Also known as developing countries or emerging economies, emerging markets are the nations which are investing in more fruitful capacity. These nations are moving away from the traditional economies relying mainly on the export of raw materials and agriculture. For creating a better life quality for the people of the developing nations, the leaders of these countries are adopting rapid industrialization and a mixed economy or free market.
There are many developing or emerging economies around the world but the 4 largest such economies are the BRIC nations Russia, Brazil, China, and India. The list continues and the next 5 markets or nations are South Korea, Mexico, Turkey, Indonesia, and Saudi Arabia.
How are Emerging markets important to the world economy?
Emerging markets have got a great contribution to the world economy, as they drive the growth of the world economy. Furthermore, the financial systems of such nations have become more advanced and sophisticated due to the currency crisis of 1997.
Emerging Markets – Five Characteristics
- Low income – Emerging markets have a lower middle or lower-than-average per capita income. As defined by the World Bank, emerging or developing nations are those whose per capita income is less than $4,035. Hence this is considered to be a very important criterion for considering a nation as emerging market.
- Rapid growth: Low income leads to rapid social change. Leaders of the emerging nations are undertaking the rapidly industrialized economy to a more mixed economy. These are done to help the people of the nation and to remain in power. It was observed in 2015, that the economic growth in many developed nations like the United States, the United Kingdom, Japan and Germany, was less than 3%, whereas in countries like Turkey, Egypt, and the UAE, which are less developed than the above, the growth was little more than 4%, and in India and China it was around 7%.
- High Volatility: Rapid growth leads to high volatility, which can come from 3 factors natural disasters, domestic policy instability, and external price shocks.
The economies which are mainly dependent on the agriculture are more prone to natural disasters like the tsunamis in Thailand, droughts in Sudan, or earthquakes in Haiti. These disasters can develop the basics for secondary commercial development as it occurred in Thailand. These markets are even more susceptible to the volatile currency swings, like the dollar, and commodities, like food or oil. This swing in commodities may create food riots in many emerging countries because they do not have the power to handle this price shock and instability.
- Less matured capital markets: The emerging markets do not have a solid method of foreign direct investment (FDI). This requires a huge investment capital, which is, unfortunately, less matured in these economies than the developed economies.
- High return for investors: If the capital markets become successful in the developing nations then this will lead to a return which is higher-than-average for investors. These countries focus mainly on export-driven strategy. They produce low-cost commodities for the developed markets, and the companies which fuel this growth will earn more profit thereby gaining a higher return for the investors.