Features of developing countries economic structures
Developing countries are usually defined as a country with low Gross National Product (GNP) per capita, the opposite of an industrial country. In terms of common traits, these economies differ substantially from the industrial country's economic structures. Many developing countries have or are on the verge to reform their economies to look more similar to the structures of the industrial economies, and on that trajectory share common features. The common structures that developing countries share are the traits of extensive direct government control of the economy, including ownership or control of large industrial companies, control of internal financial transactions, restrictions on international trade, and a high level of government consumption of the total Gross National Product. No comprehensive or single list can explain the “typical” features of the economic structures for all developing countries, but most developing countries tend to be structured by at least a few of the following structural economic features:[1]
1. There is a tendency and history of profound government control of the economy. This includes measures like government ownership of the companies and firms that consist of large parts of the economy, restrictions on international trade, direct control of financial transactions, and state consumption are a large part of the countries GDP.[1]
2. Another key trait is that the country has a history of high inflation. Due to a high level of government consumption of the total Gross National Product many developing countries are unable to make due to their heavy expenditures and losses from government-owned companies through taxes. As a result of the high levels of corruption, tax evasion is common, and vast parts of the economy are driven underground many governments print money to stimulate the economy. Seigniorage is the term that economists have given this phenomenon when governments print money to spend on public goods and services. In return developing countries experienced inflation and even hyperinflation since the government’s expansion of printing money continually to extract high levels of seigniorage resulting in inflation.[1]
3. Weak credits institutions combined with liberalized domestic financial markets. Weak credits institutions are characterized by ineffective safeguards against financial fragility, like bank supervision, and other means to curb corruption. This leads to those loans could be based on clientelism and patronage and that the funds are financed to risky and poor projects. Furthermore, in comparison to developed countries, developing countries are more fragile to a crisis. This is due to the inefficiency to direct savings to the most critical and vital investment uses.[1]
4. The exchange rate in developing countries tends to be more structured and managed by the government in comparison to developed countries. There is a history of limiting the flexibility in terms of the exchange rate in order to keep the inflation under check and due to the fear, that floating exchange rates are affected by volatility in relation to the fragile and thin markets of developing-country currencies. Furthermore, developing-country governments are more prone to exchange control where they are allocating foreign exchange through decree rather than doing this through the market. This is done through the control of capital movements by restricting foreign exchange transactions tied with trade in assets. Although, more recently, the trend is that developing country's markets have opened their capital accounts. [1]
5. Natural resources or/both agricultural commodities are a vast part of the exports of the country’s economy. For example, Liberian iron oak, South African gold, Malaysian timber, and Colombian coffee. [1]
6. Finally, one overarching trait is the circumvention of the government regulations and taxes, this has created a corrupt business climate where extortion, nepotism, and bribery are common features. But even though, as research states, the development of bottom-up economic activity has stimulated economic efficiency by building a fundamental degree of market-based resource allocation, it is distinct that poverty and corruption correlate. [1]
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