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0 10-July-2020

Study Guide in SSE 108 Comparative Economic Planning Module No. 2

STUDY GUIDE FOR MODULE NO. 2

Classification and Characteristics of Economics

MODULE OVERVIEW

Module 2 discusses the difference between the First, Second and Third World countries with
emphasis on the basic criteria for distinguishing the most structural difference among developing nations.

MODULE LEARNING OBJECTIVES

At the end of the semester the students will be able to:

a. differentiate between the First, Second and Third World countries;

b. explain the basic criteria for distinguishing the most important structural differences among
developing nations;
c. discuss each of the common characteristics of Developing Countries;
d. explain the distinction between low levels of living and low per capita incomes; and
e. cite examples of how each of the characteristic of Developing Countries is manifested in the
Philippines, a Third World country.

The First, Second, And Third World Countries: Origin of Concept and Present Beliefs

First World, Second World and Third World countries are products of the Three-World model, a
concept that grouped all of the world’s countries into the three groups. This stratification of the countries was
initially based on the basis of political ideology affiliation where First World countries were identified as the
countries which were allied with the United States while Second World countries were countries which were
allied with the Soviet Union. Third World countries were countries which supported neither the Soviet Union
nor the United States.

 The First World Countries

The First World concept was first fronted in the 20th century when the world was immersed in the
Cold War and was the collective term for the countries which were under the capitalistic umbrella. The term
was introduced by the United Nations in the 1940s and was used through the Cold War period where it was
propagated by the then global superpowers; the United States and the Soviet Union which had divided the
world into blocs in their respective quests to become the most powerful country in the world. During this
period, First World countries were identified as countries which were allies of the United States which were
economically stable and shared common socio-political beliefs with the United States. First World countries
were characterized by relative political and economic stability and also had a capitalistic economic system.
These first world countries were initially majority of the countries in Western Europe as well as the United
States and Canada. During the peak of the Cold War, relations between First World Countries and Second
World Countries were frosty with the Soviet Union and the United States being the core of the two factions.

 The First World Concept after the Cold War

The concept of the First World enjoyed much traction during the Cold War, with the United States
wielding much influence in the international affairs among First World countries. The United States even took
far-reaching measures to ensure that neighboring countries which were allied to the Second World such as
Cuba were repressed through heavy economic sanctions. However, the Eastern Bloc collapse witnessed in
1991 signified the end of the Cold War and with it, the traditional definition of First World countries. The term
“First World” is rarely used in recent years as a dichotomy of countries of the world based on their affiliation to
the United States but is often used to describe countries with economic and political stability regardless of
affiliation.

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Study Guide in SSE 108 Comparative Economic Planning Module No. 2

 The Second World

The Second World was a term used to describe several industrial countries which were affiliated to
the Soviet Union and China during the Cold War period. According to the definition, the majority of these
countries either practiced a socialistic system of government or a communist system of government. These
countries included; all countries under the Soviet Union, China, North Korea, Cuba, Vietnam, and Laos.
Germany was particularly notable as the country that was divided into two with the East Germany being
established as a Second World Country while West Germany was a First World Country. The division was
manifested in the nation’s capital, Berlin which had a fortified wall built through it to separate the two
countries. The Soviet Union was at the heart of the Second World and influenced the international affairs
among the member countries. The Soviet Union assisted other Second World Countries as seen in the
Molotov Plan in the 1940s when the Soviet Union provided aid to its allied countries as an alternative to
American aid.

 The Second World Concept After the Cold War

However, after the collapse of the Eastern Bloc in the late 20th century, this definition was deemed to
be obsolete as the collapse also signaled the end of the Cold War. While the Second World Concept is still
currently used (albeit rarely), the term is used to define former communist countries with developing
economies and is only used from an economic perspective and not as a political ideology.

