Emerging Markets Essay

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Emerging market  is a loose term, one often used by people who are not entirely comfortable  with it but have not found a useful substitute.  What substitutes do exist tend to be highly specific and have criticisms of their own, like BRICs or Asian Tigers (or the various other Tigers). The term was originally coined by Antoine  van Agtmael in 1981, as a shift away from the third world tag, a replacement  term that emphasized forward motion.  In general, an emerging market is one transitioning from a developing nation to a developed nation. Obviously this is problematic since every “developing” country  is, by implication  of the term,  transitioning,  and for that  reason, the emerging term  is sometimes  used to imply a liminal stage at the end of that  transition,  a position  on the cusp just before becoming “developed.” Emerging markets are sometimes considered to be developing more rapidly than  other  developing nations,  too, particularly since the  developing label is sometimes  attached  to countries  engaged in no obvious motion  toward the received standard of developedness.

Emerging markets  are not  necessarily bound  by common  interest,  and may in some cases be competitors,  or  perceive  each  other  as such.  There  is no  official list,  or  criteria,  of  emerging  markets, and although  there  are indices that track groups of emerging markets, those indices should not be considered exclusive.

Emerging markets  do not  always consider  themselves emerging. Russian economists and politicians, for instance, have taken offense at Russia’s economy being  called “emerging,” even in light of its recent financial troubles.

Emerging Market Lists

The FTSE maintains  two lists of emerging markets. The Advanced Emerging Markets have higher income and more developed infrastructure than the Secondary Emerging Markets. The Advanced Emerging Markets are Brazil, Hungary, Mexico, Poland, South Africa, and Taiwan. While this is clearly a disparate group of countries, with little in common, what they share is some abundance  of natural  resources (especially Brazil and  Mexico) or extensive political and economic history with more developed allies, which gives them an edge, at least a perceived one, over the secondary markets. The Secondary Emerging Markets include  Argentina,  Chile, China,  Colombia,  Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, the Philippines, Russia, Thailand, and Turkey.

The  FTSE  further   describes   Frontier   Markets, which are sometimes called “pre-emerging markets.” A tier  down  from  the  secondary  markets,  Frontier Markets are those developing economies that for one reason or another are considered to have a similar risk and return  profile as that  of the emerging markets. While the infrastructure and economic environment are not as developed as in developed nations nor, generally, in the emerging markets, Frontier Markets are marked  by their general economic  and political stability relative to other  groups of developing nations. The FTSE Frontier Market list includes Albania, Bahrain, Bangladesh, Bosnia and Herzegovina, Botswana, Bulgaria, Croatia,  Cyprus, Estonia, the Ivory Coast, Jordan, Kenya, Lithuania, Macedonia, Mauritania, Nigeria, Oman, Qatar, Romania, Serbia, Slovakia, Slovenia, Sri Lanka, Tunisia, and Vietnam.

Financial services and rating company Standard and Poor’s (S&P’s) coined the Frontier Market term in 1996, and  launched  two Frontier  Market  indices  in 2007. The Select Frontier  Index tracks 30 companies  from 11 countries  on the list; the Extended Frontier  Index tracks 150 companies from all 27 countries on the list.

The S&P’s Frontier Market list includes Bahrain, Bangladesh, Bulgaria, Cambodia, Croatia, Cyprus, Estonia, the Ivory Coast, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Nigeria, Oman,  Pakistan, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, the Ukraine, the United Arab Emirates, and Vietnam.

Since S&P’s launch of the Frontier Market indices, Deutsche  Bank and  Morgan  Stanley have adopted their own such indices using largely the same list. Morgan Stanley also maintains  an Emerging Market list: Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Iran, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the  Philippines,  Poland, Russia, South  Africa, South Korea, Taiwan, Thailand, Tunisia, Turkey, and Vietnam. The Economist maintains a list virtually identical to Morgan Stanley’s, adding Hong Kong and two countries Morgan Stanley considers developed rather than  emerging: Singapore and Saudi Arabia. (Many would argue that South Korea is a developed nation, and its inclusion in so many Emerging Markets lists is one reason the term is falling out of favor.)

The Emerging  Economy  Report  maintained   by the  Center  for  Knowledge  Societies  (a  consulting firm in India) defines emerging markets as those that “are experiencing  rapid  Informationalization under conditions   of  limited  or  partial  Industrialization.” Their list emphasizes markets that lagged behind the developed world throughout a significant part of the 20th century, but which are able to take advantage of 21st-century technological opportunities. The Center for Knowledge Societies list includes  Brazil, China, Egypt, India, Indonesia, Kenya, and South Africa.

Emerging Market Debt

External debt incurred  by the governments  of Emerging Market countries  is called Emerging Market Debt (EMD) and is a potential source of investment, such as in the funds promoted by van Agtmael when he coined the Emerging Markets term. Specifically, EMD refers to the bonds issued by such governments,  or any securities derived from other debts of those governments. Such bonds are usually low rated: bonds are rated by groups like S&P from (in increasing order of quality) D (debts that are in default), CC, CCC, B, BB, BBB, A, AA, AAA, with +s and –s for further distinction. Anything below BBB– is considered  “below investment  grade,” sometimes called “speculative grade” since such bonds are traditionally the province of more aggressive investors. Because of the high risk indicated by low ratings, bonds  with a speculative grade rating  at the time of issuing are popularly known as junk bonds. Most EMD bonds are rated as junk bonds; some may reach BBB, or in rare cases A. As with other bonds, the ratings of EMD bonds fluctuate after issuance.

