Emerging Markets

Emerging markets are states with economic and social activity undergoing a rapid rate of industrialization and growth. At present, the largest emerging markets are India and China while the ASEAN-China Free Trade Area, established in 2010, represents the world’s largest regional market.

While coined by Antoine van Agtmael in the 80s, the term is used for emerging economies which are in transition between a developing and developed state. Such markets are Iran, Indonesia, Russia, and some countries in the Middle East, Southeast Asia, and Latin America.

Emerging markets are characterized by 4 main traits. First, many of them have large resource bases and large populations. They are economic powerhouses in their region and have large markets. The economic success of such countries boosts the development of neighboring states while economic crises in them affect their neighbors. Second, they are among the fastest growing economies in the world and facilitate the growth of trade on a global level. It has been predicted that by 2020, the share of the largest emerging markets in the world’s output will double from 7.8 percent (1992) to 16.1 percent. These nations will become more serious consumers of services and goods compared to the industrialized states. Third, emerging markets are characterized by transitional societies that undertake political and economic reforms. Having failed to generate sustainable economic development, they replace their state-oriented interventionist market policies with an open door approach. Finally, emerging markets are major participants in the world’s social, economic, and political affairs. They seek a larger involvement in international politics as well as a bigger share of the world’s economic benefits.

While emerging markets aim at sustainable economic development and growth, they still face major challenges related to their political systems and economies. A functioning market economy is established when the role of the government is redefined as to reduce undue interventions. Another major problem these states have to confront is rampant corruption, which mars the business environment, impeding the processes of transition. The undertaking of structural reforms is another major task, in view of the legal, financial, and political system. Structural reforms serve as a guarantee of having a stable and well-managed economy that is free of interference and political pressure.

Emerging markets are often understood as having strict standards in securities regulation and accounting, as well as the same level of market efficiency as advanced economies such as the EU, Japan, and the United States. However, such markets are typically characterized by physical financial infrastructure including stock exchanges, banking institutions, and a unified currency.

Emerging markets are attractive for international investors due to the potential high returns related to these countries’ fast economic growth, as reflected in their GDP. However, investing in emerging markets is associated with higher risks because of the more limited equity opportunities, domestic infrastructural problems, currency volatility, and political instability. Many of the large companies in these states are still state-owned and run. In addition, the stock exchanges may not be associated with liquid markets by international investors.

Finally, these developing markets are among the key factors for the future market stability and the growth of global trade, as they will be among the major players in international politics. Such countries have a huge potential to develop and they are decided on undertaking key domestic reforms, supporting sustainable economic development. If they succeed in maintaining political stability and undertake structural reforms, their future development is likely to be promising. Accelerated exchange of information, thanks to the Internet, helps integrate developing countries into the global markets at a much faster pace.