 Third World

The Third World was originally the term used to define the countries that were neither First World
countries nor Second World countries which were also members of the non-aligned movement. The term
“Third World” was first penned in 1952 by Alfred Sauvy, a French economist and historian who defined Third
World countries as countries that were neither Western Countries nor members of the Soviet Federation.
These Third World countries were predominantly found in South America, Africa, Oceania, and Asia.
However, some countries seemed to be classified as both Second World countries as well as Third World
countries, for instance Cuba. Due to the impoverished economic situation in these countries, the term “Third
World” increasingly became associated with the countries with low GDP and where the majority of citizens
lived in abject poverty. There were European countries which were neither capitalistic-inclined nor soviet-
affiliated such as Sweden, Finland, Ireland, Switzerland, and Austria had prosperous economies and were all-
around developed and were commonly known as neutral countries.

 Third World: Modern Use

After the collapse of the Eastern Bloc in the late 20th century which also signaled the end of the Cold
War meant that the definition of Third World countries had to change as the global political landscape had
suddenly changed. During this period, the countries under the “Third World” umbrella were primarily defined
by their economic status instead of their political ideology affiliations. Due to the original stereotype associated
with Third World countries, these countries were identified as the countries with poor but developing
economies. The majority of Third World countries in Asia, Oceania, South America and Africa were originally
colonies of European colonial authorities which had gained independence in the 20th century. Due to
increased criticism against the use of the term “Third World countries,” economists instead refer these
countries either as developing countries or least developed countries.

 Modern Relations in First, Second and Third World Countries

The stratification of the world’s countries into the three categories; First World, Second World, and
Third World has received much criticism in the 21st century. The majority of the countries which were
originally First World countries established NATO, an intergovernmental military alliance. In recent years,
globalization and increased technological advancements have seen the decreased alienation of countries in
the world. Many countries which were initially seen as Third World Countries have also in recent years
experienced increased growth in their respective economies and have ceased being identified as developing
countries.

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Developing Countries – Similarities and Differences

There are many indicators that can be used to compare and contrast developing countries.

 World Bank Income Classification (2013)

As of July 2013, the World Bank income classifications by GNI per capita are as follows:

o Low income: $1,025 or less

o Lower middle income: $1,026 to $4,035
o Upper middle income: $4,036 to $12,475
o High income: $12,476 or more
o Low- and middle-income economies are sometimes referred to as developing economies.

Please remember that this term is used for convenience.

 Fall in Extreme Poverty

The number of people living on less than US$1.25 a day is projected to be 883 million in 2015,
compared with 1.4 billion in 2005 and 1.8 billion in 1990. However, much of this progress reflects rapid growth
in China and India, while many African countries lag behind

 Diversity Between Developing Countries

No two developing countries are the same! There is a huge diversity between them

There are many key structural economic differences between nations – for example:

o The size of an economy (i.e. population size, basic geography, annual level of national income).
o Historical background including years since independence from colonial rule.
o Natural resource endowment such as access to mineral deposits and a favorable climate.
o The age structure of the population, natural rates of population growth.
o Ethnic and religious composition.
o Relative size / importance of public and private sectors of the economy.
o Structure of national output (e.g. primary, secondary, tertiary and quaternary sectors).
o Structure of international trade (both geographical and the commodity pattern of trade).
o Political stability, strength of democratic institutions, transparency of government, level of corruption
and ease of doing business.
o Ethnic and gender equality, opportunity and tolerance.
o The ease with which new businesses can be created and sustained.
o Other competitiveness indicators.

The proportion of people living in poverty having 1.25 U.S. dollars (PPP) or less per day.

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 Common Characteristics of Developing Countries

These characteristics might include:

o Relatively low incomes per capita and a low level of absolute savings
o Lower absolute levels of productivity (labor and capital)
o Often endowed with rich natural resources
o A higher dependency on export incomes from primary commodities / low export diversification
o They have a large share of the population living in rural areas and employed in agriculture
o Limited scope and support provided by a welfare system
o A higher informal sector for example in partial subsistence farming
o Many industries in low-income countries tend to be some distance from technological frontiers
o Relatively fast growth of population and a younger average age
o Rapid urbanization and large-scale rural-urban migration
o Weaknesses in infrastructure such as telecommunications, transport, ports, water and
sanitation
o Weaknesses in institutions such as stable government, civil service money and capital
markets
o Relatively higher tariffs and other import controls
o Tendency to have capital controls / relatively closed capital markets
o Lower access to advanced country markets

