The term "third world" came into use in grouping countries by their economic status. The industrialized countries located mainly in the West were categorized as the "first world," the once-communist countries of the East as "second world," and the rest of the developing countries as the "third world." With the dismantling of the Soviet Union and the discarding of communism by the Eastern European countries, the "second world" has lost its meaning and the term "third world" has become a misnomer. The term is still being used as a synonym to describe the developing countries, but according to the International Monetary Fund (IMF) there are only two groupings of countries by their economic status—the 23 industrialized countries and the 138 developing countries. For the purposes of this article, third world countries are taken to be the same as the developing countries as loosely grouped by the IMF.


Most of the third world countries are former colonies of European powers and gained their independence after the World War II. Colonialism was as much an economic domination as it was political. The main features of a colonial economy were twofold. First, the natural resources of the colonies were exploited and depleted by the colonial powers. Secondly, the colonies were used as the market for the manufactured goods. In both ways the economic interests of the colonial countries prevailed.

When the colonies gained their independence, most of them had to overcome this adverse economic situation created by colonialism. Economic discipline, good management, strategic planning, and above all, competent political leadership are some of the attributes required to reverse such a condition. Unfortunately, most newly independent countries lack these necessary characteristics.

A legacy of colonialism is mistrust of the colonial powers. The emphasis on economic self-reliance by many former colonies can be traced to this mistrust. Protectionism is a by-product of this policy of self-reliance. Foreign investment is suspect. Fear of foreign profits draining the economy is prevalent. The post-independent economic growth, or lack of it, in many countries is conditioned by this colonial past.


Most third world countries do not enjoy a democratic political system. Dictatorships, of one kind or other, are a common feature of most countries. There are a few notable exceptions, such as India, that have managed to maintain an unbroken record of democratic governments. In an undemocratic system there are no checks on corruption or unilateral decision making. Dictatorships often distort the economic system. Efficiency and the need for quick decision making are reasons given by dictators for seizing power. Dictatorships rarely live up to their promise. Political stability and consistent government policies are preconditions for businesses to operate successfully. In the absence of these conditions in many third world countries, doing business involves added risk.


National debt is a common characteristic among third world countries. Often the economy of a country is based on a few commodities, making it vulnerable to price fluctuations. Even when the commodity is oil, countries are unable to make use of the profits to overcome economic backwardness because of poor economic management. The economies of many countries revolve in a vicious circle. To develop the economy these countries need to borrow capital, thereby increasing their debt. It becomes difficult to service the debt unless there is sustained export surplus and it is seldom possible to achieve this surplus in a fluctuating world commodity market. When commodity prices are low, exports do not generate enough trade surplus to service the debt.

The developing countries require capital and skilled human resources to transform a colonial economy into a modem industrial economy. Most countries do not possess either, again with some exceptions. The internal savings are inadequate to mount an ambitious development program. Technical and managerial skills are in short supply due to the slow growth in higher education. In the absence of political will and direction, economic management becomes even more difficult. Poverty and economic drift are generally the consequence. Even when foreign investment is welcome, the economic uncertainties stand in the way of attracting capital.

In recent years, increased globalization, a breakdown of protectionism, expanded free trade, collapse of the Soviet system and the popularity of the free market economy have allowed a group of third world countries to emerge as newly industrialized states. These countries, in spite of their political systems, have embraced the capitalist path of development. They have trained enough skilled people to utilize the capital generated by domestic savings and foreign investment. These countries are the most entrepreneurial among the developing countries. South Korea, Taiwan, Hong Kong, Singapore, Thailand, Brazil, Chile, and Mexico are, in varying degrees, examples of newly industrialized countries. Unfortunately the discrediting of socialism led to unrestrained acceptance of free market and free flow of capital. Bad investment decisions and a decrease in the demand for goods in Western countries for the products of the newly industrialized countries, especially electronic goods, caused an economic downfall. The financial sector in the East Asian countries—including in Japan, one of the economic giants in the world—nearly collapsed. Beginning with Thailand in 1997, the financial crisis spread quickly to other East Asian countries. Measures are under way through the efforts of the IMF and Western banking institutions to stabilize the situation. In early 1999 Brazil became the latest country to be hit by a financial crisis. These events point out the need for keeping a sensible balance between a regulated economy and an unrestrained free market economy.

Commensurate with the high risks involved are the prospects of higher returns in doing business in these developing countries and especially so in the newly industrialized countries. The countries provide cheap labor that is skilled enough to perform many operations. As these countries become more prosperous, they also provide a growing market for goods and services. Their large population base is a potential market as their purchasing power increases. Many of the developing countries offer attractive incentives for establishing businesses and for investing. It is in the interest of the industrialized countries to take advantage of this situation. In a highly competitive global economy, many industries can diversify manufacturing and keep costs to the minimum by moving operations to developing countries. In many of the third world countries, the policy of nationalistic self-reliance is being replaced by a policy of pragmatic economic interests. Generating employment and prosperity even at the cost of some of the profits being repatriated is gaining support. The need of the industrialized countries to expand economically is consistent with the need of developing countries to industrialize and improve the standard of living of their people. In this context, the economic interests of both groups of countries are fulfilled.


It is inaccurate to generalize the business conditions prevailing in the third world countries. Conditions vary greatly especially between the newly industrialized countries and the rest of the developing countries. Some common features, however, can be noted. Political stability is wanting, especially in those countries where democratic roots are not strong. Investment capital is scarce. Wages and benefits tend to be low. Availability of skilled workers is limited. Educational levels are low, especially if high technology is involved in the business. Environmental regulations are few and not seriously enforced. The judicial system is often unpredictable and severe. Bureaucratic hurdles, such as obtaining licenses and permits, have to be overcome. Communication is difficult in an unfamiliar linguistic and cultural environment. Value systems tend to be different, which might cause misunderstandings. Instruction in the language and culture of the country is a prerequisite to doing business. Infrastructure necessary to operate a business—such as communication facilities, transportation, and energy supply—may not be adequate. These factors have to be borne in mind before embarking on any business venture in the third world.


The United Nations Industrial Development Organization located in Vienna, Austria, is a major source of additional information on developing countries. It publishes the periodical Industrial Development Abstracts. The World Bank in Washington, D.C., is another source of information. One of its publications, World Development Indicators, incorporates two of its earlier publications, Social Indicators of Development and World Tables. The World Bank web site is an excellent source for concise and up-to-date country statistics. The UN Economic Commissions for Latin America and for Asia and the Pacific publish the Economic Survey of Latin America and the Caribbean and the Economic Bulletin for Asia and the Pacific, respectively. The Association of South East Asian Nations publishes annual surveys and statistical data on member countries. The Asia Yearbook, published by the Far Eastern Economic Review, and Latin America, an annual published by Stryker-Post publications in Washington, D.C., are examples of private publications providing country-based information in their respective regions.

[ Divakara K. (Dik) Varma ]

Other articles you might like:

User Contributions:

Comment about this article, ask questions, or add new information about this topic: