CHAPTER 2

1. Structural Features and Common Characteristics of the Third World

1.1 Common Characteristics of Developing Countries

Common characteristics of the third world are

 Low per capita real income
 Low per capita real income is one of the most defining
characteristics of developing economies.
 They suffer from low per capita real income level, which results in
low savings and low investments.
 It means the average person doesn’t earn enough money to invest
or save money.
 The percentage of people in absolute poverty (the minimum
income level) is high in developing countries.
 1.1 Common Characteristics of Developing
Countries……..
High population growth rate/size
 Another common characteristic of developing countries is that they
either have high population growth rates or large populations.
 Often, this is because of lack of family planning options, lack of
sex education and the belief that more children could result in a
higher labour force for the family to earn income.
 This increase in recent decades could be because of higher birth
rates and reduced death rates through improved health care.
 High rates of unemployment
 In underdeveloped countries, there is vast open unemployment and
disguised unemployment.
 The unemployment is spreading with urbanisation and the spread
of education.
 However, unemployment is a more complex problem requiring
policies beyond traditional fixes. Disguised unemployment is a
 1.1 Common Characteristics of Developing
Countries……
 Dependence on primary sector
 Almost 75% of the population of low-income countries is rurally
based and their livelihood depends on agriculture.
 As income levels rise, the structure of demand changes, which
leads to a rise in the manufacturing sector and then the services
sector.
 Dependence on exports of primary commodities
 Since a significant portion of output originates from the primary
sector, a large portion of exports is also from the primary sector.
For example, copper accounts for two-thirds of Zambia’s exports.
 An underdeveloped country’s weak export capacity relatively to
its strong import needs is reflected in its persistent external
indebtedness.
 1.1 Common Characteristics of Developing
Countries……
Lower Levels of Human Capital
 Human capital (i.e. education, health and skills) are of crucial
importance for economic development.
 There is great disparity in human capital among the developing
and developed countries. The developing countries lack in human
capital that is responsible for low productivity of labour and capital
in them.
Underdeveloped Natural Resource:
 The natural resources of an underdeveloped country are
underdeveloped in the sense that they are either unutilized or
underutilized.
 Although a country may be poor in resources, it is just possible
that in the future it may become rich in resources as a result of the
discovery of presently unknown resources or because new uses
may be found for the known resources.
 1.1 Common Characteristics of Developing
Countries……
Health:
 Health is a key factor that determines efficiency or productivity of
the people. The people who are undernourished and malnourished
often suffer from sickness cannot be efficient and cannot contribute
much to the increase in productivity.
 Besides, health enjoyed by the people is good in itself as it directly
increases the happiness and welfare of the people, Lower health of
the people of developing countries is manifested lower life
expectancy at birth, higher mortality rate of children under five
years’ age, undernourishment and malnourishment (i.e.,
underweight children) of the people and access to improved
sanitation facilities.
 1.1 Common Characteristics of Developing
Countries……
Dualistic Structure
 An important feature of developing economies, especially those
which are marked by surplus labour is that they have a dualistic
structure.
 This dualistic character of these economies has been held to be the
cause of unemployment and underemployment existing in them.
Keeping in view this dualistic structure of less developed
economies, important models of income and employment have been
propounded.
Economic Backwardness
In underdeveloped countries particular manifestations of economic
backwardness are low labour efficiency, factor immobility, limited
specialization in occupation and in trade, economic ignorance, values
and social structure that minimize the incentives for economic change.
 1.1 Common Characteristics of Developing
Countries……
Lack of Enterprise and Initiative
There exist a few entrepreneurs who are engaged in the manufacture of
some consumer goods. The thin supply of entrepreneurs is also
attributed to the lack of infrastructural facilities which add to the risk
and uncertainty of new entrepreneurship. LDCs lack in properly
developed means of transport and communications, cheap and regular
power supply, availability of sufficient raw materials, trained labour,
well-developed capital and money markets; etc.
Insufficient Capital
Underdeveloped countries are characterized as capital-poor or low-
saving and low-investing economies. There is not only an extremely
small capital stock but the current rate of capital formation is also very
low. The root cause of this capital deficiency is the problem of under-
saving or that of under-investment in productive instruments capable
of increasing their rate of economic growth.
 1.1 Common Characteristics of Developing
Countries……
 Technological Backwardness
 Underdeveloped countries are also in the backward state of
technology. Their technological backwardness is reflected, firstly, in
high average cost of production despite low money wages.
 Secondly, in high labour-output and capital-output ratios as a rule,
and on the average, given constant factor prices thus reflecting a
generally low productivity of labour and capital.
 Thirdly, in the predominance of unskilled and untrained workers;
and lastly, in the large amount of capital equipment required to
produce a national output.
 1.2 An Overview of the Diverse Structure of Developing Countries

