A lot has been said about emerging markets in the financial press as of late. With the recent BRICS Conference in Durban recently concluded, the eyes (and dare we say expectations) of the world are now on emerging market economies to start to flex their financial muscle and perhaps one day become the future economic engines of the world. No more might it be that “when America sneezes, the rest of the world catches a cold.” Indeed we might see very soon that when the Russian Bear shivers or the Chinese Consumer marches does the rest of the world tremble and await the outcome. In the light of this one may then ask, how is it that emerging markets “emerge” to become developed markets? This essay hopes to answer that question.
Let us start with a definition of what an emerging market is. It is generally accepted that emerging markets are nations which are in the process of rapid growth and industrialisation. However looking at things from another angle the economist Dr. Vladimir Kvint of the Russian Academy of Sciences published this definition: ” An emerging market country is a society transitioning from a dictatorship to a free-market-oriented-economy, with increasing economic freedom, gradual integration with the Global Marketplace and with other members of the Global Emerging Market, an expanding middle class, improving standards of living, social stability and tolerance, as well as an increase in cooperation with multilateral institutions”  As to which nations fit this list is open to question and whether or not that country need to have been ruled by a dictator is a matter of debate but suffice it to say that the above two definitions are enough to give the reader a fair idea as to what an emerging market is.
Now let us define what is a developed market. Although there is no fixed definition either for a developed market, it generally refers to a country which has a relatively high level of economic growth and development along with a high level of industrialisation and developed infrastructure, a high living standard and GPD per capita, and free and well developed financial markets. Examples of this would be Australia, France, Germany, Italy, Japan, USA, UK and Switzerland. So how emerging markets “emerge” then? Emerging Markets are starting to catch up with developed markets, mostly as a result of their higher growth rate. (See picture) Thanks no doubt to their higher than average population growth, sustained economic development and a growing middle class – resulting in increased economic opportunities for all concerned in these markets.
Ernst & Young published an article in 2011 which confirms this potential, “Most of the world’s new middle class will live in the emerging world, and almost all will live in cities, often in smaller cities not yet built. This surge of urbanization will stimulate business but put huge strains on infrastructure. Physical infrastructure, such as water supply, sanitation and electricity systems, will need to be built or upgraded to cope with the growing urban middle class. Addressing such concerns in Asia alone will require an estimated US$7.5 trillion in investments by 2020.” 
Clearly the numbers involved are staggering by any standard. As Simon Johnson of the IMF reported, “Over the past five years, these (emerging economy) countries have accounted for between one-quarter and one-half of global growth (depending on how it is measured). They have also weathered the recent global financial disturbance well and, through growing financial and trade linkages, have helped keep advanced economies from slowing down. And, now, the way emerging markets handle the latest round of inflation challenges will have profound effects on growth and inflation around the world.”  Emerging markets are clearly beginning to play an increasing role in the world economy and the interesting thing is this view was expressed just as the financial crisis of 2008/2009 was unravelling. So how did the emerging economies rise to prominence? According to the IMF it seems to be the result of three factors: 
- Although emerging markets are highly connected to the world in terms of goods flows, they are not (yet) fully connected in terms of financial flows – this had a protective effect during the recent financial crises as the emerging market banks tended to be more cautious after burning their fingers in years gone by. As a result they were not significantly exposed to US subprime mortgages and other financial derivatives that proved problematic during this period thus ring fencing their balance sheets from any significant write-downs.
- Emerging markets have continued to maintain sound economic policies – the authorities in these countries seem to be learning from their lessons and unlike during some previous booms, they did not throw fiscal caution to the wind. Furthermore attempts have been made to reign in corruption which has had a positive effect.
- Global trade remains strong and so-called south-south trade (not involving advanced economies) has proved resilient. – Countries understood that throwing up trade barriers can hurt them more in the long run and this enabled the free flow of goods to continue unabated.
So in conclusion, clearly emerging markets are on the rise, but this is not necessarily likely for all countries that fit this category. For example China and India, despite having seen spectacular GDP growth in recent years, are faced with great social imbalances that could spoil their continued rise – uneven distribution of wealth, unsustainable population levels and finite resources will all have their role to play in the near future. Just as the Asian Financial Crises illustrated in the early 1990s, growth does not last forever and sooner or later a level of equilibrium will have to reset market conditions. As, when and where that will happen though, is still to be seen.
- The Global Emerging Market: Strategic Management and Economics – Kvint, Vladimir (2009) – January 2009 – ISBN-13: 9780415988407; ISBN: 0415988403
- Straight Talk: Emerging Markets Emerge – Simon Johnson – Finance and Development Magazine – September 2008, Volume 45, Number 3
- Tracking Global Trends – How 6 key developments are shaping our business world – Ernst & Young – 2011 – EYG No. DK0061
The Economist: www.economist.com /blogs/dailychart/2011/08/emerging-vs-developed-economies Date: 9 March 2013 Time: 16:30 UTC +2