Countries can be classes as developed economies or developing economies, based on how high their GDP per head is.

Developed economies are high-income countries, with mature markets, high standards of living and high standards of productivity.

The term developing economy can refer to a wide variety of very different countries, often with differences due to their geographical location. The problems faced by sub-Saharan African countries for instance, can be quiet different to those faced by developing countries in Asia. There can be consistency though, in terms of suffering from poverty cycles as shown in the diagram below:

Emerging economies refers to economies with high rates of economic growth that are expected to give high rates of return on investment, whilst carrying a greater risk than investment in developed economies.

Classification according to income

The World Bank classifies every economy as low income, lower middle income, upper middle income or high income, according to the value of GDP per head or GNI per head. Countries move each year, with Russia, Chile, Lithuania and Uruguay beconming high income countries for the first time in 2013. The thresholds are also updated to reflect inflation to keep them constant in real terms over time.

Classification according to level of external indebtedness

A country may be severely indebted, moderately indebted, or less indebted. This depends on a number of measures, the most important of which is the proportion of GNI devoted to servicing the debt. Economists also measure the ratio of debt services to exports. If debt service exceeds 80% of GNI or 220% of exports, then the country is considered severely indebted. If either of these ratios reach 60% of the critical level, a country is considered moderately indebted.

The fact that this is used as a measure highlights the impact of indebtedness on economic development, as scarce resources are directed away from health, education, infrastructure and poverty relief towards interest payments.

Classification according to economic structure

Economic activity is classified within four sectors:

• Primary sector: Includes agriculture and commodity extraction (e.g. oil, gold, mining);
• Secondary sector: Includes all manufacturing and construction industries;
• Tertiary sector: Includes all service industries except for:
• Quaternary sector: Knowledge based services such as education, financial planning, ICT, the media and R&D.

Developing economies often have a high dependence on the primary sector, making them vulnerable to volatility (e.g. due to weather for those dependent on agriculture and due to international demand for those dependent on commodity extraction).

As an economy develops, the secondary sector becomes more prominent, and eventually the tertiary sector usually makes the largest contribution to their output. A smaller proportion of the economy’s labour force is employed in the primary sector, however due to higher labour and capital productivity, the total value of the sector’s output may increase. The below table compares the economic structure of some developing, emerging and developed economies:

Classification by population growth & population structure

Developing economies typically have high rates of population growth, sometimes due to a need for children to support parents in their old age, a lack of availability of contraception, relatively low costs of raising children and a relatively low labour force participation.

Some economists apply Malthusian Theory as initially suggested by Thomas Malthus in 1798 to developing economies. This theory suggests that population grows in geometric progression, whereas the quantity of food produced grows in arithmetic progression. He suggests this because land is in a relatively fixed supply and using increasing quantities of labour in production leads to diminishing marginal returns.

Malthus suggested that various checks kept the population level in line with the available food supplies. These included what he termed positive checks which increased the death rate, such as epidemics, diseases and war, and preventative checks which decreased the birth rate, such as delaying marriage and using contraception.

Malthusian Theory is criticised as not recognising the impact of technological changes on food production and distribution.

Malnourishment and famine, however, remain significant problems in many developing countries. These come from various factors, such as uneven distribution of world resources, poor agricultural management, vulnerability to supply shocks such as floods and droughts, and an inability to respond to them.

The high birth rate in developing countries leads to a low average age and a high proportion of dependent non-productive members of the population (children). These countries are said to have high dependency ratios meaning that a proportionally smaller working population must produce enough goods and services to sustain themselves and a large number of economically dependent children.

Developed economies, by contrast, often face the problem of an ageing population, due to a decreasing birth rate and a decreasing death rate. This also leads to high dependency ratios, and also increases the cost of health care and pensions. Some governments have tackled this by increasing the retirement age.

Economists define optimum population as such where the output per head is greatest, given existing quantities of the other factors of production and the current state of technical production, as illustrated below:

If a country is underpopulated, increasing population can make better use of the other factors of production such as land and capital, due to increasing returns. When it passesthe optimum level and decreasing returns are being experienced, we can say it is overpopulated. Naturally, in reality the situation is more complex, with technical knowledge constantly changing and improving as well as other factors of production constantly changing so that the optimum population is not a fixed entity.

Task – Population Demographics

Classification by income distribution

Some developing countries are characterised by an uneven distribution of income, partly because income generating assets, in particular land, are owned by very few. This can lead to great extremes of rich and poor, particularly in Southern America and Southern Africa. By contrast, income is relatively evenly distributed in Scandinavian Europe.

With the exception of Slovenia and the Czech Republic, the transition of Eastern European countries from centrally planned to market economies increased inequality as a small number of people benefitted disproportionately from new opportunities.

Classification according to external trade

For many developing countries, primary products account for most of the export revenue that they earn. This makes them vulnerable in trading, as demand, and especially supply, can fluctuate significantly. As a result, the market for primary products experiences frequent and large fluctuations in price. Demand for many primary products, particularly food, is also income inelastic, whereas demand for manufactured goods is income elastic. As a result, primary goods tend to become relatively cheaper than manufactured goods as world incomes rise. Hence, terms of trade of primary goods tend to decline relative to manufactured goods, known as the Prebisch-Singer hypothesis.

Classification according to urbanisation

Developing economies often have a relatively high proportion of their population living in rural areas. However, they also often experience rapid rates of rural-to-urban migration. This migration can put pressure on infrastructure, housing and schools in urban areas.

Task – Demographics

Emerging Economies

Between 1990 and 2014, emerging economies share of global GDP rose from less than a third up to one half. Most significant growth was observed in the four BRIC countries. Below we see how their growth compared with those of four developed economies: