What an emerging market is

Overview

Emerging market and newly industrialised country.

What you need to know

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Questions from this subtopic

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1. 1

   What is an emerging market?

   Model answer

   An emerging market is a country, formerly classed among the LEDCs, whose economy is growing rapidly and industrialising, whose incomes are rising from low towards middle and upper-middle levels, and which is becoming closely integrated into the global economy through trade and foreign investment. It is also developing the institutions of a market economy: a functioning stock exchange, a banking and regulatory system, and a currency investors are willing to hold. It is 'emerging' rather than developed because it retains features associated with LEDCs, including GNI per capita well below MEDC levels, wide inequality, a large informal sector, rural poverty and gaps in infrastructure and governance.

2. 2

   Where does the term 'emerging market' come from?

   Model answer

   It was coined in 1981 by an economist at the International Finance Corporation, part of the World Bank group, who needed a more attractive label than 'third world' when marketing an investment fund to Western investors. Its origins are therefore financial rather than geographical: an emerging market was originally a market in which foreigners could now buy shares, offering higher returns than developed markets in exchange for higher risk. That origin explains why the category has always been defined partly by the interests of investors rather than by the development of the countries themselves.

3. 3

   What characteristics would you look for in identifying an emerging market?

   Model answer

   Sustained economic growth well above the world average over a period of years. A changing economic structure, with the share of agriculture in output and employment falling and manufacturing and services rising. Rising exports, and particularly a shift from unprocessed primary commodities towards manufactures. Substantial and growing inward foreign direct investment. Rapid urbanisation and the growth of large cities. A growing middle class creating a domestic consumer market. Improving social indicators, with falling infant mortality and rising literacy and life expectancy. Liberalised trade and investment rules. And developing financial institutions, including a stock exchange open to foreign investors.

4. 4

   How does an emerging market differ from a least-developed LEDC?

   Model answer

   In scale of economy and speed of change. A least-developed country typically has most of its workforce in subsistence agriculture, very low and slowly rising GNI per capita, little manufacturing, exports concentrated in one or two unprocessed commodities, minimal foreign investment except in extraction, weak infrastructure and power supply, high infant mortality and low literacy, and often conflict or landlocked isolation. An emerging market has a substantial industrial and service sector, a growing domestic consumer market, its own large firms, functioning capital markets, far better infrastructure and social indicators, and it attracts investment across many sectors rather than only mining. The emerging economy is being transformed; the least-developed economy is not.

5. 5

   How does an emerging market differ from an MEDC?

   Model answer

   GNI per capita remains substantially lower, even at purchasing power parity. Inequality is generally much wider, and a large share of employment is informal and unprotected, without contracts, pensions or safety regulation. Rural poverty persists alongside urban wealth, and internal regional contrasts are far larger. Infrastructure, though improving fast, remains incomplete, with unreliable power or sanitation outside the main cities. Social indicators such as infant mortality and years of schooling lag behind. Institutions, regulation and the rule of law are typically weaker, corruption more common, and the currency and financial system more vulnerable to sudden capital outflows. Growth is faster than in an MEDC, but from a much lower base.

6. 6

   What is a newly industrialised country, and how does the term relate to 'emerging market'?

   Model answer

   A newly industrialised country is one that has recently undergone rapid industrialisation, shifting from an agricultural to a manufacturing economy with fast growth in exports and incomes. The term was first applied in the 1970s and 1980s to the Asian Tigers, South Korea, Taiwan, Singapore and Hong Kong, and later to a second wave including Malaysia, Thailand, Brazil and Mexico. The terms overlap heavily, but 'newly industrialised country' describes the industrial transformation specifically while 'emerging market' is broader, taking in financial integration and consumer market growth, and can apply to economies growing through services or resources rather than manufacturing. Several early newly industrialised countries have since become high-income and are no longer regarded as emerging at all.

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