What Is an Emerging Market Economy?
An emerging market economy is the economy of a developing nation integrating increasingly with global markets as it grows. These countries possess some, but not all, characteristics typical of a developed market.
Characteristics of developed markets include strong economic growth, high per capita income, liquid equity and debt markets, accessibility for foreign investors, and dependable regulatory systems.
As an emerging market economy advances, it generally becomes more woven into the global economy, seeing enhanced liquidity in local debt and equity markets, increased trade volumes, and foreign direct investment. Key emerging market economies presently include India, Mexico, Russia, Iran, Saudi Arabia, China, and Brazil.
Critically, an emerging market economy evolves from a low income, less developed, often pre-industrial economy towards a contemporary, industrial economy with a higher standard of living.
Key Takeaways
- Rapid Transition: Emerging market economies are rapidly evolving into developed economies.
- Unified Systems: These economies typically feature a unified currency, stock market, and banking system, and they are in the process of industrializing.
- Investor Returns: They often offer higher returns due to rapid growth potential.
- Inherent Risks: Alongside growth opportunities, emerging markets are exposed to significant risks like political instability and currency fluctuations.
- Reforms: Over time, emerging markets usually adopt reforms and institutions resembling those in developed markets.
Understanding an Emerging Market Economy
Investors are often drawn to emerging markets owing to the high returns driven by faster economic growth, often measured by gross domestic product (GDP). However, these higher returns come with greater risks.
Risks of Emerging Markets
The associated risks can include political instability, domestic infrastructure challenges, currency volatility, and illiquid equity. State-run or private ownership of larger companies, as opposed to fluid market operation, is common in these regions. Local exchanges may not always offer liquid markets to external investors.
Emerging markets typically don’t match the developed markets in terms of market efficiency and stringent standards in accounting and securities regulation.
Signs of Progress
Emerging markets generally possess a physical financial infrastructure, including banks, a robust stock exchange, and a unified currency. Over time, they tend to adopt reforms characteristic of more developed countries, fostering economic growth.
Shifting from agriculture and resource extraction activities to industrial and manufacturing pursuits is a key trait. Governments often pursue strategies like export-led growth and import substitution industrialization to drive this transition.
Domestic improvements such as enhancing educational systems, infrastructure development, and legal reforms to protect investor property rights are common.
Frontier Markets
Frontier markets are often smaller than emerging markets, with lower per capita income, limited market liquidity, and lesser industrialization. Although they present attractive investment chances, frontier markets hold more risks compared to emerging markets.
How Emerging Market Economies Are Classified
Classification can vary based on different criteria such as income levels, quality of financial systems, and growth rates. The list of emerging markets varies with organizations, examples include 20 countries by the International Monetary Fund (IMF) and 24 by Morgan Stanley Capital International (MSCI).
Countries can be reclassified into developed nation status or downgraded to frontier markets depending on their developmental progress.
Important Considerations
Rapid GDP Growth
Emerging market economies are characterized by rapid GDP growth and improving per capita income, larger debt and equity market liquidity, and established financial infrastructure.
Key Emerging Markets
The BRICS nations (Brazil, Russia, India, China, South Africa) are prominent emerging markets with significant growth trajectories. Additionally, economies like Thailand and Indonesia are increasingly stepping onto the emerging market stage.
Potential for Investment
Emerging markets present attractive investment opportunities due to their propensity for rapid growth. However, investments can be risky owing to possible political instability, unreliable data, currency fluctuations, and market volatility. Thorough analysis is essential before committing investments.
Conclusion
Emerging market economies, by transitioning into developed markets, present promising opportunities accompanied by greater risks. While their rapid growth and unfolding market systems invite investor interest, careful consideration of inherent risks is crucial for making informed investment decisions.
Related Terms: Frontier Markets, Developed Markets, Global Economy, Economic Development.
References
- International Monetary Fund. “Miles to Go”.
- Morgan Stanley Capital International. “MSCI Emerging Markets Index (USD)”. Page 1.
- The World Bank. “GDP (current US$) - South Africa, Brazil, India, China, Russian Federation”.
