What Are Emerging Markets? Definition and Key Characteristics
Unpack the concept of emerging markets. This guide clarifies their essence, common attributes, how they are identified, and their vital role in the global economy.
Emerging markets are a dynamic and increasingly influential segment of the global economy. These economies are undergoing significant transformations, moving from lower-income, developing statuses toward more industrialized and integrated roles on the world stage. They are a focal point for global economic analysis due to their growing contribution to overall world output and trade.
Defining Emerging Markets
An emerging market economy is generally considered a developing nation that is integrating into the global marketplace. The term “emerging market” was coined to describe countries with investment potential, aiming to present a more positive outlook than previous labels like “Third World” or “less developed” economies.
These economies typically exhibit lower-to-middle income levels per capita, distinguishing them from high-income developed nations. They are characterized by rapid economic expansion, often driven by a shift from agrarian or resource-extraction bases towards industrialization and service-based sectors. As they develop, these markets work to establish and mature their financial systems, including banks, stock exchanges, and unified currencies, fostering greater integration with the global financial system.
Key Characteristics of Emerging Markets
Emerging markets are distinguished by several common features that reflect their transitional nature. They typically experience higher rates of Gross Domestic Product (GDP) growth compared to developed economies, fueled by industrialization and increasing productivity. This rapid economic expansion is often accompanied by significant urbanization, as populations shift from rural areas to cities in search of economic opportunities.
Market liberalization is another defining characteristic, involving increasing openness to international trade and capital flows. Governments in these nations often implement policies designed to attract foreign direct investment and promote export-led growth, integrating their economies more deeply into global supply chains. This process frequently entails deregulation and the adoption of international business standards.
Infrastructure development is a prominent feature, with ongoing investment in transportation, communication, and energy systems to support economic activity and improve living standards. While progress is made, infrastructure can still be in various stages of development.
Demographic trends in many emerging markets include younger populations and a growing middle class, which drives increasing consumer demand for goods and services. This expanding consumer base contributes significantly to economic growth.
Despite their growth, emerging markets face higher sensitivity to external shocks, such as fluctuations in global commodity prices, shifts in international capital flows, or changes in global monetary policies. This vulnerability can lead to market volatility and currency fluctuations.
Major Classification Methodologies
There is no single, universally accepted list of emerging markets, as different financial institutions and index providers use their own criteria for classification. This leads to variations in how countries are categorized. These classifications are important for global investors, guiding investment strategies and portfolio allocations.
MSCI (Morgan Stanley Capital International) is a prominent index provider that classifies markets as developed, emerging, frontier, or standalone. Their methodology considers three main criteria: economic development, the size and liquidity of the market, and market accessibility for international investors. Market accessibility involves evaluating factors like foreign ownership limits and capital mobility.
FTSE Russell also employs its own framework, taking into account economic development, market size, and the regulatory environment. S&P Dow Jones Indices similarly categorizes equity markets using a comprehensive approach that combines quantitative criteria, qualitative indicators, and feedback from global market participants. The criteria for these classifications often include macroeconomic requisites, political stability, and the ease with which foreign investors can transact in a market.
Role in the Global Economy
Emerging markets are increasingly influential in the global economic landscape. They contribute significantly to global GDP growth, transforming them from peripheral players to central drivers of global trade and investment.
Their expanding industrial and service sectors create a rising demand for goods and services, fostering international trade. Many emerging economies have increased their share of global exports and imports, reshaping supply chains and fostering economic interdependence. They also serve as significant destinations for foreign direct investment (FDI) and portfolio investment, attracting capital due to their growth potential and untapped consumer bases.
Emerging markets provide sources of both goods and demand for developed economies, creating interconnectedness within the world economy. Their increasing integration means that economic developments within these nations can have broader implications for global growth and stability.