Rather than take the three-world view, economists classify the world's economies as:
Each of these types of countries has fairly specific characteristics, and economic issues, which we examine in this section. The countries also are classified by their level of income, which we'll look at after we examine their economic characteristics and issues.
An industrialized economy has a large base of productive capital, sophisticated banking systems and financial markets, a variety of industries producing a broad range of products, and vigorous and varied international trade. Industrialized nations also have well established systems of government and law, and provide educational opportunities for their people.
The G-8 includes the G-7 plus Russia, which may best be described as an economy in transition. The transition will take Russia from a planned economy to a free-market, capitalist economy. The central planning structure has been dismantled, but the transition to a successful market economy is still in progress. In that sense, Russia is also a developing economy.
The term sustainable growth refers to economic growth based on renewable resources (and efforts to renew them) and minimal environmental degradation. You will often hear about efforts to achieve sustainable growth in an economy or in the global economy.
The countries in the Group of Seven (G-7) have the most industrialized economies. The G-7 are the United States, Canada, Japan, Germany, France, the United Kingdom, and Italy (with Germany, France, the United Kingdom, and Italy comprising Europe's so-called Big Four). However, the entire EU—which also includes Austria, Belgium, Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal, and Spain—and some European nations outside the EU, such as Switzerland, Sweden, and Denmark, are also industrialized. So are Australia, New Zealand, and Taiwan.
Less than 20 percent of the world's population lives in industrial nations, and they account for about 70 percent of world output. That fact—and the income inequality that it generates—creates some of the questions these countries face, such as: What is the realistic and responsible role for developed nations to play in the economies of less developed nations? What are the moral and ecological implications of using such a large share of the earth's resources (relative to the share other nations use) to sustain the levels of production and growth that industrial nations have achieved? What, in fact, constitutes sustainable growth, and is it achievable?
Industrialized economies also face the problems of maintaining low unemployment and inflation, choosing the optimal mix of public and private goods, and coping with domestic poverty, crime, and disease. Also, the United States, Japan, and Western Europe are experiencing record low birth rates coupled with longer life expectancies. This translates to a “graying” of the population, in which older people will come to outnumber younger people. This holds serious implications for funding their retirement and health care, as we saw in our look at the U.S. Social Security system in Hey, Big Spender! The Federal Budget.
On top of all this, the threat of terrorism, mainly from Islamic extremists from less developed countries, may well represent the most difficult and dangerous problem for industrialized nations, particularly the United States.
Newly industrialized nations (NICs) have a rapidly growing base of productive capital and rising incomes. Most of these nations have sound governments and banking and financial systems, although they may occasionally be subject to financial or political dislocation. For instance, Brazil is weighed down with international debt and must work hard to control inflation. Pakistan may face political instability and a shaky relationship with neighboring India.
Newly industrialized nations include Hong Kong, Singapore, Taiwan, and South Korea—which are known as Asia's “Four Tigers”—Pakistan, Malaysia, Indonesia, Thailand, Mexico, Brazil, Chile, Venezuela, Israel, South Africa, and Hungary.
Less than 5 percent of the world's population lives in NICs, and they earn less than 5 percent of the world's income.
The Four Tigers followed a strategy of export-oriented industrialization, in which they moved from the status of developing country to that of NIC in the 1970s and 1980s. These nations ambitiously took Japan as a role model, but concentrated on light manufacturing. The Tigers have been held up by the World Bank and the International Monetary Fund as models for other developing and underdeveloped nations. However, export-oriented growth isn't possible for every nation, especially when other nations, including China and some industrialized nations, still engage in protectionism.
NICs face a variety of problems, depending on their specific situations. One common issue is financing growth. How much can and should they rely on foreign borrowing? How much money for capital investment can they reasonably expect to generate themselves? A number of newly industrialized countries need more sophisticated banking and financial systems, and more stable governments.
Some NICs are moving from economies based on producing and exporting natural resources to producing and exporting manufactured goods. Diversity of exports is both the mark of an industrial economy and a stabilizer of any economy. But this transition can be difficult, especially for nations such as Venezuela and Mexico, which export oil and have come to depend on the large revenues that oil exports produce.
Developing nations range from the poorest in the world to those that have begun to build an industrial base, but have yet to achieve stable growth in production and income. These economies are also called underdeveloped, undeveloped, and, most commonly, less developed countries (LDCs). A number of these nations have large, growing urban populations and serious difficulties with unemployment, crime, and poverty in the cities.
The Organization for Economic Cooperation and Development, which I'll discuss later in this section, includes the following nations in its official list of less developed countries:
The People's Republic of China could be considered an LDC. However, most economists view the PRC as a special case because it is beginning to industrialize but still relies heavily on small farms.
This list literally covers a lot of ground, and includes some nations that some economists would classify elsewhere. For example, Cuba is by many measures a less developed country, and while Portugal, Spain, and Greece are poor by European standards, they are wealthy compared with most nations of Africa. Regarding the Middle East, many economists think of Israel as an industrialized nation, albeit one that uses significant amounts of foreign aid.
Most economists also place the oil producing nations of the Middle East in a separate category. OPEC nations suffer serious internal income equality and have not diversified their industrial base significantly beyond oil production. But it's difficult to think of Saudi Arabia, with per capita income of about $7,000 as being in the same category as Ghana, with per capita income of $400.
Many less developed nations experience intense periodic political upheaval, including war, as well as natural disasters, such as drought and hurricanes. Most of them depend on small scale commercial farming, which produces exports such as coffee, bananas, and timber, and on subsistence farming, in which people grow their own food.
The staggering array of economic problems in truly less developed nations includes lack of skills, productive capital, organized financial markets, commercial diversification, transportation and communication infrastructure, technological infrastructure, capital formation, stable currency, and stable government. The poverty in many of these nations results in lack of food, clothing, housing, health care, education, and even drinkable water and basic sanitation.
Virtually all less developed nations receive some forms of economic aid and assistance. Yet the extent and persistence of their internal economic and political problems render this help almost symbolic.
Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.