen involved in at least part-time labor. The International Labor Organization (ILO) estimates that there are 120 million involved in hazardous and exploitative full-time work. Child labor by region suggests that child labor is a global problem: there are an estimated 152.5 million child laborers in Asia, 80 million in Africa, and 17.5 million in Latin America (Palley, 2002). The International Labor Organization reports that child labor is used in multiple industries and sectors including agriculture, fishing, forestry, hunting, manufacturing, retail, trade, community and personal services, transport, storage, communications, construction, mining, and quarrying (Tierney, 2000).

Child labor is deeply connected to the economic life and prosperity of many developing countries. Child labor in developing countries cannot be eradicated without solving the problems that afflict developing country labor markets. Labor market dysfunction and underdevelopment are believed to be the fundamental causes of exploitative child labor practices in developing regions of the world. The eradication of exploitative child labor practices requires the development and implementation of economic development programs that strengthen the economies of developing countries.

International development organizations, national governments, and corporations debate whether voluntary practices or required labor rules should be used to solve the problem of child labor in developing countries. Corporations are increasingly adopting voluntary practices, such as private labeling schemes, as part of corporate social responsibility (CSR) efforts, which certify to global consumers that a product has been produced without child labor. While voluntary efforts by corporations to use adult labor rather than child labor is a positive step, voluntary practices alone are not believed to be sufficient to eradicate child labor in developing countries. International labor standards, which address the root causes of child labor such as labor market dysfunction and underdevelopment, have a better chance for success than voluntary practices alone.

The International Labor Organization (ILO), as described in the 1998 Declaration of Fundamental Principles and Rights at Work, promotes five main international labor standards which, if adopted by developed and developing countries alike, would likely significantly affect the problem of child labor (Palley, 2002):

• Freedom of Association: The ILO Freedom of Association and Protection of the Right to Organize Convention (No. 87) establishes the right of workers to form and join organizations, including unions, of their own choosing.
• Effective Recognition of the Right to Collective Bargaining: The Right to Organize and Collective Bargaining Convention (No. 98) protects unions from outside interference.
• The Elimination of All Forms of Forced or Compulsory Labor: The Forced Labor Convention (No. 29) and the Abolition of Forced Labor Convention (No. 105) require governments to suppress all forms of forced and compulsory labor in their territories.
• The Effective Abolition of Child Labor: The Minimum Age Convention (No. 138) sets a baseline minimum working age of fifteen.
• The Elimination of Discrimination in Respect of Employment and Occupation: The Discrimination Convention (No. 111) requires governments to establish national policies that eliminate discrimination on the basis of race, color, sex, religion, political opinion, and national origin (Palley, 2002, p.605).

Creditworthiness

Many developing countries depend on international loans and grants from both the public sector and private sector to fund economic development programs and initiatives. International institutions use creditworthiness scores to determine a developing country’s loan eligibility. Numerous national governments, international aid and development organizations, and for-profit reporting agencies compile and distribute sets of economic indicators, in part, to meet the demand for quantifiable data about economic development and activity. International organizations that depend on and produce economic indicators include the United Nations and World Bank. Common economic indicators include national income per capita, age-dependency rates, fertility rates, migration, unemployment rates, the number of mothers in paid employment, childcare costs, tax on labor, unemployment benefits, students' performance, material deprivation, earnings inequality, gender wage gaps, intergenerational mobility, public social spending, poverty persistence, housing costs, and pension replacement rates.

Development agencies, which refer to either public or private organizations, that lead the economic development and regeneration efforts in developing countries or regions of the world use multiple economic tools and products to promote economic growth and its related social, cultural, and political gains. One of the most important economic tools that developments agencies use to promote economic growth in developing countries are loans for small and large-scale businesses and initiatives. Development agencies use the criteria of creditworthiness to determine the type and amount of development loan that a developing country business or local government may receive. Ultimately, creditworthiness is directly tied to increasingly important and competitive development funds.

The World Bank produces a set of statistics on developing countries based solely on income. These income-based country classifications are used to determine creditworthiness and development loan eligibility. The World Bank's main criterion for classifying developing country economies is gross national income (GNI) per capita. Gross national income per capita classifies economies and countries as low income, lower middle income, upper middle income, or high income. The gross national income categories correspond to the following income levels:

• Low income: $875 or less
• Lower middle income: $876–$3,465
• Upper middle income: $3,466–$10,725
• High income: $10,726 or more

While classification by income does not always correctly represent development status, low-income and middle-income economies are usually categorized as developing economies. Developing countries are eligible for different types of loans based on their gross national income per capita and perceived creditworthiness. The most common economic development loans made to developing countries are made by the International Development Association (IDA) and the International Bank of Reconstruction and Development (IBRD).

