Defining Emerging Markets

Following on my initial query on why so many diverse countries in various stages of development (and some may argue that a handful are in fact fully developed) are lumped into the vague category of emerging markets economies, I have been delving into some general research and data analysis.

Before I could look at the data, I needed to know what to look for. How does one define “emerging market”?

In a speech last year, Ben Bernanke noted that there is no single agreed-upon definition of emerging markets  but “generally speaking, emerging market economies are defined as those economies in the low- to middle-income category that are advancing rapidly and are integrating with global capital and product markets.”

Institutions have different definitions and lists of countries classified as emerging market economies. People have written whole books on the topic, but I chose to look at a few basic definitions by various financial institutions and indices, particularly those who provide data analysis on emerging market economies and must be categorizing the countries in some way.

The IMF glossary broadly states: “The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors.”

The IMF World Economic Outlook Database is more precise and classifies countries as advanced economies or emerging market and developing economies based on the per capita income level, export diversification, and level of integration into the global financial system.

The FTSE Group calculates a wide range of indices, including ones for emerging markets, and produces analysis widely used by investors and other financial actors. Their broad definition of “emerging market” covers countries with rapidly growing economies.

For their indices they have developed 15 defined “Quality of Markets” criteria that are used to determine emerging markets.  They have further separated the emerging markets into ‘advanced emerging’ and ‘secondary emerging’ countries based on the development of their market infrastructure. According to FTSE, these categories tend to have the following characteristics:

  • Advanced Emerging: Upper Middle Income GNI [gross national income]countries with advanced market infrastructures and High Income GNI countries with lesser developed market infrastructures;
  • Secondary Emerging: Lower Middle and Low Income GNI countries with reasonable market infrastructures and significant size and Upper Middle Income GNI countries with lesser developed market infrastructures.

World Bank
According to the World Bank, all countries are classified based on their GNI per capita using a specific tool – the Atlas formula – so as to keep the classifications objective. They do not keep a list of emerging market countries nor do they ever categorize a country as an emerging market economy. This pleased me, because it indicates that they are trying to shift away from the term. Instead they use the terms low income, lower middle income, upper middle income, and high income, which all have specific monetary ranges for each. The income classifications are determined each year in July for accurate analysis.

If you want to see 20 minutes of your day disappear in a flash, the World Bank classification charts are pretty fabulous.

In the next part of this series I will be looking at some of the classification systems as well as individual country data to see how emerging market economies have developed over time. Should some countries move beyond the emerging market classification? Is it time to phase out this term? I’m looking forward to finding out.


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