The chapters in this part present observations of phenomena that characterise economic life in today’s low-income countries, with a specific focus on countries in Africa south of the Sahara.1 The objective is to identify and understand these characteristics, and to discuss how they are conceptualised and measured in eco-nomics and neighbouring social sciences. By being descriptive in its method, the analysis in this part does not purport to deliver causal explanations of the observed characteristics, or to predict their consequences for the development of low- income countries. The task of theoretical analysis, and the prior search for an analytical framework capable of explaining economic realities in low-income countries, will be approached in the subsequent parts of the analysis. The purpose of this part is to receive a picture of economic life in low-income countries that delineates the space to which theoretical explanations and meaningful predictions about the behaviour of the observed economic phenomena are to be confined. In this respect, the discussion is also intended to serve as a basis for the later analysis of why some theories worked better in explaining characteristic problems of low-income countries while others did not. As will be seen from the retrospective assessment of development theories in the second part of the study, development economists have long but misleadingly taken the behaviour of economic phenom-ena in rich economies as models for explaining economic realities in low-income countries – as the former were thought to provide a clear example of development paths that could, at least theoretically, be open to the developing world as well. Theoretic models relevant for advanced economies were thus generalised and extended to developing countries without specifying in their assumptions the often significant differences between the economic characteristics of advanced and less developed countries.

Part IEconomic Characteristics of

Low-Income Countries

1Thirty-three out of the 49 countries currently classified as low-income countries are located in Sub-Saharan Africa (for a country listing see footnote 3). African countries deserve particular attention also because the identified characteristics that go along with their low income levels per head are more enduring than in most other regions of the world.

10 Part I Economic Characteristics of Low-Income Countries

Against this experience, a clear analytic distinction between the characteristics of developing and developed economies seems vitally important.2 This shall nei-ther disguise the fact that less developed economies in themselves represent a very diverse group of countries, nor does the observation of commonalities in the eco-nomic characteristics of low-income countries imply that these characteristics have unique underlying causes. The factors that contribute to the emergence of certain common characteristics can, in fact, vary widely with each country’s spe-cific cultural roots, colonial history, territorial and demographic size, natural endowments, degree of ethnic heterogeneity, form of government, or with regard to many other context-specific factors. In other words, contextual diversity among countries relates primarily to the endogenous processes that bring about certain common characteristics or outcomes. As will be discussed at the end of Part II, this limits not only the scope for deriving broad policy conclusions from the com-monly observed characteristics of low-income countries. Conversely, it also implies that broadly framed development policies can lead to very divergent results in different developing countries, unless they are accompanied by individ-ual implementation arrangements that accommodate a country’s context-specific conditions.

Before individual economic characteristics of low-income countries will be dis-cussed in the chapters that follow, it seems sensible to look at how this group of countries is conventionally defined. Developing countries are usually classified by their low level of income per capita relative to that of advanced industrialised economies. Most international organisations use gross national income (GNI) per capita as classification criterion in their formal definitions of developing countries. However, as GNI by itself does not constitute a measure of welfare or success in development, these official definitions are often supplemented by indicators for the quality of social and human life. The group of developing countries is generally subdivided in low- and middle-income economies. The World Bank currently clas-sifies economies with a GNI per capita at or below 935 US$ per year as low-income countries.3 Those countries with a GNI per capita between US $936 and 3,705 are

2The economic characteristics of developing and advanced economies often differ markedly both in their degree and in their kind. For example, informal economic activity (the subject of Chap. 5 below) is a phenomenon that can be observed in low-income and high-income countries alike. But while the informal sector sometimes accounts for the largest part of output and employment in low-income economies, it has often only negligible effects on economic outcomes in industria-lised countries. Moreover, informality in low-income countries and high-income countries differs substantially in its forms and underlying causes: Whereas informal economic activity in advanced economies occurs mostly as a form of tax evasion, it is in low-income countries primarily a strat-egy to cope with the absence or poor performance of formal legal and juridical institutions.3As per 2009, 49 countries are belonging to the group of low-income countries. These are: Afghanistan; Bangladesh; Benin; Burkina Faso; Burundi; Cambodia; Central African Republic; Chad; Comoros; Congo, Dem. Rep.; Côte d’Ivoire; Eritrea; Ethiopia; Gambia, The; Ghana; Guinea; Guinea-Bissau; Haiti; Kenya; Korea, Dem. Rep.; Kyrgyz Republic; Lao PDR; Liberia; Madagascar; Malawi; Mali; Mauritania; Mozambique; Myanmar; Nepal; Niger; Nigeria; Pakistan; Papua New Guinea; Rwanda; São Tomé and Principe; Senegal; Sierra Leone; Solomon Islands;