The structure of Third World/developing Countries will be evaluated

by considering the (1) size of the county, (2) historical back-ground of
the country, (3) resource endowments of the country, (4) relative
importance of public and private sectors in the country, (5) nature of
industrial sector in the country. (6) degree of dependence on external
economic and political forces, (7) distribution of power in a country,
(8) ethnic and religious composition
 Size and Income Level: The physical size of a country, its
population and its GNP per capita are the important determinants of
the economic position of a country.
 Out of 160 UDCs (UN Classification) 87 had fewer than 5 million
people, 58 fewer than 2.5 million. There were 38 countries whose
population was less than 5 lac.
 The large and high countries have more resources, extended
markets and they have lesser dependence on foreign sources and
 1.2 An Overview of the Diverse Structure of Developing Countries..

 Historical Background:
 Most of Asian and African Third World Nations have been the
colonies of England, France, Germany, Spain and Holland etc.
 The economic, social educational and institutional structures of the
poor countries have been moulded by their former colonial rulers.
 These rulers introduced three important and tradition-shattering
ideas: (i) private property, (ii) personal taxation, (iii) money
taxation, rather taxation in kind.
 These ideas helped in eroding the autonomy of local communities,
and they also developed certain other ways of exploitation
 1.2 An Overview of the Diverse Structure of Developing Countries..

 The Latin American countries are furnished with a longer history of

political independence and Spanish and Portuguese Colonial
heritage.
 This shows that though the Latin American countries differ in their
size and resources, yet these countries are similar in respect of
economic, social and cultural institutions and face similar problems.
 Physical and Human Resources:
 The economic potentialities of any country depend upon its physical
and human resources.
 The Third World Countries differ in respect of physical resources. As
the Gulf States are rich in oil, heavy endowments of natural
resources. While the countries like Bangladesh, Haiti, Yemen,
Ethiopia, Chad etc., are highly deficient in natural resources, oil and
fertile lands.
 1.2 An Overview of the Diverse Structure of Developing Countries..

 Relative Importance of the Public and the Private Sectors:

 Most of the UDCs have "Mixed Economic Systems" i.e., they
depend upon a mixture of public and private sectors in respect of
allocation of resources and production of goods.
 The historical and political circumstances would determine their
role in an economy. Generally, one finds the greater role of private
sector in Latin American and South East Asian countries as
compared with African and South Asian Countries.
 Again, in certain UDCs there is a greater role of foreign investment
like Malaysia, Singapore, Thailand, Taiwan and Gulf-States etc.
While in case of Pakistan, Bangladesh, Ethiopia, Chad and other
African countries the foreign private investment has never been
attractive
1.2 An Overview of the Diverse Structure of Developing Countries..

 Industrial Structure:
 In case of most of LDCs the main occupation is agriculture. Thus
the people's economic, social and cultural life is highly
influenced by agrarian set-up.
 Again, as far as industrial structures are concerned they also
differ in the developing countries. The Latin American countries
which have a long history of independence and their incomes are
higher than African and Asian countries follow advanced
techniques of production in their industrial structures.
 India has the largest manufacturing sector in the Third World
countries. However, it is small in relation to the country's big
rural population. On the other hand, Afghanistan, Bhutan and
Chad lack the industrial set-ups.
 1.2 An Overview of the Diverse Structure of Developing Countries..

 External Dependence on Economic, Political and Cultural:

 The external dependence of a country is related to its size, resource
endowments, and political history. In case of UDCs, this
dependence is substantial.
 They are bound to export their raw material to the DCs, and they
have to import finished products as well as technologies from them.
Such technologies are hardly appropriate for the LDCs.
 In such situation, the growth of UDCs is highly dependent upon the
behaviour of DCs. The UDCs not only depend upon foreign goods
and technologies, but they are highly influenced by the foreign
values, patterns of consumption and attitudes towards life, work and
self.
 1.2 An Overview of the Diverse Structure of Developing Countries..

 Political Structure, Power and Interest Groups:

 The national approaches and strategies followed in UDCs are based
upon political structures, vested interests and allegiances of ruling
elites like landlords, urban industrialists, bankers, foreign investors,
the military rulers and trade unionists etc., in addition to economic
considerations.
 The constellation of interests and power among different segments
of the populations of most developing countries is itself the result
of their economic, social and political histories and they differ from
country to country in developing world.
 In Latin American countries there are the landowners; there are
bureaucrats in Pakistan; there are money lenders in India; there are
wealthy sheikhs of Gulf-States which play their role in the politics
of their respective countries.
 1.2 An Overview of the Diverse Structure of Developing Countries..

 Ethnic and Religious Composition:

 There was a time when there existed a cold war between two super
powers USA and USSR and two economic systems like capitalism
and socialism.
 But after the disintegration of USSR and Eastern Europe, so many
developing countries curtailed their defence expenditures. But quite
against it, within and outside countries, the conflicts and enmities
rose.
 As after the incident of 11th September 2001, an era of terrorism is
being observed. It is said that the countries which suffer from
religious, ethnic and cultural differences, they will also face political
instability. As a result, the development efforts will suffer. The
development of South Korea, Taiwan, is attributed to their cultural
homogeneity.
 2.Growth Models and Theories of development
2.1 Facts of economic growth and why growth rates differ across countries

 The term economic growth is associated with economic

progress and advancement. It can be defined as an
increase in the capacity of an economy to produce goods
and services within a specific period of time.
 It refers to a long-term expansion in the productive
potential of the economy to satisfy the wants of
individuals in the society.
 Sustained economic growth of a country has a positive
impact on the national income and level of employment,
which further results in higher living standards
 2.1 Facts of economic growth and why growth rates differ across countries

 Economic growth is directly related to percentage increase in GNP

of a country. In real sense, economic growth is related to increase in
per capita national output or net national product of a country that
remain constant or sustained for many years.
 Economic growth can be achieved when the rate of increase in total
output is greater than the rate of increase in population of a country.
The economic growth of a country may get hampered due to a
number of factors, such as trade deficit and alterations in
expenditures by governmental bodies.
 Generally, the economic growth of a country is adversely affected
when there is a sharp rise in the prices of goods and services.
 2.2 Factors of Economic Growth

 The process of economic growth is determined by two types of

factors, economic and non-economic. Economic growth is
dependent upon its natural resources, structural change, capital,
enterprise, technology etc.
 These are economic factors. But economic growth is not possible so
long as social institutions, political conditions and moral values of a
nation do not encourage development. These are non-economic
factors.
Economic Factors:
 Economists regard factors of production as the main economic
factors that determine growth. The growth rate of the economy rises
or falls as a consequence of changes in them. Following are some
of the important economic factors:
 2.2 Factors of Economic Growth…..

 Natural Resources:
 It affects the economic growth of a country to a large extent.
Natural resources involve resources that are produced by nature
either on the land or beneath the land.
 The resources on land include plants, water resources and
landscape. The resources beneath the land or underground
resources include oil, natural gas, metals, non-metals, and minerals.
 The natural resources of a country depend on the climatic and
environmental conditions. Countries having plenty of natural
resources enjoy good growth than countries with small amount of
natural resources.
 The efficient utilization or exploitation of natural resources depends
on the skills and abilities of human resource, technology used and
availability of funds.
 2.2 Factors of Economic Growth…..

 Capital Formation:
 Capital means the stock of physical reproducible factors of
production. When the capital stock increases with passage of time,
this is called capital formation.
 It involves land, building, machinery, power, transportation, and
medium of communication. Capital formation increases the
availability of capital per worker, which further increases
capital/labour ratio
process of capital formation is cumulative and self-feeding and
includes three inter-related stage: (a) the existence of real savings and
rise in them; (b) the existence of credit and financial institutions to
mobilize savings and to divert them in desired channels; and (c) to use
these savings for investment in capital goods. Since the propensity to
save is low in an LDC, voluntary savings will not be forthcoming in
 2.2 Factors of Economic Growth…..

 Technological Development:
 It refers to one of the important factors that affect the growth of an
economy. Technology involves application of scientific methods
and production techniques.
 It can be defined as nature and type of technical instruments used
by a certain amount of labour. Technological development helps in
increasing productivity with the limited amount of resources.
 Countries that have worked in the field of technological
development grow rapidly as compared to countries that have less
focus on technological development.
 The selection of right technology also plays a role for the growth of
an economy. On the contrary, an inappropriate technology- results
in high cost of production.
 2.2 Factors of Economic Growth….

