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Wednesday, May 9, 2012

How emerging markets differ economically from developed economies

 Developed vs Emerging Market Economies
GDP growth in emerging market economies is often high
Most of North America & all of Western Europe have developed economies

Emerging markets characterize nation-states that are rising out of economic underdevelopment into a market based economy. These markets are still in the earlier phases of the industrial growth cycle in the sense they have large potential for systemic growth as measured by economic statistics. In other words, nation-states are developed to the point of self-sustainable growth but have not reached their full, or near full economic capacity. Economic capacity is the potential of an economy to produce, productively engage a work force, and make efficient use of economic resources in a profitable way. 

Market economy


Emergence from a developing nation to a growing market economy is a key attribute of an emerging market. This distinction between developing nation and emerging market is made by Vladimir Kvint in a Forbes report discussing emerging markets. Specifically, Kvint says a developing country is characterized by a strong need for economic assistance in the form of basic commodities needed to sustain a population whereas emerging markets have developed resources beyond this point. This is echoed in a report from the World Bank and cited by the U.S. Department of Agriculture.

Population demographics


According to Ashoka Mody of the International Monetary Fund (IMF), an emerging market is also characterized by changes in its demographic statistics. For example, Mody suggests an emerging market economy will have telling increases in fertility rates, education and life expectancy. These demographic categories represent advancements in wealth and health care. Additional demographics that may align themselves with emerging markets are higher employment and per capital income.

Economic policy


Since emerging markets are 'emerging' out of either undeveloped statehood or non-market economies, changes to government policy are also likely to be simultaneously indicative of changes to a state's economic status. This characteristic of emerging markets is highlighted by Ashoka Mody  and also  Chuan Li of the University of Iowa Center for International Finance  and Development. According to Li, changes in governance within emerging markets are aimed at transitioning away from overly interventionist policies, and avoiding corruption that can inhibit development of a free market.

Statistical metrics


There are a number of economic statistics that if measured correctly, are characteristic of an emerging market. Some of these statistical metrics include Gross Domestic Product (GDP), trade balance, government spending, tax receipts, and manufacturing activity among several others. These types of statistics are different from demographic statistics because they are representative of an economy and more derivative of demographics which directly measure changes to the population in an emerging market.

So having defined some of the characteristics of emerging markets what are some examples that meet all the above criteria? One place to look is an emerging market index that measures growth across a variety of economic sectors in multiple emerging markets. Moreover, this type of index is designed to measure business growth, a key characteristic of emerging markets.

Emerging and Growth Leading Economies (EAGLES)
Globalization has led to interdependence of national economies
BRIC nations are forecast to grow substantially between 2010-2020

The MSCI Emerging Markets Index includes Brazil, Chile, China, Columbia, Egypt, Hungary, Morocco and India among its emerging markets. Some of these economies such as China and Brazil are already quite large and may seem beyond the status of emerging. Yet what distinguishes these large growing economies from fully matured developed economies are the pace of growth, the speed at which structural change takes place and the potential to significantly increase economic capacity.

Image attribution: 1. AlexCovarrubias; public domain, 2. Pawel; CC BY-SA 3.0

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