Diversification of the economies worldwide is a recent phenomenon. Countries have defied social and political barriers in a bid to become developed and serve its nationals better. This diversification has led to a divisive classification of the countries on the basis of their growth. Financial organizations around the world are keen on introducing measures that allow for the sustained growth of all economies.
In 2009, the International Monetary Fund’s World Economic Outlook, classified countries as advanced emerging or developing, on the basis of the following criteria :
- Per capita income
- Export diversification
- Degree of integration in the global financial system
The confusion then prevails over whether developing countries and emerging markets are the same or not. One can partially attribute this confusion to the fact that emerging markets are a classification of the developing countries.
Though both of the above have lower ratings in the social and economic arena, as compared to the developed countries, but they are not the same.
- Developing countries are the countries that have less developed industrial base alongside lower standards of living. They are striving to become better with the help of other strong economies.
- Emerging markets are the countries that have stepped aside from the traditional mediums of sustenance and have witnessed massive economic growth.
Developing Countries vs Emerging Markets
The main difference between Developing Countries and Emerging Market is that while developing countries have weak trading ties due to being primarily engaged in agriculture and indigenous industries, emerging markets have undergone high economic development owing to industrialization.
Comparison Table Between Developing Countries and Emerging Markets (in Tabular Form)
| Parameter Of Comparison | Developing Countries | Emerging Markets |
|---|---|---|
| Definition | Developing countries are the countries that have not seen any significant growth in their economy due to sticking to traditional growth practices such as agriculture. | Emerging markets are the countries that have witnessed massive economic growth due to the development of industrial and technological sectors. |
| Extent of Industrialization | Industrialization is limited in developing countries due to the apprehensions of the government regarding investment in the global market. | Industrialization is the vital element of emerging markets as they have leveraged this factor for their economic growth. |
| Export Conditions | Developing countries have less favorable conditions for exports due to unfavorable trade terms, mounting import needs, and depleting foreign exchange coffers. | Emerging markets are more favorable to exports due to business-friendly policies, increased domestic production, and less reliance on agriculture. |
| Position in Global Finance | In the global financial scenario, developing countries are characterized by less foreign investment, trade deficits, currency devaluations, and high rates of inflation. | In the global finance, emerging markets reign due to high foreign investment, surplus trade, healthy cash balances and access to cheap capital. |
| Volatility and Instability | Here, the causes of volatility and instability are propensity to currency, financial crises, and political unrest. | Here, the causes of volatility and instability are unstable governments, economies based on a few industries, and capital outflows. |
What are Developing Countries?
A developing country is also called a low and middle-income country (LMIC) or a less economically- developed country (LEDC). It is characterized by a less developed industrial base and low Human Development Index (HDI).
International finance and development organizations have classified the division of developing countries into :
- Newly industrialized countries
- Emerging markets
- Frontier markets
- Least developed countries
In the most basic sense, developing countries include the countries that employ indigenous livelihoods as the financial driver of the nation. They achieve this through agriculture, artisanship, and other local trades.
These countries have weak economic growth and generally low standards of living. Other problems include illiteracy, lack of sanitation, and political upheaval.
They generally have trade deficits and seek support from other developed countries. However, many of the developing countries have transformed themselves into emerging markets by employing a sound economic approach.
What are Emerging Markets?
An emerging market is also called a rapidly developing economy, such as the UAE and Chile. These countries are a subpart of the developing countries.
Emerging markets have relied on industrialization and improvements in the IT and telecommunication sector for economic growth. The idea here is to produce a surplus for the domestic needs, and further export the extra for fiscal advantage.
Emerging markets are the newly industrialized countries that have increased productivity through technological innovations. In Asia, China and India are prominent emerging markets.
These countries are more trade-friendly due to calculated policies, healthy cash balance, and cheap labor and capital. They, therefore, leverage high foreign investment and employment growth.
However, fluctuating economic policies due to changing governments and social unrest make them non-ideal for foreign traders. Also, they have low per capita income and environmental issues due to the shifting of industries from developed countries.
Main Differences Between Developing Countries and Emerging Markets
Developing countries constitute all the countries of the world that couldn’t make it to the list of developed countries. They include emerging markets that are on the threshold of becoming developed.
- Developing countries are at the backdrop in terms of growth due to limited investment in globalization, whereas emerging markets have witnessed high economic growth due to technological innovations.
- Developing countries have employed little to no industrialization, whereas emerging markets have used industrialization to improve employment for the masses.
- Developing countries are not in a condition to export commodities due to deficiency in meeting domestic demands. On the other hand, emerging markets have an adequate amount of production to meet both domestic and export requirements.
- The developing countries have less foreign investment, trade deficits, and higher rates of inflation, whereas emerging markets have high foreign investment, trade surplus, and cheap capital.
- The developing countries are fraught with challenges such as financial crises, empty coffers, and insurgencies. On the other hand, emerging markets suffer from fluctuating economic policies, and social and political unrest.
Conclusion
Developing countries and emerging markets have changed the global scene, where only the developed countries had large economies. A recent study has suggested that 70% of the world’s future economic growth in the next 12 years will arise from the emerging markets.
At any point in time, a developing country can transform itself into an emerging market. For this, it should adopt a proactive approach to link industrialization with employment generation.
A country is free to declare itself as developing. However, in 2020, the USA removed many countries from the list of developing countries. India was one of them, and it was removed on account of being a G-20 member and having more than 0.5% of the share in world trade.
Many countries have criticized the practice of labeling a country as developing. Countries such as Cuba and Bhutan do not want to be driven by the western approach. They support another parameter, called Gross National Happiness, to measure the development of a nation.
References
- https://scholar.smu.edu/cgi/viewcontent.cgi?article=1935&context=til
- https://madoc.bib.uni-mannheim.de/915/1/dp0464.pdf