 Structural Changes
 Structural changes imply the transition from a traditional agricultural
society to a modern industrial economy involving a radical
transformation of existing institutions, social attitudes, and
motivations.
 Such structural changes lead to increasing employment
opportunities, higher labour productivity and the stock of capital,
exploitation of new resources and improvements in technology.
Structural changes may begin with the transfer of population from
the primary to secondary and then to tertiary employment.
 Structural changes involve the expansion of the non-agricultural
sector so that the proportion of population in the agricultural sector
is progressively reduced. It implies reduction in the size of
contribution to net national output by the agricultural sector.
 2.2 Factors of Economic Growth….

 Division of Labour and Scale of Production

 Specialization and division of labour lead to increase in
productivity. They lead to economies of large-scale production
which further help in industrial development.
 They increase the rate of economic development. Adam Smith gave
much importance to the division of labour in economic
development.
 Division of labour leads to improvement in the productive
capacities of labour. Every labourer becomes more efficient than
before. He saves time.
 When scale of production is large there is greater specializations
and division of labour. As a result, production increases and the rate
of economic progress is accelerated.
 2.2 Factors of Economic Growth….
 Non-Economic Factors:
 Non-economic factors influence economic growth along with
economic factors. Social, cultural, psychological, human, political
and administrative factors are as much important as economic
factors in economics growth.
 Social and Political Factors:
 It plays a crucial role in economic growth of a country. Social
factors involve customs, traditions, values and beliefs, which
contribute to the growth of an economy to a considerable extent.
 For example, a society with conventional beliefs and superstitions
resists the adoption of modern ways of living. In such a case,
achieving becomes difficult.
 Apart from this, political factors, such as participation of
government in formulating and implementing various policies, have
a major part in economic growth.
 2.2 Factors of Economic Growth….

 Human Resources
 It refers to one of the most important determinant of economic
growth of a country. The quality and quantity of available human
resource can directly affect the growth of an economy.
 The quality of human resource is dependent on its skills, creative
abilities, training, and education. If the human resource of a country
is well skilled and trained, then the output would also be of high
quality.
 On the other hand, a shortage of skilled labour hampers the growth
of an economy, whereas surplus of labour is of lesser significance to
economic growth.
 Therefore, the human resources of a country should be adequate in
number with required skills and abilities, so that economic growth
can be achieved.
 2. Growth Models and Theories of development
2.1 Facts of economic growth and why growth rates differ across countries

2.3 Models and Theories of Economic Growth and

Development
2.3.1 Linear stages of growth models
Rostow’s stage of growth
Rostow penned his classic "Stages of Economic Growth" in 1960,
which presented five steps through which all countries must pass to
become developed
 2.3.1 Linear stages of growth models
Rostow’s stage of growth

Traditional society:
 This is an agricultural economy of mainly subsistence farming, little of which is
traded. The size of the capital stock is limited and of low quality resulting in very
low labour productivity and little surplus output left to sell in domestic and
overseas markets.
 More than 75 percent of the working population was engaged in agriculture.
Naturally, agriculture happened to be the main source of income of the state and
the nobles, which was dissipated on the construction of temples and other
monuments, on expensive funerals and weddings and on the prosecution of wars.
Pre-conditions for take-off:
 The second is a transitional era in which the pre-conditions for sustained growth
are created. The pre-conditions for sustained growth were created slowly in
Britain and Western Europe, from the end of the 15th and the beginning of the
16th centuries.
 Agriculture becomes more mechanised and more output is traded. Savings and
investment grow although they are still a small percentage of national income.
 2.3.1 Linear stages of growth models
Rostow’s stage of growth

