What Is an Emerging Market Economy?
An emerging market economy is the economy of a developing nation that's becoming more engaged with global markets as it grows. Countries classified as emerging market economies are those with some but not all of the characteristics of a developed market.
Characteristics of developed markets can include strong economic growth, high per capita income, liquid equity and debt markets, accessibility by foreign investors, and a dependable regulatory system.
It typically becomes more integrated with the global economy as an emerging market economy develops. It can have increased liquidity in local debt and equity markets, increased trade volume, and foreign direct investment. It can develop modern financial and regulatory institutions. Some notable emerging market economies include India, Mexico, Russia, Iran, Saudi Arabia, China, and Brazil.
An emerging market economy is transitioning from a low-income, less developed, often pre-industrial economy toward a modern, industrial economy with a higher standard of living.
Key Takeaways
- An emerging market economy is one that's transitioning into a developed economy.
- Emerging market economies typically feature a unified currency, stock market, and banking system. They're in the process of industrializing.
- Emerging market economies can offer greater returns to investors due to their rapid growth.
- They also offer greater exposure to some inherent risks due to their status.
- Emerging markets typically adopt reforms that are seen in developed markets over time.
Understanding an Emerging Market Economy
Investors seek emerging markets for the prospect of high returns because these markets often experience faster economic growth as measured by gross domestic product (GDP). Higher returns usually come with much greater risk, however.
Risks of Emerging Markets
Risks can include political instability, domestic infrastructure problems, currency volatility, and illiquid equity because many large companies may still be state-run or private. Local stock exchanges might not offer liquid markets to outside investors.
Emerging markets generally don't have highly developed market and regulatory institutions like those found in developed nations. Market efficiency and strict standards in accounting and securities regulation are generally not on par with advanced economies such as those of the United States, Europe, and Japan.
Signs of Progress
Emerging markets typically have a physical financial infrastructure, including banks, a stock exchange, and a unified currency. A key aspect of emerging market economies is that they adopt reforms and institutions like those of modern developed countries over time. This promotes economic growth.
Emerging market economies tend to move away from activities that are focused on agricultural and resource extraction toward industrial and manufacturing activities instead. Their governments usually pursue deliberate industrial and trade strategies to encourage economic growth and industrialization. These strategies include export-led growth and import-substituting industrialization.
Export-led growth is more typical of economies that are considered emerging because it promotes more engagement and trade with the global economy. Emerging market countries also often pursue domestic programs such as investing in educational systems, building physical infrastructure, and enacting legal reforms to secure investors' property rights.
Frontier Markets
Frontier markets are usually smaller than emerging markets with lower per capita income, less market liquidity, and less industrialization. They offer attractive investment opportunities but frontier markets are considered riskier for investors than emerging markets.
How Emerging Market Economies Are Classified
Emerging market economies are classified in various ways. Levels of income, quality of financial systems, and growth rates are all popular criteria but the exact list of emerging market economies can vary depending on who you ask.
The International Monetary Fund (IMF) classifies 20 countries as emerging markets. Morgan Stanley Capital International (MSCI) classifies 24 countries as emerging markets. Standard and Poor's (S&P), FTSE Russell, and Dow Jones also vary slightly in their classification of countries as emerging markets.
A country can be removed from the list by either upgrading it to developed nation status or downgrading it to a frontier nation at any of these institutions' discretion. Developed nations may likewise be downgraded to an emerging market as was the case with Greece. Frontier markets such as Qatar and Argentina may be upgraded to emerging markets.
What's an Emerging Market Economy?
An emerging market economy is generally considered an economy that's transitioning into a developed market economy. It has rapid GDP growth, growing per capita income, increasing debt and equity markets liquidity, and an established financial system infrastructure.
What Countries Are Classified As Emerging Markets?
Classifications differ but the so-called BRICS countries represent five emerging markets with major economic growth and opportunities for investment: Brazil, Russia, India, China, and South Africa. The GDPs of these countries have increased steadily from 2000 through 2023. Data for 2024 isn't yet available.
That trend is expected to continue through the years ahead.
Do Emerging Markets Make Good Investments?
They can make good investments due to their propensity for rapid GDP growth compared to more mature markets but investing in emerging markets can be risky due to potential political instability, lack of dependable information, currency fluctuations, lower liquidity, and investment volatility.
Investors should carefully weigh potential risks and rewards before making any investment.
The Bottom Line
Countries that are classified as emerging market economies are those with economies that are transitioning into being developed. They have a unified currency, stock market, and banking system, and they're in the process of industrializing.
Emerging market economies can be attractive to investors due to their rapid growth and greater returns but they also involve greater exposure and risk due to political instability or currency fluctuation.
