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Emerging Markets Defined

The term emerging markets appeared during the 90s and is now widely used. It is easy to find lists of emerging market countries but hard to find a definition of what they are. Look at those lists and you will see countries such as China, Botswana, Chile, South Africa, Hungary, Jordan, Singapore and Hong Kong. Given the diversity of these economies how can we come up with a sensible definition of emerging markets?

One way would be to describe emerging markets as simply "all those countries not considered developed". Developed here meaning essentially the major European countries plus USA, Canada, Japan, Australia and New Zealand. This is a rather negative and not particularly useful approach however and would include all the countries.

Another approach would be to simply think of the term as an updated, and more politically correct version, of the terms used in the 70s and 80s such as Third World, lesser developed countries (LDCs) or under-developed countries. There is possibly some truth in this but again it is not particularly helpful

A more useful way to look at defining emerging markets is to consider some of their key attributes and see what help this gives us. The major ones would be

Level of income the World Bank uses Gross Domestic Product (GDP) per head as a measure to classify countries as follows


GDP per head USD


< 755

Lower Middle

755 < 2995

Upper Middle

2995 < 9265


>= 9265

World Bank Classifications

Source World Bank

Growth rate a reason that emerging markets have been considered attractive has been they often exhibit a high rate of GDP growth as the Asian "tigers" did during the late 80s and 90s

Stage of development this is a factor that fits more closely with the word "emerging". Factors to consider would be the degree of openness in the economy. The size of the economy and the state of financial markets.

Can we define emerging markets based on setting values for each of these criteria? Unfortunately no as there are countries such as Singapore and Hong Kong which do well on all these criteria but are still classified as emerging markets. To address this anomaly we need to consider the fact that many emerging markets lack stability, either economically or politically or face considerable uncertainty.

Given these considerations it is best to define emerging markets in broad terms as those countries which have started to grow but have yet to reach a mature stage of development and/or where there is significant potential for economic or political instability. 

The key considerations therefore are maturity and instability. Maturity can be defined using the above various measures to provide a floor, which would rule out the poorest countries with few prospects, as well as a ceiling for being classified as an emerging market. Measuring the stage of development of financial markets is however somewhat more subjective as is the second criteria instability. These later two factors explain why Singapore and Hong Kong are still classified as emerging markets. They both have small, by international standards, and not particularly deep financial markets and are vulnerable to external events.

Emerging markets therefore include those which have reached a minimum level of GDP and are in the growth phase of the development cycle but whose economies are particularly vulnerable to internal or external forces.


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