What is an emerging market?

The term emerging market is ubiquitous in modern economics, but where does it come from and what does it mean?

What is an emerging market?

Before the toppling of the Soviet Union, and the theatrics of President Yeltsin atop a tank, the world was trifurcated into the First, Second and Third worlds.

The first was the Western, free-market economy.

The second was the communist world.

And the third, the remaining, poorly developed nations of Latin America, Africa, and Asia.

With the Cold War over, the neologism “Emerging Markets,” or EMs, came to describe this latter category.

EMs, then, are those nations perceived by the main arbiters of political and economic performance—such as the UN, IMF, and World Bank—as walking a developmental path broadly in sync with their so-called developed” cousins.

The idea of a government legislation policy to advance the country it controls presupposes a sense of responsibility to the population and a large sense of nationhood.

The criteria this entails are many and diverse, and will vary depending upon the political system itself. A ruling monarch will be pursuing policies of growth no less stringently than a pluralist democracy, although the economic spoils may well be very differently reallocated.

And then there is the issue of international relations, where one nations friend may be less favorably looked upon by the economic arbiter—and its own political masters—assessing its progress as an emergent economy. Responsible behavior, then, is a matter of compliance with predetermined economic expectations—say, wholesale privatization—and with crossing a certain democratic threshold in terms of citizen rights and realistic expectations.

So, what is an emerging market?

In fact, the term EM was the brainchild of economist Antoine van Agtmael, who in 1981 was at work for International Finance Corporation (IFC), itself a component of the World Bank Group. Other phrases had existed, but lost traction, such as less developed countries (LDCs), as used in the 1970s. EMs were identified as countries displaying evident tendencies of developed markets, but still short of the mark by internationally accepted standards of operation, trade, and, importantly, political system. EMs are identified as transitioning into free-market-oriented economies, achieving gradual integration with the global marketplace. Identified hallmarks of this include an expanding middle class, rising standards of living, social stability, and willing cooperation with multilateral institutions.

Pick Your Label

The 2008 Emerging Economy Report from the Center for Knowledge Societies definedemerging economies” as those “regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization.”

Indeed, the notion of emerging finance capitalism is arguably a refinement of the term EM, recognizing as it does that certain economies will prioritize financial imperatives over more populist social commitments. A further take on EMs, emerging economie,” focuses squarely on progress toward meeting financial criteria. A benchmark here is healthy growth over the previous decade narrowing the income gap with advanced economies. During the same period, the nation in question must have realized institutional transformations that underpin deep global integration. A decade into the new century over 50 countries, accounting for 60% of the global population and 45% of total GDP, met these benchmarks.

By definition, though, being identified as an EM, or any of the above labels, is at once a challenge and motivator to escaping the list. Inevitably this is a subjective issue from the get-go.

And the complex process of compliance, however incentivized, continues to witness mixed, if encouraging results, as nations negotiate the free-market rulebook.