Developing Countries and Markets

A developing country is defined as a country with low incomes, undeveloped infrastructures and low standards of living compared to averages in developed nations, normally defined by the members of the OECD- Organization of Economic Growth and Development. Fully developed economies have economic systems that support employment, and institutional and physical infrastructures and commerce within the country and with other countries that permit self-sustaining economic growth.

For a nation to develop economically a strong, modern infrastructure (both physical and institutional) must be in place and commerce on a large scale must exist. An underdeveloped nation relies primarily on the rudimentary sectors of the economy such as agriculture and and natural resource extraction.

In order for a nation to compete in world markets, it must move into more value added products, such as in the manufacturing and service industries. For this to happen, governments must create a base for sustained growth. They may do this by lifting restrictions on foreign investment, allowing micro loans to reach the poorest in the country, and developing realistic tax and permit policies that do not stifle small industry.

This is a decided advantage for the citizens of a developing nation, since, in the beginning, much of the growth in such economies occurs in lower income sectors. As this sector grows, it will become a more consumer oriented sector, rather than just a subsistence sector. It becomes a very favorable cycle as further economic growth, and eventually credit growth center around this increased consumer demand. In other words, as the poor find businesses and industries that can not only sustain them, but afford some disposable income, they will in turn create the need for more business and industry to meet that need.

As long as the governments in these economies can provide a stable macro economic environment — that is stable prices, stable currency and stable interest rates — the natural engine of commerce will take over and move these counties into market-oriented societies. This kind of structural reform requires a stable political situation in the first place, and it needs the governments of developing nations to shed their large, non-market focused bureaucracies. (That is why so many of the African nations cannot make the step into economic development: unstable governments, war and tribal rivalry undermine any basis for stable government).

As domestic investment in these less developed nations grows, external investment follows. The reason for this is two-fold. As these businesses develop and become profitable, outside investors are willing to invest in them to reap the profits as well, and the newly formed consumer sector becomes increasingly more attractive for businesses from other countries to cater to. As long as the governments avoid the temptation, mentioned above, of increasing their own revenue at the cost of small business and industry by imposing exorbitant taxes, irrelevant fees and fines, and bureaucratic delays and bottlenecks.

Today, the focus in the developing market arena is on the collection of countries now known as BRIC: Brazil, Russia, India and China. These markets are leading the way in terms of increasing service and technology industries, and in doing so creating a new consumer society that is fast becoming the focus of many of the large multi-national corporations. As such, they are being targeted for marketing campaigns by giants in the computer, telecommunications, auto and other industries. The end result will be a shift from being the manufacturers of all of these kinds of goods for consumption by other countries, to being major consumers, and no longer developing nations themselves.

Categories Investing and Financial Planning

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