A true developing country has an economy that has been in developing country status for decades, and will surely remain in that league for years to come.
When a developing economy is viewed in the world as having no hope of achieving “advance economy” status for decades to come, or is called a “true developing country,” it means that the country has fundamental flaws in its political and legal system that cannot be fixed easily.
Such a country usually has corrupt political and legal systems. The bulk of its economy is in low-technology industries. It faces formidable competition from many other developing countries in the world. Because a corrupt developing country is viewed poorly around the world, it has almost no hope of creating competitive consumer brands in the world market, and thus cannot compete effectively with major foreign rivals.
Without a clean political and legal system, rich people in this developing country will prefer to move much of their wealth abroad for safety reasons. This creates a huge deficit for this economy in the long term, since most of the wealth in any economy is in the hands of upper class.
Another factor is human capital: Many of the best minds in this developing country will prefer going abroad to study and settle in developed countries. Citizens do not want their children to study in domestic second- or third-rate educational institutions and later work for lowly regarded corporations in their corrupt society.
Financial Flows
The relative currency strength of two economies is determined by their relative competitiveness in the world economy. There are many competitors among developing countries that compete with each other for export dollars, since the barrier to entry is not very high in those low-tech industries. This vicious cycle of competition will result in currency devaluation of all the developing countries involved.
Capital inflow is either for low-tech manufacturing or speculation; low-tech exports face many competitors and speculative capital can be gone any minute. Since the currency of a developing country does not have significant use in international trade, it does not make sense for foreigners to hold it—thus the currency can lose value quickly in a panic caused by political or economic turmoil.
In a corrupt society, bureaucracy is everywhere and is always a big part of society. To support the large bureaucratic system, higher taxes in one form or another are needed. The huge tax burden has to be passed to consumers in the form of higher price for goods and services. Thus products are generally more expensive than in other parts of the world, especially the United States.
A relatively corrupt country is usually not a big attraction for tourists either. So a current account deficit is usually a constant phenomenon. Adding that to the middle and upper class who usually send their money to developed countries, both for investment and for their children’s education, and you get a picture that—except in the short term—capital move into certain developing economy to speculate, developing economies will almost always face a demand for U.S. dollars, thus creating a long-term trend of currency devaluation.
The form of currency devaluation usually takes the form of sudden volatility because of the nature of capital outflow in the international market today. In the age of Internet, news is instant and capital transferred in seconds.
The only way to have a strong currency in the world is to have a clean political and legal system, top educational institutions, a well-trained workforce, and a positive national “brand,” thus creating an ideal environment for domestic companies to grow and become competitive in the world.
Warren Song is a New York-based financial consultant.
