Characteristics of Emerging Economies
Different kinds of economies exist in various parts of the world such as developed, emerging, and developing economies. These economies can be differentiated by their characteristics.
Some of the characteristics of emerging economies include rapid economic growth, a large youth population, an increased middle class, and the presence of regulatory bodies.
The International Monetary Fund (IMF) Fiscal Monitor classified about 20 countries including Argentina, China, Egypt, India, and South Africa among the world’s emerging and developing economies. In 2021, these emerging economies contributed 34% of the world’s nominal gross domestic product (GDP) in US dollars and 46% in purchasing power parity (PPP).
The classification was based on income level as well as:
Systemic presence: The size of the country’s economy (nominal GDP), its population, and its share of exports in global trade.
Market access: The share of a country’s external debt in global external debt, as well as whether it is included in global indices used by large international institutional investors and the frequency and amount of international bonds issued.
Income level: A country’s GDP per capita in nominal US dollars
International Monetary Fund (IMF)
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What is an emerging economy?
An emerging economy is below a developed economy because it has not attained the high per capita income level, economic growth, and technological advancement found in a developed economy. Its available resources, level of wealth, and quality of life have also not reached that of a developed economy.
On the other hand, however, it has advanced beyond a developing economy which is an economy that is highly agriculture-dependant with a less developed industrial sector. A developing economy also has a low Human Development Index (HDI) compared to other countries and a high poverty rate.
Therefore, an emerging economy has a high local and international growth rate with improved living standards for its citizens. It also has a rapidly expanding rate of industrialization resulting in high production levels and increased gross domestic product (GDP).
Emerging economies play an important role in globalization due to their being mixed economies or free markets that encourage the emergence of new and advanced products and services which results from the high level of competition that exists between companies
According to the World Bank, emerging economies make up 75% of the world’s population, representing about one-third of global GDP, and are major engines of global growth.
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Characteristics of Emerging Economies
- Attractive markets
- Fast economic growth
- High production levels
- Increase in the middle class
- Increased exports
- Large youth population
- Market and currency volatility
- Presence of regulatory bodies
- Transitional nature
- Upper-middle per capita income (PCI)
Attractive markets
One of the top characteristics of emerging economies is their emerging markets which are attractive to investors due to the high return on investments.
Starting new businesses, expanding existing ones, and diversifying into new sectors often require significant capital investments. Most businesses in emerging markets do not have the needed funds to implement the needed actions, thus, they depend on individuals or corporate organizations who are willing to invest in them.
Most emerging economies have large deposits of natural resources such as crude oil and solid minerals which are largely unexploited. Since exploring this sector is mostly capital intensive, investors who invest and operate in the sector often enjoy a monopoly for some time before more competitors join the sectors.
Therefore, they can recoup their initial investments and make significant profits during their monopoly time since they have market power and access to export to other countries that may buy at a higher rate.
Generally, when investing, the more risky the investment, the higher the expected return on investment. The higher rate of return is used to encourage investors who may otherwise not want to invest.
Since emerging markets are prone to market volatility as they are not as stable as developed economies, businesses that operate there often offer investors higher returns so that they can access the needed capital for their businesses.
Fast economic growth
A key feature of emerging economies is the fast rate of economic growth. This is made possible due to the rapid industrialization of the economy which enhances production to the level that the country can increase its exports to other countries.
Additionally, most governments in emerging economies implement policies that encourage the participation of more actors in the economy. This may be in the form of tax holidays or reductions, infrastructural development, and aid to indigenous companies.
The government may also encourage foreign investments by lessening the cost of doing business and other factors that encourage market expansion. All these lead to increased employment opportunities, more disposable income, higher investments, better infrastructure, and consequently, faster economic growth.
High production levels
The rapid rate of industrialization in emerging economies often comes with increased production levels which is another characteristic of emerging economies.
For example, if a shoe manufacturer used to produce 50 pairs of shoes daily using crude equipment, access to funding and investors would aid them in purchasing advanced machines that could hasten up their production process. When this occurs, their production capacity will significantly improve and they may be able to produce up to 100 pairs of shoes daily.