The pre-conditions for sustained industrialization, according

to Rostow, have usually required radical changes in three
non-industrial sectors:
(a) a build-up of social overhead capital, especially in
transport, in order to enlarge the extent of the market,
to exploit natural resources productively and to allow
the state to rule effectively.
(b) a technological revolution in agriculture so that
agricultural productivity increases to meet the
requirements of a rising general and urban population.
(c) an expansion of imports, including capital imports,
financed by efficient production and marketing of natural
resources for exports.
 2.3.1 Linear stages of growth models
Rostow’s stage of growth
Take-off:
Manufacturing industry assumes greater importance, although the
number of industries remains small. Political and social institutions
start to develop - external finance may still be required. Savings and
investment grow, perhaps to 15% of GDP. Agriculture assumes lesser
importance in relative terms although the majority of people may
remain employed in the farming sector.
The requirement of take-off are the following three related but
necessary conditions: (a) a rise in the rate of productive investment
from, say five percent to less than to over 10 percent of national income
or net national product. (b) the development of one or more substantial
manufacturing sectors with a high rate of growth. (c) the existence or
quick emergence of a political, social and institutional framework
which exploits the impulses to expansion in the modern sector and
gives to growth an outgoing character.
 2.3.1 Linear stages of growth models
Rostow’s stage of growth
Drive to maturity:
Rostow defines it “as the period when a society has
effectively applied the range of modern technology to the
bulk of its resources.
It is a period of long sustained economic growth extending
well over four decades.
New production techniques take the place of the old ones.
New leading sectors are created. Rate of net investment is
well high over 10 % of national income.
Industry becomes more diverse.
 2.3.1 Linear stages of growth models
Rostow’s stage of growth
When a country is in the stage of technological maturity, three
significant changes take place: (a) the character of working force
changes. It primarily becomes skilled. People prefer to live in urban
areas rather than in rural. Real wages start rising and the workers
organize themselves in order to have greater economic and social
security. (b) the character of entrepreneurship changes. (c) the society
feels bored of the miracles of industrialization and wants something
new leading to a further change.
Age of mass consumption: The age of high mass-consumption has
been characterised by the migration to suburbia, the extensive use of
the automobile, the durable consumer’s goods. Output levels grow,
enabling increased consumer expenditure. There is a shift towards
tertiary sector activity and the growth is sustained by the expansion of
a middle class of consumers
 . Harrod-Domar Growth Model
 The Harrod- Domar models of economic growth are based on the
experiences of advanced economics.
 They are primarily addressed to an advanced capitalist economy
and attempt to analyse the requirements of steady growth in such
economy.
 The Harrod–Domar model is a Keynesian model of economic
growth. It is used in development economics to explain an
economy's growth rate in terms of the level of saving and
productivity of capital.
 The model was developed independently by Roy F Harrod in
1939 and Evsey Domar in 1946
Assumptions
 Output is a function of capital stock: Y = f(K)
Harrod-Domar Growth …

Assumptions….

 The production function exhibits CRS; i.e., the

marginal product of capital (productivity of capital)
is constant and equal to average product of capital
 Capital-output ratio is constant across time t.
 Savings rate is given and constant, s.
 The economy invests it’s all saving: sY = S = I
 Capital stock depreciates at a constant rate, δ
 The change in the capital stock equals investment less
the depreciation of the ∆K = I -δK
 Harrod-Domar Growth …
Savings Rate (s)

Rate of
Economic
Capital Productivity Growth (g)
(k)

Capital Depreciation
(δ)

Explanatory Variables Explained Variable

g = s*k -δ
3
5
 Harrod-Domar Growth …
• The basic Harrod-Domar model views limited savings as the
major constraint on aggregate economic growth.
– The critical variables required to determine the growth of
GNP
are saving and new investment.
• Given the targeted growth rate and the national capital output
ratio the Harrod-Domar growth model can be used to specify the
amount of domestic saving required to generate targeted
economic growth rate.
• Mathematical Derivation
 Following the conventional short run Keynesian model
S = sY; 0 < s < 1
 In equilibrium: S = I
 Harrod-Domar Growth …
 According to them, rise in investment has two effects:
1. Supply side: capital stock increases
2. Demand side: businesses expand more
 Production function: Y = k*K
Where k is the productivity of capital: ∆Y/∆K
 Change in capital stock changes income
k = ∆Y/∆K implies ∆Y = k*∆K and ∆K = ∆Y/k
∆K = I
 Assuming capital doesn’t depreciate and returning to the
equilibrium condition (I = S),
∆K = s*Y = I
 But we know that K/Y = ∆K/∆Y = k
Harrod-Domar Growth …
 Harrod-Domar Growth …
Mathematical Derivation …
• Since ∆K/K = ∆Y/Y = g, then the rate of growth of national
income can be formulated as

Example 2 If s = 0.15 and k = 0.5, δ =0.2 how much will be the rate
of growth of national income? 0.1 or 10%
where s is the average/marginal propensity to save; k is capital
growth rate; δ is capital stock depreciation at a constant rate,
 Solow Growth Model

 Robert Solow developed the neo-classical theory of economic

growth and Solow won the Nobel Prize in Economics in 1987.
 He has made a huge contribution to our understanding of the factors
that determine the rate of economic growth for different countries.
Growth comes from adding more capital and labour inputs and also
from ideas and new technology
 Solow Growth Model
The Solow growth model focuses on long-run economic growth.

