What is an emerging economy?
These nations are characterised by rapid economic growth, increasing engagement with global markets, and the development of financial and regulatory institutions.
Economic characteristics
- Rapid economic growth - emerging markets typically experience faster GDP growth compared to developed economies
- Creates opportunities for both domestic and foreign investors
- Can also lead to economic volatility
- Increasing global market integration - becoming more connected to the global financial system
- Work on making their stock markets and bond markets easier to buy and sell in
- Attracting more investment from foreign companies
- Developing financial and regulatory systems - emerging markets are in the process of establishing modern financial institutions and regulatory frameworks
- While they may have basic financial infrastructure like banks and stock exchanges, these systems are often less sophisticated and less stable than developed economies
- Transitioning economic focus - typically moving away from agriculture and resource extraction towards industrial and manufacturing activities
- Governments often pursue deliberate strategies to encourage this shift, such as export-led growth or investments in education and infrastructure
- Higher risk-return profile - emerging markets can offer higher potential returns due to their rapid growth, but they also come with increased risks
- Can include political instability, currency volatility, and issues with corporate governance and transparency
- Improving living standards - often see rising per capital incomes and improving quality of life
- However, significant income inequality can persist
So what countries have emerging economies?
The global economic landscape is increasingly shaped by emerging economies, many of which have formed strategic alliances to amplify their collective influence. Let’s examine some of the most prominent emerging economy groups:
CIVETS is an acronym for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, coined in 2009 by the Economist Intelligence Unit. These countries were identified as the next generation of emerging market.
These countries have emerging economies, as they are fast-growing, diverse economies. These nations generally enjoy relative political stability and place a strong focus on higher education. They have reasonably sophisticated financial systems and maintain a low dependence on external demand or commodity exports.
As of 2022, the GDP of these countries ranged from $343.94 billion (Colombia) to $1.32 trillion (Indonesia).
There are ways to invest into the CIVETS countries:
- Exchange-Traded Funds (ETFs) were created to provide exposure to these markets
- S&P launched the CIVETS 60 Index in 2011 to target emerging market investments
- HSBC introduced a CIVETS fund but closed it in 2013 due to limited growth
It’s worth considering that these markets may have little in common beyond broad economic concepts.
BRICS is an acronym for Brazil, Russia, India, China, and South Africa, originally coined by Goldman Sachs economist Jim O’Neill in 2001, initially without South Africa. This group of emerging economies has evolved into an informal alliance aimed at increasing their collective economic and political influence on the global stage.
- As of 2023, BRICS countries account for 31.5% of global GDP, slightly surpassing the G7 nations.
- The group seeks to deepen economic cooperation, reform global financial institutions, and provide an alternative to Western-dominated international organisations
- In 2023, BRICS invited Saudi Arabia, Iran, Ethiopia, Egypt, and the United Arab Emirates to join, with Argentina initially invited but later withdrawing
- This expanded group represents about 45% of the world’s population
- BRICS has established the New Development Bank to fund infrastructure projects in emerging economies and created a BRICS Parliamentary Forum for inter-parliamentary cooperation
- Despite their collective economic power, BRICS nations face internal disagreements and varying levels of economic growth
To learn more check this video out 👇🏻
Impact of emerging economies on the UK
- India (£8 billion)
- Taiwan (£2.8 billion)
- Thailand (£2.2 billion)
- Kuwait (£2.5 billion)
The positive impact of emerging economies on the UK are very similar to the advantages to globalisation in the fact that there’s expanded market access, job creation, economic growth, and innovation. If you want to revisit these, go back to this learning block 👉🏻 Global Trade
However, political instability is a major concern when dealing with emerging markets. Recent events, such as Russia’s invasion of Ukraine, highlight how geopolitical tensions can rapidly disrupt business operation and international trade. This instability can lead to sudden changes in government policies, trade restrictions, or asset seizes, which can severely impact UK firms with investments or operations in these countries.
- For example, many Western companies have faced difficulties in Russia due to the sanctions and reputation risks following the outbreak of the war.
In addition, economic volatility is a risk as emerging markets often experience more dramatic fluctuations in currency values, inflation rates, and economic growth compared to developed economies. Furthermore, less developed regulatory systems and market structures in emerging economies can expose UK businesses to issues such as intellectual property theft, unfair competition, or difficulties in contract enforcement.