What Is a Developing Country?
Definition & Examples of Developing Countries
Developing countries are countries with economies that have a low gross domestic product (GDP) per capita and rely heavily on agriculture as the primary industry. When it comes to regions of the world, developing countries have not quite reached economic maturity, although there's a wide array of different definitions.
Learn more about developing countries, the varying definitions, and the purpose behind these classifications.
What Is a Developing Country?
A developing country is generally defined to a certain degree by its economic output. There has been much debate around where to draw the line between a developed and developing country, which is evident by the lack of a universal definition.
For example, the United Nations has conventions for distinguishing between developed and developing countries, and the World Bank has stopped using such terms in favor of low-income economy, lower-middle-income economy, and so on based on gross national income (GNI) per capita.
- Alternate name: Low-income economy
- Alternate definition: The World Bank has a more concrete methodology that considers countries with a per capita income of less than $1,035 in 2019 as low-income economies.
- Alternate definition: The International Monetary Fund's (IMF) definition is often considered the most comprehensive measure. It considers per capita income, export diversification, and the degree of integration into the global financial system.
In 2011, the IMF published a research report on the topic of development classification that outlines its methodologies for classifying a country's level of development.
International investors often classify countries around the world based on their level of economic development. Several classification levels exist, and these use several economic and social criteria, ranging from per capita income and life expectancy to literacy rates. Developing countries, less-developed countries (LDCs), or emerging markets have lower ratings based on these statistical criteria.
Countries deemed more developed than LDCs are called developed countries, while those less developed are known as less economically developed countries (LEDCs) or frontier markets. These terms have been the subject of criticism, but they remain commonly used in many circles, including among international investors and international organizations.
How Developing Countries Work
Classifying countries as either developing or developed became common in the 1960s as a way to better examine and understand the economic and social outcomes of countries in each group. When discussing global policies, categorizing countries in these groups allowed for easier policy discussions on transferring resources to the poorer countries.
Although various organizations use different measures to determine how countries are classified, there are a few common denominators that appear in the mix. For instance, Brazil, Russia, India, China, and South Africa (BRICS) are generally considered developing countries. Other developing countries include 10 newly industrialized countries—which are the BRICS countries, not including Russia—as well as the following six:
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 emerging countries and developing countries is the increased presence of industrialization. Unlike developing countries that rely heavily on agriculture as the primary industry, emerging countries are making noticeable strides in technology, infrastructure, and manufacturing. These strides have led to increased income and economic growth.
Benefits of Developing Countries
Investors like to use classification systems in order to simplify the investment process. While these investments aren't as safe as those in developed countries because of their volatility, they tend to have higher return rates over the long-term, simply because developing economies often grow at a faster rate than developed ones. This makes them an important component of an investor's portfolio, particularly if they have a long-term horizon.
Another benefit of these emerging markets is diversification, which spreads out investment risk to limit exposure to any single asset. Emerging markets provide investors with diversification from both domestic and developed market equities that tend to account for most of a portfolio.
- Developing countries are countries with economies that have a low GDP per capita and rely on agriculture as the main industry.
- There is no universal definition of a developing country.
- Emerging countries are those making strong strides in technology and other manufacturing sectors.
- Investors use country classifications to help drive investment decisions.