Developing Economy

Updated on January 25, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Developing Economy Definition

A developing economy defines a country with a low human development index, less growth, poor per capita income, and more inclined toward agriculture-based operations rather than industrialization and business. In other words, a developing economy is often referred to as an underdeveloped country or a less developed economy.

In such an economy, a government often has certain issues, like population growth, unemployment, rising poverty, poor infrastructure, low lifestyle quality, etc. As a result, the citizens of such countries are either dependent on government policies to sustain a better life because of inadequate resources and income.

Key Takeaways

  • Developing economies have a low per capita income, poor living standards, and less monetary growth. As a result, they often rely on their agricultural sector or a national resource alone.
  • Overpopulation, poverty line, poor infrastructure, poor quality of living, adverse health conditions, the struggle with management, social unrest, etc., are common problems seen in such economies.
  • The term “underdeveloped” or “developing” is largely considered bad when describing a country’s economy.
  • “Emerging economy” is another term for countries that have lately started performing well and have reflected rapid growth in becoming developed economies.

Developing Economy Explained

Developing Economy Features

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A developing economy includes countries that are not performing well in industrialization, technology, and business trade. Such countries often rely on their on-ground resources and generate revenue by exporting them. As a result, there is always a crisis in such nations that their governments and citizens struggle with.

The common problems in these countries are many people living below the poverty line, unemployment, no better resources, lack of opportunities, hunger, poor standards of living and infrastructure, etc. In addition, governments of such countries are often in debt to other countries or have loans to pay back to the world bank and other international financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more or regulatory authorities. Also, one of the differences between developed and developing economies is that any change in foreign market policies and business trade regulations directly or indirectly affects the latter more.

One of the developing economy examples is the case of Afghanistan. A major portion of its revenue comes from agriculture. However, the country is frequently plagued with hunger, poverty, and a perpetually rising humanitarian crisis.

 Now the country is awaiting an imminent financial crisis, adding to its perils. In August 2021, America froze approximately $9.1 billion in Afghan reserves, depicting its consequences as its economy declined sharply. The reserves are held at the Federal Reserve Bank of New York. Lately, there is a 30% depreciation of the Afghani currency in contrast to the US dollar.

In the 1990s, “emerging economy” was a new term coined to define such economies that have shown steady and rapid growth in the last few years and are on the road to development. They have also changed their fiscal policiesFiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more and monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more and introduced new technology and industrialization. India and China are some notable examples of emerging economies.

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Characteristics

  • Developing economies are low on business trade, globalization, and technological advancement.
  • Such economies majorly depend on their resources and agriculture, so they are often agro-based economies.
  • In developing economies, there is always a rising problem of poverty and hunger.
  • These nations are dependent on other countries for their revenue and smooth functioning.
  • These countries are on low or no foreign reserves.
  • One of the key developing economy features is that one can rank such countries on the basis of their per capita income which is relatively lower than developed nations.
  • Noone drives these economies well and they face problems like illiteracy and overpopulation.
  • People’s quality of life and living standards in such nations are poor and below average.
  • The growth and development opportunities for citizens are low in such economies, and in some cases, people struggle for basic day-to-day needs.
  • The government has to deal with issues of poor infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more and providing basic necessities to their citizens.
  • The currency exchange rate of such countries is very low, and they hardly play any role or contribute to the world economy.
  • Such nations only have two or three major earning resources that depend on how other countries participate, like exporting abundantly available resources in their regions, tourism industry, etc.

Developing Economy Countries

One of the worst examples of how a developing economy falls in Sri Lanka. The country was well-growing because of its tourism industry, which constitutes about 12% to 15% of annual revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. However, due to high import rates, terrorist attacks, and communal riots in the pre-pandemic times, Srilanka’s tourism industry broke its back. This has been one of the major reasons for its disappointing economic downfall.

Since 1980, numerous countries such as India, South Korea, Brazil, Estonia, and Turkey have shown rapid growth, brought industrialization to their country, and have drastically improved and hiked their GDP. However, such economies still have a long way to go and are undoubtedly emerging market economies. This is because even though these nations have worked well on their infrastructure, there are still a lot of problems to cope with.

Then there are countries like Honduras and Ukraine, which are changing their monetary policies so they can benefit and get on the path to becoming developed countries. These countries already possess the developing economy features and look forward to attaining more in the future.

Frequently Asked Questions (FAQs)

What is an example of a developing economy?

Honduras can be considered a good example of a developing economy. It is one of the poorest countries in Latin America. More than 50% of its population lives below the poverty line. Other examples can be Africa, Turkey, Latin America, China, etc.

What does a developing economy mean?

A developing country mostly relies on an agricultural-based economy. It is termed a developing country because every sector or infrastructure of the economy is still on the path of development. Often, there are certain issues and problems that such countries are facing, like unemployment, inflation, overpopulation, poverty, etc.

What are the basic features of a developing economy?

The main developing economy features are –

– Agricultural based economy
– Low per capita income
– Overpopulation
– Unemployment
– Poor quality of life
– A greater percentage population under the poverty line
– Poor infrastructure
– The low capital formation rate

This has been a guide to Developing Economy & its Definition. Here we discuss their characteristics, features, and countries. You can learn more from the following articles –

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Comments

  1. Robinson Queen says

    Thank you for this article. It is very informative and inspiring, invoking further research.
    I would appreciate more of such articles.

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