EMD bonds have become more common since 1989, when in the wake of widespread Latin American debt crises, U.S. Secretary of the Treasury  Nicholas Brady proposed  a plan to convert  bonds  issued by friendly developing  nations   into  dollar-denominated  bonds, i.e. bonds redeemable  in American  dollars instead of the currencies of these fragile economies. Commercial banks holding debts from developing countries  were allowed to exchange those debts for such bonds. In the process, the nominal outstanding debt obligation could be reduced, in exchange for the original creditor being protected from exposure to risk. The Treasury Department helped to oversee this process, which essentially renegotiated debts between debtor governments and creditor banks, ostensibly to the benefit of both. Restructuring was highly flexible, and generally involved collateralizing the restructured principal with special 30year dollar-denominated bonds issued by Treasury for this purpose. These so-called Brady bonds were more highly-rated  than  most  EMD bonds  are  today, with their interest payments sometimes guaranteed by high rated securities held by the Federal Reserve.

Types of Brady bonds  included  discount  bonds, which were guaranteed  and issued with market-rate coupons,  but  which had  been  discounted  from the original value of the debt; this was especially common as many commercial banks wanted out of investment in developing/emerging markets altogether, and were willing to reduce the amount  of the original debt out of the belief that if they did not take advantage of the opportunities of the  Brady plan,  they  might  never recoup that debt at all. Par bonds were issued at the original value of the loan, but with a below-market rate  coupon.  There were also front-loaded  interest reduction  and debt-conversion bonds.

The original Brady bonds were issued to collateralize debt obligations from the governments  of Argentina,  Brazil,  Bulgaria,  Costa  Rica,  the  Dominican Republic,  Ecuador,  Mexico,  Morocco,  Nigeria,  the Philippines,  Poland, and Uruguay. Though the  program ended in the 1990s after dealing with the fallout of those initial Latin American crises, the creation of the Brady bonds standardized  and facilitated the secondary  market  for EMD bonds.  Notably, several of these emerging markets have since paid off the debts the Brady bonds represented.  Mexico was the first to do so, in 2003; Brazil, the Philippines, Colombia, and Venezuela have all done likewise (the latter two having joined the Brady program later in the process). Many EMD bonds are available as part of mutual funds.

Newly Industrialized Countries

There is a fair bit of overlap, conceptually  and geographically, between “emerging” or “frontier” markets, and the  classification of “newly industrialized  countries.” Both share a liminal, or threshold,  quality: they describe  something  going on  right  now  more  than something that has been achieved. Like emerging markets, newly industrialized countries have pulled ahead of other developing nations. Specifically, they have done so because of their advances in industrialization, which generally leads to rapid economic growth, an improvement in the balance of trade, and a significant increase in exports  and export  incomes. Newly industrialized countries  do not always enjoy the political and social stability necessary to be considered emerging markets, however: the rapid industrialization can disrupt rural, agrarian societies, which in turn  can lead to political uncertainty during a period of adjustment.

Generally speaking, the newly industrialized  countries are considered to be Brazil, China, India, Malaysia, Mexico, the  Philippines,  South  Africa, Thailand, and Turkey. Egypt and Indonesia  are often included, and advocates of the usefulness of the BRICs designation include Russia by implication. The newly industrialized nations have such diverse histories and heritages that, like emerging markets, they should no longer be considered  a homogeneous  group. China and Russia, for instance, have a history of communism  to contend with—still in force but modified in China’s case, and in the  recent  past in Russia’s.  India and Mexico, on the other hand, have long histories of democracy and struggles with imperialist powers.


  1. Lado Beridze, Economics of Emerging Markets (Nova Science, 2008);
  2. Sebastian Edwards and Márcio Gomes Pinto Garcia, Financial Markets Volatility and Performance in Emerging Markets. A National Bureau of Economic Research Conference Report (University of Chicago Press, 2008);
  3. International Finance in  Emerging  Markets Issues, Welfare Economics Analyses and Policy Implications (Gardners, 2008);
  4. Harinder Kohli, Growth and Development in Emerging Market Economies: International  Private Capital Flows, Financial Markets and Globalization (Sage, 2008);
  5. Damian Miller, Selling Solar: The Diffusion of Renewable Energy in Emerging Markets (Earthscan, 2008);
  6. Kamel Rouibah, Omar Khalil, and Aboul Ella Hassanien, Emerging Markets and E-Commerce in Developing Economies (Information Science Reference, 2009);
  7. Karl P. Sauvant, Kristin Mendoza, and Ince Irmak, The Rise of Transnational Corporations From Emerging Markets: Threat or Opportunity? (Edward Elgar, 2008);
  8. Antoine W. van Agtmael, The Emerging Markets Century: How a New Breed of World-Class Companies is Overtaking the World (Simon & Schuster, 2008).

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