Importance of Emerging Markets
The importance of emerging markets cannot be overemphasized especially with their ever-growing population size and economic growth. These two factors are among many others that make emerging markets important.
Currently, in 2024, emerging markets account for approximately 85% of the world’s population and over 50% of global gross domestic product (GDP) growth. There have also been projections by the PwC that emerging markets will dominate the top ten global economies by 2050 with China and India being the top two world economies.
The large population growth indicates the availability of a ready labor force that can be deployed to further advance the economies of emerging markets as they propel industrialization and expansion of existing businesses.
This in turn raises the purchasing power of households due to higher employment rates leading to a reduction in poverty levels, growth in purchasing power, and consequent increase in economic activities.
In a paper presented at the University Of Maryland in 2016, Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) stated:
As a group, emerging and developing economies now account for almost 60 percent of global GDP, up from just under half only a decade ago. They contributed more than 80 percent of global growth since the 2008 financial crisis, helping to save many jobs in advanced economies, too. And they have been the main driver behind the significant reduction in global poverty. China alone has lifted more than 600 million people out of poverty over the past three decades.
Christine Lagarde
Before we consider the importance of emerging markets, let us define what an emerging market is.
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What is an emerging market?
Due to the transitional nature of emerging markets, they mostly have volatile markets that are easily affected by changes in the prices of commodities, natural disasters, and political instability.
Despite this market volatility, investors who want higher than average returns on investment and who are willing to take on the additional risks invest heavily in emerging markets.
This availability of funds through funding from investors further spurs the growth of emerging markets as it helps companies expand and grow their operations and output.
Consequently, more individuals get employed which increases the available disposable incomes of households. It in turn reduces poverty levels in most emerging markets whilst increasing the productivity levels of its companies.
Additionally, emerging economies record an increase in GDP, especially due to the added revenue generated from the exports of the excess goods and services.
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Importance of emerging markets
- Aids in diversifying investor’s portfolio
- Encourages innovation and creativity
- Provide adequate and cheaper workforce
- Reduction in global poverty rates
- Source of cheaper goods and services
- Source of raw materials
Aids in diversifying investor’s portfolio
One of the importance of emerging markets is that they aid investors in diversifying their investment portfolios. Instead of investing only in developed markets where the rate of returns is often low, investors can choose to invest in emerging markets which typically have a rate of return.
For example, while index funds such as the S&P 500 offer an average annual rate of return of approximately 10.5%, the MSCI emerging markets index which is an aggregation of companies that operate in emerging markets offers up to 14.7% return rates.
The increased rate of return offered by emerging markets serves as a source of additional capital for these investors who can further increase their investments in emerging markets.
Thus, companies in emerging markets also benefit from the added investments as they get access to additional capital with which they can invest in modern machines to aid the drive towards greater industrialization of the economy and higher production rates.
Encourages innovation and creativity
An additional importance of emerging markets is that they encourage innovation and creativity by providing a breeding ground for new and upcoming companies to experiment and try out new ideas and ways of doing business.
This is necessary because for companies in emerging markets to effectively compete with companies in other markets especially those in developed economies, they have to be innovative and creative with the kinds of goods they produce and services they provide.
Hence, emerging markets are fast becoming development hubs for different sectors such as fashion, technology, manufacturing, and retail with several individuals, corporate entities, and even governments actively contributing to the adoption of new technologies.
The push towards green energy and a circular economy is being driven by emerging economies through the development of alternative power sources and the creation of new products from recycled materials, effectively turning waste into wealth.
Provide adequate and cheaper workforce
The International Monetary Fund (IMF) classified emerging markets as those that have a population of at least 5 million individuals. Some of the top emerging markets such as China, India, and Brazil, currently have populations of 1.42 billion, 1.44 billion, and 217 million respectively.
The large population is important because it aids in providing a teeming workforce for emerging markets. As the law of demand and supply in economics portends, this higher supply of labor has led to a cheaper cost of acquiring labor.
