Great Land College

MA in Development Management

Course Title: Development Economics

Course Code: ECON 631

Lecturer: Firdisa Birru (Assistant Professor)

Email: helphelpless2015@yahoo.com

Firdisa Birru (Assistant Professor) 4/16/2022 1

 LECTURE 3

Economic
Underdevelopment

By Firdisa Birru (Assistant Professor) 22

 Introduction:
An underdeveloped economy is one in which
the per-capita income and the standard of
living of the people are low.
The underdeveloped economy is one which
has low per capita income, high rate of
population growth, dependence on backward
agriculture, etc as when compared to
developed economy.
In underdeveloped economy, contribution of
industrial sector to national income is very
small
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UNDERDEVELOPED ECONOMY

Low per capita income

Low standard of living

Low economic performance

Unutilised human and natural resources

Inefficient and conventional techniques

of production

Good potential prospects

Enthusiasm in its people for growth

Features of an underdeveloped economy
O Low Per capita income
O Economic inequalities
O Low levels of living
O Dependence on agriculture
O Low growth rate of per capita income
O High rate of population growth
O Features concerning foreign trade
O Vicious circle of poverty
O Unemployment and underemployment
O Deficiency of capital
O Backward techniques of production
O Backward industrial structure
 Causes of Economic Underdevelopment
O The main causes of underdevelopment of
an economy include:
 poverty; child marriage;
 illiteracy;
 high population growth rate;
 corruption;
 high dependence on agriculture;
 economic inequality;
 lack of structural, institutional, & technical
change
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 High Population Growth
O Most of the underdeveloped countries
have high population
O The man land ratio is very high
O For the population is high and growing
the per capita exploiting of resources
of a country is decreasing

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 Views on Population and
Economic Development

Pessimist Optimist Neutralist

view view view

By Firdisa Birru (Assistant Professor) 10

 Effects of Population Growth on
Economic Growth
O Population growth restricts economic growth:
The “Pessimist” theory
O Population growth promotes economic
growth:
The “Optimist” theory
O Population growth is independent of
economic growth:
The “neutralist” theory

By Firdisa Birru (Assistant Professor) 9

Effects of population Growth on Economic
Growth: Pessimists
Negative consequences of population growth on:
Economic growth
Poverty and inequality
Education
Health
Food
Environment
International migration
By Firdisa Birru (Assistant Professor) 10
Effects of population Growth on Economic
Growth: Optimists
Population is not the problem but the
following are:
Underdevelopment
Resource depletion &
environmental
degradation
Population distribution
Subordination of Women
By Firdisa Birru (Assistant Professor) 11
Effects of population Growth on Economic
Growth: Neutralists
No statistical relationship between
population and economic growth
Developing countries can take advantage
of the demographic dividend
Conclusion: No Consensus Of Opinion On
Population Growth!
By Firdisa Birru (Assistant Professor) 12
 International Obstacles
O Except few, almost all countries below the
equator are underdeveloped
O Colonization: most of the underdeveloped
countries are colonized by western for an
extended period of time like 40 years. Most of
the countries became independent after WWII
O The main problem is Resources were purchased
in local currencies and were taken to the
colonizing country
O This leads to imbalanced pricing of the export
and the import from the colonies
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By Firdisa Birru (Assistant Professor)
O Developing countries produce more of agr’l
commodities & less of industrial
commodities.
O According to the theory of dependency
the TOT in LDCs remain the same over a
period of time
O TOT is defined as the ratio of average of
country’s export to the average of
country’s import
 TOT = Av. Export price/Av. Import price
O In Ethiopia we can say:
 TOT = Av. Agr’l price/Av. Manufactured 14

price
O Singer states that TOT has declined over a
period against developing country in favor of
developed nation
O Example: In 1952 TOT = price of coffee/price
of machinery = 1000/1000 = 1
O In 2002 TOT = price of coffee/price of
machinery = 3000/10,000 = 0.3
O This means that in 1952, Ethiopia
required one tone of coffee to import one
machinery, while in 2002, it required 3
tone of coffee to import one machinery
By Firdisa Birru (Assistant Professor)
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 Why TOT goes against LDCs?
1. The demand for agr’l commodities are highly
price inelastic. That is the demand for primary
commodities does not rise as the income of the
developed countries rise!
2. Substitutes are usually found over time for
primary goods imported from LDCs.
Ex. synthetic as a substitute for leather
3. Most of the products produced in LDCs are
under perfect competition leading to low price,
where as the product of the developed countries
are under imperfect competition, which leads to
higher prices
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By Firdisa Birru (Assistant Professor)
4. LDCs produce with cheep labor, than the
industrial products thus experience low price
5. The production of LDCs are highly
dependent on nature like rainfall, hence
seasonal variation is highly exhibited, which
challenges the competitiveness, uniformity &
sustainable supply, etc.
That is why Singer says, stop relying on
agriculture and go for industrialization

By Firdisa Birru (Assistant Professor) 17

 IT and the theory of Immiserizing growth
O Developed by J. Bhagwati, an Indian born American
economist
O This is developed against the international trade
theory that says, countries engaged in trade will
mutually benefit
O the international trade by depending on the
agricultural sector adds misery to the country than
welfare gain b/c the terms of trade for agricultural
commodities decrease from year to year in relation
to the industrial commodities
O Specializing agriculture will bring net welfare loss to
a country, hence adds misery to the country and nor
welfare By Firdisa Birru (Assistant Professor) 18
 Immiserizing growth …
O UNCTAD (United Nations Conference on Trade
and Development) has developed two strategies:
Inward looking Strategy: a strategy in which a
country attempts to depend on itself for
development
 Such policy applied is called self-reliance
 Such policy is also called import substitution
 Important substitution does not mean complete
closure of the door, but minimum level or survival
level of import.
By Firdisa Birru (Assistant Professor)
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Outward Looking Strategy: a strategy in
which a country looks to depend on another
country, say for international trade through
export of a commodity for development.

By Firdisa Birru (Assistant Professor)

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 Theory of Cumulative Circular causation
O A theory developed by Swedish economist
Gunnar Myrdal in the year 1956
O He wrote a book called economic theory and
underdevelopment.
O In his book Myrdal questions the applicability of
international trade theory to developing
countries
O He argues that the international trade leads to
further impoverishment of LDCs and
development of the developed countries
O That is the poor become poorer and the rich
become richer. By Firdisa Birru (Assistant Professor)
21
O International trade releases two effects
1) Spread effects: effects that are beneficial and
conducive to the developing countries
a) Trickle down effect: That is the spread of
benefits of trade from developed to other
regions. That is the benefit effect is not
confined to the region alone, rather it spreads.
b) Hinter Land: a land surrounding development
regions that supply resources to the developed
region.
O Trickle down effect and Hinter Land are
called the spread effects.
By Firdisa Birru (Assistant Professor) 22
 2. Backwash effect:
O this is the negative effect of international trade.
O Myrdal says, the negative effect of international
trade is greater than the positive effects.
O Cumulative Causation: if a developed country
trades with LDCs, it washes away the
purchasing power of the Hinter lands because of
two reasons
a)The factors of production drawn from the hinter
lands are low priced.

By Firdisa Birru (Assistant Professor) 23

 Cumulative Causation…
b)Manufactured products are drawn from the
developed countries to the hinter land as a
damping place which leads to the
deindustrialization of the poor countries.
O Hence, they are forced to remain dependent on
the developed countries.
O Thus trade does not lead to equitable
distribution of income

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By Firdisa Birru (Assistant Professor)
Thank You!

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