11Part I Economic Characteristics of Low-Income Countries

classified as lower middle-income countries, and the group of countries with a GNI per capita between US $3,706 and 11,455 as upper middle-income countries.4

A more elaborate definition of the poorest countries is given by the UN’s clas-sification for Least Developed Countries (LDCs). According to UNCTAD (2008), a country is classified as LDC if it meets inclusion thresholds on three criteria: (1) a low-income criterion (a GNI per capita below US $750); (2) a weak human assets criterion (measured by a composite index based on indicators of nutrition, health, school enrolment and literacy); and (3) an economic vulnerability criterion (mea-sured by a composite index based on indicators of instability in agricultural produc-tion, instability in exports of goods and services, the share of manufacturing and modern services in GDP, economic concentration, economic smallness and eco-nomic remoteness).5

Based on the World Bank’s classification, latest statistics of 2007 suggest that nearly 84% of the world’s population lived in low- and middle income countries which together produced 26% of the world’s output. The group of low-income countries alone accounted for 20% of the world’s population in 2007, but produced just 1.5% of the world’s statistically recorded output of that year (World Bank, 2009). At a first glance, this output share of low-income countries is so low that one might be tempted to conclude that virtually no economic activity is performed in the world’s poorest countries. That is not the case at all. Poor people engage in exchange and production activities in many different ways and forms, albeit often at only subsistence or small-scale levels. But just as the outcomes of these activities are hardly accounted for in international statistical compilations, so have the moti-vations and forms that characterise economic activity in low-income countries only incompletely been understood and addressed in mainstream development thinking.

Somalia; Tajikistan; Tanzania; Togo; Uganda; Uzbekistan; Vietnam; Yemen, Rep.; Zambia; and Zimbabwe. Although the term “low-income countries” has been chosen in this study to refer to the world’s poorest countries, the analysis is not restricted to the countries included into the group of countries classified as low-income by the World Bank. An additional criterion for consideration of a country or region in this study is in particular the absence of major historical growth accelera-tions across a variety of interlinked sectors that also increased economic opportunities for the poorest parts of society.4Figures correspond with data on 2007 GNI per capita using the “atlas conversion factor” to reduce the impact of exchange rate fluctuations (World Bank, 2009). Note that higher income values are usually obtained by calculating GNI per capita in purchasing power parity units, as prices tend to be lower in poor countries (thus a dollar of spending there is worth more).5The differences in classification criteria have the effect that 14 countries (Angola; Benin; Bhutan; Djibouti; Equatorial Guinea; Kiribati; Lesotho; Maldives; Samoa; Sudan; Timor–Leste; Tuvalu; and Vanuatu) are considered LDCs by the UN but not as low-income countries by the World Bank. Conversely, another thirteen low-income countries according to the World Bank’s definition (Benin; Côte d’Ivoire; Ghana; Kenya; Korea, Dem. Rep.; Kyrgyz Republic; Nigeria; Pakistan; Papua New Guinea; Tajikistan; Uzbekistan; Vietnam; Zimbabwe) are not considered LDCs according to UN criteria.

12 Part I Economic Characteristics of Low-Income Countries

Against this background, the following chapters are intended to illuminate some of the conditions that have influenced the emergence of seemingly idiosyncratic but functioning forms and processes of economic activity in low-income countries. The common characteristics that are identified in this part, and discussed with regard to their economic implications, include persistent poverty (Chap. 2), high transaction costs (Chap. 3), private economic governance in responses to poorly performing governments (Chap. 4), and the widespread informalisation of economic relations (Chap. 5). The focus is mainly on the micro-level because it is at this level where the specific conditions of low-income countries affect economic choices and hence the specific forms in which economic activity is organised and governed. Macroeconomic factors are taken into account to the extent in which they affect the conditions that define the incentive structure of individuals and their responses to changes in the broader policy and institutional environment. Apart from that, the topics of the following chapters have been chosen as low-income countries are believed to differ especially in the occurrences of these phenomena from more advanced countries – with far-reaching implications for development theory, policy and operations as later parts of this study will show.

Part I Economic Characteristics of Low-Income Countries