For instance, based on data from Indeed, developed markets such as the United States pay truck drivers $1991 per week while emerging markets such as China pay truck drivers $1,450 per week.
The cheaper labor is very important because it enables companies to hire more workers at a lower cost, thereby reducing operational costs and increasing output and production levels. It additionally has a direct impact on the prices of the goods produced in emerging markets as well as the overall profits made by companies.
In addition, the availability of cheap labor has increasingly attracted multinational companies to set up their manufacturing firms in emerging markets to minimize operational costs and maximize profits.
For example, due to lower and adequate labor, Apple has partnered with Foxconn to assemble most of its iPhones in Shenzen, China.
The increasing acceptance of remote work is another factor that companies in developed markets have effectively used to access cheaper labor as they can hire people from emerging markets who possess the skills they need but charge considerably cheaper than their counterparts in developed markets.
Therefore, emerging markets are important because they provide adequate and cheaper labor both for developed and emerging companies which aid them in making more profits while increasing production output.
Reduction in global poverty rates
Another importance of emerging markets is their active contribution towards the reduction in global poverty rates. It has been reported by the United Nations Development Programme (UNDP) and the Oxford Poverty and Human Development Initiative (OPHI) that between 2005 to 2021, 415 million people exited poverty in India while 69 million people were lifted out of poverty in China between 2010 to 2014.
The reduction in global poverty can be attributed to the millions of jobs that have been created in emerging markets due to the expansion of existing companies, the emergence of new ones, and well as the establishment of multinational firms in these regions.
As more companies get established in emerging economies, more people get employed and earn a regular income. Thus, more individuals in households become gainfully employed and raise their household incomes above the poverty level.
The reduction in poverty rate is also often linked to increased literacy rates as parents are better able to send their children to school and even pursue education themselves to improve their employability.
A 2006 report by the United Nations Educational, Scientific and Cultural Organization (UNESCO) asserts the correlation between poverty reduction and increased literacy rates.
Source of cheaper goods and services
Due to the availability of labor at a cheap rate, an additional importance of emerging markets is the availability of goods and services at cheaper rates. This is because operational costs are usually part of the determinants of the selling price of products or services.
Thus, when operational costs such as the cost of labor is low, prices of products and services are often low too, because of this, emerging markets often earn a considerable income from the sale of their products especially when they export these products to developed countries.
The disparity in currency value between emerging markets and developed markets often means that emerging markets gain considerable foreign exchange and a better price for their products when they export to the developed markets.
Conversely, the developed markets have a large market that readily absorbs the products from emerging markets since they are often cheaper than products made in the developed markets. This presents a win-win situation for both markets.
The digital revolution has further aided access to cheaper services as more individuals and companies in emerging markets offer services such as digital marketing, data security, app development, copywriting, data entry, and customer service for developed companies.
Aside from the cheap access to these services, the diversity in the workforce and differences in time zones across these markets aid most developed companies to serve a wider consumer base as they operate across different time zones and are better able to serve an increasing consumer base scattered across the globe.
Thus, the availability of cheap goods and services is important as it not only contributes to the growth of the economies of emerging markets but also aids in sustaining the growth of companies in developed markets by increasing their revenue and overall profitability.
Source of raw materials
Emerging markets are a source of diverse raw materials such as crude oil, mineral resources, and agricultural produce such as cocoa, coffee beans, maize, rice, and soya beans.
These raw materials are mostly used by companies in developed markets in the manufacturing of several products such as gas, jewelry, breakfast cereals, livestock feed, chocolate, coffee, solar panels, etc.
For instance, China has access to critical raw materials (CRMs), such as silicon metal and gallium which are needed for the production of solar panels, and cobalt and germanium which are used to produce smartphones and electric vehicles.
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Why is the emerging market important?
Additionally, emerging markets provide a wide range of raw materials that are used by industries all over the world. They also contribute to the reduction of global poverty rates and provide higher returns on investments to investors.
Therefore, even as emerging economies continue to grow towards becoming developed markets themselves, they also contribute directly and indirectly towards the growth of existing developed markets and building a stronger world economy.
