In many developing countries long-established custom provides answers to the “what”, “how” and “for whom” questions. In these economies ways of doing things are passed down from generation to generation. If your father was a carpenter, you are likely to be a carpenter. If your parents were poor, you are likely to be poor. Economic and other decisions may be made by a group of elders, who follow the beliefs and practices of previous generations. Such economies are called traditional ones.
Developing nations such as Ethiopia, the Sudan and Bolivia exhibit elements of traditional economies in their tendency to make economic decisions accordingly to how things have been done in the past. The answers to the “what”, “how” and “for whom” questions in these countries are: produce what they have always produced; produce the way they have always produced; and distribute income and wealth as they have been distributed in the past.
A traditional economy may have elements of capitalism or socialism, but it is predominantly traditional in the way economic decisions are made. Traditional economies exist because people lack the opportunities to learn new ways – they simply learn how to do the job their parents do. People living on subsistence incomes take a great risk if they try a new technology or change production strategies. Farmers whose families’ lives depend directly on the success of their crops take a great risk if they decide to use untried “new” techniques in their farming. In addition new technologies often involve capital expenditures well beyond the cash available to farmers in the less developed countries.
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