Developed and Developing Countries - What Indicates the Difference?
The world is an ever changing place which means countries are in a constant state of economic flux. One can generally find two subsets of countries - developed and developing. While developed countries are simply more stable or have reached some level of economic saturation developing countries see large policy changes and times of instability, but both are still trying to grow. So, how do these two groups grow? What factors are responsible?
We all remember the financial crises of 2007-2009; we also remember the ripple effects it had on the world economy, with a recession burning deep into any progress we had made in past decade towards world development. But, one may question, why were the effects so widespread? Why was an individual working for a corporation in a developing country affected by the actions of individuals in the US?
The answer? Because of how intertwined world economies have become. Developed countries, including the US now recognise the power of developing economies, teeming with knowledgable individuals, pushing the collective consciousness of the workforce daily. Think about this: the CEOs of Microsoft and Google, two spearheads in the technology market, are of Indian origin. Developed economies like the US have accepted the power that developing economies harvest, but they also understand the need to cultivate that power.
Economic theory as old as day suggests that developing countries run a budget deficit, meaning they save less and invest more. This investment source is often a financially stronger company or in many cases, a country. This entity invests in a developing economy, projected for growth, and waits patiently as the action churns out hungry, talented individuals. As an additional incentive, labour in these countries is often low-cost.
With this increasing trend in diversification of assets, is it not natural then that the effects of the financial crisis would be felt globally? The real question, and one that is begging for an answer, is that if developing countries had to pay the price (in the form of a recession) due to the actions mainly of richer entities, are they gaining any benefits from the same entity’s actions? Rephrased, the question we should be asking is are any of the enthusiastic investments making a real difference in the lives of individuals in developing economies?
In this report we embarked on a detailed exploration between two groups: developing and developed economies. We use GDP as the measure of economic growth and through analysis of the raw data trends and subsequent modelling identify key variables that separate the two groups when it comes to growth.
We first looked at macroeconomic variables: the big metrics that we often see in magazines such as The Economist. We found that developed economies have more stable, and higher, rates of GDP, suggesting stable growth levels. As for developing economies, we see a strong correlation between Foreign Direct Investment(FDI) and GDP, suggesting that our initial hypothesis, of investment playing a big role in development of regions, was not far from reality. FDI can be defined as investment made by entities, usually into developing countries, with the purpose of expanding their operations. Results for this can be seen in the following figure:
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Using this insight, we dived further into what makes the FDI ‘tick’. We tested models pitting FDI against other macroeconomic covariates and found that FDI was a significant variable in developing countries, but not so much in developed countries. This makes sense, since developed economies have stable growth rates and do not require much foreign investment.
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While this was satisfying for us to see how FDI related to development levels, our analysis was not yet finished. We set out trying to find the main determinants of growth particularly for developing economies and we realised that we were looking in the wrong place altogether. For the effects of any investment of development measure to reach the macroeconomic metrics (such as GDP) takes many years (due to a phenomenon called the Multiplier Effect). Instead, we realised, there is a struggle for more basic necessities and quality of life problems in developing regions.
So, we refocused our analysis on microeconomic variables, ones that affect individuals in a rural setting. These included covariates such as: mortality rate, access to drinking water and rural population among others.
What we found, was disturbing. We found a high level of correlation between mortality rates and unemployment in developing regions. We interpreted this as the workings of a poverty trap; one in which unemployed individuals cannot provide access to adequate healthcare and educations, necessary for survival. All of this results in infant deaths.
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This analysis started off as an exploration of microeconomic factors that have links to the development of an economy (with unemployment being the key measure of development.) However, our analysis has transformed our point of view on discussion of development. In developing economies, our data has uncovered the codependant relationship of unemployment and infant moralities, a grim reality that many infants in developing economies die from inadequate care and provision. Even in developed settings, a large rural population which is not exposed to the advanced level of healthcare that the environment provides will cause higher infant deaths. Our goals shifted from a discussion on unemployment as a grassroot level to the unceasing reality of inadequate child protection.
This analysis threw many unforeseen questions at us and made us face unnerving realities, with our data confirming our fears.
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Here is a link to a website we created detailing our explorations, analyses and conclusions.
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