 Difference Between Developed Countries and Developing Countries

Countries are divided into two major categories by the United Nations, which are developed countries
and developing countries. The classification of countries is based on the economic status such as GDP, GNP,
per capita income, industrialization, the standard of living, etc. Developed Countries refers to the sovereign
state, whose economy has highly progressed and possesses great technological infrastructure, as compared
to other nations.

The countries with low industrialization and low human development index are termed as developing
countries.

After a thorough research on the two, we have compiled the difference between developed countries
and developing countries considering various parameters, in tabular form.

BASIS FOR
DEVELOPED COUNTRIES DEVELOPING COUNTRIES
COMPARISON

Meaning A country having an effective rate of Developing Country is a country which

industrialization and individual income is has a slow rate of industrialization and

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BASIS FOR
DEVELOPED COUNTRIES DEVELOPING COUNTRIES
COMPARISON

known as Developed Country. low per capita income.

Unemployment and Low High

Poverty

Rates Infant mortality rate, death rate and birth High infant mortality rate, death rate
rate is low while the life expectancy rate and birth rate, along with low life
is high. expectancy rate.

Living conditions Good Moderate

Generates more Industrial sector Service sector

revenue from

Growth High industrial growth. They rely on the developed countries

for their growth.

Standard of living High Low

Distribution of Equal Unequal

Income

Factors of Effectively utilized Ineffectively utilized

Production

 Developed Countries

Developed Countries are the countries which are developed in terms of economy and
industrialization. The Developed countries are also known as advanced countries or the first world countries,
as they are self-sufficient nations.

Human Development Index (HDI) statistics rank the countries on the basis of their development. The
country which is having a high standard of living, high GDP, high child welfare, health care, excellent medical,
transportation, communication and educational facilities, better housing and living conditions, industrial,
infrastructural and technological advancement, higher per capita income, increase in life expectancy etc. are
known as Developed Country. These countries generate more revenue from the industrial sector as compared
to service sector as they are having a post-industrial economy.

The following are the names of some developed countries: Australia, Canada, France, Germany,
Italy, Japan, Norway, Sweden, Switzerland, and United States of America.

 Developing Countries

The countries which are going through the initial levels of industrial development along with low per
capita income are known as Developing Countries. These countries come under the category of third world
countries. They are also known as lower developed countries.

Developing Countries depend upon the Developed Countries, to support them in establishing
industries across the country. The country has a low Human Development Index (HDI) i.e. the country have
low Gross Domestic Product, high illiteracy rate, educational, transportation, communication and medical
facilities are not very good, unsustainable government debt, unequal distribution of income, high death rate
and birth rate, malnutrition both to mother and infant which case high infant mortality rate, high level of
unemployment and poverty.

The following are the names of some developing countries: Colombia, India, Kenya, Pakistan, Sri

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Lanka, Thailand, and Turkey.

 Key Differences between Developed and Developing Countries

The following are the major differences between developed countries and developing countries:

o The countries which are independent and prosperous are known as Developed Countries.
The countries which are facing the beginning of industrialization are called Developing
Countries.
o Developed Countries have a high per capita income and GDP as compared to Developing
Countries.
o In Developed Countries the literacy rate is high, but in Developing Countries illiteracy rate is
high.
o Developed Countries have good infrastructure and a better environment in terms of health
and safety, which are absent in Developing Countries.
o Developed Countries generate revenue from the industrial sector. Conversely, Developing
Countries generate revenue from the service sector.
o In developed countries, the standard of living of people is high, which is moderate in
developing countries.
o Resources are effectively and efficiently utilized in developed countries. On the other hand,
proper utilization of resources is not done in developing countries.
o In developed countries, the birth rate and death rate are low, whereas in developing countries
both the rates are high.

