Developing countries are those that have a low gross domestic product (GDP) per person. They tend to rely on agriculture as their prime industry. They have not quite reached economic maturity, although there are a number of definitions for this term.
What Is a Developing Country?
This type of country is s often defined by its economic output. There has been a lot of debate as to where to draw the line between a developed country and a developing one, which can be seen by the lack of one single meaning for the term.
The United Nations has some rules for distinguishing between developed and developing countries. The World Bank has stopped using these terms in favor of others, such as low-income or lower-middle-income economies, based on gross national income (GNI) per person.
- Alternate name: Low-income economy
- Alternate definition: The World Bank has a firmer method that considers countries with a per-person income of less than $1,035 in 2019 as being low income.
- Alternate definition: The International Monetary Fund's (IMF) definition is often thought to be the most comprehensive measure. It is based on per-person income, export diversification, and the degree of union with the global financial system.
The IMF published a research report on the topic of development classification in 2011. It outlined its methods for classifying a country's level of development.
Investors often sort countries around the world based on their level of economic development. Several levels exist, and they use many economic and social criteria. These range from per capita income and life expectancy to literacy rates. Developing countries, less developed countries (LDCs), and emerging markets have lower ratings based.
Countries that are deemed more developed are referred to as developed countries, while those that are less developed are known as less economically developed countries (LEDCs), or frontier markets. These terms have been the subject of criticism, but they remain used in many circles, including international organizations.
How Developing Countries Work
Classifying countries became common in the 1960s as a way to better understand the outcomes of countries in each group. Sorting countries into these groups allows for easier policy discussions on moving resources to the poorer lands.
Although organizations use different measures to determine how countries are classified, a few common factors appear in the mix. Brazil, Russia, India, China, and South Africa (BRICS) are often thought to be developing countries.
Others include 10 newly industrialized countries, which are the BRICS countries, but not including Russia. This list adds Indonesia, Malaysia, Mexico, Philippines, Thailand, and Turkey.
Developing Country vs. Emerging Market
|Developing Country||Emerging Market|
|Less industrialized||Becomes more engaged with global markets|
|Often agricultural||Transitioning to modern industrialized economy|
|Lower per capita income||Higher standard of living|
The primary difference between these countries is the increased presence of industrialization. Unlike countries that rely on agriculture as their prime industry, they are making strides in technology, infrastructure, and manufacturing. This has led to increased income and growth.
Benefits of Developing Countries
Investors like to use class systems to make the investment process simpler. They are not as safe as those in developed countries, but they tend to have higher return rates over the long term. Developing countries often grow at a faster rate. This can make them a prime part of a portfolio, particularly if your horizon is long term.
Another benefit of these markets is diversification. This spreads out risk to limit exposure to any single asset. Emerging markets provide investors with both market equities that tend to account for most of a portfolio.
- Developing countries are countries with economies that have a low GDP per person and rely on agriculture as the main industry.
- There is no single definition of a developing country.
- Emerging countries are those making strong strides in technology and other manufacturing sectors.
- Country classes help drive investment decisions.