What makes an emerging market

They are moving away from their traditional economies that have relied on agriculture and the export of raw materials.

Leaders of developing countries want to create a better quality of life for their people. They are rapidly industrializing and adopting a free market or mixed economy. Alternate names : Emerging economies, developing countries. A few examples of emerging markets are Brazil, China, India, and Russia. There are five defining characteristics of an emerging market:.

These characteristics are found in emerging markets of all sizes. The first defining characteristic of emerging markets is that they have lower-than-average per capita income. Low income is the first important criterion because this provides an incentive for the second characteristic, which is rapid growth.

Leaders of emerging markets are willing to undertake the rapid change to a more industrialized economy to remain in power and to help their people.

In , the economic growth of major advanced economies, such as the United States, Germany, and the United Kingdom, was 5. Rapid social change leads to the third characteristic of emerging markets, which is high volatility.

That can come from three factors: natural disasters, external price shocks, and domestic policy instability. Traditional economies traditionally reliant on agriculture are especially vulnerable to disasters, such as earthquakes in Haiti, tsunamis in Thailand, or droughts in Sudan. But these disasters can lay the groundwork for additional commercial development, as it did in Thailand.

Emerging markets are more susceptible to volatile currency swings, such as those involving the U. They are also vulnerable to commodities swings, such as those of oil or food. That's because they don't have enough power to influence these movements. For example, when the United States subsidized corn ethanol production in , it caused oil and food prices to skyrocket. That caused food riots in many emerging market countries. When leaders of emerging markets undertake the changes needed for industrialization, many population sectors suffer, such as farmers who lose their land.

Over time, this could lead to social unrest, rebellion, and regime change. Investors could lose all if industries become nationalized or the government defaults on its debt. This growth requires a lot of investment capital. However, the capital markets are less mature in these countries than what is seen in developed markets. That's the fourth characteristic: currency swings. Emerging markets don't have a solid track record of foreign direct investment.

It's often difficult to get information on companies listed on their stock markets. It may not be easy to sell debt, such as corporate bonds, on the secondary market. All these components raise the risk.

That also means there's a greater reward for investors willing to do the ground-level research. If successful, rapid growth can also lead to the fifth characteristic, which is the higher-than-average return for investors.

That's because many of these countries focus on an export-driven strategy. They don't have the demand at home, so they produce lower-cost consumer goods and commodities for export to developed markets.

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Emerging market economies are classified in different ways by different observers. 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. At any of these institution's discretion, a country can be removed from the list by either upgrading to a developed nation or downgrading to a frontier nation.

Likewise, developed nations may be downgraded to an emerging market, as was the case with Greece, or frontier markets may upgrade to an emerging market, as was the case for Qatar and Argentina. International Markets. Emerging Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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