What is an “emerging market” anyway?
July 7th, 2009 — 12:21pm
India is one. So is China. And likewise Brazil. Sure, we use the term to describe the economies of all these countries, but what is an “emerging market” anyway?
Though a loose definition, countries are considered to be “emerging” when their economies undergo a rapid succession of developments and reforms. They have more modern governments and are more industrialized than developing countries, but aren’t yet considered developed – placing them in a state of transition. These are countries – big or small – which have short operating histories in global financial markets but, because of increasing industrial growth, have “emerged” onto the global scene. They are also said to be “labor rich and capital poor”, implying relatively cheap labor costs and hence are attractive to manufacturers and developers, who, if they decide to invest in areas like infrastructure and machinery, create the potential for significant economic growth.
Such countries account for 80 percent of the global population and approximately 20 percent of the world’s economies. These include India, China, Mexico and Brazil, among others in Latin America, South-East Asia, the Middle East, Africa and Eastern Europe. Numerous terms have been thrown around to describe the largest developing countries, such as BRIC, which stands for Brazil, Russia, India and China.
As they become flooded with foreign investors, emerging market countries see increased opportunity, with rising employment and production levels, increased national income and, eventually, a lessening of the gap between their own country and the developed world.
Foreign investors tend to view emerging markets as an opportunity too – one for expanding and diversifying their investment portfolios. Because there’s always the chance that the development of an emerging economy will slow or reverse (due to circumstances such as civil war, nationalization or other government changes), they are risky investments. And with risky investments come high rewards – if investors bid on the right market.
It’s a double-edged sword for an emerging market country to open its doors to the rest of the world. On the one hand, it brings them closer to the developed world. Yet, on the other, it exposes them not only these new work ethics, but to new cultures as well, which can change the very fabric of the emerging country’s society.