There is a big difference between Developed Countries and Developing Countries as the developed
countries are self-contained flourished while the developing countries are emerging as a developed country.
Developing Countries are the one which experience the phase of development for the first time. If we talk
about developed countries, they are post-industrial economies and due to this reason, the maximum part of
their revenue comes from the service sector.

Developed Countries have a high Human Development Index as compared to Developing Countries.
The former has established itself in all fronts and made itself sovereign by its efforts while the latter is still
struggling to achieve the same.

 Low Income Countries 2021

What is a low-income country? According to the World Bank, low-income countries are nations that
have a per capita gross national income (GNI) of less than $1,026.

The World Bank classifies countries into several categories. Originally, there were three categories:
high-income countries, middle-income countries, and low-income countries. The high-income group has the
highest income globally, with a GNI per capita of at least $12,476. The upper-middle-income group has per
capita incomes between $4,038 and $12,475. The lower-middle-income nations have GNI per capita of
$1,026 to $4,035. Finally, low-income countries have GNI per capita of $1,025 per less.

Low-income countries are often synonymous with underdeveloped countries, also known as
developing countries, emerging markets, or newly industrialized countries. These counties receive
development aid, which is financial aid given by governments or agencies to boost and support the economic,
political, social, and environmental development in other countries. Bilateral aid is given directly from the
donor country to another, and multilateral aid is given to an international organization that distributes aid to
developing countries. World Bank and United Nations agencies such as UNICEF are examples of
organizations that are involved in development aid.

Low-income countries face struggles relating to a poor economy. Issues related to poor economic
health include below-average life expectancy, high infant mortality rates, poor educational outcomes,
degrading infrastructure, environmental and climate conditions, and poor health outcomes. These low-income
countries suffer high rates of illnesses and infections due to lack of clean water, low sanitation levels,
malnutrition, and lack of access to quality medical care.

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There are currently 32 countries in the low-income country category. Somalia is at the bottom of the
low-income country list, with a GNI per capita of $130.

LEARNING ACTIVITY 1

1. Distinguish developed countries and developing countries from each other in their economic terms.
2. Criticize the stratification of world countries into First World, Second World and Third World.

SUMMARY

First World, Second World and Third World countries are products of the Three-World model, a
concept that grouped all of the world’s countries into the three groups. However, the stratification of the
world’s countries into the three categories; First World, Second World, and Third World has received much
criticism in the 21st century.

There are many indicators that can be used to compare and contrast developing countries.

Countries are divided into two major categories by the United Nations, which are developed countries
and developing countries. The classification of countries is based on the economic status such as GDP, GNP,
per capita income, industrialization, the standard of living, etc.

Developed Countries are the countries which are developed in terms of economy and
industrialization. The Developed countries are also known as advanced countries or the first world countries,
as they are self-sufficient nations.

The countries which are going through the initial levels of industrial development along with low per
capita income are known as Developing Countries. These countries come under the category of third world
countries. They are also known as lower developed countries.

REFERENCES

Azanza, Patrick Alain, et.al. 2000. Economics, Society and Development. Philippines. Kayumanggi Press, Inc.

Fajardo, Feliciano. 1990. Economics. Quezon City. Rex Book Store.

Miranda, Gregorio S. 2001. Introductory Economics. L & G Business House.

Sicat, Gerardo P. 2003. Macroeconomics. Manila. Anvil Publishing, Inc.

Todaro, Michael P. 2000. Economic Development. Philippines: Pearson Education Ltd.

Vibar, Teofista et. al. 1998. Economics: Theories and Principles. Quezon City, Vibal Publishing House, Inc.

https://www.worldatlas.com/articles/the-first-second-and-third-world-countries-origin-of-concept-and-present-
beliefs.html

https://www.tutor2u.net/economics/reference/developing-countries-similarities-and-differences

https://keydifferences.com/difference-between-developed-countries-and-developing-
countries.html#KeyDifferences

https://worldpopulationreview.com/country-rankings/low-income-countries

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