Economic Issues Facing Developing Countries - Iloka Benneth Chiemelie, Ehumadu Chika

ECONOMIC ISSUES FACING DEVELOPING COUNTRIES

Kindleberger argued that economic development theories could not be compared to economic growth theories, as the latter is simple, elegant and easy to explain. On the other hand, economic development theories are very complex and chaotic – more or less like the mass poverty which they attempt to come in terms with (Herrick and Kindleberger, 1988, p. 48). Development amongst countries is determined by their productivity level, trade and investment rate. Developing countries face numerous economic problems, as will be discussed below.

ISSUE OF POVERTY

At the world summit for social development held in Copenhagen in 1995, it was highlighted that poverty has been steadily increasing since the 1980s, especially in developing countries; and they now make up to one-fifth of the world population. In 1988, the percentage for poverty was found to be 61 percent in Latin America, 60 percent in sub-Saharan Africa, 31 percent in Asia and 26 percent in North African and the Middle East. This decrease is as illustrated in figure (1) below.

Figure 1: Poverty rates for the developing world 1981-2005

Source as adapted from: World Bank (2006)

Khan (2000) argued that almost 63 percent of the world poverty is found in developing countries, ranging from 65 and 90 percent in sub-Saharan Africa, China and Bangladesh. Todaro and Smith (2003), found that about two-third of these people under rural poverty are either small farmers or low-income farm workers dependent on subsistence agriculture.  Some of the rest engage in non-farm activities such as petty trading and service, and self-employment.

Earlier studies on poverty in developing countries can be traced back to 1970s (Esman, 1978; Eckholm, 1979). From the mid-1980s, Khan extensively studied poverty in developing countries (Khan, 1986, 2000, 2001). He identified major causes of poverty as the political environment, gender inequality and discrimination, race, ethnicity, religion and beliefs, ill-defined property rights giving unfair disadvantages to tenants, corrupt political system and/or bureaucratic red tape, large family size resulting in high dependency ratio, and national economic and biasness in social policies.

Poverty has numerous economic demises, as they can result in various forms of inequality in the society, lead to all sorts of crime and thus jeopardize the economic system of any given state. As the gap between the rich and poor continues to increase in developing countries, couples with the high digital divide that offer the rich with all necessary tools needed to live a poor life and the poor with more misery and ill-heaths, the poor in the society constantly struggle to survive. This struggle to survive can lead them to do all sorts of illegal and criminal activities such as armed robber, bribery and corruption, assassination, drug traffic and murder in other to make a living. This on the other hand, causes high investments from the government on social security and protection to its residents, and limits foreign direct investment as international companies are less reluctant to invest developing countries due to high crime rate and political instability which are also partly caused by high poverty rates (World Bank, 2000/2001, 2003).

In other to alleviate rural poverty in developing countries, effort must be made to increase the share of income of consumption by the low-income earners in the population. Therefore, any government policy aimed at redistributing income in favour of the poorest segments in the society will be beneficial in reducing rural poverty. Introduction and encouragement on the use of contraception and increasing female adult literacy level rate will also help in breaking the vicious cycle of high fertility-increased rural poverty in developing countries.

 ISSUE OF PRICE (COMMODITIES) FLUCTUATION

Large parts of economic system in many countries, both developing and developed are formed by micro and small sized enterprises. These enterprises are considered by various researches as the main source of economic development in these countries (Stel et al., 2005; van Praag and Versloot, 2007; Karadeniz and Go¨c¸er, 2007; Acs et al., 2008b; Beck et al., 2005; Acs et al., 2008a). The main reasons are the contributions these enterprises make in gross domestic production (GDP) in these countries, and creation of employment. These enterprises constitute an independent entity, managed by the owner/manager and active in a limited niche market (Filion, 1990).

The desire of most nations is to achieve stable economic growth as their major macroeconomic goal. Economist and policy makers have been given the task to find ways to sustain economic development, but history has it that long-run economic growth has never been stable. This issue coupled with hikes in petroleum prices and fluctuations in international exchange rates are dampening economic growth of developing countries. Since majority of the developing countries depend on importation to carry out their business activities, economic fluctuation leads small medium enterprises to either shut down or lay off their staffs. This results in ever increasing unemployment in developing nations.

Price fluctuation occurs in three broad ways. They can be as a result of influence on cyclical income fluctuation in developing countries, which is a result of the broad movement of general business cycle. Secondly, it can take the form of short-period fluctuation which is primarily as a result of poor harvest caused by weather conditions variation. Finally, it can be as a result of shifts in either demand or supply which are accentuated by speculative trade. No matter what the cause is, fluctuation has been found to take catastrophic dimensions in developing countries when they occur (Dragoslaw, 2007).

As SMEs play major roles in economic development, death of these enterprises affects the national economies of developing countries to a large extent as they usher in an increased problem to the government – which can include high investment in job creation and borrowing of from the IMF; this will end up increasing the national debt and putting the nation into further unpredictable financial crises. A good example is the recent economic recession of 2007/2008 which left most of the developing nations in economic ruins, due to their over dependence on importation.