The International Development Association lends money to low-income countries that have difficulty borrowing on international markets. IDA loans and grants, which carry a zero interest rate, are intended to promote economic growth and improve living conditions. IDA loans are concessional loans offering interest rates below those available on the market and long grace periods. Sixty-six countries, with a per capita income in 2005 of less than $1,025, qualified for IDA loans and grants. For the fiscal year ending in June 2013, IDA commitments surpassed $16 billion, with about 50 percent of those loans going to African countries. The International Bank of Reconstruction and Development provides loans to sixty-four developing countries. IBRD loans are nonconcessional, meaning they do not offer exceptionally low interest rates or long grace periods. IBRD loans are only offered to developing countries considered, based on economic indicators, to be financially creditworthy.

In addition to private sector development use, as described above, developing country creditworthiness indicators, also called risk indicators, are developed and used by commercial lending institutions. Commercial creditworthiness ratings (country-specific risks) refer to the likelihood that a certain country will fail to repay its debt. Default risk is evaluated using specific information about a country’s political and economic development levels thought to affect its ability and willingness to repay its loan. Commercial creditworthiness indicators determine both the volume and the rates of commercial bank loans to developing countries. Commercial creditworthiness indicators are influenced by variables such as economic fundamentals, regional location, and structure and content of its exports. Economic fundamentals refer to the ratio of non-gold foreign exchange reserves to imports, the ratio of the current account balance GDP, growth, and inflation. Three main rating agencies, including Institutional Investor, Euromoney, and Economist Intelligence Unit, produce and publish commercial creditworthiness indicators for developing countries for use by commercial lending institutions (Haque, 1996).

Corruption

Corruption is a social pathology that affects both developing and developed countries. Corruption refers to abuse of the agent-client relationship, misuse of public office, legal violations, opposition with public opinion, and not acting in ways that promote the public interest, trust, or duty. Three main factors influence the economic impact of corruption in developing countries. These factors include:

• The amount of resources wasted through each corrupt action
• The periodicity of corrupt activities
• The amount of people involved in the corrupt action

Corruption can be separated into two categories including small scale and large scale. Small-scale corruption extracts public resources to supplement the income of one or a few individuals. Large-scale corruption is systemic and supported by power networks. Corruption hinders growth and development. Scholars cite the following variables as the root causes of large-scale corruption: protection of self interest, unfair laws, pathology of the market structure, ineffective control systems, bureaucracy, lack of knowledge, economic need, job dissatisfaction, and lack of power.

Ultimately, large-scale corruption results from power networks (social networks that function through horizontal and vertical exchanges) that profit through the exploitation of opportunity and the diversion of economic gains from the public into the pockets of a small number of corrupt individuals. Power networks depend on economic, political, technical, historical, and ideological support. Large-scale corruption affects programs, law, and organizations and has a major negative impact on economic development. Corrupt networks grow quickly. Police and legal systems are major targets and places for large-scale corruption as these arenas offer the elements that corruption needs in order to grow. Large-scale corruption is an obstacle to economic development. Corruption reduces the resources available for development and limits the development of new institutions and ways of operating (Carvajal, 1999). Corruption and political instability threaten trade in developing countries. For example, bread-bulk shippers, which refer to shippers handling cargo that cannot be stored in liquid containers or steel container boxes, transporting goods to developing countries face corruption problems and related conditions. Corruption is often part of a wide range of economic related problems including: piracy, regime change, thieves, difficult terrain, lack of transportation infrastructure and ports, political instability, and unstable or disputed succession (Leach, 2006).

Poverty

Poverty, which encompasses a lack of basic necessities as well as a denial of opportunities and choices that permit economic and personal development, is a persistent, widespread, and intractable economic problem in developing regions. The United Nations provides two separate metrics for measuring poverty including the Human Development Index (HDI) and the Human Poverty Index (HPI) (Norton, 1998):

• The Human Development Index measures human capabilities through health, education, and a high standard of living based upon gross national income per capita.
• The Human Poverty Index provides a metric to compare the well-being of the most deprived people in a community for the purposes of economic planning and advocacy.

According to the World Bank, extreme poverty, and its related conditions such as hunger, currently affect more than one billion people in the world. The measure of extreme poverty is based on individual income or consumption levels of below $1.25 a day. Economic development efforts in developing countries are based on the argument that poverty reduction is tied to economic growth. Economic development, as it is practiced today, involves numerous public sector and private sector stakeholders (such as development agencies, national governments, corporations from industrialized countries, businesses from developing countries, community agencies, and communities in need) committed to ending poverty, and related conditions, in developing countries.

