What is an emerging market economy (EME)?

The term, coined by World Bank’s Antoine W. Van Agtmael in 1981, pertains to economies with low to middle per capita income. Such economies are moving away from its conventional economies to become advanced. Most of them have depended on agriculture and the export of raw materials. Unlike advanced economies such as the United States, Europe, and Japan, EMEs in general do not have the level of market efficiency and rigid standards in accounting and securities regulation.

Even though it is loosely defined, countries belonging to this classification, are normally described as emerging due to their developments and reforms. Leaders of developing nations seek to provide a better quality of life for their constituents. Hence, they adopt a free market or mixed economy, and industrializing. EMEs are also considered to be fast-growing economies.

Characteristics of EME

From a closed economy, EMEs are transitioning to be an open market economy. They will also establish accountability within the system. These economies will launch an economic reform program in order to attain firmer and more responsible economic performance levels, as well as transparency and efficiency in the capital market.

EMEs will revamp its exchange rate system because a stable local currency creates confidence in an economy, especially when foreign investors consider investing in these countries. Implementing changes in exchange rate reduces the desire for local investors to venture abroad. Aside from these reforms, EMEs may likely receive assistance and guidance from huge donor nations and/or global entities, including the International Monetary Fund and World Bank.

Since they are "emerging competitors", there is an increase in both local and foreign investment. A growth in investment frequently signals the nation has been able to institute confidence in the economy. Also, foreign investment implies the world has started to notice the emerging market. And when international capital flows directly to an EME, the integration of foreign currency into the local economy aggravates to the nation’s stock market and long-term investment to the infrastructure.

Risks and Rewards

For foreign investors and/or businesses of developed economies, EMEs offer an avenue for expansion of their business, for instance, such as a new place for a new factory or new income source. For emerging markets, employment levels increase, labor and managerial skills are more refined, and sharing and transferring of technology takes place. EME’s overall production levels will escalate in the long run, and also its gross domestic product. And the gap between the emerged and emerging worlds will be lessened.

As mentioned before, EMEs are in transition process. Therefore, their markets are not stable. This situation presents an opportunity to investors that are looking to incorporate more risk to their portfolios. The risk of investing in an EME is greater than in a developed market, resulting to fright, postulation, and knee-jerk reactions. Nevertheless, the higher the risk, the bigger the reward. So venturing in an emerging market has been a standard practice among investors seeking to diversify while integrating risk.

Politics and Economy

Local political and social factors endeavor to reveal its economy to the world. Since people of an emerging market are often guarded from the outside world, have the tendency not to trust foreign investment. Also, EMEs may also have to deal with national pride because citizens may oppose having foreigners owning portions of their economy. Getting into an emerging economy exposes you to new cultures, aside from new work ethics and norms.