What is an Emerging Market Economy?
An emerging market economy refers to a country that is in the process of developing its economy to become more advanced. It generates low to middle per capita income and is rapidly expanding due to high production levels and significant industrialization. Emerging market economies make up 80% of the world’s population and almost 70% of the world’s GDP growth.
Countries with an emerging market economy range in size – such as India versus Morocco. Although both countries differ drastically in terms of GDP and population, they are both in the middle of developing their economies and progressing towards economic globalization.
Characteristics of an Emerging Market Economy
1. Rapid growth
The economic growth of countries with an emerging market economy typically grow by 6% to 7% annually, whereas countries with an already well-established economy report a growth rates below 3%. As a result, the GDP growth rates for emerging market economies outperform those of developed countries.
2. High productivity levels
Labor is characterized by low costs, which can stimulate production and increase employment levels. Therefore, developed countries establish a preference to build manufacturing factories and engage in outsourcing to make use of the low-cost labor. As a result, emerging markets can increase their international presence and improve their exports to foreign countries.
3. Increase in the middle class
Economic improvement in a country can lift its people out of poverty, which shifts them into the middle class. As countries increase their productivity levels and make use of additional streams of income, it provides individuals with a higher standard of living, as they can get more access to educational opportunities while enjoying better infrastructure and improved technology.
4. Transition from a closed economy to an open economy
Developing countries run a closed economy, as they mainly focus on the local agricultural market. As such countries work towards economic advancement, they will want to engage in international trade to stimulate economic activity.
5. Instability and volatility
Emerging markets are vulnerable to changes, as their economies are still developing. They are especially susceptible to financial changes in currency, interest rates, and inflation. In particular, they are impacted by changes in the pricing of commodities.
6. Attraction of foreign and local investments
Investing in businesses in emerging markets is riskier than businesses in developed countries. However, higher risk means higher returns, which attracts investors.
Countries with an Emerging Market Economy
The BRICS countries is an acronym that refers to Brazil, Russia, India, China, and South Africa. They make up 40% of the world’s population and contribute to more than 25% of the world’s GDP. The BRICS countries are predicted to generate the economic potential to match the G7 countries.
2. Next Eleven
The “Next Eleven” (or N-11) is a term that refers to countries that can potentially become like the BRICS countries and with positive growth prospects. The countries are Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam.
The criteria used to select the N-11 countries were based on the country’s macroeconomic stability, political maturity, openness of trade, investment regulations, and educational quality.
MINT is a new term to distinguish Mexico, Indonesia, Nigeria, and Turkey. MINT countries were selected due to their rapid growth rate and investment opportunities.
Significance of an Emerging Market Economy
Emerging market economies in developing countries are essential in driving global economic growth. Currently, emerging market countries generate more than 50% of the world’s economic growth. By 2050, it is predicted that the top three largest economies will be China, India, and the United States. Two of the three countries are emerging market economies.
There are also increasingly more investments that are made in emerging market economies, which shows the investors’ confidence in such countries. For example, specific hedge funds help such economies raise more capital. The increase in foreign investments also helps to add more trading volume in the local stock exchange and generates more funding for businesses to succeed in the long-term.
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