Combating global poverty is an economic development goal that unites international development organizations, national governments, and corporations around the world. For example, in 2000, the United Nations Millennium Summit was held to create time-bound and measurable goals for combating poverty and related conditions. The millennium development goals (MDGs) have become a blueprint of sorts for national governments, development agencies, and corporations committed to aiding the world’s poorest people. The millennium development goals include the following objectives: eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and the empowerment of women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development by 2015 (Millennium Development Goals, 2005).

While contemporary forms of economic development are focused primarily on eradicating extreme poverty and related conditions, economic development efforts have been in existence, in some form, since the end of World War II. The modern era of international aid to developing countries began in the 1940s as World War II ended. After World War II, world leaders and governing bodies put structures into place, such as the World Bank, United Nations, World Trade Organization, and International Monetary Fund, to prevent the economic depressions and instability that characterized the years following World War I. The modern trend of globalization and the resulting shifts from centralized to market economies in much of the world has created both a need and opportunity for economic development in developing countries and regions of the world. International development organizations, national governments, and corporations are coming together to focus on building frameworks for economic development as the basis for achieving sustainable economic growth.

Conclusion

Colonial Legacy & Business Climates

Economic problems of developing areas, while not intractable, are often caused by the persistence of colonial-era influences on business climates. In many developing regions, the forces of economic globalization promise to challenge and change the colonial legacy of fixed class and power relations, limited production bases, and outdated economic institutions. In developing regions, business climates or environments (which refer to the combined factors such as tax structure, public services, government regulations, labor force, and infrastructure that affect the profitability and experience of conducting business in a particular country or region of the world) are often shaped by a colonial legacy or history. Factors such as power relations (including class and race), institutional structures (including banking or tax systems), cultural biases (including gender and work-day perceptions), resource use, and planning are, to varying degrees, shaped by local histories. For example, urban land use patterns in Nigeria, a developing country, are considered to be an outdated colonial legacy. The "traditional urban planning framework, its administration, and the associated master planning which still dominates planning in Nigeria, does not adequately respond to evolving changes in cultural, economic and social developments" (Ogu, 1999, p.347).

In the final analysis, economic problems of developing areas, while not uniform or fixed, may be classified into broad categories (such as child labor, creditworthiness, corruption, and poverty as described in this article) as part of the process of problem identification and long-term problem solving.

Terms & Concepts

Business Climate: The combined factors, such as tax structure, public services, government regulations, labor force, and infrastructure, as that affect the profitability and experience of conducting business in a particular country or region of the world.

Corporate Social Responsibility (CSR): The private sector's commitment to improving social and environmental issues.

Corporation: A firm that is owned by stockholders and operated by professional managers.

Corruption: The abuse of the agent-client relationship, misuse of public office, legal violations, opposition with public opinion, and acting in ways that hinder the public interest, trust, or duty.

Development Organization: An organization, either public or private, that leads the economic development and regeneration efforts in developing countries or regions of the world.

Developing Country: A country characterized by an underdeveloped industrial base, low per capita income, and widespread poverty.

Economic Development: Programs and strategies aimed at promoting growth in a part or whole of an economy.

Economic Fundamentals: The ratio of non-gold foreign exchange reserves to imports, the ratio of the current account balance GDP, growth, and inflation.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Private Sector: All enterprises that are outside of government control.

Public Sector: The economic and administrative enterprises of a local, regional, or national government.

Private Sector Development (PSD): Strategy for promoting economic development by private industries that benefits the poor in developing countries and regions of the world.

The World Bank: An international economic development assistance organization that was founded in 1944.

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Suggested Reading

Bird, G. (1996). The International Monetary Fund and developing countries: A review of the evidence and policy options. International Organization, 50, 477-511. Retrieved May 09, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9611060685&site=ehost-live

Prasad, B. (1998). The woes of economic reform: poverty and income inequality in Fiji. International Journal of Social Economics, 25, 1073. Retrieved May 09, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1206009&site=ehost-live

Shourie, A. (1973). Growth, poverty, and inequalities. Foreign Affairs, 51, 340-352. Retrieved May 09, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5811170&site=ehost-live

Silva, E. G., & Teixeira, A. A. C. (2011). Does structure influence growth? A panel data econometric assessment of ‘relatively less developed’ countries, 1979–2003. Industrial and Corporate Change, 20, 457–510. Retrieved November 20, 2013 from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=59688123