Another factor that ensures high production levels is the availability of cheaper labor and lower tax rates when compared to developed economies. This means that companies will have more cash which they can plough back into the business thereby increasing their capacity and production capability.
Increase in the middle class
As more jobs are created through the establishment of new companies and expansion of existing ones, more citizens get to come out of poverty and join the middle class due to the availability of well-paying jobs.
As more citizens earn better, their standard of living also improves as they have more cash to take care of not only their basic needs but some additional wants as well.
Additionally, the improvement of infrastructure and the adoption of new technology is not only beneficial to businesses but also creates an avenue for the educational sector of the country to improve as more people will want to improve their knowledge and skills to match up with the changes in the economy.
Better education is one of the precursors to becoming specialized in one’s chosen field which ensures that people can earn better thereby improving their economic situation. Therefore, another feature of an emerging economy is an increased middle class.
Increased exports
Another characteristic of emerging economies is the increased exports. As production levels in an emerging economy increase, supply begins to exceed demand as there are more goods than citizens can consume. In a bid to even this out, most companies will start targeting external markets where they can sell such excesses.
The higher currency value of other countries can also serve as a motivating factor for companies as they gain access to more revenue when they sell to countries with a higher currency value.
Large youth population
The IMF identifies emerging economies to exist in countries that normally have a population of over 5 million people. With such a large population, there is always a high rate of diversity in its constitution with about 40 – 60% comprising young people.
This means that emerging economies have access to a large labor force which is a requirement to fill up available job positions and increase the abilities of companies to provide more products and services.
Market and currency volatility
Emerging economies are prone to changes as their markets are not fully developed. Thus market and currency volatility is an additional feature of emerging economies. This kind of economy can easily be affected by diverse market factors such as changes in the price of commodities, interest rates, and inflation.
Additional factors such as political instability and the occurrence of natural disasters such as earthquakes, flooding, or drought may also contribute to market volatility because they will hamper the smooth operation of companies.
Currency instability is another prevalent occurrence in emerging economies. The changes that occur in the prices of commodities and services as well as global currencies such as the Euro and U.S Dollars often trigger a change in the value of currencies of an emerging economy as well.
This becomes more evident when the emerging economy depends on imports from other countries for certain raw materials, products, or services.
Presence of regulatory bodies
To ensure the effective operations of businesses and prevent the proliferation of illegal businesses, emerging economies usually have regulatory bodies that oversee how specific industries operate.
These regulatory bodies may be set up by the government such as agencies that certify product quality and grant operating licenses; they may also be set up by professional bodies to ensure professionalism in their sector.
They may also be charged with ensuring a competitive market, managing fairness, serving as a neutral third party in transactions, and maintaining the smooth functioning of the financial market.
Transitional nature
Another emerging economy characteristic is the transitional nature of the economy as the market gradually ascribes to becoming a developed economy. At this transitional phase, several changes occur in the economy such as:
- An increased focus on industrialization.
- Access to more funds for businesses
- Larger markets especially international trade.
- More employment opportunities.
- Higher competition among companies.
Countries that are able to effectively manage and leverage this transitional phase often go on to become developed economies.
Upper-middle per capita income (PCI)
The per capita income (PCI) of a country is one of the metrics used in classifying an economy as developed, emerging, or developing. This can be calculated by dividing a country’s gross national income (GNI) by its population.
For the current 2024 fiscal year, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,135 or less in 2022; lower middle-income economies are those with a GNI per capita between $1,136 and $4,465; upper middle-income economies are those with a GNI per capita between $4,466 and $13,845; high-income economies are those with a GNI per capita of $13,846 or more.
World Bank
Based on the above, existing emerging economies fall under the upper middle-income level with a GNI per capita between $4,466 and $13,845. This indicates that citizens earn considerably well and can attain a fairly good living standard.
As the emerging economy grows towards becoming a developed economy, the GNI per capita increases until it reaches that of a developed economy.
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Conclusion
The characteristics of emerging economies include upper-middle per capita income, increased exports, attractive markets, a large youth population, and fast economic growth.
It additionally includes high production levels, an increase in the middle class, market and currency volatility, the presence of regulatory bodies, and a transitional nature.
These unique features combine to distinguish emerging economies from other existing kinds of economies.
