What is a developed economy?
Economic characteristics
- High income levels - developed economies generally have high per capita Gross Domestic Product (GDP)
- Many economists consider a per capita GDP of $25,000 to $30,000 or more as indicative of a developed economy
- This high income translates to greater purchasing power for citizens
- Advanced industrialisation - these economies have moved beyond primary sectors like agriculture and raw material extraction
- Typically have strong manufacturing and service sectors, often with a focus on high-tech and knowledge-based industries
- High standard of living - citizens generally enjoy better quality of life
- This is reflected in factors like low infant mortality rates (usually fewer than 10 death per 1,000 live births) and high life expectancy (75 years or more on average)
- Access to quality healthcare, education, and social services is typically widespread
- Technological infrastructure - developed economies have extensive and advanced technological infrastructure
- Wide spread access to the interest, advanced telecommunication networks, and the integration of technology in various sectors of the economy
- Strong human development - these countries often score highly on the Human Development Index (HDI), typically above 0.8
- Indicates high levels of education, literacy and overall well-being
- Countries like Norway, Ireland and Switzerland consistently rank at the top of the HDI
- Stable economic and political systems - usually have well-established financial markets, stable currencies and effective regulatory systems
- Also tend to have stable political systems with strong institutions, which provide a secure environment for economic activities
What countries have developed economies?
As mentioned, developed economies generally perform better on measurement indexes, which are ways to measure the economic and non-economic factors of a country
Some of the indexes that are commonly used to measure economic factors:
- Gross Domestic Product (GDP)
- GDP per capita
- Gross National Income (GNI)
- Income per capita
As expected, developed economies usually score high on these indexes. We have seen this when we compared developing, emerging and developed economies in the Developing Economies learning block.
Other measures of a developed economy are:
- The Human Development Index (HDI)
- The World Happiness Index
Let’s look at some of the indicators 👀
Gross National Income (GNI) Per Capita
Gross National Income (GNI) per capita is the value of a country’s final income in a year divided by its population.
Human Development Index
The Human Development Index (HDI) is a summary measure of key dimensions of human development
- Long and healthy life - life expectancy at birth
- Knowledge - expected years of schooling + mean years of schooling
- A decent standard of living - gross national income per capita
These two indicators clearly demonstrate that countries classified as “developed”, such as the United States, Canada, the United Kingdom, and others mentioned earlier, consistently score highly on these indexes.
Issues in Developed Economies
Ageing Population
- Increasing life expectancy
- Declining birth rates
Advancements in healthcare and improved living standards have led to longer lifespans, while societal changes and economic factors have contributed to lower fertility rates.
- Labour force - a shrinking working-age population leads to labour shortages
- Healthcare costs - increased demand for healthcare services strains public resources and systems
- Pension systems - fewer workers supporting a larger retired population puts pressure on pension schemes and social security systems
- Fiscal pressure - governments face challenges in balancing increased spending on elderly care with reduced tax revenues from a smaller workforce
Developed nations are implementing various strategies to address the economic challenges of ageing populations. A common approach is extending the retirement age to maintain a larger workforce and reduce strain on pension systems. Additionally, some countries are exploring options to reform social security benefits and increasing taxes to bolster funding for elderly care and pension programs.
Inequality
Income inequality between countries has improved, yet income inequality within countries has worsened.
Income inequality is the extent to which income is unevenly distributed among individuals or groups in a society. Higher inequality indicates a wider gap between top earners and the rest of the population.
In 2018, the richest 26 people in the world held as much wealth as half of the worlds population (United Nations). Since 1990, income inequality has increased in most developed countries.
Let’s take a look at the United States:
- Before world war II, the top 1% had a higher share of income than the bottom 1%
- Larger proportion of inherited wealth
- during the war the US government raised their taxes significantly on high-income earners to fund the war effort
- government implemented wage controls during the war
- the war fostered a sense of shared sacrifice and national unity, which made high levels of inequality less socially acceptable
- Between the 1940s-1970s, income shares were held at a much higher rate by the bottom 50% than the top 1%
- strong labour unions and worker protections
- robust manufacturing sector providing middle-class jobs
- From the 1980s, there is a reversal - the top 1% income share increases while the bottom 50% decreases steadily
- deregulation of various industries
- decline in union membership and influence
- tax cuts that disproportionately benefited high earners
- growth of the financial sector
- By 2022, the disparity widens to the top 1% commanding over 20% of national income, while the bottom 50% receives only about 10%
- rising costs of education and healthcare, impacting the bottom 50% more severely
- growth in the financial sector has disproportionately benefitted high earners
- in fields like entertainment, sports, and business, top performers are earning far more than their predecessors due to global audiences and marketing opportunities
Wealth is the total value of an individual’s or household’s assets minus their debts. It’s often referred to as “net worth”.
- Assets include - cash and savings, investments (stocks, bonds, real estate), personal property (homes, vehicles), retirement accounts
- Debts/liabilities include - mortgages, car loans, credit card balances, student loans, any unpaid bills
Wealth inequality tends to be more pronounced than income inequality and can persist or even grow over generations due to factors such as inheritance, investment returns, and access to opportunities.
Over the last 30 + years, the wealth gap in the US has widened significantly, with the richest families increasing their wealth and the poorest families falling into “negative wealth”. This means that their debts now outweigh their assets.
- You can’t see on the graph because the figures are so low but the bottom 40% is:
- 1983: $6,900
- 2019: -$72,000
From 1953 to 2018, the wealthiest 0.01% of Americans saw their share of national wealth grow dramatically, from 2.5% to 9.6%, nearly quadrupling. However, their share of total US taxes paid in 2018 was similar to what it was in 1953, despite this massive increase in wealth. The ultra-rich have become wealthier, because they’ve been paying a proportionately smaller share of taxes relative to their growing wealth.
Regional inequality is the difference in the standards of living and opportunities for work between regions.
If we have a look at the median household income in the US, and break it up by each state, we can see the regional inequality.
There’s a clear pattern of higher median household incomes concentrated in coastal regions, particularly the Northeast and West Coast. In contrast, much of the South and portions of the Midwest show lower median incomes. Larger metropolitan areas tend to have higher incomes, even when adjusted for cost of living, compared to smaller cities and rural areas.
Several factors contribute to these differences:
- Economic concentration in major urban centers
- Differences in industry composition across regions
- Varying levels of educational attainment
- Historical patterns of economic development
Deindustrialisation - Japan
Japan experienced significant deindustrialisation starting in the 1990s, with a decline in manufacturing employment and output relative to services. This was driven by several factors:
- Increasing productivity in manufacturing, allowing fewer workers to produce more goods
- A shift in consumer demand towards services as incomes rose
- Growing international competition, especially from other Asian countries, leading some manufacturing to move overseas
- The bursting of Japan’s economic bubble in the early 1990s, which hit manufacturing particularly hard
The effects of deindustrialisation were not uniform across Japan’s manufacturing sectors. The “export core” industries like automobiles remained relatively strong, while other manufacturing industries declined more sharply.
Many workers who lost manufacturing jobs were absorbed into the service sector, often as non-regular employees with lower wages and job security.