-The Solow growth model is designed to show

-How growth in the capital stock,

-How growth in the labor force, and

-How advances in technology interact in an economy, and how

they affect a nation’s total output of goods and services. Solow
growth model also helps to identify three source of growth:-changes
in capital (saving and investment),
-changes in the labor force (population growth) and
-changes in technology affect the economy’s output.
 Solow Growth Model
Production Function
- The supply of goods in the Solow model is based on the now-familiar production function
-Production function states that Output (Y) depends on the capital stock and the labor
force Y = F(K, L)The Solow growth model assumes that Closed economy
-Two inputs into the production function(k, L)
- The size of the population and participation rates are fixed
-the production function has constant returns to scale
zY = F(zK, zL)
- That is, if we multiply both capital and labor by z, we also multiply the amount of output
by z.The assumption of constant returns to scale implies that

the size of the economy—as measured by the number of workers does not affect
the relationship between output per worker and
capital per worker.
Solow Growth Model
Solow Growth Model
 Solow Growth Model

As the amount of capital (k) increases,

-the production function becomes flatter
-indicating that the production function exhibits
diminishing marginal product of capital.
-When k is low, the average worker has only a little capital to work
with, So extra unit increases production significantly
-extra unit of capital is very useful and produces a
lot of additional output
-When k is high
-the average worker has a lot of capital, So
-an extra unit increases production only slightly
This figure illustrates
-how for any value of k, the amount of output is determined by the
production function f (k), and
-the allocation of that output between consumption and saving is determined by
the saving rate s.
 Joan Robinsons Model of Capital Accumulation

 Mrs. Joan Robinson in her book “The Accumulation of Capital” builds a simple
model of economic growth based on the ‘capitalist rules of the game.’
 But, it is not so much concerned with an automatic convergence to a moving
equilibrium in a capitalist economy, as with studying the properties of equilibrium
growth.
 When the rate of population growth is higher than the rate of capital growth,
thereby leading to progressive underemployment. In such a situation surplus of
labour will lead to a fall in money wages and if the price level remains constant,
to a fall in real wages.
 As a result, the profit rate would tend to rise and increase the growth rate of
capital to the population level. The equilibrating mechanism would not work if
real wages fall to fall either due to the rigidity of money wages.
 The golden age equilibrium will not be restored and progressive
underemployment will continue.
 If capital growing faster than population growth, equilibrium to the path of
golden age can be brought about by technological changes such as a change in the
capital-labour ratio or labour productivity, the need for labour will increase.
 2.3.2 Structural Change Models: Lewis Theory of Development

Two Sector Economy or Dual Economy:

 Professor W. Athur Lewis has developed a very systematic theory
of “Economic Development with Unlimited Supply of Labour,”
 W.A. Lewis believes that most of the underdeveloped countries of
the world live under a heavy pressure of population due to rapid
growth of population.
 In such economies, unlimited supply or surplus supply of labour is
available at a subsistence wage.
 According to Lewis underdeveloped countries have the dual
economy and hence can be divided into two sectors: (i) The
capitalist sector, and (ii) The subsistence sector.
 2.3.2 Structural Change Models: Lewis
Theory of Development
 The capitalist sector is that part of the economy which uses
reproducible capital and pays capitalists for the use thereof. The use
of capital is controlled by capitalist sector which hires the services of
the labourers. It may be either private or public.
 The average wages are quite high. The people are generally
advanced, literate, sophisticated and skilled in the capitalist sector.
They employ labourers for wages in mines, factories and plantations
etc. for earning profits.
 The output per head is high. On the other hand, the subsistence is that
part of the economy which does not use reproducible capital. In this
sector, the output per head is quite low as compared to the capitalist
sector.
 The average productivity of labour is low and people are generally
backward, illiterate, and unskilled. Thus, there are less similarities
between the two sectors and the development is lopsided.