In other to sustain a sort of economic balance in developing nation, the government will need to invest in education and training programs. Programs designed to education the nation on skills needed to manufacture their own goods and less dependent on importation. This will increase job opportunity and sustainability, as business will be forced to adjust to any given economic situation following the fact that they are independent of other nations in terms of production and service provision. By reducing importation rate, the government will increase their productivity level and economy in return; this will offer the nation a sort of economic stability both for short- and long-run economic growths.

LIMITED INTELLECTUAL CAPITALS

The need to compete effectively on cost is driving many firms based in developed countries to source from developing countries with low cost structures. There is no doubt that this trend leads to economic development in the chosen developing countries especially when these firms chose foreign direct investment as their mode of entry. There are certain factors that firms take into consideration when employing staffs including – cost, delivery, reliability and intellectual capital (Tracey and Tan, 2001; Kannan and Tan, 2002; Bolumole et al., 2007). Low cost has been the primary driver for sourcing from developing countries – because both the cost of operation and salary wages are cheaper compared with those available in developed countries.

Although the developed nations are benefiting from this, because they lower their production cost thus increasing their profit and producing more for less operational costs, it must be argued that this is eluding the developing countries with available intellectual capitals. This is because, with increasing unemployment, many skilled and talented individuals are moving from developing countries to the developed countries in search of greener pastures. Please see appendix (1) for statistical evidence. This leaves developing countries with less available skills to choose from, thus in other to ensure stable operation of their day to day business, so much investment is pumped into training and development to ensure that the staffs gain required skills. Other expenses come in the form of sourcing from developed countries and this usually incur high wages as they must offer better than these staffs are paid in their country of origin. This has negative effect on the economy, as it lowers economic development because the industries available lack the needed skills and must invest heavily to acquire these required skills; which many companies in developing countries are reluctant to do.

In other to combat this situation, the government should developed policies targeted at ensuring that their most valued intellectual capitals are not outsourced. Policies such as increasing minimum-wages, investment in entrepreneurship to ensure constant development of required skills, and reducing unemployment rate so that fewer personnel would be willing or tempted to move abroad for employment.

LOW ENTREPRENEURIAL CAPACITY

Even with increasing research on graduate entrepreneurship in developed countries (Kolvereid, 1996; Krueger et al., 2000; Scott and Twomey, 1988), there is still a high paucity of research on entrepreneurial intentions and education in developing countries. One way of building an in-depth understanding of entrepreneurship in developing countries as research suggest is through multi-country samples and contrasting developing countries with developed countries (Bruton et al., 2008). Developing countries are characterized by middle-income economies according to the classification propose by World Bank (2011).

The benefits of entrepreneurship to an economy vary depending on its phase of economic development (Wennekers et al., 2005). In accordance with Porter et al (2002), main phases of economic development are distinguished based on the country's GDP per capita and share of primary goods relative to total exports: factor-driven, efficiency-driven and innovation-driven. Developing countries are normally in the efficiency-driven stage, and entrepreneurship supports industrialization in developing countries pursuit of higher productivity and economies of scale (Bosma and Levie, 2009).

Nevertheless, with limited resources and low funding from the government; less people are willing to go into entrepreneurship, as they lack the needed support and fund required to open or run business. Majority of individuals venturing into entrepreneurship end up folding their businesses, as they lack the intellectual capital needed to run a successful business. This has been linked to lack of well-equipped academic institutions needed to develop successful entrepreneurs.

This government have a big role to play in ensuring that this issue is limited. Considering the impact of entrepreneurship on the economy, it can be argued that ain investment pumped into promoting entrepreneurship is worthwhile. Thus, the government should invest in academic institutions to ensure that their citizens are trained and equipped with the skills needed to run a successful business. The government should also provide financial funding and support to entrepreneurs in other to increase entrepreneurship intentions within residents of the country as this will ensure stable economy in the long-run.

INCREASING NATIONAL DEBT

With high dependency on importation as means of survival in developing countries, these countries are forced to spend more than they have. Thus, it results in high borrowing and loaning from international monetary funds (IMF) (Karadeniz and Go¨c¸er, 2007; Acs et al., 2008b). The dependency on loan is high, as most developing countries lack sustainable economy and must loan in order to ensure economic stability (Tracey and Tan, 2001). Some of these loaned capitals are intended for investment on economic development, but, corruption and political instability leads to miscues of these funds.

As developing countries continue to borrow more and produce less, coupled with fluctuations in national currencies, they are left in mess of national debt. Mauritius a relatively low income state in Africa is a good example, as their national debt increased from 8% in 1988 to 15% in 2009, almost double the initial amount. This increase as recorded by the IMF is partly due to increasing United States dollar value and depreciating Mauritius dollar value. The government can reduce national debt by controlling corruption level, this will ensure proper use of funds and returns on investments which will be used to settle the national debt.

In conclusion, the above arguments and analyses highlighted some of the economic problems face by developing countries. It can be seen that these problems lower development level and can result in some other social issues such as poverty, unemployment and high rise in crime rate. Nevertheless, it has also been pointed out that the government can apply strict policies and regulations to reduce or eliminate all or some of these economic problems. Some of the policies that would ensure better economic development in developing countries were also pointed out in this research, thus making the argument valuable and informative.

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